National Rural Utilities Cooper

Good afternoon and welcome to the National Rural Utilities Cooperative Finance Corporation Fiscal Year 2023 Year-End Investor Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Hee-Sun Choi, Vice President, Capital Markets Relations. Please go ahead.

Thank you, Operator. Welcome to our Fiscal Year 2023 Investor Conference Callers. Joining with me today are Andrew Dan, our Chief Executive Officer, and Ling Wang, our Chief Financial Officer. Andrew and Ling will discuss our financial and operating results during the fiscal year ended May 31, 2023. Today's presentation slides and financial reports filed with the SEC are available on our investor relations page on our website. This call is being recorded. and a replay and call transcript will be made available on our investor relations page after the call. Our presentation today will include four looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two and slide three of the presentation regarding these statements and measures. I would like to remind you that Any forward-looking statements that we may make during today's call as of August 9, 2023, are subject to risk and uncertainties. Factors that may cause actual results to differ materially from expectations are described on slide two of today's presentation, as well as our Form 10-K file with the SEC on August 2, 2023. Information about any non-GAAP financial measures referenced, including reconciliations to GAAP measures, can also be found in our Form 10-K as well as in the appendix of the presentation slides. At the end of the presentation, we will open the call and Andrew and Lynn can take your questions. You can ask questions over the phone or submit your questions online. With that, I will turn this call over to Andrew.

Thank you, Heesun. Thank you for joining our call today to review the results for our fiscal year 2023, which concluded on May 31, 2023. I'll provide comments regarding our fiscal year 2023 results and then turn this call over to Ling to review our financial performance in greater detail. I'll start on slide five. As you can see on the slide, we had another very strong year with exceptionally robust loan growth as well as solid financial performance. Our results reflect the overall continued financial strength of our members and our focus on strategically managing our balance sheet to fund our members' capital needs. During fiscal year 2023, our loans to members increased by $2.5 billion, or 8%, from $30 billion at May 31, 2022 to $32.5 billion at May 31, 2023. This 2.5 billion loan growth is the largest year-over-year growth since 2002. As we continue to focus on lending to electric cooperatives, our total loans outstanding represent market share of 25% of the total loans outstanding in the electric cooperative sector as of December 31, 2022, based on financial data submitted to us by our distribution of power supply members. We continue to be the largest private lender to electric cooperatives. The overall quality of our loan portfolio continues to be sound and strong, with 99% of our loans to rural electric systems that provide essential electric utility services. Consistent with our historical experience of very limited charge-offs, loan defaults, loan delinquencies, and non-performing loans in our electric portfolio, non-performing loans represented 0.27% of our total loans outstanding as of May 31, 2023, and we had only 0.05% net charge-offs during fiscal year 2023. It is worth noting that this has been the first charge-off in our electric portfolio since fiscal 2013. The charge-off in fiscal 2023 was related to the payment default of Brazos Electric Power Cooperative and Brazos Sandy Creek Electric Cooperative in connection with their previously disclosed bankruptcy filings. I am also pleased to report that subsequent to May 31, 2023, we received payments in full for all remaining loans to Brazos Electric and Brazos Sandy Creek. Ling will discuss the charge-offs later during her commentary. Our financial position remains strong as we continue to generate solid financial metrics. During fiscal year 2023, our adjusted tier was 1.25 times, which was well above our targeted goal of 1.1 times. Our capital position continued to improve during fiscal year 2023. Our members' equity, consisting primarily of our retained earnings, continued to grow and surpassed $2.2 billion at fiscal year end By comparison, our members' equity at fiscal year-end 2013 was approximately $1 billion. We have more than doubled our members' equity over the past 10 years by diligently and strategically managing our financial results while steadily accumulating retained earnings. Our liquidity position remains healthy and resilient as we maintain diverse, well-established funding sources to minimize the risk of being dependent on any single source or market. We are committed to having strong investment grade credit ratings from Fitch, Moody's, and S&P. We currently have long-term senior secured ratings of A+, A1, A-, and long-term unsecured ratings of A, A2, A-, all with stable outlook. For fiscal year 2024, we institute an incentive payout contingency for named executive officers. Specifically, incentive payments are tied to the overall performance of the company and will be capped at 50% for the named executive officers in the event that CFC's long-term unsecured credit rating is below an A rating or equivalent for two or more of the credit rating agencies at May 31, 2024. Lastly, a strategic initiative that we've engaged in for over the past year has been to consolidate the Rural Telephone Finance Cooperative portfolio with the National Cooperative Services Corporation portfolio. In April and June 2023, RTFC and NCSC's members respectively approve the sale of the RTFC portfolio to NCSC. We intend to complete the consolidation of RTFC and NCSC over the next 12 months, which is subject to meeting certain closing conditions. We believe that the consolidation of these two portfolios will further enhance our operating efficiency. Now I'm turning to slide 6 to further discuss our loan portfolio. As I mentioned earlier, we recorded a 2.5 billion increase in net loan growth during fiscal year 2023. The 2.5 billion increase in loans to members during fiscal year 2023 reflected net increases in long-term and line of credit loans of 1.6 billion and 845 million, respectively. The 845 million increase in line of credit loans was primarily attributable to funding for higher operating costs that our members experienced. Bridge loans due to delays in RUS financing as well as broadband bridge loan financing. At May 31, 2023, our loans to distribution members totaled $25.4 billion and our loans to power supply members totaled $5.4 billion. During fiscal year 2023, we experienced increases in all of our business segments. Specifically, our distribution loan portfolio increased by $1.6 billion and our power supply loan portfolio increased by $535 million. We also experienced increases in CFC statewide and associate loans and CFC and RTSC loans of 74 million, 246 million, and 20 million, respectively. Loans to our electric borrowers accounted for 99% and 98% of total loans to members as of May 31, 2023 and May 31, 2022, respectively. During fiscal year 2023, we made long-term loan advances totaling $3.3 billion. of which $2.8 billion, or 86%, were fixed-rate loans. Additionally, approximately $3.1 billion, or 95%, of long-term loan advances were for capital expenditure purposes, compared to 80% during fiscal year 2022, with the remaining balance being for the refinancing of other lenders' debt for other corporate purposes. As the Federal Reserve increased the federal funds rate over the past year, leading to higher interest rate environments, our members have shown a preference for relatively shorter fixed rate term loans in fiscal year 2023 compared to fiscal year 2022. The weighted average fixed rate term was 18 years for the new $2.8 billion fixed rate term loan advances during fiscal year 2023, where it was 23 years during fiscal year 2022. We serve a geographically diverse group of electric and telecommunications borrowers throughout the U.S. The consolidated number of borrowers with loans outstanding total 884 at May 31, 2023. Our borrowers are located in 49 states and the District of Columbia. The top five states of the largest loan growth for fiscal year 2023 were Texas, Arkansas, Florida, Kentucky, and Georgia. You can see the increases in loans in those five states in the map presented on the right side of the slide. For Texas, Arkansas, and Georgia, the growth was primarily driven by our members' funding needs for electric CapEx or broadband projects. For Florida and Kentucky, the majority of the growth was driven by bridge financing for capital expenditures and or weather-related emergency funding needs. Separately, we experienced a decrease in loan growth in Louisiana. Some of the outstanding balances on emergency line of credit loans were repaid using reimbursement funds from FEMA, the Federal Emergency Management Agency. We continue to see an increase in members' needs for bridge financing for broadband projects. At May 31, 2023, outstanding loans to CFC distribution members for their broadband projects increased to approximately $2.4 billion, which is a $708 million or 43% increase compared to the May 31, 2022 level of $1.6 billion. The three states with the largest CSC loans outstanding for broadband projects were Indiana with $300 million, Arkansas with $273 million, and Oklahoma with $253 million in loans outstanding for broadband infrastructure investment at May 31, 2023. As you may be aware, we issued our second sustainability collateral trust bond in August 2022 with proceeds of the bond to fund our broadband loans. We are planning to publish our sustainability bond report for the bond issuance in the near future, and the report will be available on our website. Moving on to slide seven, we recently published our annual preliminary key ratio trend analysis for results for 801 electric distribution cooperatives for the year ended December 31, 2022. Our key ratio trend analysis and annual assessment of financial trends amongst electric distribution cooperatives nationwide. Based on the preliminary KRTA results for 2022, electric cooperatives continue to experience growth across many metrics, including number of consumers, sales, and utility plan investment, and have maintained strong financial metrics. Consumer growth nearly surpassed 1% after exceeding 1% last year for the first time in more than 10 years, with approximately 95% of the cooperatives reporting showing increases in consumers served. Notable states that greater than 2% consumer growth were Texas, Florida, Idaho, and Utah. Investment in utility plant also sustained its five-year growth trends as demonstrated by an increase in the total utility plant ratio, which grew by 4.48% in 2022 as compared to 3.95% in 2021. Inflationary pressures, especially rising power costs, are affecting operating expenses. Power costs have increased by more than 9% compared to 2021 and continue to be a distribution cooperative's single largest expense, representing more than 60% of revenue. It's worth noting that a majority of our distribution members also face material and supply cost increases, along with wage hikes during the calendar year 2022. Rising operating expenses over time are effectively passed through to consumers through power cost adjustments. Furthermore, both accounts receivable over 60 days and write-offs continue their pre-pandemic declines, falling to historic lows. Accounts receivable over 60 days fell to 0.08% of operating revenue from 0.09% in 2021, and write-offs fell to 0.06% of operating revenue from 0.07% in 2021. We believe that the 2022 KRTA results demonstrate that our member cooperatives' financial condition continues to be resilient sound, and stable. As I conclude my remarks, I'd like to extend my gratitude and appreciation to our employees for their exceptional efforts and contributions in meeting our members' financing needs during a period of remarkable loan demand, when we grew our balance sheet by nearly $6 billion, from $26 billion to $34 billion over the last three fiscal years. With that, I will turn the call over to Ling.