United States General Accounting Office

GAO Report to the Chairman, Committee on

the Budget, House of Representatives

April 1997 RURAL

DEVELOPMENT

Financial Condition of

the Rural Utilities

Service’s Loan

Portfolio

GAO/RCED-97-82

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-275588 

April 11, 1997

The Honorable John R. Kasich

Chairman, Committee on the Budget

House of Representatives

Dear Mr. Chairman:

To assist in the development of infrastructure in the nation’s rural areas,

the Rural Utilities Service (RUS) in the U.S. Department of Agriculture

(USDA) made or guaranteed about $10.4 billion in loans during fiscal years

1992 through 1996. Because of the concerns you raised about the financial

risks associated with RUS’ lending, we examined the (1) financial condition

of the electricity, telecommunications, and water and waste disposal loan

portfolios and (2) financial characteristics of borrowers having electricity

and telecommunications loans.1

 We did not examine the financial

characteristics of borrowers with water and waste disposal loans because

most are public entities rather than private firms.

Results in Brief At the end of fiscal year 1996, over $8 billion of the total $42.5 billion in

outstanding principal on the Rural Utilities Service’s electricity,

telecommunications, and water and waste disposal loans was owed by

borrowers that were experiencing financial problems (i.e., they were

delinquent, in bankruptcy, or likely to default on loan repayment in the

future). Almost all of this amount was owed by 12 electricity loan

borrowers, representing less than 2 percent of the total number of

electricity loan borrowers. These 12 borrowers owed almost 25 percent of

the outstanding electricity loan portfolio. Of the $5.2 billion in outstanding

principal on the telecommunications loans, none was owed by borrowers

experiencing similar financial distress. Of the slightly more than $5 billion

in outstanding principal on water and waste disposal loans, $43 million

was owed by 70 delinquent borrowers that made up less than 1 percent of

total borrowers and that owed less than 1 percent of the outstanding

portfolio.

Most electricity and telecommunications loan borrowers had favorable

financial characteristics at the end of calendar year 1995. For example,

year-end reports to the Rural Utilities Service showed that more than 98

percent of the electricity loan borrowers and more than 99 percent of the

1

RUS operates loan programs formerly administered by other USDA agencies. In this report, we refer

to these loans and programs as RUS’ loans and programs.

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telecommunications loan borrowers had positive equity at the end of 1995.

About 95 percent, or a total of 1,610 borrowers, had equity of $1 million or

more. Similarly, the year-end reports showed that about 96 percent of the

electricity loan borrowers and about 98 percent of the telecommunications

loan borrowers made a profit in 1995. About 92 percent, or a total of 1,565

borrowers, made a profit of $100,000 or more. However, 10 electricity and

3 telecommunications loan borrowers had negative equity at the end of

1995. Nine of these electricity loan borrowers owed about $6.2 billion as of

September 30, 1996; the loans of the 10th borrower were resolved prior to

that date when the borrower made a partial payment and the agency wrote

off the remaining debt. The three telecommunications loan borrowers

owed about $5.4 million as of September 30, 1996. Also, 38 electricity and

14 telecommunications loan borrowers did not make a profit in 1995; these

borrowers owed about $1.2 billion and about $103 million, respectively, as

of September 30, 1996.

Background USDA is the federal government’s principal provider of loans used to assist

the nation’s rural areas in developing their utility infrastructure. Through

RUS, USDA finances the construction, improvement, and repair of electrical,

telecommunications, and water and waste disposal systems. The agency

provides credit assistance through direct loans and through repayment

guarantees on loans made by other lenders.

Electricity loans are made primarily to electric cooperatives; more than 99

percent of the borrowers with electricity loans are nonprofit cooperatives.

Direct loans are made to construct and maintain the distribution facilities

that provide electricity to users, and guarantees are provided on loans to

finance the construction of electricity generating and transmission

facilities. Telecommunications loans—both direct and guaranteed—are

made primarily to telephone cooperatives and commercial companies to

build and improve telephone and telecommunications facilities and

services; about 28 percent of the borrowers with telecommunications

loans are nonprofit cooperatives, and about 72 percent are for-profit

companies. RUS also administers the Rural Telephone Bank (RTB) loan

program, in which direct loans are made to supplement the financing that

telephone cooperatives and commercial companies receive from RUS

through the telecommunications loan program.2 Water and waste disposal

loans, either direct or guaranteed, are made to public bodies and nonprofit

associations; about 80 percent of the borrowers with water and waste

2

RTB is a government-private corporation with federal agency status until it is privatized through the

retirement of the stock that the government owns. Privatization began in fiscal year 1996, when RTB

purchased $18 million of the federally owned stock.

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disposal loans are public bodies, and about 20 percent are nonprofit

associations. Water loans are made to improve the storage, treatment, and

distribution of water, and waste disposal loans are made to collect, treat,

and dispose of waste, including solid waste and storm drainage. (App. I

provides additional details on each of the utility loan programs.)

RUS’ Recent Loan

Obligations

During fiscal years 1992 through 1996, RUS made or provided USDA

guarantees on slightly more than 6,150 utility loans, which totaled about

$10.4 billion. Table 1 shows the level of loans in each of the utility

programs.

Table 1: Total Number and Amount of

Utility Loans Made or Guaranteed by

RUS, Fiscal Years 1992-96

Dollars in millions

Program

Total number

of loans

Total dollar

amount of loans

Average dollar

amount of loans

Electricity 880 $ 4,352.4 $4.9

Telecommunicationsa 510 2,575.1 5.0

Water and waste disposal 4,764 3,464.3 0.7

Total 6,154 $10,391.8 $1.7

aIncludes Rural Telephone Bank loans.

Sources: USDA, Budget Explanatory Notes for Committee on Appropriations, fiscal years 1994

through 1997; RUS’ reports; and as calculated by GAO.

Direct loans accounted for 6,033 of the total loans and for $8.9 billion of

the total loan amount. The other 121 loans had USDA guarantees—83 loans

were electricity or telecommunications loans, and 38 were water and

waste disposal loans. All electricity and telecommunications loans that

received USDA repayment guarantees during this 5-year period were made

by the Treasury’s Federal Financing Bank (FFB);3

 all water and waste

disposal loans that received guarantees were made by commercial lenders.

(App. I provides detailed information on direct and guaranteed loans in

each of the utility loan programs for fiscal years 1992 through 1996.)

RUS’ Recent Cost for

Operating the Utility Loan

Programs

RUS’ cost for the utility loan programs totaled about $1.4 billion in fiscal

years 1992 through 1996. This cost consists of two components: federal

subsidy costs and administrative costs for salaries and other expenses.

The subsidy cost under credit reform (post-fiscal year 1991 credit)

3

Loans made by the FFB that have USDA repayment guarantees are treated in RUS’ financial

statements as direct loans.

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includes net present value estimates of (1) the interest costs associated

with loans made at rates below the rate at which RUS borrows from the

Treasury, (2) default costs, (3) fees, and (4) other costs and revenues.4

(App. I presents a more detailed discussion of the principles and

requirements of credit reform.) Table 2 shows RUS’ reported costs for each

of the utility programs.

Table 2: RUS’ Total Costs for Utility

Loans, Fiscal Years 1992-96 Dollars in millions

Program Subsidy costs

Administrative

costsa Total costsb

Electricity $ 446.2 $105.1 $ 551.3

Telecommunicationsc 108.3 82.0 190.3

Water and waste disposal 544.7 154.9 699.7

Totalb $1,099.2 $342.1 $1,441.3

aRUS’ administrative costs apply to the operation of both direct and guaranteed loans. The

amounts shown do not include any costs that the FFB or commercial lenders may have incurred.

bTotals may not add due to rounding.

cIncludes the costs of Rural Telephone Bank loans.

Sources: Obligation data on subsidy costs obtained from USDA, Budget Explanatory Notes for

Committee on Appropriations, fiscal years 1994 through 1997, and the Budget Division of USDA’s

Rural Development mission area. Administrative costs were obtained from the latter.

About 54 percent of RUS’ total subsidy costs on electricity loans involved

loans made in fiscal years 1992 and 1993; the remaining 46 percent

involved loans made during fiscal years 1994 through 1996. On

telecommunications loans, about 69 percent of the total subsidy costs

involved loans made in the first 2 fiscal years, and 31 percent involved

loans made in the last 3 fiscal years. On the other hand, about 31 percent

of the total subsidy costs on water and waste disposal loans involved loans

made in fiscal years 1992 and 1993, and 69 percent involved loans made in

fiscal years 1994 through 1996.

Almost 99 percent of RUS’ total subsidy costs involved direct loans. About

59 percent of the electricity loans were direct loans made at a 5 percent

interest rate; these loans accounted for about 42 percent of the total dollar

amount of all electricity loans. About 24 percent of the

telecommunications loans were direct loans made at a 5 percent interest

4

The Federal Credit Reform Act of 1990, which was included as Title 13B of the Omnibus Budget

Reconciliation Act of 1990 (P.L. 101-508, Nov. 5, 1990) changed the way post-fiscal year 1991 credit

programs are reported in the budget by ensuring that their subsidy costs were considered in making

resource allocation decisions.

Page 4 GAO/RCED-97-82 RUS’ Utility Loans
B-275588 

rate; these loans accounted for about 27 percent of the total dollar amount

of all telecommunications loans. Also, about 91 percent of the water and

waste disposal loans were direct loans made at interest rates that were

less than RUS’ costs of borrowing from the Treasury; these loans accounted

for about 87 percent of the total dollar amount of all water and waste

disposal loans. (App. I discusses loans with subsidized interest rates.)

We did not assess the accuracy of RUS’ reported subsidy cost estimates or

the adequacy of the system used by RUS to derive such estimates under

credit reform. (App. I provides detailed information on the reported costs

for the direct and guaranteed loans in each of the utility loan programs for

fiscal years 1992 through 1996, and further discussion of subsidy costs.)

Financial Condition of

Portfolio

The outstanding principal on RUS’ direct and guaranteed electricity,

telecommunications, and water and waste disposal loans totaled $42.5

billion at the end of fiscal year 1996.5

 About $660 million of the total

outstanding principal was owed by borrowers that were delinquent (at

least 30 days past due on loan repayment)—about $618 million by

delinquent borrowers with electricity loans and about $43 million by

delinquent borrowers with water and waste disposal loans. The

telecommunications loan portfolio had no delinquencies. Much more of

the outstanding electricity loan principal is at risk, however, because it is

owed by other borrowers that are experiencing financial distress; for

example, they are in bankruptcy or, according to RUS officials, are likely to

default on loan repayment in the near future. RUS’ records show that a total

principal of $7.4 billion was owed by such borrowers at the end of fiscal

year 1996. Four borrowers whose loans had previously been restructured

(the original loan agreements were altered, including revised repayment

schedules and changes in interest rates) and that continue to be in severe

financial trouble owe $5.7 billion; four other borrowers whose loans had

not previously been restructured and that are also in serious financial

difficulty owe $1.1 billion; and, one other borrower whose loans had

previously been restructured and that informed RUS in early fiscal year

1997 that it was experiencing financial difficulties owes $0.6 billion. Most

of the electricity loans to RUS’ problem borrowers were made many years

ago—some dating back to the late 1970s.

5

The information in this section of the report discusses the outstanding principal on the loans made or

guaranteed by RUS. We have not adjusted the outstanding loan amounts to reflect the allowance for

losses that RUS includes in its financial statements. Also, while borrowers have pledged collateral

property as security for the loans, we did not determine the extent to which such property protects the

government’s investments in the outstanding utility loans.

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This relatively high dollar amount of problem loans exists even though RUS

had written off some borrowers’ debts in recent years. Most of the

write-offs have involved electricity loans, but some water and waste

disposal loans have also experienced write-offs. Specifically, RUS wrote off

almost $1.05 billion in electricity loans during the 5-year period, fiscal

years 1992-96. It also wrote off $6 million in water and waste disposal

loans during this period.

Electricity Loans According to RUS’ reports, about $8 billion, or almost 25 percent of the

$32.3 billion in outstanding principal on electricity loans as of

September 30, 1996, was owed by 12 borrowers that are delinquent or in

financial distress. These 12 borrowers made up less than 2 percent of the

total number of RUS’ electricity loan borrowers.

About $618 million of principal was owed by three delinquent borrowers.

These three borrowers, each of which had been delinquent since the

mid-1980s, also owed almost $400 million in unpaid interest. Table 3 shows

the amount of principal owed by all borrowers, and the portion owed by

delinquent borrowers, on electricity loans at the end of fiscal year 1996.

(App. II provides information on electricity loans at the end of fiscal years

1992 through 1995.)

Table 3: Amount of Outstanding

Principal on Electricity Loans Made or

Guaranteed by RUS, and Portion Owed

by Delinquent Borrowers, as of

September 30, 1996

Dollars in millions

Loan type

Outstanding principal

owed by all borrowers

Amount owed by

delinquent borrowers

RUS’ direct loans $11,475.2 $ 29.6

Guaranteed FFB loans 13,328.6 572.0

Other guaranteed loans 664.7 16.3

Restructured loansa 6,841.1 0

Total $32,309.6 $617.9

aIncludes previously issued (1) direct loans made by RUS, (2) guaranteed loans made by the

FFB, (3) guaranteed loans made by commercial lenders on which RUS agreed to be directly

liable for repaying the loan, and (4) loans that had been owed by borrowers now assumed by

other utilities. The amounts cover the principal and the capitalized interest owed on the loans. The

loans in this category are not included in the other direct and guaranteed loan categories.

Source: RUS’ reports.

Each of the three delinquent borrowers has filed for bankruptcy.

According to RUS officials, two of the borrowers (a distribution borrower

and a power supply borrower) have problems that stem from investments

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in the same nuclear-generating plant, which resulted in high levels of debt

and debt-servicing expenses, coupled with a lack of growth in their

customer bases. At the end of fiscal year 1996, the distribution borrower

owed $15.1 million in outstanding principal and $4 million in unpaid

interest on RUS’ direct loans. The power supply borrower owed

$41.2 million in principal and $21.5 million in interest on RUS’ direct and

guaranteed loans. Both borrowers filed for bankruptcy in April 1996. The

third delinquent borrower has a high debt level because it invested in a

nuclear-generating plant that was not completed. This power supply

borrower, which owed $561.5 million in principal and $373.4 million in

interest on loans guaranteed by RUS, has been in bankruptcy since 1985.

In addition to delinquent borrowers, the electricity loan program had other

problem borrowers at the end of fiscal year 1996. These include four

power supply borrowers that previously had their debts restructured and

that continued, according to RUS officials, to be in severe financial trouble.

According to the RUS officials, these borrowers’ problems stem from their

investments in nuclear-generating plants that were completed late and

over budget or in coal-fired generating plants that were built to satisfy

anticipated industrial growth that did not occur. These borrowers’ debts

had been restructured at least once in the 1980s or the early part of 1990.

Two of these borrowers had filed for bankruptcy: One, with $4.2 billion in

outstanding loans, filed in 1994, and the other, with $531 million in

outstanding loans, filed in 1996. The third borrower with $293 million of

debt was negotiating the resolution of its outstanding loans at the time of

our review. The fourth borrower, with more than $700 million in

outstanding loan principal and about $36 million in accrued interest, had

agreed in late 1995 to provide a lump-sum payment to settle its electricity

debt. (In mid-October 1996, this borrower paid RUS about $240 million, and

RUS forgave slightly more than $500 million.)

Furthermore, according to RUS officials, four other power supply

borrowers, none of which have had their debts restructured, were also in

serious financial difficulty at the end of fiscal year 1996. RUS’ automated

records show that, as of September 30, 1996, these four borrowers owed a

total principal of about $1.1 billion on direct and guaranteed electricity

loans.

RUS officials also told us that another power supply borrower, which had

had its debts restructured in the mid-1980s, had requested in October 1996

that RUS consider renegotiating its debt because it does not expect to

remain financially viable due to increasing competition and a high

Page 7 GAO/RCED-97-82 RUS’ Utility Loans
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debt-service expense. As of September 30, 1996, this borrower owed

$562.3 million of principal on direct and guaranteed loans.

RUS continues to experience problems with its electricity loan portfolio

even though it wrote off $1,047.4 million for three borrowers from fiscal

years 1992 through 1996. These three borrowers had had their debts

restructured prior to the agreements that resulted in the RUS write-offs;

none was delinquent on the terms of the restructured loans when the debt

settlement agreements were completed. These three borrowers were a

distribution borrower that had $13.7 million written off in February 1994, a

power supply borrower that had $51.7 million written off in August 1995,

and another power supply borrower that had about $982 million written

off in September 1996.

RUS’ electricity loan portfolio faces the possibility of additional financial

stress due to increasing competition among the providers of electricity.

For example, as we previously reported,6

 competition in the wholesale

electricity market is increasing as a result of legislation that was enacted

in the early 1990s, such as the Energy Policy Act of 1992 (P.L. 102-486,

Oct. 24, 1992). The act encouraged additional wholesale suppliers to enter

the electricity market and provided greater access to other utilities’

transmission lines.

Telecommunications Loans According to RUS’ reports, the outstanding principal owed on

telecommunications loans totaled $5.2 billion as of September 30, 1996. Of

this amount, RUS’ direct loans accounted for $3.4 billion, loans guaranteed

by RUS accounted for $320 million ($318 million on FFB loans and $2 million

on non-FFB loans), and RTB’s direct loans accounted for $1.5 billion. (App.

II provides information on telecommunications loans at the end of fiscal

years 1992 through 1995.)

RUS’ telecommunications loan program does not display the level of risk

that exists in the electricity loan program or, to a lesser extent in the water

and waste disposal loan program. Specifically, there were no

delinquencies on these loans.7

 In addition, the RUS telecommunications

6

Power Marketing Administrations: Cost Recovery, Financing, and Comparison to Nonfederal Utilities

(GAO/AIMD-96-145, Sept. 19, 1996) and Federal Electric Power: Operating and Financial Status of

DOE’s Power Marketing Administrations (GAO/RCED/AIMD-96-9FS, Oct. 13, 1995).

7

We do not include as delinquent those telecommunications loan borrowers that are shown in RUS’

reports as being past due on repayments when the delinquency was due to billing, payment, or

administrative errors and when the past due amount was paid shortly after the start of the next fiscal

year.

Page 8 GAO/RCED-97-82 RUS’ Utility Loans
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loan portfolio has no loans that have been restructured because of past

repayment problems or that had been flagged by the agency’s officials as

being in serious financial difficulty. Furthermore, RUS did not write off the

debt of any telecommunications loan borrowers during fiscal years 1992

through 1996.

However, the industry in which RUS’ telecommunications loan borrowers

operate is changing. In particular, as we previously reported,8

 there have

been rapid advances in technology and changes in the legislative

environment, such as the Telecommunications Act of 1996 (P.L. 104-104,

Feb. 8, 1996). These factors could work to either the betterment or the

detriment of the borrowers that have telecommunications loans.

Water and Waste Disposal

Loans

According to RUS’ reports, less than 1 percent of the outstanding principal

on water and waste disposal loans was owed by borrowers that were

delinquent. Specifically, the outstanding principal on water and waste

disposal loans totaled slightly more than $5 billion as of September 30,

1996; direct loans accounted for all but about $8 million of this amount. On

the direct loans, 70 delinquent borrowers owed $43.3 million at the end of

fiscal year 1996. These 70 borrowers made up less than 1 percent of the

total number of water and waste disposal direct loan borrowers. On

guaranteed loans, there were no delinquencies. (App. II provides

information on water and waste disposal loans at the end of fiscal years

1992 through 1995.)

When borrowers have had problems repaying their water and waste

disposal loans on schedule, RUS has changed their repayment schedules.

During fiscal years 1992 through 1996, 33 borrowers had their repayment

schedules revised; these borrowers owed RUS $54.1 million at the end of

fiscal year 1996. There was no debt forgiveness associated with these

payment changes.

RUS has, however, provided debt relief to other problem borrowers. During

fiscal years 1992 through 1996, RUS forgave slightly more than $6 million in

settling the accounts of 12 water and waste disposal loan borrowers.

These write-offs ranged from slightly less than $6,000 for a borrower

whose debt was resolved through bankruptcy to $3.1 million for a local

development authority following the transfer of its assets and debts to

another public body.

8

Rural Development: Steps Toward Realizing the Potential of Telecommunications Technologies

(GAO/RCED-96-155, June 14, 1996) and Telecommunications: Initiatives Taken by Three States to

Promote Increased Access and Investment (GAO/RCED-96-68, Mar. 12, 1996).

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Financial

Characteristics of

RUS’ Electricity and

Telecommunications

Borrowers

While the majority of borrowers with electricity or telecommunications

loans had generally favorable financial characteristics, some did not.

Specifically, RUS has automated records that contain the financial data

submitted by about 96 percent of its 1,778 electricity and

telecommunications loan borrowers at the end of 1995.9

 While the

overwhelming majority of borrowers had positive equity at the end of

1995, 13 borrowers, or about 1 percent, had negative equity. Also, while

most had a profit as a result of 1995 operations, 52 borrowers, or

3 percent, had a loss.10 Furthermore, 14 of the 52 borrowers that had

losses in 1995 also had losses in at least 1 year between 1992 and 1994.

Electricity Loans RUS’ automated files contained financial information for 804 distribution

borrowers and 51 power supply borrowers with outstanding electricity

loans (direct and/or guaranteed loans) at the end of 1995. On the basis of

the measures we used, which included net worth and net income, we

found that even though the dollar amount of problem electricity loans was

relatively large, most, but not all, electricity loan borrowers had generally

favorable financial characteristics. For example, the distribution

borrowers had average assets of $37.4 million, liabilities of $21.6 million,

and a net worth of $15.8 million. All but five of these borrowers had

$1 million or more of net worth; however, two had a negative net worth.

These two borrowers owed about $32 million on their outstanding

electricity loans as of September 30, 1996. In comparison, power supply

borrowers had average assets of $633 million, liabilities of $622.1 million,

and a net worth of $10.9 million. Of the power suppliers, 42 had $1 million

or more of net worth, but 8 had a negative net worth. Seven of these 8

borrowers owed about $6.1 billion on their outstanding electricity loans as

of September 30, 1996. The electricity loans of the eighth borrower were

settled on September 13, 1996, when the borrower made a partial payment

and RUS wrote off the remaining debt.

Another financial characteristic of the borrowers with electricity loans is

the net income they made in 1995. The distribution borrowers had average

operating revenues of $18.9 million, operating expenses of $17.2 million,

and a net operating income of $1.7 million. Overall, they had a total profit

of $1 billion, or about $1.3 million on average. All but 34, or 4.2 percent, of

9

The information presented in this section of the report on borrowers’ financial characteristics is

calendar year data taken from RUS’ databases. While RUS’ files contain financial information on the

majority of its borrowers, they did not include financial data for the year ending 1995 for 4 of the 12

electricity loan borrowers that were delinquent or experiencing financial difficulty.

10RUS refers to the profits made by electricity and telecommunications loan borrowers that are

nonprofit cooperatives as “net margins” and to the losses as “deficits in net margins.”

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these borrowers had a profit in 1995. The 34 borrowers that had a loss

owed $359 million on their outstanding electricity loans as of

September 30, 1996. Furthermore, 10 of these 34 borrowers had losses in

at least 1 year between 1992 and 1994. In comparison, the power suppliers

had average operating revenues of $190.3 million, operating expenses of

$161.5 million, and a net operating income of $28.8 million. Overall, the

power suppliers had $234 million in total profit, or about $4.6 million on

average. However, four borrowers, or 7.8 percent, did not have a profit in

1995. These four borrowers owed $866 million on their outstanding

electricity loans as of September 30, 1996. Furthermore, two of these four

borrowers had losses in at least 1 year between 1992 and 1994.

Our analysis also showed that, in general, the majority of electricity loan

borrowers had other favorable financial ratios. This part of our analysis

covered the following measures, which are also discussed below: current

ratio, which is a measure of liquidity, and debt-to-asset ratio and

times-interest-earned ratio, which are measures of solvency.

Current ratio. This measure shows the extent to which a borrower has

sufficient current assets to cover its current liabilities. About 88 percent of

the distribution borrowers and 94 percent of the power supply borrowers

had current assets that equaled or exceeded their current liabilities.

However, 100 distribution borrowers and 3 power suppliers had current

ratios of less than 1, indicating that they could not, if necessary, cover

their current liabilities with their current assets.

Debt-to-asset ratio. This measure shows the extent to which a borrower

has sufficient assets to cover all of its debt. About 93 percent of the

distribution borrowers and about 22 percent of the power supply

borrowers had ratios in the range of 70 percent or less. However, 51

distribution borrowers and 32 power suppliers had ratios of between

71 percent and 99 percent. Furthermore, two distribution borrowers and

eight power suppliers had ratios that exceeded 100 percent, showing that

their total debt was greater than their total assets.

Times-interest-earned ratio. This measure shows the ability of a borrower

to pay its annual interest expenses. About 96 percent of the distribution

borrowers and about 92 percent of the power supply borrowers had 1995

income that equaled or exceeded their 1995 interest expenses. However,

the income of 34 distribution borrowers and of 4 power suppliers was less

than their 1995 interest expenses, indicating that their ability to cover

those expenses as they come due was questionable.

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The financial characteristics of electricity loan borrowers at the end of

1992 through 1994 show results similar to the characteristics at the end of

1995. (App. III provides a more detailed analysis of the borrowers’

characteristics for 1992 through 1995.)

Telecommunications Loans RUS’ automated files contained financial information for 848 borrowers

with outstanding telecommunications loans (direct and/or guaranteed

loans) at the end of 1995. On the basis of the measures we used, including

net worth and net income, we found that the vast majority, but not all, of

these borrowers also had generally favorable financial characteristics. For

example, these borrowers had average assets of $17.7 million, liabilities of

$9.3 million, and a net worth of $8.4 million. Almost 91 percent of them

had a net worth of $1 million or more. However, three borrowers had total

liabilities that exceeded their total assets. These three borrowers owed

$5.4 million on their outstanding telecommunications loans as of

September 30, 1996. RUS officials told us that these three borrowers had

received loans during 1992 and 1993 to start their telecommunications

operations or to rebuild their systems. RUS officials also told us that they

anticipate that these borrowers will achieve a positive equity position in

late 1997 and 1998 once construction is completed and service to

customers is provided.

Another financial characteristic of the borrowers with

telecommunications loans is the net income they made in 1995. The

telecommunications loan borrowers had average operating revenues of

$6 million, operating expenses of $4.6 million, and a net operating income

of $1.4 million. Overall, they had a total profit of $772.6 million and an

average profit of slightly more than $910,000. Twenty-nine percent of the

borrowers made more than $1 million in profit in 1995; these borrowers

accounted for 92.5 percent of the total profit. However, 14 borrowers had

a loss in 1995. These 14 borrowers owed $103 million on their outstanding

telecommunications loans as of September 30, 1996. Furthermore, 2 of

these 14 borrowers had losses in at least 1 year between 1992 and 1994.

Our analysis also showed that, in general, the majority of

telecommunications loan borrowers had other favorable financial ratios.

This part of our analysis covered the following measures that we

previously discussed for the electricity borrowers: current ratio,

debt-to-asset ratio, and times-interest-earned ratio.

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Current ratio. About 91 percent of the borrowers had current assets that

equaled or exceeded current liabilities. However, 73 borrowers had

current ratios of less than 1, indicating that they could not, if necessary,

cover their current liabilities with their current assets.

Debt-to-asset ratio. About 88 percent of the borrowers had ratios of

70 percent or less. However, 98 borrowers had ratios of between

71 percent and 99 percent, and 3 borrowers had ratios that exceeded

100 percent.

Times-interest-earned ratio. About 98 percent of the borrowers had

income that equaled or exceeded their interest expenses. However, the

income of 14 borrowers was less than their interest expenses.

As was the case with the electricity loan borrowers, our analysis of the

financial characteristics of telecommunications loan borrowers at the end

of 1992 through 1994 shows results similar to those at the end of 1995.

(App. III also provides a more detailed analysis on the characteristics of

the telecommunications loan borrowers for 1992 through 1995.)

Agency Comments We provided a draft of this report to USDA for its review and comment.

USDA provided comments on two areas. First, USDA agreed that RUS has a

significant problem with a small number of electricity loan borrowers that

are experiencing financial difficulty. USDA stated that much of the problem

relates to loans that were made to borrowers many years ago for

investments involving nuclear power-generating plants and related

transmission facilities. USDA added that RUS and the Department have been

working, in some cases in conjunction with the Department of Justice, in

an attempt to resolve the agency’s problems. Second, USDA stated that the

Rural Electrification Loan Restructuring Act of 1993 (P.L. 103-129, Nov. 1,

1993) significantly amended the RUS electricity and telecommunications

programs and dramatically reduced their cost to the government. USDA

provided a comparison of the total dollar amounts of subsidy costs and

loan levels shortly before and after passage of the law. USDA’s comments

are contained in appendix IV.

We performed our review of RUS’ utility loan programs from April 1996

through February 1997 in accordance with generally accepted government

auditing standards. Our scope and methodology are discussed in appendix

V.

Page 13 GAO/RCED-97-82 RUS’ Utility Loans
B-275588 

We are sending copies of this report to the appropriate Senate and House

committees; interested Members of Congress; the Secretary of Agriculture;

the Administrator of RUS; the Director, Office of Management and Budget;

and other interested parties. We will also make copies available to others

upon request.

Please call me at (202) 512-5138 if you or your staff have any questions.

Major contributors to this report are listed in appendix VI.

Sincerely yours,

Robert A. Robinson

Director, Food and

 Agriculture Issues

Page 14 GAO/RCED-97-82 RUS’ Utility Loans
Page 15 GAO/RCED-97-82 RUS’ Utility Loans
Contents

Letter 1

Appendix I 

Description of RUS’

Utility Loan Programs

20

Utility Loan Programs 20

Loan Making and Servicing 23

Loans Made and Guaranteed in RUS’ Utility Loan Programs 24

RUS’ Costs for the Utility Loan Programs 28

Credit Reform 30

Appendix II 

Financial Condition of

RUS’ Utility Loan

Portfolios

32

Appendix III 

Financial Information

on Borrowers With

Electricity and

Telecommunications

Loans

35

Financial Characteristics of Borrowers With RUS’ Electricity and

Telecommunications Loans

35

Definitions of Financial Statistics for RUS’ Borrowers 40

Appendix IV 

Comments From the

U.S. Department of

Agriculture

42

Appendix V 

Objectives, Scope,

and Methodology

44

Appendix VI 

Major Contributors to

This Report

48

Page 16 GAO/RCED-97-82 RUS’ Utility Loans
Contents

Tables Table 1: Total Number and Amount of Utility Loans Made or

Guaranteed by RUS, Fiscal Years 1992-96

3

Table 2: RUS’ Total Costs for Utility Loans, Fiscal Years 1992-96 4

Table 3: Amount of Outstanding Principal on Electricity Loans

Made or Guaranteed by RUS, and Portion Owed by Delinquent

Borrowers, as of September 30, 1996

6

Table I.1: Number of Utility Loans Made or Guaranteed by RUS,

Fiscal Years 1992-96

25

Table I.2: Total Dollar Amount of Utility Loans Made or

Guaranteed by RUS, Fiscal Years 1992-96

26

Table I.3: Average Dollar Amount of Utility Loans Made or

Guaranteed by RUS, Fiscal Years 1992-96

27

Table I.4: RUS’ Subsidy Costs for Utility Loans, Fiscal Years

1992-96

29

 Table I.5: RUS’ Administrative Costs for the Utility Loan

Programs, Fiscal Years 1992-96

30

Table I.6: RUS’ Total Costs for the Utility Loan Programs, Fiscal

Years 1992-96

30

Table II.1: Amount of Outstanding Principal Owed on Electricity

Loans Made or Guaranteed by RUS, and Portion Owed by

Delinquent Borrowers, September 30, 1992, Through

September 30, 1996

33

Table II.2: Amount of Outstanding Principal Owed on

Telecommunications Loans Made or Guaranteed by RUS,

September 30, 1992, Through September 30, 1996

34

Table II.3: Amount of Outstanding Principal Owed on Water and

Waste Disposal Loans Made or Guaranteed by RUS, and Portion

Owed by Delinquent Borrowers, September 30, 1992, Through

September 30, 1996

34

Table III.1: Number and Percentage of RUS’ Electricity Loan

Distribution Borrowers, by Range of Net Worth, December 31,

1992, Through December 31, 1995

36

Table III.2: Number and Percentage of RUS’ Electricity Loan

Distribution Borrowers, by Range of Profit, December 31, 1992,

Through December 31, 1995

36

Table III.3: Number and Percentage of RUS’ Electricity Loan

Distribution Borrowers, by Range of Three Ratio Measures,

December 31, 1992, Through December 31, 1995

37

Table III.4: Number and Percentage of RUS’ Electricity Loan

Power Supply Borrowers, by Range of Net Worth, December 31,

1992, Through December 31, 1995

37

Page 17 GAO/RCED-97-82 RUS’ Utility Loans
Contents

Table III.5: Number and Percentage of RUS’ Electricity Loan

Power Supply Borrowers, by Range of Profit, December 31, 1992,

Through December 31, 1995

38

Table III.6: Number and Percentage of RUS’ Electricity Loan

Power Supply Borrowers, by Range of Three Ratio Measures,

December 31, 1992, Through December 31, 1995

38

Table III.7: Number and Percentage of RUS’ Telecommunications

Loan Borrowers, by Range of Net Worth, December 31, 1992,

Through December 31, 1995

39

Table III.8: Number and Percentage of RUS’ Telecommunications

Loan Borrowers, by Range of Profit, December 31, 1992, Through

December 31, 1995

39

Table III.9: Number and Percentage of RUS’ Telecommunications

Loan Borrowers, by Range of Three Ratio Measures,

December 31, 1992, Through December 31, 1995

40

Abbreviations

FFB Federal Financing Bank

GAO General Accounting Office

RDA Rural Development Administration

REA Rural Electrification Administration

RTB Rural Telephone Bank

RUS Rural Utilities Service

USDA U.S. Department of Agriculture

Page 18 GAO/RCED-97-82 RUS’ Utility Loans
Page 19 GAO/RCED-97-82 RUS’ Utility Loans
Appendix I 

Description of RUS’ Utility Loan Programs

The Rural Utilities Service (RUS), established by the Federal Crop

Insurance Reform and Department of Agriculture Reorganization Act of

1994 (P.L. 103-354, Oct. 13, 1994), administers the electricity and

telecommunications programs that were operated by the former Rural

Electrification Administration (REA) and the water and waste disposal

programs that were operated by the former Rural Development

Administration (RDA). Within USDA, RUS is located in the Rural Development

mission area. The Rural Electrification Act of 1936, as amended (7 U.S.C.

901 et seq.), provides the basic statutory authority for the electricity and

telecommunications programs, including the authority for guaranteed

loans to be made by the Federal Financing Bank (FFB) of the Treasury. The

Consolidated Farm and Rural Development Act, as amended (7 U.S.C.

1921 et seq.), contains the authority for the water and waste disposal

programs.

This appendix provides information on the different loans within the

utility loan programs and on the differences in procedures for making and

servicing loans. Information is also provided on the number and dollar

amount of loans that RUS made or guaranteed during fiscal years 1992

through 1996 and on RUS’ subsidy and administrative costs for operating

the utility loan programs during those years. Finally, this appendix

describes the credit reform procedures in the Federal Credit Reform Act

of 1990.

Utility Loan Programs The following is a general description of RUS’ utility loans.

Electricity loans. RUS makes direct loans primarily to construct and

maintain electricity distribution facilities that provide electricity to rural

users. RUS also places guarantees on loans made to finance the

construction, repair, and improvement of electricity generation and

transmission facilities. The following are the types of loans provided in the

electricity program:

• Direct loans with a 5 percent interest rate. These loans, referred to as

hardship rate loans, are made to borrowers that serve financially

distressed rural areas.

• Direct loans with an interest rate that is tied to an index of municipal

borrowing rates. These loans, referred to as municipal rate loans, have a

maximum interest rate of 7 percent when the borrower meets, at the time

of loan approval, either a consumer density test or both a rate disparity

test and a consumer income test. To meet the first test, the average

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Appendix I 

Description of RUS’ Utility Loan Programs

number of consumers per mile of line of the borrower’s total electric

system has to be less than 5.5. For the rate disparity test, the borrower’s

average revenue per kilowatt hour sold has to be more than the average

revenue per kilowatt hour sold by all electric utilities in the state in which

the borrower provides service. For the consumer income test, either the

average per capita income of the residents receiving electric service from

the borrower has to be less than the average per capita income of the

residents of the state in which the borrower provides service or the

median household income of the households receiving electric service

from the borrower has to be less than the median household income of the

households in the state. If these tests are not met, the interest rate may

exceed 7 percent.

• Guaranteed loans. RUS places a USDA repayment guarantee on loans made

by the FFB; these loans have an interest rate that is the Treasury’s cost of

money plus one-eighth of 1 percent. If the applicant selects the FFB as the

lender, RUS is required to place a 100-percent guarantee on the loan. While

RUS can also place a 100-percent USDA guarantee on electricity loans made

by commercial lenders, it has not guaranteed any such loans in recent

years because all applicants have applied for loans to be made by the FFB.

Telecommunications loans. RUS’ direct and guaranteed loans are made

primarily to build and improve telephone services and

telecommunications facilities in rural areas, including loans for advanced

telecommunications facilities and services such as fiber-optic cabling,

digital-switching equipment, and educational television applications. RUS’

telecommunications loans are the following:

• Direct loans with a 5 percent interest rate. These loans, referred to as

hardship rate loans, are made to borrowers that are financially stressed.

• Direct loans with an interest rate that matches USDA’s cost of money. These

loans are referred to as cost-of-money rate loans.

• Guaranteed loans. RUS places a USDA repayment guarantee on loans made

by the FFB, which have an interest rate that is the Treasury’s cost of money

plus one-eighth of 1 percent. As with electricity loans, if an applicant

selects the FFB as the lender, RUS is required to place a 100-percent

guarantee on the loan. While RUS can also place a 100-percent USDA

guarantee on telecommunications loans made by commercial lenders, it

has not guaranteed any such loans in recent years because all applicants

have applied for loans to be made by the FFB.

Rural Telephone Bank loans. In administering the Rural Telephone Bank

(RTB) loan program, RUS makes direct loans to telephone cooperatives and

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Appendix I 

Description of RUS’ Utility Loan Programs

commercial companies that receive RUS’ telecommunications loans. RTB

loans, which have an interest rate that matches RTB’s cost of money, are

made to extend and improve rural telephone services, including advanced

telecommunications facilities and services.

Water and waste disposal loans. RUS’ direct and guaranteed water loans are

made to improve the storage, treatment, and distribution of water in rural

areas. Similarly, RUS’ direct and guaranteed waste disposal loans are made

to collect, treat, and dispose of waste, including loans for sewer systems,

solid waste disposal, and storm drainage. Other than the purpose of the

loan, there are no differences between RUS’ water and waste disposal

loans. The loans fall into the following categories:

• Direct loans with a 4.5 percent interest rate. These loans, referred to as

poverty-rate loans, are made to borrowers that serve areas where the

median household income is below the poverty line or is less than

80 percent of a state’s nonmetropolitan median household income. To

receive a loan with this interest rate, the borrower’s project has to address

health or sanitary violations identified by the state’s health department.

The maximum interest rate authorized on a poverty-rate loan is 5 percent.

• Direct loans with an interest rate that is tied to an index of municipal

tax-exempt bonds. These loans, referred to as market-rate loans, are made

to borrowers that serve areas where the median household income

exceeds a state’s nonmetropolitan median household income.

• Direct loans with an interest rate that is one-half the difference between

the rates on poverty- and market-rate loans. These loans, referred to as

intermediate-rate loans, are made to borrowers that serve areas where the

median household income is between 80 percent and 100 percent of a

state’s nonmetropolitan median household income. Loans at this rate are

also made to borrowers that serve areas where the median income is less

than 80 percent of a state’s nonmetropolitan median household income

but where the state’s health department has not identified a health or

sanitary problem. The maximum interest rate authorized on an

intermediate-rate loan is 7 percent.

• Guaranteed loans. RUS places a USDA repayment guarantee on loans made

by commercial lenders; these loans have an interest rate that is agreed

upon by the lender and the borrower. While RUS can place a maximum

guarantee of 90 percent on these loans, in most cases it has placed an

80-percent guarantee.

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Appendix I 

Description of RUS’ Utility Loan Programs

Loan Making and

Servicing

The Assistant Administrators for RUS’ electricity, telecommunications, and

water and waste disposal programs provide direction and guidance on

their respective programs for loan making and servicing. The Assistant

Administrators also review and approve certain loan applications.

Many loan-making and -servicing functions associated with electricity and

telecommunications loans are centralized at RUS’ headquarters. RUS’

regional offices in the electricity program and area offices in the

telecommunications program process loan applications, decide on the

technical aspects and the financial feasibility of the proposed projects, and

service approved loans. Also, the Power Supply Division in the electricity

program services those borrowers that have guaranteed loans for

electricity generation and transmission purposes. Staff assigned to the

regional and area offices and to the Power Supply Division are physically

located at RUS’ headquarters in Washington, D.C.

RUS also employs approximately 70 general field representatives who are

located throughout the country; about half of these work on the electricity

program and the other half on the telecommunications program. These

field representatives are an extension of the headquarters-based regional

and area office staff. For example, during the loan-making process, they

assist an applicant by, among other things, providing advice on the

application process and documentation requirements. During

loan-servicing, they monitor project construction. While most of their

oversight is performed by reviewing the documents that borrowers have

submitted, the field representatives also visit, at least once a year, project

sites to determine their status.

RUS also employs about 35 field accountants who conduct financial

reviews of electricity and telecommunications loan borrowers. Among

other things, these accountants perform fiscal reviews to determine if

funds are used properly and if adequate records of expenditures are

maintained.

In contrast, many loan-making and -servicing functions associated with

water and waste disposal loans are managed by staff physically located in

field offices. Specifically, staff in the Rural Development mission area who

are in state, district, or other field offices process water and waste

disposal loan applications, decide on the technical aspects and the

financial feasibility of the proposed projects, and service approved loans.

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Appendix I 

Description of RUS’ Utility Loan Programs

The programs also differ in the servicing of guaranteed loans. Specifically,

RUS staff service the electricity and telecommunications loans made by the

FFB that have USDA guarantees. Servicing includes billings, loan payment

collections, and visits and contacts with borrowers. On the other hand,

commercial lenders service the guaranteed water and waste disposal loans

that they made. RUS periodically monitors the lenders to ensure that they

are servicing the accounts.

Loans Made and

Guaranteed in RUS’

Utility Loan Programs

Tables I.1 through I.3 contain information on the number and dollar

amount of loans that RUS made or guaranteed during fiscal years 1992

through 1996 on the various utility loan programs. For example, table I.1

shows that the overwhelming number of loans made each year in each of

the programs were direct loans. Table I.2 shows that approximately

$2 billion in loans was made in each year over the 5-year period. Table I.3

shows that the average amount of all guaranteed loans was far greater

than the average amount of all direct loans. All of the electricity and

telecommunications loans that RUS guaranteed during this 5-year period

were made by Treasury’s FFB; all RUS-guaranteed water and waste disposal

loans were made by commercial lenders.

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Description of RUS’ Utility Loan Programs

Table I.1: Number of Utility Loans Made or Guaranteed by RUS, Fiscal Years 1992-96

Program and loan type 1992 1993 1994 1995 1996 Total

Electricity

Direct standard rate 193 256 a a a 449

Direct hardship rate a a 29 22 23 74

Direct municipal rate a a 111 105 96 312

Subtotal direct 193 256 140 127 119 835

Guaranteed 14 3 9 8 11 45

Total 207 259 149 135 130 880

Telecommunications

Direct standard rate 40 43 a a a 83

Direct hardship rate a a 18 8 12 38

Direct cost-of-money rate a a 50 48 44 142

Subtotal direct 40 43 68 56 56 263

Guaranteed 3 7 10 12 6 38

Total 43 50 78 68 62 301

Rural Telephone Bank

Direct 29 38 50 48 44 209

Water and waste disposal

Direct poverty rate 355 433 412 456 431 2,087

Direct intermediate rate 378 422 506 511 412 2,229

Direct market rate 126 72 75 85 52 410

Subtotal direct 859 927 993 1,052 895 4,726

Guaranteed 12 5 8 b 13 38

Total 871 932 1,001 1,052 908 4,764

RUS total

Direct 1,121 1,264 1,251 1,283 1,114 6,033

Guaranteed 29 15 27 20 30 121

Total 1,150 1,279 1,278 1,303 1,144 6,154

aUSDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and

were referred to as standard rate REA loans. USDA was authorized in a November 1993

amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and

cost-of-money rate loans starting in fiscal year 1994.

bUSDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water

and waste disposal loans.

Sources: USDA, Budget Explanatory Notes for Committee on Appropriations, fiscal years 1994

through 1997, and RUS’ reports.

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Description of RUS’ Utility Loan Programs

Table I.2: Total Dollar Amount of Utility Loans Made or Guaranteed by RUS, Fiscal Years 1992-96

Dollars in millions

Program and loan type 1992 1993 1994 1995 1996 Total

Electricity

Direct standard rate $622.1 $913.4 a a a $1,535.5

Direct hardship rate a a $109.2 $ 74.1 $ 90.6 273.9

Direct municipal rate a a 408.8 536.4 544.6 1,489.8

Subtotal direct 622.1 913.4 518.0 610.5 635.2 3,299.1

Guaranteed 182.8 113.3 269.8 300.0 187.3 1,053.3

Total $804.9 $1,026.7 $787.8 $910.5 $822.5 $4,352.4

Telecommunications

Direct standard rate 204.5 311.0 a a a 515.5

Direct hardship rate a a 70.3 48.1 71.2 189.6

Direct cost-of-money rate a a 198.0 242.3 216.7 657.1

Subtotal direct 204.5 311.0 268.3 290.5 287.9 1,362.3

Guaranteed 35.2 67.1 59.7 119.4 78.1 359.6

Total $239.7 $378.1 $328.1 $409.9 $366.0 $1,721.8

Rural Telephone Bank

Direct 177.0 175.0 199.8 175.0 126.4 853.3

Water and waste disposal

Direct poverty rate 217.9 319.6 282.6 328.2 291.5 1,439.8

Direct intermediate rate 261.9 268.6 372.0 411.4 272.6 1,586.4

Direct market rate 120.2 59.0 60.9 88.3 39.1 367.6

Subtotal direct 600.0 647.1 715.5 827.9 603.2 3,393.8

Guaranteed 4.6 1.7 5.2 b 59.1 70.5

Total $604.6 $648.8 $720.7 $827.9 $662.3 $3,464.3

RUS total

Direct $1,603.6 $2,046.5 $1,701.7 $1,903.9 $1,652.8 $8,908.4

Guaranteed $222.7 $182.1 $334.7 $419.4 $324.5 $1,483.3

Total $1,826.2 $2,228.6 $2,036.4 $2,323.3 $1,977.3 $10,391.8

Note: Subtotals and totals may not add due to rounding.

aUSDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and

were referred to as standard rate REA loans. USDA was authorized in a November 1993

amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and

cost-of-money rate loans starting in fiscal year 1994.

bUSDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water

and waste disposal loans.

Sources: USDA, Budget Explanatory Notes for Committee on Appropriations, fiscal years 1994

through 1997, and RUS’ reports.

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Description of RUS’ Utility Loan Programs

Table I.3: Average Dollar Amount of Utility Loans Made or Guaranteed by RUS, Fiscal Years 1992-96

Dollars in millions

Program and loan type 1992 1993 1994 1995 1996 5-year average

Electricity

Direct standard rate $3.2 $3.6 a a a $3.4

Direct hardship rate a a $3.8 $3.4 $3.9 3.7

Direct municipal rate a a 3.7 5.1 5.7 4.8

All direct 3.2 3.6 3.7 4.8 5.3 4.0

Guaranteed 13.1 37.8 30.0 37.5 17.0 23.4

Average for all electricity 3.9 4.0 5.3 6.7 6.3 4.9

Telecommunications

Direct standard rate 5.1 7.2 a a a 6.2

Direct hardship rate a a 3.9 6.0 5.9 5.0

Direct cost-of-money rate a a 4.0 5.0 4.9 4.6

All direct 5.1 7.2 3.9 5.2 5.1 5.2

Guaranteed 11.7 9.6 6.0 10.0 13.0 9.5

Average for all

telecommunications

5.6 7.6 4.2 6.0 5.9 5.7

Rural Telephone Bank

Direct 6.1 4.6 4.0 3.6 2.9 4.1

Water and waste disposal

Direct poverty rate 0.6 0.7 0.7 0.7 0.7 0.7

Direct intermediate rate 0.7 0.6 0.7 0.8 0.7 0.7

Direct market rate 1.0 0.8 0.8 1.0 0.8 0.9

All direct 0.7 0.7 0.7 0.8 0.7 0.7

Guaranteed 0.4 0.3 0.6 b 4.5 1.9

Average for all water and

waste disposal 0.7 0.7 0.7 0.8 0.7 0.7

All RUS loans

Average for all direct 1.4 1.6 1.4 1.5 1.5 1.5

Average for all guaranteed 7.7 12.1 12.4 21.0 10.8 12.3

Average for all loans 1.6 1.7 1.6 1.8 1.7 1.7

aUSDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and

were referred to as standard rate REA loans. USDA was authorized in a November 1993

amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and

cost-of-money rate loans starting in fiscal year 1994.

bUSDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water

and waste disposal loans.

Source: GAO’s calculation.

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Description of RUS’ Utility Loan Programs

RUS’ Costs for the

Utility Loan Programs

Tables I.4 through I.6 contain information on RUS’ subsidy costs for making

and guaranteeing utility program loans and its administrative costs for

operating the utility loan programs during fiscal years 1992 through 1996.

For example, table I.4 shows that the subsidy costs for direct loans in the

programs in each year were considerably higher than for guaranteed loans.

Table I.5 shows that RUS’ administrative costs for each program were fairly

consistent in each year—in the mid-$60 million to mid-$70 million range.

Table I.6 shows that RUS’ total costs were approximately $300 million in

each year.

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Description of RUS’ Utility Loan Programs

Table I.4: RUS’ Subsidy Costs for Utility Loans, Fiscal Years 1992-96

Dollars in millions

Program and loan type 1992 1993 1994 1995 1996 Total

Electricity

Direct standard rate $117.1 $117.3 a a a $234.4

Direct hardship rate a a $18.7 $ 9.7 $21.2 49.6

Direct municipal rate a a 46.0 46.0 56.9 148.9

Subtotal direct 117.1 117.3 64.7 55.7 78.1 432.9

Guaranteed 3.3 5.3 3.1 0 1.6 13.3

Total $120.4 $122.6 $67.8 $55.7 $79.7 $446.2

Telecommunications

Direct standard rate 34.4 36.3 a a a 70.7

Direct hardship rate a a 11.3 3.8 13.9 29.0

Direct cost-of-money rate a a <0.1 0.1 <0.1 0.1

Subtotal direct 34.4 36.3 11.3 3.9 13.9 99.8

Guaranteed 0 0.1 0 0 0 0.1

Total $34.4 $36.3 $11.3 $3.9 $13.9 $99.9

Rural Telephone Bank

Direct 3.6 <0.1 0.8 0.8 3.2 8.4

Water and waste disposal

Directb 84.6 82.1 115.8 126.5 135.7 544.7

Guaranteed 0 0 0 c 0 0

Total $84.6 $82.1 $115.8 $126.5 $135.7 $544.7

RUS total

Direct $239.7 $235.8 $192.6 $186.9 $230.9 $1,085.9

Guaranteed $ 3.3 $ 5.4 $ 3.1 $ 0 $ 1.6 $ 13.3

Total $243.0 $241.1 $195.7 $186.9 $232.5 $1,099.2

Note: Totals may not add due to rounding.

aUSDA’s direct loans for fiscal years 1992 and 1993 were made at a 5 percent interest rate and

were referred to as standard rate REA loans. USDA was authorized in a November 1993

amendment to the Rural Electrification Act to make direct hardship rate, municipal rate, and

cost-of-money rate loans starting in fiscal year 1994.

bAccording to officials in the Budget Division of USDA’s Rural Development mission area, a

breakout of the subsidy costs for the three types of direct water and waste disposal

loans—poverty rate, intermediate rate, and market rate—is not available because the Budget

Division’s subsidy cost records are not maintained by the type of loan.

cUSDA’s appropriation for fiscal year 1995 did not authorize the Department to guarantee water

and waste disposal loans.

Sources: Obligation data obtained from USDA, Budget Explanatory Notes for Committee on

Appropriations, fiscal years 1994 through 1997, and information provided to GAO by the Budget

Division in USDA’s Rural Development mission area.

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Description of RUS’ Utility Loan Programs

Table I.5: RUS’ Administrative Costs for the Utility Loan Programs, Fiscal Years 1992-96

Dollars in millions

Program 1992 1993 1994 1995 1996 Total

Electricity $20.8 $20.8 $21.2 $21.2 $21.2 $105.1

Telecommunications 8.6 8.6 8.8 8.8 8.8 43.6

Rural Telephone Bank 8.6 8.6 8.8 8.8 3.5 38.4

Water and waste disposal 26.8 28.4 34.3 34.4 31.1 154.9

Total $64.9 $66.5 $73.0 $73.1 $64.6 $342.1

Note: RUS’ administrative costs apply to the operation of both direct and guaranteed loans in the

various utility loan programs. The amounts shown do not include any administrative costs that

Treasury’s FFB or commercial lenders may have incurred on RUS-guaranteed loans. Totals may

not add due to rounding.

Source: Information provided to GAO by the Budget Division in USDA’s Rural Development

mission area.

Table I.6: RUS’ Total Costs for the Utility Loan Programs, Fiscal Years 1992-96

Dollars in millions

Program 1992 1993 1994 1995 1996 Total

Electricity $141.1 $143.4 $ 89.0 $ 76.9 $100.9 $ 551.3

Telecommunications 43.1 45.0 20.1 12.7 22.7 143.5

Rural Telephone Bank 12.3 8.7 9.6 9.6 6.7 46.8

Water and waste disposal 111.4 110.6 150.0 160.9 166.8 699.7

Total $307.9 $307.6 $268.7 $260.0 $297.1 $1,441.3

Note: Totals may not add due to rounding.

Source: GAO’s calculation.

Credit Reform The two key principles of credit reform contained in the Federal Credit

Reform Act of 1990 center on the (1) definition of cost in terms of the

present value of the estimated cash flow over the life of a credit

instrument and (2) inclusion in the budget of the costs of credit programs

before direct or guaranteed loans are made or modified.

Credit reform requirements separate the government’s cost of extending

or guaranteeing credit, called the subsidy cost, from administrative and

unsubsidized program costs. Administrative expenses receive separate

appropriations. They are treated on a cash basis and reported separately in

Page 30 GAO/RCED-97-82 RUS’ Utility Loans
Appendix I 

Description of RUS’ Utility Loan Programs

the budget. The unsubsidized portion of a direct loan or loan guarantee is

expected to be recovered from the borrower.

The Credit Reform Act defines the subsidy cost of direct loans as the

present value—over the loan’s life—of estimated disbursements by the

government (loan disbursements and other payments) minus estimated

payments to the government (repayments of principal, payments of

interest, and other payments) after adjusting for projected defaults,

prepayments, fees, penalties, and other recoveries. It defines the subsidy

cost of loan guarantees as the present value of cash flows from estimated

payments by the government (for defaults and delinquencies, interest rate

subsidies, and other payments) minus estimated payments to the

government (for loan origination and other fees, penalties, and

recoveries). Permanent, indefinite appropriations are available should the

appropriated subsidy cost be less than the estimates in a later fiscal year.

Before credit reform, credit programs—like other programs—were

reported in the budget on a cash basis. As a result, it was difficult to make

appropriate cost comparisons between direct loan and loan guarantee

programs and between credit and noncredit programs. Credit programs

had different economic effects than most budget outlays, such as the

purchase of goods and services, income transfers, and grants. In the case

of direct loans, for example, the fact that the loan recipient was obligated

to repay the government over time meant that the budgetary impact of a

direct loan disbursement could be much less than other budget

transactions of the same dollar amount. This lower budgetary impact also

created a bias in favor of loan guarantees over direct loans. Loan

guarantees appeared to be free, while direct loans appeared to be

expensive because the budget did not recognize that at least some of the

loan guarantees would default and that some of the direct loans would be

repaid.

The Credit Reform Act changed this treatment for direct loans and loan

guarantees made on or after October 1, 1991.

Page 31 GAO/RCED-97-82 RUS’ Utility Loans
Appendix II 

Financial Condition of RUS’ Utility Loan

Portfolios

This appendix contains information on the amount of outstanding

principal owed on RUS’ electricity, telecommunications, and water and

waste disposal loans, and the portions owed by delinquent borrowers, at

the end of fiscal years 1992 through 1996. For example, table II.1 shows

that the amount of outstanding principal owed on electricity loans

declined by about $2.1 billion, or 6.2 percent, from the end of fiscal year

1992 to the end of fiscal year 1996. Table II.2 shows that the amount of

outstanding principal owed on telecommunications loans declined by

about $168 million, or 3.1 percent, over the same period. On the other

hand, table II.3 shows that the outstanding principal owed on water and

waste loans increased by about $1.5 billion, or 40.6 percent, over this

period.

Page 32 GAO/RCED-97-82 RUS’ Utility Loans
Appendix II 

Financial Condition of RUS’ Utility Loan

Portfolios

Table II.1: Amount of Outstanding Principal Owed on Electricity Loans Made or Guaranteed by RUS, and Portion Owed by

Delinquent Borrowers, September 30, 1992, Through September 30, 1996

Dollars in millions

Loan type 1992 1993 1994 1995 1996

RUS’ direct loans

Outstanding principal owed by

all borrowers

$11,978.4 $11,855.8 $11,771.3 $11,894.8 $11,475.2

Outstanding principal owed by

delinquent borrowers

92.2 92.2 29.6 29.6 29.6

Guaranteed FFB loans

Outstanding principal owed by

all borrowers

14,676.6 14,249.3 13,789.1 13,780.4 13,328.6

Outstanding principal owed by

delinquent borrowers

765.5 739.0 591.6 584.5 572.0

Other guaranteed loans

Outstanding principal owed by

all borrowers

755.4 936.8 702.6 685.2 664.7

Outstanding principal owed by

delinquent borrowers

0 16.9 16.7 16.5 16.3

Restructured loansa

Outstanding principal owed by

all borrowers

7,027.3 7,179.8 8,172.0 8,008.3 6,841.1

Outstanding principal owed by

delinquent borrowers

0 0 0 0 0

Total loans

Outstanding principal owed

by all borrowers

$34,437.7 $34,221.7 $34,435.0 $34,368.7 $32,309.6

Outstanding principal owed

by delinquent borrowers

$857.7 $848.1 $637.9 $630.6 $617.9

Note: The information in this table, and in tables II.2 and II.3, covers outstanding principal on

loans made or guaranteed by RUS. We have not adjusted the outstanding loan amounts to reflect

the allowance for losses that RUS includes in its financial statements or the adequacy of reserves

on the loans.

aIncludes previously issued (1) direct loans made by RUS, (2) guaranteed loans made by the

FFB, (3) guaranteed loans made by commercial lenders on which RUS agreed to be directly

liable for repaying the loan, and (4) loans that had been owed by borrowers now assumed by

other utilities. The amounts cover the principal and the capitalized interest owed on the loans. The

loans in this category are not included in the other direct and guaranteed loan categories.

Source: RUS’ reports.

Page 33 GAO/RCED-97-82 RUS’ Utility Loans
Appendix II 

Financial Condition of RUS’ Utility Loan

Portfolios

Table II.2: Amount of Outstanding Principal Owed on Telecommunications Loans Made or Guaranteed by RUS,

September 30, 1992, Through September 30, 1996

Dollars in millions

Loan type 1992 1993 1994 1995 1996

RUS’ direct loans $3,251.9 $3,306.5 $3,320.2 $3,369.0 $3,360.9

Guaranteed FFB loans 352.1 340.8 297.0 304.3 318.4

Other guaranteed loans 2.4 2.3 2.2 2.1 1.9

RTB’s direct loans 1,727.3 1,733.9 1,543.0 1,531.7 1,484.9

Total loans $5,333.7 $5,383.5 $5,162.4 $5,207.1 $5,166.1

Note: There were no delinquent telecommunications loans at the end of fiscal years 1992 through

1996. We do not include as delinquent those borrowers that are shown in RUS’ reports as being

past due on repayments at the end of the fiscal years when the delinquency was due to billing,

payment, or administrative errors and when the past due amount was paid shortly after the start of

the next fiscal year.

Source: RUS’ reports.

Table II.3: Amount of Outstanding Principal Owed on Water and Waste Disposal Loans Made or Guaranteed by RUS, and

Portion Owed by Delinquent Borrowers, September 30, 1992, Through September 30, 1996

Dollars in millions

Loan type 1992 1993 1994 1995 1996

Direct loans

Outstanding principal owed by

all borrowers

$3,580.1 $3,848.5 $4,113.0 $4,511.5 $5,024.9

Outstanding principal owed by

delinquent borrowers

53.7 29.6 50.5 39.5 43.3

Guaranteed loans

Outstanding principal owed by

all borrowers

0 0.9 4.7 7.1 7.9

Outstanding principal owed by

delinquent borrowers

0 0 0 0 0

Total loans

Outstanding principal owed

by all borrowers

$3,580.1 $3,849.4 $4,117.7 $4,518.6 $5,032.8

Outstanding principal owed

by delinquent borrowers

$53.7 $29.6 $50.5 $39.5 $43.3

Source: RUS’ reports.

Page 34 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

This appendix contains information on the financial characteristics of

borrowers that had RUS’ electricity and telecommunications loans and that

reported financial information to RUS as of the end of calendar years 1992

through 1995.1

 A glossary is also provided that defines the financial

measures used to describe these borrowers.

Financial

Characteristics of

Borrowers With RUS’

Electricity and

Telecommunications

Loans

Tables III.1 through III.9 provide information describing the financial

characteristics of electricity and telecommunications loan borrowers that

reported to RUS. The first three tables provide information on the

distribution borrowers with electricity loans. The second set of three

tables provides information on the power supply borrowers with

electricity loans. The last three tables provide information on borrowers

with telecommunications loans.

Tables III.1, III.4, and III.7 show that the overwhelming majority of the

borrowers had a net worth of $1 million or more at the end of each year

from 1992 through 1995. Tables III.2, III.5, and III.8 show that most of them

had profits of at least $100,000 in each of these years. Tables III.3, III.6, and

III.9 show that the current ratios, debt-to-asset ratios, and

times-interest-earned ratios of the borrowers were generally favorable in

each year.

1

The information presented in this appendix was taken from RUS’ databases. The information we

present covers more borrowers than are covered in RUS’ annual statistical reports on borrowers,

which exclude, for example, borrowers that submitted information to the agency after the submission

date for publishing the annual reports. However, the information submitted after that date is

maintained in the agency’s databases.

Page 35 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

Table III.1: Number and Percentage of RUS’ Electricity Loan Distribution Borrowers, by Range of Net Worth, December 31,

1992, Through December 31, 1995

1992 1993 1994 1995

Range of net worth Number Percentage Number Percentage Number Percentage Number Percentage

$100 million or more 2 0.2 7 0.8 7 0.8 9 1.1

$10 million to $99.9 million 403 46.7 421 49.2 432 51.9 431 53.6

$1 million to $9.9 million 447 51.8 419 49.0 385 46.3 359 44.7

$100,000 to $999,999 7 0.8 4 0.5 4 0.5 2 0.2

$0 to $99,999 1 0.1 1 0.1 1 0.1 1 0.1

Less than $0 3 0.3 3 0.4 3 0.4 2 0.2

Total 863 100.0a 855 100.0 832 100.0 804 100.0a

aDoes not add due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by electricity loan borrowers.

Table III.2: Number and Percentage of RUS’ Electricity Loan Distribution Borrowers, by Range of Profit, December 31, 1992,

Through December 31, 1995

1992 1993 1994 1995

Range of profit Number Percentage Number Percentage Number Percentage Number Percentage

$10 million or more 4 0.5 6 0.7 4 0.5 4 0.5

$1 million to $9.9 million 290 33.6 360 42.1 304 36.5 303 37.7

$100,000 to $999,999 512 59.3 459 53.7 478 57.5 438 54.5

$0 to $99,999 36 4.2 20 2.3 26 3.1 25 3.1

Less than $0 21 2.4 10 1.2 20 2.4 34 4.2

Total 863 100.0 855 100.0 832 100.0 804 100.0

Source: GAO’s analysis of RUS’ automated database containing financial information submitted by

electricity loan borrowers.

Page 36 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

Table III.3: Number and Percentage of RUS’ Electricity Loan Distribution Borrowers, by Range of Three Ratio Measures,

December 31, 1992, Through December 31, 1995

1992 1993 1994 1995

Ratio measure and range Number Percentage Number Percentage Number Percentage Number Percentage

Current ratio

Five or more times 115 13.3 98 11.5 86 10.3 84 10.4

Two to up to five times 372 43.1 354 41.4 340 40.9 310 38.6

Up to two times 301 34.9 309 36.1 290 34.9 310 38.6

Less than one time 75 8.7 94 11.0 116 13.9 100 12.4

Debt-to-asset ratio

40 percent or less 92 10.7 100 11.7 101 12.1 94 11.7

41 to 70 percent 660 76.5 685 80.1 674 81.0 657 81.7

71 to 99 percent 108 12.5 67 7.8 54 6.5 51 6.3

100 percent or more 3 0.3 3 0.4 3 0.4 2 0.2

Times-interest-earned ratio

Five or more times 54 6.3 91 10.6 70 8.4 63 7.8

Two to up to five times 497 57.6 573 67.0 504 60.6 479 59.6

Up to two times 291 33.7 181 21.2 238 28.6 228 28.4

Less than one time 21 2.4 10 1.2 20 2.4 34 4.2

Note: Percentage of borrowers for each ratio may not add to 100.0 percent due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by electricity loan borrowers.

Table III.4: Number and Percentage of RUS’ Electricity Loan Power Supply Borrowers, by Range of Net Worth,

December 31, 1992, Through December 31, 1995

1992 1993 1994 1995

Range of net worth Number Percentage Number Percentage Number Percentage Number Percentage

$100 million or more 6 11.1 7 13.0 7 13.0 7 13.7

$10 million to $99.9 million 30 55.6 30 55.6 31 57.4 30 58.8

$1 million to $9.9 million 4 7.4 4 7.4 3 5.6 5 9.8

$100,000 to $999,999 1 1.9 1 1.9 1 1.9 1 2.0

$0 to $99,999 0 0 0 0 1 1.9 0 0

Less than $0 13 24.1 12 22.2 11 20.4 8 15.7

Total 54 100.0 54 100.0a 54 100.0a 51 100.0

aDoes not add due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by electricity loan borrowers.

Page 37 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

Table III.5: Number and Percentage of RUS’ Electricity Loan Power Supply Borrowers, by Range of Profit, December 31,

1992, Through December 31, 1995

1992 1993 1994 1995

Range of profit Number Percentage Number Percentage Number Percentage Number Percentage

$10 million or more 10 18.5 7 13.0 7 13.0 9 17.6

$1 million to $9.9 million 23 42.6 32 59.3 34 63.0 27 52.9

$100,000 to $999,999 10 18.5 5 9.3 4 7.4 8 15.7

$0 to $99,999 5 9.3 4 7.4 3 5.6 3 5.9

Less than $0 6 11.1 6 11.1 6 11.1 4 7.8

Total 54 100.0 54 100.0a 54 100.0a 51 100.0a

aDoes not add due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by electricity loan borrowers.

Table III.6: Number and Percentage of RUS’ Electricity Loan Power Supply Borrowers, by Range of Three Ratio Measures,

December 31, 1992, Through December 31, 1995

1992 1993 1994 1995

Ratio measure and range Number Percentage Number Percentage Number Percentage Number Percentage

Current ratio

Five or more times 13 24.1 6 11.1 5 9.3 3 5.9

Two to up to five times 24 44.4 26 48.1 29 53.7 28 54.9

Up to two times 14 25.9 18 33.3 15 27.8 17 33.3

Less than one time 3 5.6 4 7.4 5 9.3 3 5.9

Debt-to-asset ratio

40 percent or less 0 0 0 0 0 0 0 0

41 to 70 percent 8 14.8 9 16.7 12 22.2 11 21.6

71 to 99 percent 33 61.1 33 61.1 30 55.6 32 62.7

100 percent or more 13 24.1 12 22.2 12 22.2 8 15.7

Times-interest-earned ratio

Five or more times 1 1.9 1 1.9 0 0 3 5.9

Two to up to five times 6 11.1 11 20.4 6 11.1 6 11.8

Up to two times 41 75.9 36 66.7 42 77.8 38 74.5

Less than one time 6 11.1 6 11.1 6 11.1 4 7.8

Note: Percentage of borrowers for each ratio may not add to 100.0 percent due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by electricity loan borrowers.

Page 38 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

Table III.7: Number and Percentage of RUS’ Telecommunications Loan Borrowers, by Range of Net Worth, December 31,

1992, Through December 31, 1995

1992 1993 1994 1995

Range of net worth Number Percentage Number Percentage Number Percentage Number Percentage

$100 million or more 11 1.2 7 0.8 8 0.9 4 0.5

$10 million to $99.9 million 148 16.3 154 17.3 158 18.0 172 20.3

$1 million to $9.9 million 603 66.3 607 68.2 608 69.3 593 69.9

$100,000 to $999,999 142 15.6 118 13.3 100 11.4 76 9.0

$0 to $99,999 6 0.7 4 0.4 1 0.1 0 0

Less than $0 0 0 0 0 2 0.2 3 0.4

Total 910 100.0a 890 100.0 877 100.0a 848 100.0a

aDoes not add due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by telecommunications loan borrowers.

Table III.8: Number and Percentage of RUS’ Telecommunications Loan Borrowers, by Range of Profit, December 31, 1992,

Through December 31, 1995

1992 1993 1994 1995

Range of profit Number Percentage Number Percentage Number Percentage Number Percentage

$10 million or more 21 2.3 11 1.2 16 1.8 6 0.7

$1 million to $9.9 million 225 24.7 213 23.9 228 26.0 240 28.3

$100,000 to $999,999 553 60.8 565 63.5 555 63.3 530 62.5

$0 to $99,999 100 11.0 82 9.2 68 7.8 58 6.8

Less than $0 11 1.2 19 2.1 10 1.1 14 1.7

Total 910 100.0 890 100.0a 877 100.0 848 100.0

aDoes not add due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by telecommunications loan borrowers.

Page 39 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

Table III.9: Number and Percentage of RUS’ Telecommunications Loan Borrowers, by Range of Three Ratio Measures,

December 31, 1992, Through December 31, 1995

1992 1993 1994 1995

Ratio measure and range Number Percentage Number Percentage Number Percentage Number Percentage

Current ratio

Five or more times 359 39.5 288 32.4 299 34.1 296 34.9

Two to up to five times 341 37.5 377 42.4 375 42.8 344 40.6

Up to two times 123 13.5 137 15.4 132 15.1 135 15.9

Less than one time 87 9.6 88 9.9 71 8.1 73 8.6

Debt-to-asset ratio

40 percent or less 179 19.7 197 22.1 218 24.9 244 28.8

41 to 70 percent 567 62.3 552 62.0 528 60.2 503 59.3

71 to 99 percent 164 18.0 141 15.8 129 14.7 98 11.6

100 percent or more 0 0 0 0 2 0.2 3 0.4

Times-interest-earned ratio

Five or more times 369 40.5 366 41.1 375 42.8 364 42.9

Two to up to five times 446 49.0 421 47.3 422 48.1 392 46.2

Up to two times 84 9.2 84 9.4 70 8.0 78 9.2

Less than one time 11 1.2 19 2.1 10 1.1 14 1.7

Note: Percentage of borrowers for each ratio may not add to 100.0 percent due to rounding.

Source: GAO’s analysis of RUS’ automated database containing financial information submitted

by telecommunications loan borrowers.

Definitions of

Financial Statistics for

RUS’ Borrowers

The following is a general description of the measures used to describe the

financial characteristics of RUS’ borrowers.

Total assets. Includes current assets (e.g., cash and equivalents),

investments, net plants (e.g., plants in service and under construction, less

accumulated depreciation), and other noncurrent assets and/or property.

Total liabilities. Includes current liabilities, long-term debt, and other

noncurrent liabilities and/or deferred credits.

Total equity or net worth. Includes capital stock and/or patronage capital,

memberships, and capital credits.

Operating revenues. Revenues from operations.

Page 40 GAO/RCED-97-82 RUS’ Utility Loans
Appendix III 

Financial Information on Borrowers With

Electricity and Telecommunications Loans

Total operating expenses. Expenses from operations. These expenses

include, for example, for power supply borrowers with electricity loans,

the costs of producing electricity and/or purchasing power, transmission

and distribution expenses, and maintenance expenses. For distribution

borrowers with electricity loans, this includes the costs of acquiring power

and distribution operating and maintenance expenses. For borrowers with

telecommunications loans, this includes plant and nonplant specific

operating expenses.

Net operating income. Operating revenues less total operating expenses.

Total net income (profit or loss). Includes operating income plus

nonoperating income and/or capital credits less fixed charges (e.g.,

interest on funded debt and other interest expense).

Current ratio. The ratio is used to measure the extent to which current

assets, if liquidated, would cover current liabilities. It is computed by

dividing current assets by current liabilities.

Debt-to-asset ratio. The ratio is used to measure the proportion of assets

that are financed by debt. It is computed by dividing total debt by total

assets.

Times-interest-earned ratio. The ratio is used to measure the extent to

which interest on debt can be paid by net income. It is computed by

dividing the sum of total net income and interest on debt by interest on

debt.

Page 41 GAO/RCED-97-82 RUS’ Utility Loans
Appendix IV 

Comments From the U.S. Department of

Agriculture

Page 42 GAO/RCED-97-82 RUS’ Utility Loans
Appendix IV 

Comments From the U.S. Department of

Agriculture

Page 43 GAO/RCED-97-82 RUS’ Utility Loans
Appendix V 

Objectives, Scope, and Methodology

This appendix contains information on our objectives, scope, and

methodology in conducting this review. In April 1996, we initiated a survey

of RUS’ loan portfolios. Subsequently, on October 17, 1996, the Chairman of

the Committee on the Budget, House of Representatives, wrote to us

expressing his concern about the financial risks associated with RUS’

lending and asking that we report to him on the (1) financial condition of

the electricity, telecommunications, and water and waste disposal loan

portfolios and (2) financial characteristics of borrowers having electricity

and telecommunications loans.

In conducting our review, we focused on the financial condition of RUS’

loan portfolios at the end of fiscal year 1996 and, for trend information, the

preceding 4 fiscal years. For the financial characteristics of the electricity

and telecommunications borrowers, we focused on the end of calendar

year 1995, the most recent year for which RUS had information available on

the programs’ borrowers, and the preceding 3 calendar years.

To compile background information and to gain an understanding of how

the utility loan programs operate, we interviewed numerous RUS officials,

including the Assistant Administrators and/or Deputy Assistant

Administrators for electricity, telecommunications, and water and waste

disposal. We reviewed the basic statutory authority for the programs—the

Rural Electrification Act of 1936, as amended, for the electricity and

telecommunications programs and the Consolidated Farm and Rural

Development Act, as amended, for the water and waste disposal

programs—and relevant parts of RUS’ implementing regulations and

internal policy guidance. We also reviewed RUS’ various publications,

pamphlets, and reports that describe the utility loan programs and USDA’s

Budget Explanatory Notes for Committee on Appropriations for fiscal

years 1994 through 1997. Furthermore, we reviewed prior reports by GAO

and USDA’s Office of Inspector General that were issued during fiscal years

1992 through 1996. Finally, we reviewed the provisions that apply to RUS

and its utility loan programs that are contained in the Federal Crop

Insurance Reform and Department of Agriculture Reorganization Act of

1994.

To compile information on the number and dollar amount of loans that RUS

made or guaranteed during fiscal years 1992 through 1996 and on RUS’

subsidy and administrative costs for operating the utility loan programs

during those years, we used RUS’ various financial reports, the

Department’s budget explanatory notes, and information provided to us by

the Budget Division in USDA’s Rural Development mission area. During the

Page 44 GAO/RCED-97-82 RUS’ Utility Loans
Appendix V 

Objectives, Scope, and Methodology

course of our study, we provided RUS with schedules of the loan and cost

information that we had compiled; RUS officials reviewed these schedules

and did not suggest any revisions to the tabulated data. The descriptive

information on credit reform was extracted from prior GAO reports.

Most of the financial data presented in this report are unaudited

information that we extracted from RUS’ reports and automated records.

We did not verify the accuracy of the information contained in the

agency’s reports and automated records.

Our analysis of the financial condition of RUS’ portfolios covered fiscal

years 1992 through 1996. To determine the financial condition of the

electricity, telecommunications, and water and waste disposal loan

portfolios, we reviewed RUS’ financial reports, other information that RUS

provided to us, and data contained in the agency’s automated records. We

used these data sources to compile information on outstanding principal

in each program and the portion of outstanding principal that was owed by

delinquent borrowers at the end of fiscal years 1992 through 1996, and the

extent of restructuring and/or reamortizing of loans and the losses that RUS

has incurred during these years. We did not adjust the outstanding loan

amounts to reflect the allowance for losses that RUS includes in its

financial statements nor did we assess the adequacy of reserves on the

loans. During the course of our study, we provided RUS with schedules of

the outstanding and delinquent loan information that we had compiled; RUS

officials reviewed these schedules and did not suggest any revisions to the

tabulated data.

Additionally, to identify problem borrowers other than those that were

delinquent, we interviewed, among others, the Program Advisor in the

Financial Services Staff—the RUS office that works on resolving problem

loan accounts—the Director of the Electric and Telephone Financial

Operations Division, and the Director of the Power Supply Division in the

electricity program. We compiled specific information on each problem

borrower from the agency officials we interviewed and from RUS’ financial

reports and automated records.

Our analysis of the financial characteristics of borrowers covered calendar

years 1992 through 1995. To determine the financial characteristics of

borrowers having electricity and telecommunications loans, we reviewed

RUS’ annual statistical reports covering calendar years 1992 through 1994

that contain financial information submitted by electricity and

telecommunications borrowers. Although borrowers had submitted to RUS

Page 45 GAO/RCED-97-82 RUS’ Utility Loans
Appendix V 

Objectives, Scope, and Methodology

financial information for calendar year 1995 and the agency had prepared

the automated files that are used to produce the 1995 annual statistical

reports, it had not published the reports until our work was close to being

completed. In addition, we accessed the agency’s automated files for

calendar years 1992 through 1995 containing the borrower-submitted

information that is used to prepare the annual statistical reports.

We used the annual statistical reports to identify the financial information

to extract from the automated files. We used the automated files to

analyze selected balance sheet and income statement information,

including borrowers’ current and total assets, current and total liabilities,

net worth (equity), operating revenues, operating expenses, operating

income, and net income (profit or loss). We analyzed similar information

for all borrowers who submitted financial information to RUS.

For each calendar year, we calculated totals and averages for the selected

balance sheet and income statement items. We also used the balance sheet

and income statement information to calculate various financial ratios for

each borrower, including current ratio, debt-to-asset ratio, and

times-interest-earned ratio. We categorized borrowers in ranges of the

various balance sheet and income statement items and in ranges of the

ratios. This allowed us to use consistent information to analyze borrowers

in these two programs. RUS uses some of these same items and measures

in its monitoring of borrowers.

We did not verify the accuracy of the financial submissions from the

borrowers to RUS. However, we did perform various tests to ensure the

correctness of the information contained in the automated files, such as

whether assets less liabilities equals net worth, operating revenues less

operating expenses equals operating income, and operating income plus or

minus nonoperating income/expenses and adjustments equals net income

(profit or loss). When the balance sheet or income statement information

did not equal, we excluded the borrowers from the analyses for the year(s)

in question. Specifically, we excluded five electricity distribution

borrowers for calendar year 1994, one telecommunications borrower for

1995, three telecommunications borrowers for 1994, and four

telecommunications borrowers for 1993. We verified that the correct

information had been extracted from the automated records by, for

example, comparing those data with information in RUS’ 1992 through 1995

statistical reports for electricity and telecommunications borrowers. We

also compared the results of our computation of the times-interest-earned

Page 46 GAO/RCED-97-82 RUS’ Utility Loans
Appendix V 

Objectives, Scope, and Methodology

ratios with those contained in the 1992 through 1995 reports for electricity

distribution and telecommunications borrowers.

The results of our analysis covered more borrowers than are covered in

RUS’ annual statistical reports because, for example, we included

borrowers that submitted information to RUS after the submission date for

publishing its annual reports. The information submitted after that date is

maintained in the agency’s automated files. Also, while our analysis covers

most borrowers with electricity and telecommunications loans, some

borrowers are excluded because they did not submit financial information

to RUS. For example, the automated files covering 1995 did not have

financial information on 74 borrowers.

We did not attempt to determine the financial characteristics of the

borrowers with water and waste disposal loans because most are public

entities rather than private firms.

We conducted our review from April 1996 through February 1997 in

accordance with generally accepted government auditing standards. USDA

reviewed a draft of this report. The Department’s comments are contained

in appendix IV.

Page 47 GAO/RCED-97-82 RUS’ Utility Loans
Appendix VI 

Major Contributors to This Report

Resources,

Community, and

Economic

Development Division

Emi N. Brock, Assistant Director

Jerry D. Hall

Rebecca L. Johnson

Renee D. McGhee-Lenart

F. John Schaefer, Jr.

Patrick J. Sweeney

(150711) Page 48 GAO/RCED-97-82 RUS’ Utility Loans
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