National Rural Utilities Cooper

Good afternoon and welcome to the National Rural Utilities Cooperative Finance Corporation Fiscal Year 2024 Year-End Investor Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Hee-Sun Choi. Please go ahead.

Thank you, operator. Welcome to our investor conference call for our fiscal year 2024. Today, I'm joined by our CEO, Andrew Dunn, and our CFO, Ling Wang. Andrew and Ling will discuss our year-end results and answer your questions. Before we get started, I would like to remind that today's presentation slides and financial reports filed with the SEC can be found on our website at nrucfc.coop under Investor Relations. This call is being recorded, and a replay and court transcript will be made available on our website as well. Our presentation today will include four looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two and three of the presentation regarding these statements or measures. I would like to remind you that any four looking statements that we may make during today's call as of August 5, 2024, are subject to risks 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 in our annual and quarterly reports filed with the SEC. Information about any non-GAAP financial measures referenced during the presentation, including reconciliations to GAAP measures, can also be found in our Form 10-K filed with the SEC on August 1, 2024, as well as in the appendix of the presentation slides. At the end of the presentation, we will open the call and Andrew and Ling will 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. Good afternoon. Thank you for joining our call today to review the results of our fiscal year 2024, which concluded on May 31, 2024. I'm pleased to report that we experienced another successful year as evidenced by strong financial performance and robust demand for capital in support of our members' financing needs. As many of you know, CFC was created by America's Electric Cooperative Network with a clear and focused mission of being in a position to meet the financing needs of rural electric cooperatives. Unlike many financial institutions that prioritize growth through its own interest, our primary objective remains meeting the financial needs of our members. Our success is aligned with our members' success. We have stayed true to this mission by continuing to provide loans and financial products to our members, helping them achieve their goals and maintain their operations. Our commitment to service, integrity, and excellence has once again demonstrated its value as evidenced by our solid financial performance. Today, I look forward to discussing our successful results with you in greater detail. I will start on slide five. I'd like to summarize our fiscal year 2024 by highlighting four key components components of our business model, namely the continued strong loan demand from our membership, a significant member equity position, a superior quality loan portfolio, and high investment grade credit ratings. Our financial results reflect the credit strength of our members and are focused on strategically managing our balance sheet to fund our members' capital needs. During fiscal year 2024, our loans to members increased by $2 billion, or 6%, from $32.5 billion at May 31, 2023 to to $34.5 billion at May 31, 2024. This $2 billion loan growth is the second largest year-over-year growth CFC has experienced since 2002. Based on our analysis of the calendar year-end date of December 31, 2023, our total loans outstanding represented 25% of the total loans outstanding in the electric cooperative sector. We continue to be the largest private lender in the space. Consistent with our historical experience of very limited charge-offs, loan defaults, loan delinquencies, and non-performing loans in our electric portfolio, the overall quality of our loan portfolio remained pristine during fiscal year 2024, with 98% of our loans to rural electric systems that provide essential electric utility services. We had no charge-offs during fiscal year 2024. Instead, we recorded $1 million in net loan recoveries. Non-performing loans represented only 0.14% of our total loans outstanding at May 31, 2024, compared to 0.27% at May 31, 2023. Our financial position remains strong as we continue to generate strong financial metrics. During fiscal year 2024, our adjusted tier was 1.24 times, which was well above our targeted goal of 1.1 times. Our capital position continued to improve during fiscal year 2024, with our members' equity surpassing $2.3 billion at fiscal year end 2024. Our members' equity consists primarily of our retained earnings. By comparison, our members' equity at fiscal year 2014 was approximately $1 billion. Through prudent financial practices, we have more than doubled our members' equity over the past 10 years by steadily accumulating retained earnings. Furthermore, during fiscal year 2024, CFC's Board of Directors approved a change in the patronage capital allocation and net earnings that will allow us to retain additional earnings and further enhance our capital position. As a result of the change in the patronage capital practice, we are retaining 79% of adjusted net income for fiscal year 2024 in members' capital reserve compared to 56% for fiscal year 2023. Our liquidity position remains healthy and resilient. as we maintain diversive, well-established funding sources to minimize the risk of being dependent on any single source or market. We are committed to having strong investment 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 a stable outlook. As we have stated on prior calls, we have an incentive payout structure where incentive payments for named executive officers are directly tied to CFC's credit ratings. Lastly, I'm pleased to inform you that we recently published our 2024 Corporate Citizenship Report, which is available on our website. This report includes information about how we support our members who are dedicated to delivering essential electric and or broadband services that improve the quality of life in rural America's unserved or underserved communities. Now I'm turning to slide six. As you can see in the middle of the slide, our loans to members increased nearly $9 billion, or 33%, over the last five years from the end of fiscal year 2019 to the end of fiscal year 2024. Our members have experienced increased financing needs, primarily driven by several factors that I will review with you now. First, our members are experiencing increased electricity demand in their service areas. Based on our analysis, both total kilowatt-hour sales and total operating revenue increased by 1.2% in 2023 compared to 2022. Additionally, according to research published by S&P Global, electricity demand is forecast to grow substantially in all U.S. regions through 2040. Over the next decade, demand growth is expected to be driven primarily by new data centers and new manufacturing facilities, as well as strong electric vehicle growth and beneficial electrification trends. Rural electric cooperatives have become increasingly supportive of beneficial electrification, which refers to the replacement of fossil fuel-powered systems with electric systems, such as electric vehicles and heat pumps, in a way that reduces overall emissions while providing benefits to the environment and to households. Secondly, our members continue to enhance resilience and reliability for their electric systems. We observed an increase in capital expenditures by electrical cooperatives to proactively strengthen existing electric systems as well as replace systems in the aftermath of damages from weather-related incidents, including hurricanes, winter storms, and wildfires. We believe that the adverse impact on electric systems from weather-related incidents has resulted in a heightened awareness by electric cooperatives of the need to focus attention on making infrastructure upgrades to improve both the resiliency and reliability of electric systems. Third, our members have an increased focus on clean energy supply investments. Due in part to the new empowering rural America, referred to as New Era, to electric cooperatives, many electric power supply and electric distribution cooperatives are increasingly focused on efforts to identify potential opportunities to increase investments in renewable power supply, transmission, and storage. The New Era program is a $9.7 billion initiative established under the Inflation Reduction Act specifically designed to help rural electric cooperatives transition to clean, affordable, and reliable energy. This program is the largest investment in rural electrification since the Rural Electrification Act of 1936. Lastly, electric cooperatives have increasingly invested in broadband to address the digital divide in rural America. Many rural electric cooperatives have made or are making infrastructure investments that include building fiber optic lines, to improve electric grid system reliability, efficiency, and cost savings as fiber operations offer enhanced communications to monitor electric systems, identify outages, and speed electric restoration. Many electric cooperatives are also leveraging community relations to offer broadband services in their service territory. Based on the aforementioned drivers, our members are expected to make substantial investments in new power supply, transmission, and other related infrastructure in order to meet future demand, and other strategic goals. We believe these investment priorities will nest state funding and may lead to an increased demand for capital from us. Turning to slide seven, we serve a geographically diverse group of electric and telecommunications borrowers throughout the U.S.