Overview/Update of Rural Utilities Service Programs NARUC Subcommittee on Accounts Spring Meeting Austin, Texas March 28, 2017

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1 Presented by: Tim Frantz Chief Broadband Initiative Program Overview/Update of Rural Utilities Service Programs NARUC Subcommittee on Accounts Spring Meeting Austin, Texas March 28, 2017

2 Topics Rural Development Electric Program Update Telecom Program Update Water & Environmental Program Update Accounting & Auditing Topics Questions Copyright 2015 Accenture All Rights Reserved.

3 Rural Development s (RD) Mission Rural Utilities Service s Programs Water and Waste Disposal Direct Loans, Loan Guars., Grants Solid Waste Management Grants Technical Asst./Training/Circuit Rider Rural Broadband Direct Loans and Loan Guarantees Electric and Telecommunications Direct Loans/Loan Guarantees High Energy Cost Grants Distance Learning and Telemedicine Loans/Grants Community Connect Grants Continuing Resolution until April 28, 2017

4 Electric Program 3

5 A Record of Accomplishment $41.3 billion loan portfolio (2229 loans) as of * Almost 600 current borrowers $120 billion total investment since inception of program 0.04% delinquency rate (2 loans) Over 40% of the electric infrastructure in the USA built by entities currently or once financed by RUS/REA 4

6 RD Electric Program We make and service loans for generation, transmission, distribution, energy efficiency, conservation, smart grid & smart home purposes We have Policy, Planning and Finance components Our staff provides expertise in Generation, Transmission & Distribution Electric Programs is an incentive lender, not a lender of last resort (A 1.5% interest rate differential over a 30 year saves coops nearly $1,000,000 for every $4,000,000 borrowed.) At or near Treasury rates: 5

7 Low Interest Rate Environment Continues ( as of 02/28/17 ) APPROXIMATE FFB QUARTERLY RATES* 3-mo 6-mo 1-yr 2-yr 3-yr 5-yr 7-yr 10-yr 20-yr 30-yr *plus 1/8 % 6

8 FY 2016 Overview Total loans obligated: 91 $3.9B FY16 loans (FFB) 89 $3.2B Distribution loans 71 $1.8B G&T loans 18 $1.3B Note Guarantees (313A): 2 $0.75B FY 16 loan purposes: Distribution $2.4 billion Transmission $443 million Smart Grid $338 million Renewable projects $47 million EECLP $68 million High Energy Cost Grants:8 grantees $8.9 million

9 FY 2016 Boxscores as of September 2016 # FFB # Guaranteed # Total Allocation $ 5,500,000,000 $ 750,000,000 $ 6,250,000,000 Obligated 89 $ 3,165,750,000 2 $ 750,000, $ 3,915,750,000 Unobligated $ 2,334,250,000 $ -0- $ 2,334,250,000

10 FY 2017 Projection - Anticipated Loan Queue (as of 03/01/2017) FFB Loans approved: 11 FFB Loans in process: 33 FFB Loans anticipated: 66 Electronic loan in-take through RD Apply Increased renewable project inquiries Additional EECLP market exploration and outreach More Smart Grid deployment RESP (Rural Energy Saving Program) rollout High Energy Cost Grants USDA Climate Change Mitigation Strategy Portfolio impacts and response to EPA Clean Power Plan

11 FY 2017 Boxscores as of February 2017 # FFB # RESP # Guaranteed # Total Allocation $ 5,500,000,000 $ 49,861,495 $ 750,000,000 $ 6,299,861,495 Obligated 10 $ 269,875, $ 269,875,000 Unobligated* $ 5,230,125,000 $ 49,861,495 $ 750,000,000 $ 6,029,986,495 Applications on Hand 38 $ 1,307,032,453 5 $ 15,700,000 $ $ 1,322,732,453 Expected Surplus of Funds $ 3,923,092,547 $ 34,161,495 $ 750,000,000 $ 4,707,254,042 * Includes one loan for $90,344,000 which has been approved but not obligated as of February 28, 2017

12 RUS Electric Program Organizational Structure Christopher McLean Assistant Administrator James Elliott Director of Operations Jonathan Claffey - Policy Luis Bernal - Energy Special Advisors Joseph Badin Deputy Assistant Administrator Office of Loan Origination and Approval Victor Vu Deputy Assistant Administrator Office of Portfolio Management and Risk Assessment Gerard Moore Deputy Assistant Administrator Office of Policy, Outreach, and Standards

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14 GFR Planning Duties Assist in preparation of Long Range Engineering Plans developed to anticipate construction needs based on a minimum of 10 and in most instances 20 years. Assist in development of Construction Work Plans and Environmental Review documents which identify projects specifically required within a four year period which the loan request corresponds to. Load Forecasts (10 year) are developed to provide valid estimates of future customer growth and sales amounts. Comprehensive Long Range Financial Forecasts (10 year) are developed to ensure feasibility of loan and rates needed to repay the loans. Copyright 2015 Accenture All Rights Reserved.

15 GFR Loan / Lending Duties Then.the Loan Application process begins with the coordination of the customer s Board, Management and Staff Electric Programs issues loan guarantees (and previously direct loans) to: finance electrical distribution, transmission and generation facilities finance system improvements and replacements finance renewable energy projects, energy efficiency and conservation initiatives Currently, our loan product is the Federal Financing Bank (FFB) Loan Guarantee Program. This is a unique arrangement whereby RD offers a 100% guarantee on loans issued by the FFB, a division of the Department of Commerce, to allow our customers to access their loans at cost of funds plus a 1/8% servicing fee. The loans are called 2 to 4 year loans, to correspond with the period of the associated work plan. Two year loans may be advanced over four years, and four years loans may be advanced up to five years. Extensions are possible, but not automatically granted. Copyright 2015 Accenture All Rights Reserved.

16 Eligible Borrowers Eligible borrowers are corporations, states, territories, and subdivisions and agencies thereof, municipalities, people's utility districts, and cooperative, non-profit, limiteddividend or mutual associations that provide retail or power supply service needs in rural areas. However (except in Nebraska who has an excellent network of Public Power Districts PPD s), and several PUD s (Public Utility Districts), Electric Cooperative s constitute a majority of our borrowers. 591 electric systems borrowers in 46 states Copyright 2015 Accenture All Rights Reserved.

17 GFR Oversight Duties GFR is responsible for ensuring Borrower s compliance with regulatory matters such as Civil Rights Reviews and Operations and Maintenance Reviews. GFR is responsible for assisting with financial analysis as it relates to loan security by helping monitor the Borrower s financial performance to ensure mortgage compliance Copyright 2015 Accenture All Rights Reserved.

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20 Challenges Ahead for the Electric Program State and local support for new power plant projects and for needed transmission projects Legal challenges NEPA / Environmental regulations Construction cost uncertainty and volatility Forecast of wholesale fuel prices Demand effects of increased energy efficiency, conservation, smart grid, load management, and prices Increase in renewable project financing to coops and developers introduces greater risks Other RUS portfolio impacts: buyouts; wait and see approach to carbon constraints; distributed generation, microgrids, storage, and other technologies Copyright 2015 Accenture All Rights Reserved.

21 Energy Efficiency and Conservation Loan Program (EECLP) and Renewable Energy Project Loans (RESP)

22 Purpose and Authority EECLP (FFB Guarantee) Finance DSM, EEC, on-grid/off-grid renewables that will result in the better management of the utility system load growth more beneficial load profile greater optimization of the use of alternative energy resources Rural Electrification Act of 1936 as amended in CFR Subpart H RESP (Direct RUS Loan) Help rural families and small businesses achieve cost savings through loans that would enable them to implement durable cost-effective energy efficiency measures. The Agricultural Act of 2014

23 Eligibility EECLP A utility system that has direct or indirect responsibility for providing retail electric service to persons in a rural area. Including existing borrowers & utilities who meet RUS borrower requirements RESP any public power district, public utility district, or similar entity, or any electric cooperative that borrowed and repaid, prepaid, or is paying an electric loan made or guaranteed by RUS; any entity primarily owned or controlled by 1 or more entities described before; or any other entity that is an eligible borrower of RUS, as determined by 7 CFR

24 RESP vs. EECLP- Overview Eligibility Purpose Utilities in rural areas EECLP- $Billions To help utilities manage their system load growth or a more beneficial load profile Interest Rate US treasury rate + 1/8 th % 0% Interest Rate to Borrower US treasury rate +borrowers interest rate from RUS +1.5% RESP- (Subject to Appropriation) Not limited to utilities but they have to serve rural areas (E.g. subsidiaries of utilities) To help rural families & rural small businesses reduce energy costs or consumption 3% or lower Mark-up to end user Capped at 1.5%, waived on case by case basis Capped at 3% Advances Reimbursable May or may not be reimbursable Advance for start-up activities Up to 5% Up to 4% Loan term 15 years or useful life of equipment Up to 20 years Acceptable financial structures/ investments RUS Cushion of Credit On bill, on bill-tariff based structures, direct investments in the utility s system Only for re-lending like in tariff charge, PACE programs, traditional consumer loans (line item in the electric bill)

25 RESP Application Process 45 days Due on 8/5/2016 RUS Pre screening 60 business days By invitation only RUS Application Review Complete Application Conditional Commitment Letter RESP Borrower Applicants Publication of NOSA June 21,2016 Letter of Intent

26 EECLP Pre Application Process Eligibility Determination Existing Borrower New Borrower Business Plan & Quality Assurance Plan Approval RUS written approval of the EE Program GFR submits application to the Loan Origination and Approval Division 1. GM s letter requesting the loan 2. Board Resolution establishing the EE Program 3. BP & QA 4. RUS letter of approval (BP & QA) 5. EE Program Work Plan 6. Statement of whether a 5% working capital advance is included in the loan budget 7. List of assets to be financed (as excepted property under RUS mortgage (if applicable)

27 Telecom Program 26

28 RUS Telecommunications Programs History From electricity to broadband 1930s Rural Electrification Administration (REA) began providing financing to promote rural electrification 1949 REA received authority to finance telephone service in rural communities 1995 Evolving from the REA, the Rural Utilities Service (RUS) required all financed telecommunications networks have the capacity to deliver broadband 2010 to present RUS has invested approximately $6 billion in loans and grants to build out broadband infrastructure in rural areas

29 Telecommunications Loan Programs Infrastructure Program Farm Bill Broadband Program FY 2016 $690 million available in FY 2016 Loans finance new and improved telecommunications infrastructure in rural communities of 5,000 or less FY 2016 $64 million available in FY 2016 Loans finance the costs of constructing a broadband network Serving rural communities of 20,000 or less 15% unserved area Cannot have 3 or more incumbent service providers Service area cannot be in a RUS previously funded area

30 Telecommunications Loan Programs Updates Infrastructure Program FY loans approved: $194 million FY loans in process: $495 million 7 loans approved: $66.96 million Applications are accepted year round RD Apply online application system Farm Bill Broadband Program FY loan approved: $4.1 million FY loan pending (Carry over from FY16): $15.3 million Notice of Solicitation of Application (NOSA) published on January 9, 2017 RD Apply online application system Pre Application Window Application Window Window 1 Window 2 Jan 9, 2017 to Mar 24, 2017 Mar 1, 2017 to Mar 31, 2017 Jul 1, 2017 to Sep 22, 2017 Sep 1, 2017 to Sep 30, 2017

31 Telecommunications Loan Programs -- Did You Know? Standard Loan Terms include: 2 Year Principal Deferral Interest Rate at the Cost-Of-Money Loan Maturity - Life of the Facilities Financed Plus 3 Years Modified Loan Terms for Serving a Substantially Underserved Trust Area (SUTA) include: At the discretion of Administrator, RUS can modify certain loan terms or application requirements, which may include: Interest rates as low as 2%, Extended amortization period, and/or Priority processing Staff can assist and review loan applications before submission.

32 Telecommunications Grant Programs FY 2016 Community Connect Program $11.74 million available in FY 2016 Grant funds for Broadband Service deployment. Population of 20,000 or less Distance Learning and Telemedicine Program FY 2016 $23.4 million available in FY 2016 Grants fund equipment needed to provide Distance Learning and Telemedicine services 15% Matching Requirement Amounts from $100,000 to $3 million Service Area must be entirely unserved Minimum Broadband Service is defined as 4 Mbps (download) and 1 Mbps (upload) 15% Matching Requirement

33 Telecommunications Grant Programs Update FY 2016 Community Connect Program Over 70 applications received: $120 million 6 applications approved: $7.7 million More may be approved in the near future pending required reviews. FY 2017 Notice of Solicitation of Applications (NOSA) released on January 10, 2017 Applications were accepted until March 13, 2017 Link: Distance Learning and Telemedicine (DLT) Program FY applications received for $55 million 98 applications approved: $27.9 million 56 distance learning & 42 telemedicine projects 5 Promise Zones 29 of 98 (30%) include a tribal coverage component FY 2017 Notice of Solicitation of Applications (NOSA) expected to be released in April 2017 Link:

34 Telecommunications Programs Investments Since 2010, RUS has invested approximately $5.7 billion in projects serving rural residents: Telecom Infrastructure Broadband Initiatives Program (BIP) Farm Bill Broadband Community Connect Distance Learning and Telemedicine (DLT) Total $2.3 billion $2.9 billion $244.5 million $71.7 million $183.6 million $5.7 billion

35 Water and Environmental Program 34

36 RUS: Infrastructure and Services for Rural America 80 years serving rural America Eligibility Serving cities, towns, and rural areas of 10,000 or less Municipalities, private non-profit, and Native American entities Federal program delivered locally in rural areas Built on strong partnerships Copyright 2015 Accenture All Rights Reserved.

37 Program Accomplishments to the present Program Wide Rural Residents Served 20.7 million Households & Businesses Served 7.7 million New households & businesses served 207,742 Projects 5,990 (3,343 Water 2,309 Waste & 338 Combos) Copyright 2015 Accenture All Rights Reserved.

38 Direct Loan Interest Rates January 1-March 31, 2017 (FY 2017, Quarter 2) Poverty 2.000% Intermediate 2.750% Market 3.375% Copyright 2015 Accenture All Rights Reserved.

39 Obligations for FY 2016 Loans and Grants Program Area Obligated $1, M Section 306C Grants to Alleviate Health Risks $ M Alaskan Village Grants $ M Appalachian Region Commission $ M RUS Totals $1, M Copyright 2015 Accenture All Rights Reserved.

40 Program Improvements New consolidated RD environmental regulation 7 CFR part 1970 April 1, 2016 o Streamlined environmental processes shorten and simplify reviews as evidenced by increased projects funded o Rollout activities internal and external outreach and training New Environmental Regulation Impacts: o Seeing anecdotal reduction in number of Environmental Assessments o Improved quality of environmental reports o Less time in processing project applications Example- Tawas Area Schools, Tawas City, MI o Application received in April o Project complete and constructed in September Copyright 2015 Accenture All Rights Reserved.

41 Program Improvements RD Apply and eper Launch of online filing through RD Apply September 2015 Live demos and registration at more than 40 rural water conferences 500+ registered to use RD Apply 250 applications filed online eper Electronic Preliminary Engineering Report Coming 2017 o Improves RUS experience for consulting engineers o Ensures needed information included o Is compatible w/ RD Apply #RDApply Copyright 2015 Accenture All Rights Reserved.

42 Program Improvements RD Apply and eper Includes eligibility determination (review and approval online). Puts digital documentation of site visit, application processing and underwriting in one place. Integrates Application Processing Guide information into the program. Continues Underwriting from the information the applicant submitted. Includes a workflow for the approval process. Copyright 2015 Accenture All Rights Reserved.

43 What is eper? eper Electronic Preliminary Engineering Reports Web-based application for engineers to use to write PERs Interactive system steps engineers through the PER development process based on 2013 Interagency Template Secure portal protects engineer s work Generates PERs in PDF and XML data format Latest innovation in the application process Copyright 2015 Accenture All Rights Reserved.

44 What is eper? eper: Built In Features Follows PER outline of Interagency Template Service area mapping tool Population projection Life cycle cost analysis Automatic completion of costs once alternative is selected Copyright 2015 Accenture All Rights Reserved.

45 What is eper? eper: Benefits SECURE: Only the consulting engineers or their designees can access the reports INTERACTIVE: eper prompts users for information, minimizing the time and effort involved in completing reports FLEXIBLE: Reports are generated in PDF and XML for easy submission to USDA and other Federal/state funding agencies COMPATIBLE: The eper system is compatible with the RD Apply online application system Copyright 2015 Accenture All Rights Reserved.

46 Accounting and Auditing Issues 45

47 RESP Accounting Requirements RUS accounting requirements include compliance with Generally Accepted Accounting Principles, as well as compliance with the requirements of the applicable regulations: 2 CFR 200, or RUS Bulletin 1767B-1, Uniform System of Accounts Electric, as appropriate. RESP borrowers must comply with all reasonable RUS requests to support ongoing monitoring efforts.

48 RESP Audit Requirements RESP borrowers will be required to prepare and furnish to RUS, at least once during each 12-month period, a full and complete report of its financial condition, operations, and cash flows, in form and substance satisfactory to RUS, audited and certified by an independent certified public accountant, satisfactory to RUS, and accompanied by a report of such audit, in form and substance satisfactory to RUS. RESP borrowers must follow the 7 CFR 1773, Policy on Audits for RUS borrowers or 2 CFR 200, Subpart F audit requirements.

49 Leases ASC 842 released February 25, 2016 After exposure drafts in 2010 & 2013 Effective for public companies for years beginning after December 15, 2018 Effective for all other companies for years beginning after December 15, 2019 Early adoption is encouraged

50 Leases No public action has been taken by the FERC at this time. RUS will delay action as we wait to determine the direction the industry is headed. No action expected by the FCC. The assumption for telecommunications companies is that changes to GAAP are adopted unless the FCC issues specific guidance to the contrary.

51 Federal Communications Commission Actions The FCC released a Report and Order (Order) on WC Docket No , Comprehensive Review of the Part 32 Uniform System of Accounts (USOA) on February 24, The Comprehensive Review of the Part 32 USOA has been ongoing since 2000 at the FCC and this Order is the completion of that process. This Order is effective January 1, The Order results in two primary effects: It consolidates Class A and Class B accounts effectively eliminating Class A accounting, and It allows price cap carriers to elect to use GAAP with certain exceptions.

52 Federal Communications Commission Actions (Cont d) Footnote #51 includes the following language to accommodate RUS and state regulatory agencies. Nothing in this Order precludes a state or regulatory agency, or another party as part of a contractual requirement, from requiring a carrier to maintain the Class A accounts or otherwise maintain the USOA. The Order goes on to more closely align the USOA with GAAP; Redefine original cost to be purchase price when acquired rather than cost when it was originally placed into regulated service Allows carriers to reprice assets to market value after a merger or acquisition Use GAAP principles to determine AFUDC Incorporate the concept of materiality

53 Federal Communications Commission Actions (Cont d) Further, the Order addressed the subject of pole attachment rates for price cap carriers that elect to follow GAAP by providing two options. The Order also acknowledged that the changes to the USOA have implications for the separations rules found in Part 36 and referred these issues to the Joint Board for consideration.

54 Electric Accounting Training RUS Borrower Accounting (Electric) Offered by The Graduate School USA (formerly known as The USDA Graduate School Discontinued during the Summer Now available

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56 Tim Frantz Chief Broadband Initiative Program Office: Rural Utilities Service U.S. Department of Agriculture 1400 Independence Ave., S.W. Washington, D.C USDA is an equal opportunity provider, employer, and lender.