National Rural Utilities Cooper

Good day and welcome to the National Rural Utilities Cooperative Finance Corporation Fiscal Year 2025 First Quarter Investor Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to He Sun Choi, Vice President of Capital Markets Relations. Please go ahead.

Thank you, Operator. Welcome to our Investor Conference Call for our Fiscal Quarter of Fiscal Year. Our first quarter of fiscal year 2025. Today, I'm joined by our CEO, Andrew Dan, and our CFO, Ling Wang. Andrew and I will discuss our first quarter as a result and answer your questions. Before we get started, I would like to remind you 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 slides two and three of the presentation regarding these statements and measures. I would like to remind you that any four looking statements that we may make during today's call as of October 25, 2024 are subject to RIF and uncertainties. Factors that may cause actual results to differ materially from expectations are described on slide 2 of today's presentation, as well as in our annual and quarterly reports filed with the FCC. Information about any non-GAAP financial measures referenced during the presentation, including reconciliations to GAAP measures can also be found in our Form 10Q-filed VDSCC on October 11, 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 our business and operating results during the three months ended August 31, 2024, which is our first fiscal quarter of fiscal year 2025. I'm moving to slide five to discuss highlights during the quarter. We continue to experience solid loan demand from our members during our first fiscal quarter, with loans to members reaching $35.1 billion, reflecting an increase of approximately $569 million, or 2%, from the prior fiscal year end. We continue to maintain a strong financial position. Our adjusted tier was 1.20 times during the current fiscal quarter, well above our goal of 1.1 times. We remain committed to growing our members' equity to support loan growth. Our members' equity stood at $2.4 billion at the current fiscal quarter end. The quality of our loan portfolio remains pristine. We had no charge-offs during the fiscal quarter, and only 0.14% of loans were classified as non-performing at the quarter end. Over the years, we have strategically diversified our funding and liquidity sources to minimize the risk of being dependent on any single source or market. Our diverse liquidity sources consist of operating cash, investments, committed bank lines, committed loan facilities under the Guaranteed Underwriter Program, a revolving note purchase agreement with PharmaMac, and access to repo facilities. We remain committed to maintaining strong investment grade credit ratings from Fitch, Moody's, and S&P. Our short-term and long-term credit ratings and outlook are unchanged. During the quarter, Fitch affirmed all of CFC's credit ratings with a stable outlook. Next, I would like to provide an update on the recent hurricanes that affected some of our members. Slide 6 summarized the impact of recent hurricanes, specifically Hurricane Helene and Milton. Hurricane Helene affected five states, Florida, Georgia, North Carolina, South Carolina, and Tennessee. causing power outages for approximately 5.5 million customers in those states. Among the 5.5 million customers, approximately 1.25 million, or 22%, were served by 26 out of 132 electric distribution cooperatives operating in the affected states. On the other hand, Hurricane Milton impacted Florida only, resulting in power outages for 3.4 million customers where 340,000, or 10%, were customers of five out of the 21 electric distribution cooperatives in Florida. Three electric distribution cooperatives in Florida were affected by both hurricanes. We have received requests or inquiries for our emergency line of credit product from some of the impacted members and have been working with our members to support their restoration efforts following these hurricanes. We anticipate our members will likely advance funds gradually over the course of the next 12 months. Rural electric cooperatives generally eligible to apply for assistance from the Federal Emergency Management Agency, FEMA, and their states to help recover from major disasters and emergencies. Governors of those states impacted by Hurricane Helene and Milton declared a state of emergency and President Biden declared a federal disaster which enabled assistance from FEMA. Hurricanes Helene and Milton were therefore declared as a natural disaster by FEMA. FEMA typically reimburses up to 75% of eligible costs after restoration is complete. The FEMA reimbursement process could take between two and four years. With that, I'll now turn this caller to Ling, who will review our financial results in greater detail. Thank you.

Thank you, Andrew, and good afternoon, everyone. I'm going to move to slide eight to discuss our financial results for the three-month ended August 31, 2024. which I am going to refer to as the current fiscal quarter end. Our total assets at the current fiscal quarter end were approximately $36.5 billion, an increase of $310 million, or 1% from prior fiscal year end level. This is driven primarily by loan growth. Our loans to members increased by $569 million, or 2%, to $35.1 billion at the current fiscal quarter end. Loans to CSC distribution, power supply, and statewide and associate members accounted for 95% of total loans to members at the current fiscal quarter end. The increase in loans to members was primarily attributable to net increases in loan term and line of credit loans of $386 million and $183 million, respectively. Additionally, approximately $105 million of the loan growth was related to loans to our members' broadband projects. Our aggregate loans outstanding to our electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to an estimated $3.2 billion at the current fiscal quarter end, compared to approximately $3.1 billion at the prior fiscal year end. Our members' equity, which excludes cumulative derivative forward value gains and accumulated other comprehensive loss, increased by $18 million to $2.4 billion from the prior fiscal year end, primarily due to the adjusted net income of $66 million during the current fiscal quarter, partially offset by the CFC Board of Directors authorized patronage capital retirement of $47 million during the current fiscal quarter, which was returned to our members in cash in September 2024. Our adjusted debt to equity ratio was 6.32 to 1 at the current fiscal quarter end, an increase from 6.24 to 1 at the prior fiscal year end. The increase from the prior fiscal year end was primarily driven by increasing adjusted liabilities resulting from additional borrowings to fund loan growth, partially offset by increasing adjusted equity. We are moving away from maintaining the internally established threshold of a six to one adjusted debt to equity ratio and are in the process of making changes of how we calculate and manage our adjusted debt-to-equity ratio that will allow us to continue to execute our business objectives and to sustain our current credit ratings. Looking at slide 9 for our loan portfolio, the composition of our loan portfolio at the current fiscal quarter end remain largely similar to the prior fiscal year end. Our loan portfolio consists mainly of long-term fixed-rate secured loans to rural electric cooperatives. At the current fiscal quarter end, $34.5 billion, or 98% of our loans consisted of loans to rural electric systems, and $611 million, or 2%, to the telecommunications sector. During the current fiscal quarter, we experienced increases in loans outstanding across all member classes. Our distribution loan portfolio increased by $419 million, and our power supply loan portfolio increased by $83 million. We also experienced increases in CSC statewide and associate loans of $27 million, NCSC electric loans of $27 million, and NCSC telecom loans of $13 million during the current fiscal quarter. Our long-term fixed rate loans were worth 87% of our total loan outstanding at the current fiscal quarter end, similar to the level of 88% at the prior fiscal year end. Our long-term loans are typically secured substantially by all assets of the borrower. Long-term loan advances total $848 million during the current fiscal quarter, of which approximately 97% worth was provided to members for capital expenditures. 2% for refinancing of loans made by other lenders, and 1% for other purposes. In comparison, long-term loan advances totaled $711 million during the same prior year period, of which approximately 87% was provided to members for capital expenditures and approximately 13% for other purposes, primarily asset acquisitions. Of the $848 million total long-term loan advance during the current fiscal quarter, $774 million were fixed rate loan advances with a weighted average fixed rate term of 8 years. In comparison, of the $711 million total long-term loan advance during the same prior year period, $659 million were fixed rate loan advances with a weighted average fixed rate term of 14 years. Our line of credit loans outstanding increased by $183 million to $3.6 billion. or 10% of total loans outstanding at the current fiscal quarter end. Based on recent developments regarding the two hurricanes that Andrew mentioned earlier, we expect that we may experience a further increase in our line of credit loans, driven by our members' need for emergency line of credit financing to support their restoration efforts following these recent hurricanes. We typically lend to our members on a senior secure basis, with 91% of our loans being senior secure at the current fiscal quarter end, similar to the level of 92% at the prior fiscal year end. We generally offer long-term amortized loans to our members for up to 35 years. The average remaining maturity of our long-term loans, which accounted for 90% of total loans outstanding at the current fiscal quarter end, was 19 years. LIHTCAN presents historical performance of our loan portfolio for the past three years. The quality of our loan portfolio remains strong, with stable credit metrics. We had only one non-performing loans outstanding at the current fiscal quarter end, totaling $49 million, or 0.14% of total loans outstanding. This loan was made to an electric power supply follower and was put on non-performing during fiscal year 2020. Our allowance for credit losses increased slightly by $1 million to $50 million at the current fiscal quarter end compared to $49 million at the prior fiscal year end. The allowance coverage ratio remained unchanged at 14 basis points at the current fiscal quarter compared to the prior fiscal year end. The $1 million increase in the allowance for credit losses reflected an increase in the collective allowance primarily due to loan growth. we had no loan charge-offs during the current fiscal quarter. Moving on to slide 11, during the current fiscal quarter, we generated an adjusted net income of $66.1 million compared to $66.3 million, which was a slight decrease from the same prior year period. The slight decrease in our adjusted net income was primarily driven by an increase in operating and other expenses of approximately $4 million, partially offset by a combination of an increase in adjusted net interest income, an increase in gains recorded on our investment securities, and an increase in fee and other income of $1 million in each of the categories. During the current fiscal quarter, our adjusted net interest income increased by $1 million, or 1%, from the same prior year period, primarily due to an increase in average interest earning assets of $1.8 billion, or 5%, partially offset by a decrease in adjusted net interest yield of 5 basis points, or 5%, to 1.05%. The increase in average interest earning assets of 5% during the current fiscal quarter was primarily driven by the growth in average total loans of $2 billion, or 6%, attributable primarily to the increases in average long-term fixed rate and line of credit loans discussed previously. The decrease in the adjusted net interest yield of 5 basis points was primarily attributable to an increase in our adjusted average cost of borrowing of 25 basis points to 3.91%, which was partially offset by increasing average yield of interest-earning assets of 17 basis points to 4.69% and an increase in the benefit from non-interest-bearing funding of 3 basis points to 0.27%. The increase in both average yield and interest-earning assets and the adjusted average cost of borrowing were attributable to a continued elevated interest rate environment. Being a member-owned finance cooperative, our primary financial goal focuses on earning an annual minimum adjusted time interest rate ratio, or a tier of 1.1 times. For the current fiscal quarter, our adjusted tier decreased by 0.03, or three ticks, to 1.20, compared to the same prior year period, still comfortably exceeding our target of 1.1 times. Our total debt outstanding was $33.2 billion at the current fiscal quarter end, an increase of $448 million or 1% from the prior fiscal year end, primarily to fund the growth in our loan portfolio. We continue to maintain diverse funding sources, including funding from our members, as well as capital markets and non-capital markets funding. At the current fiscal quarter end, $4.9 billion of CFC's funding came from our members in the form of short-term and long-term investments, an increase of $19 million from the prior fiscal year end. Our member investments represented 15% of our total debt outstanding at the current fiscal quarter end. unchanged from prior fiscal year end. At the current fiscal quarter end, our funding under the Guaranteed Underwriter Program and notes payable with PharmaMac totaled $9.9 billion, or 30% of our total debt outstanding, a $496 million, or 5% decrease from the prior fiscal year end, primarily due to net decreases of $319 million in borrowings under the Farmer Magno Purchase Program, and $177 million decrease under the Guarantee Underwriter Program. Our capital markets-related funding sources totaled $18.4 billion at the current fiscal quarter end, a $925 million or 5% increase from the prior fiscal year end. The increase was primarily due to net increases of $585 million in dealer commercial paper, $349 million in collateral trust bonds, partially offset by a net decrease of $9 million in dealer median term notes. At the current fiscal quarter end, capital markets related funding sources accounted for 55% of our total funding, compared to 53% from the prior fiscal year end. At the current fiscal quarter end, 51% of our total debt was secured and 49% was unsecured. Slightly shifted from 52% for secured and 48% for unsecured at the prior fiscal year end. Our short-term borrowings increased by $84 million to $4.4 billion at the current fiscal quarter end, compared to $4.3 billion at the prior fiscal year end. At the current fiscal quarter end and the prior fiscal year end, short-term borrowings accounted for 13% of our total debt outstanding. The slight increase in short-term borrowing was driven by a $585 million increase in dealer commercial paper, partially offset by a repayment of $500 million in short-term borrowings from PharmaMac. At the current fiscal quarter end and the prior fiscal year end, A total of $3.3 billion of our short-term borrowings came from short-term investments made by our members, representing 75% and 77% of our total borrowings, respectively. As we have discussed, as we have consistently stated, investments from our members are a very reliable funding source with little reinvestment risk, as our member continues to invest a large portion of their excess cash funds with us. Our member short-term investments have averaged $3.5 billion over the last 12 fiscal quarter end reporting periods. Slide 13 shows the variable sources of liquidity that CFC had in place at the current fiscal quarter end. Our available liquidity included cash investment, Committed Bank Lines, Committed Loan Facilities under the Guaranty Underwriter Program, and Farmer Mag Note Purchase Agreement, totally $6.95 billion at the current fiscal quarter end. Subsequent to the current fiscal quarter end, in September 2024, we received an additional $450 million commitment under the Guaranty Underwriter Program. We expect to close this commitment by this calendar year end. As indicated in the table on the right side, at the current fiscal quarter end, we had a total of $7.4 billion in debt maturities over the next 12 months, with $3.3 billion of these debt maturities representing short-term investments from our members. Based on our experience, we expect our members to roll over a large portion of their short-term investments with us at maturity. The remaining $4.1 billion in debt maturities includes $1.1 billion in dealer commercial paper and $3 billion in long-term and subordinated debt obligations. These obligations are well covered by the $6.95 billion liquidity discussed previously. It is also worth noting that the $6.95 billion liquidity does not include the $1.6 billion scheduled repayment and amortization on long-term loans we expect to receive from our members over the next 12 months. Slide 14 summarizes CFC's long-term debt issuance needs over the next 18 months, subsequent to the current fiscal quarter end. Our cash needs are derived from two primary areas. refinancing existing debt maturities, and funding loan advances to our members, partially offset by the amortization and repayment of loans from our members. Our funding needs are also driven by our member investment levels. During the current fiscal quarter, we issued $350 million of collateral trust funds and borrowed $200 million under the no-purchase agreement with PharmaMac. Subsequent to the current fiscal quarter end in September, we issued a total of $1 billion in fixed and floating rate median term notes with tenors ranging from three to five years. As a result, our outstanding dealer commercial paper decreased to $155 million as of September 30, 2024, as we used the proceeds from these issuance to pay down commercial paper. Over the next 18 months from September 2024 through February 2026, We have a total of $5.4 billion of long-term debt maturities at amortization, consisting of $3.6 billion in capital markets debt and $1.8 billion in non-capital markets debt. We expect our net loan growth over the same period to be approximately $2.2 billion. As indicated in the chart, we project issuing approximately $6.6 billion in long-term debt over this time period to refinancing to refinance existing debt and fund expected loan growth. Thank you once again for joining us today to review our results for our first fiscal quarter ended August 31, 2024. We appreciate your interest in CFC and look forward to discussing our financial performance and funding plans in the future. I would like to ask the operator to open the lines for questions. and also suggest that you can submit your questions via the web service so we may respond to those as well. Thank you.

Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. If you are in the event via the web interface and would like to ask a question, simply type your question into the ask a question box and click send. We will pause for just a moment to allow everyone an opportunity to ask a question.

At this time, we do not have any questions over the phone.

Okay, so we do have a question that's asked via the web service. The question is, can we talk about the issuance needs in Q4 and 2025? I think if you look at our material, We have issued, in September of 2024, we issued about a billion of median term notes in the form of fixed and floating rate debt. So that's in September of 2024. And if you look at our projections, we forecast to issue approximately a billion of debt in Q2. of our fiscal year, which is Q4 of 2024, calendar year. So when you say Q4, I'm assuming you mean Q4 of 2024. So we say we're going to issue a billion, which we have issued a billion in September. Our 2025 issuance plan, I think we have showed it That will be what we will call the February 28, 2025, May 31, 2025. So the long-term debt issuance, if you add those up, it will probably be around $3 to $4 billion. That will be the 2025 issuance plan for calendar year.

This is the operator, and we do have a question over the phone. We'll take a question from Raymond Leung with Scotiabank.

Andrew, hey, Ling, thanks for your time. Just a question. You mentioned Fitch just affirmed your ratings. Any insights on the other two agencies, you know, thoughts around them and any update with respect to that?

Timing, Ray, is your question about timing or is that what it's related to?

Yeah. Yeah, I guess typically I suspect you guys all go in at the same time to see the agencies, unless I'm misreading that.

Yeah.

And just update on the news from the other two.

Yeah, so Fitch already reaffirmed our ratings outlook, so we already met with Fitch. We actually met with S&P a few weeks ago. Do we expect them to say something soon? Moody's, we have, I think if you look at last time, they refreshed our ratings and outlook. It was actually February of 2024, so this year, earlier this year. So they do it once a year. We are planning to meet with Moody's sometime in November. I would expect they will follow a similar timeline to refresh their ratings and outlook for us.

Okay, great. I'll see you all in a couple of weeks.

Yes, see you in a couple of weeks.

Thank you. Once again, if you would like to ask a question over the phone, please signal by pressing star 1.

We do have a question about what change is being evaluated for the leverage target?

It's something that we've spent a lot of time discussing both internally and with our board of directors. It's still in process. What we're contemplating potentially doing is something that more closely mirrors the calculations that we see coming out of Moody's and Fitch. We think that will be more instructive and more beneficial for investors on a going forward basis. So I think that's the timing. look to do something, you know, within the next couple of months in terms of finalizing kind of what I'll call a new target and description of it. But it won't, I mean, I think it's just to make, have greater transparency between, you know, how we're calculating it and how the agencies calculate. It'll be our own, it'll be our own calculation.

There's another question. What are we seeing in terms of data center issues, demand supply, and what is your outlook on that?

We're getting a lot of inquiries from our members around data centers. I mean, you know, I think it's very topical and, again, a lot of interest from the hosts, you know, the people that put the data centers in place into electric cooperative service territories. It has not as yet resulted in direct requirements for increased generation capacity. It is concentrated certainly in certain states, Virginia being one of them, of course, southeast part of the country. Georgia's getting a lot of inquiries, so along the coast. But I can tell you, I think we are hearing pretty consistently from a large number of our members that they are getting inquiries from, again, data center owners and operators, but we have not seen any requests for increased capital to support this as yet. And, you know, whether on a, you know, related to either distribution or transmission capex or on the generation side. So I think our co-operative is still evaluating opportunities and see where it makes sense. But it has not resulted in any definitive or increase in loan demand for CFC at the current time.

We do have another question about leverage, which I can't answer. Elaborate on the decision to adjust the six to one debt to equity ratio target and any impact EQHAP ratings. I think we are, like Andrew said, we are evaluating the way we calculate the leverage ratio to be more consistent with what the rating agencies' methodology. Different rating agencies have a different leverage ratio target for us. As we have consistently stated, ratings are very important to us. Whatever that we come up with that will be in line with our current rating. Right now, I think we are well below what the rating agencies leverage target for us. Another question, do we expect any credit losses from co-ops impacted by the hurricane?

As we detailed, we do not expect any. We have to be frank. Obviously, these types of weather events have happened numerous times over the past years, and cooperatives have been able to manage through that. We typically, as I said in our formal comments, do provide what's called emergency line of credit so that people can, if they do have increased needs on a kind of short-term basis, that they can get those put in place. and they can focus on restoring their business and operations. But we have never actually had any loss related to any lines of credit or funding that we've provided to cooperatives for rebuilding their systems related to hurricanes. Again, it's because they are eligible for FEMA reimbursement. It can be a lengthy process, but it can take several years to get that reimbursement done. but they do typically get reimbursed anywhere from 75% to 90% of expenditures, depending on state contributions as well. So we have never seen any type of a credit loss related to a hurricane. Obviously, Winter Storm Yuri was an extreme weather event. There was a nominal occurrence there, because that was not eligible for FEMA reimbursement as well.

One more question we have on the web. Can we talk about how we will bridge the funding gap of over a billion between the cash needs and long-term debt issuance? I think if you look at our slide, these are what we projected long-term debt issuances. So it does not include the fluctuations that we have in for our dealer commercial paper or our member investment. So the $1 billion gap that you see will probably be breached either by issuance of additional dealer commercial paper or our member investment. Operator, are there any questions from the participants on the phone?

We have no further questions over the phone.

Okay, I think we have answered all the questions we have on the web service as well. If you have any additional questions, feel free to contact myself or Hisung Choi. We are planning to be at the EEI in November, so we can do a one-on-one meeting or small group meeting. If you're interested in that, you can reach out to us, and we'll see what will fit into our schedule. Thank you.

This does conclude today's call.

Thank you.

Thank you for your participation.