National Rural Utilities Cooper

Good morning and welcome to the National Rural Utilities Cooperative Finance Corporation Fiscal Year 2023 Second Quarter Investor Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Heesan Choi, Vice President, Capital Market Relations.

Hello, I'm Heesan Choi, Vice President of Capital Market Relations and National Rural Utilities Cooperative Finance Corporation. Thanks for joining us in our fiscal year 2023 second quarter investor conference call. On today's call, Andrew Dan, our chief executive officer, and Lin Wang, our chief financial officer, will discuss our financial results during the three months, as well as the six months ending November 30, 2022. Before we begin our discussion, I want to remind you that some information provided and comments made during today's call will contain forward-looking statements within the Securities Act of 1933 as amended and the Exchange Act of 1934 as amended. Forward-looking statements which are based on certain assumptions and describe our future plans, strategies, and expectations are generally identified by our use of words such as intend, plan, may, should, will, project, estimate, anticipate, believe, expect, continue, potential, opportunity, and similar expressions whether in the negative or affirmative. All statements about future expectations or projections are forward-looking statements. Although we believe that the expectations defected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ entirely from our forward-looking statements. Factors that could cause future results to vary from our forward-looking statements about our current expectations are included in our annual and quarterly reports filed with the U.S. Securities and Exchange Commission. All the forward-looking statements are made as of today, January 18, 2023, and we undertake no obligation to update or publicly release any reasons to forward-looking statements to reflect events, circumstances, or changes in our expectations after the statements are made. Today's discussion will also include certain non-GAP measures. Please refer to our Form 1025 on January 13, 2023 with the SEC and also posted on our website for discussion of why we believe our adjusted measures provide useful information in analyzing CFC's financial performance and the reconciliation to the most comparable GAP measures. We will open the call for Q&As at the end of the presentation. You can ask questions via phone or submit your questions online if you're participating in this event via webcast. We invite you to join our Q&A session to ask questions you may have. Today's presentation slides and financial reports are available in our investor relations page on our website at www.ruralutilities.com. and RUCFC.coop. A replay and course transcript will be also available in our investor relations page after this event. Now I'm turning this call over to Andrew.

Thank you, Heesun. Good morning. This is Andrew Don, Chief Executive Officer for CFC. Thank you for joining us today. I am pleased to review our business and operations during our second fiscal quarter of 2023, which was the three-month period ended November 30, 2022. We have continued to generate solid financial results during the second fiscal quarter and for the first six months of our 2023 fiscal year. As of November 30, 2022, our total assets exceeded $33 billion. with our loans to members being the largest component in the balance sheet at $31.6 billion. This level represents a net increase of $1.5 billion from the May 31, 2022 fiscal year end level. The $1.5 billion increase in loans to members during the six months ended November 30, 2022 reflected net increases in long-term and line of credit loans of $825 million and $688 million respectively. The $688 million increase in line of credit loans outstanding was primarily attributable to funding provided for higher operating costs that our members have experienced due to inflationary pressures as well as broadband investments in the form of bridge loan financing. Our long-term loan advances during the current year-to-date period total $1.7 billion with approximately $1.6 billion or 95% of those advances made for capital expenditure purposes and only $40 million or 2% for the refinancing of loans made by other lenders. To the same prior year-to-date period, our long-term loan advances totaled $1.5 billion, consisting of $1 billion, or 69%, for capital expenditure purposes and $437 million, or 29%, for members' operating expenses, primarily due to increased power costs and natural gas prices during the March 2021 winter storm year A. that the total long-term loans advance for capital expenditures during the current year-to-date period, approximately $397 million, or 24%, was to provide funding for our electric distribution members' infrastructure investments in broadband projects. Our aggregate loans outstanding to our distribution members relating to their broadband projects increased to approximately $2 billion as of November 30, 2022, compared to approximately $1.6 billion as of May 31, 2022. From an operating performance perspective, our financial position remains strong as shown by consistently solid financial metrics achieved during the current year-to-date period. Our adjusted tier was 1.23 times during the six months ended November 30, 2022, which was well above our goal of 1.1 times. Our members' equity exceeded $2 billion at the end of the second fiscal quarter. As we've previously discussed, we've had nonperforming loans outstanding to Brazos Electric Power Cooperative and its wholly owned subsidiary, Brazos Sandy Creek Electric Cooperative, due to their bankruptcy filings. On November 14, 2022, the Bankruptcy Court confirmed Brazos' plan of reorganization, and as a result, we had a total of $15 million in charge-offs related to the Brazos and Brazos Sandy Creek nonperforming loans during the current quarter. In December 2022, We received payments for a total of $56 million from BROWSIS in accordance with the provision of its plan of reorganization, which included the full $21 million of the secured portion of the loans. We also expect to receive payments on the remaining amount of the BROWSIS and BROWSIS Sandy Creek outstanding non-performing loans.