1 Rural Utilities Service DIANA C ALGER Chief, Technical Accounting and Auditing Staff Program Accounting and Regulatory Analysis Florida Finance and Accounting

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Rural Utilities Service

DIANA C ALGERChief, Technical Accounting and Auditing StaffProgram Accounting and Regulatory Analysis

Florida Finance and Accounting MeetingOcala, FloridaMay 21, 2010

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Topics

• Electric Program• Telecommunications Program (as it applies to

Electric borrowers)• Broadband Stimulus Funding (ARRA)• Accounting Issues• RUS CPA Seminars

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Electric Program

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Electric Portfolio Overview

As of 12/31/2009

682 Active Borrowers

• 626 Distribution• 56 Power Supply

RUS Principle Outstanding $12,587,698,358FFB Principle Outstanding $28,230,575,896Total $40,818,274,254

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Approvals Subsidy

BILLIONS

LOAN PROGRAM VERSUS SUBSIDIES

-$10

$40

$90

$140

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

MILLIONS

LOAN SUBSIDIES

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Summary of Loan ProgramElectric Programs Budget

(Dollars in Million)

Loan 2008 2009 2010Program: Actual Actual Budget

Direct 5% 99.3 100.0 100.0Municipal Rate 0.0 0.0 0.0Direct Treasury Rate 0.0 0.0 0.0FFB Guaranteed 6,500.0 6,500.0 6,500.0Non-FFB Guaranteed 0.0 0.0 0.0

Total Loan Program 6,599.3 6,600.0 6,600.0

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Loan ProgramsFY 2010 – As of 5/4/10

http://www.usda.gov/rus/electric/loans/loan_types041118.pdf

Loans Approved 63

Loan Applications In House 77

$1,171,110,000

$8,143,118,403

FFB Approved 59 $1,071,110,000

FFB Applications In House 76 $8,139,398,403

Hardship Approved 4 $100,000,000

Hardship Applications In House 1 $3,720,000

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Loan Programs FY 2010

Hardship $ 100,000,000

FFB Guaranteed $6,500,000,000

313A Guaranteed Underwriter $ 500,000,000

High Cost Energy Grants $ 17,500,000

Loan Levels

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Geographic Information Systems

Rural Development recognizes the importance of GIS in managing digital data and mapping systems, so that our borrowers can achieve greater efficiencies and capabilities in the future.

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GIS Applications

FY

Number Applications Amount

2007 2 $2,445,698

2008 6 $5,398,197

2009 10 $6,373,919

2010 5 $3,269,570

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COAL FIRED GENERATION

• 50% of the electricity in this country • 80% for rural electric cooperatives

WHY? Fuel Use Act of 1978• Prohibited the use of natural gas and oil to generate

electricity.• Forced the industry into coal and nuclear to meet

demand.

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• 51% of cooperative generation

• 79% of MWhs generated

• Trend is not likely to be reversed any time soon.

• Strong track record in owning and operating coal fired plants.

• Meaningful options are limited.

COAL FIRED GENERATION

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US Power Generation by Fuel Source

• US EIA Projections

• Annual Energy Outlook 2009

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ALTERNATIVESRenewables

• Critical, but space limited, low energy density, and cannot be scaled up rapidly.

• Biofuels have their own environmental issues.

• Manufacturing Photovoltaic (PV) panels requires heavy metals, gases and solvents that are carcinogenic and must be disposed of in certified landfills

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• 1,000 MW solar farm requires 50 square miles of land.

• 1,000 MW wind farm requires about 60,000 acres.

• Studies suggest that efficiency and renewables together can meet between 17 to 25% of demand.

ALTERNATIVESRenewables (continued)

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ALTERNATIVESNuclear

• Nuclear sources are not expected to increase proportionally very much, but can provide scalability and energy density.

FACTOIDOne fuel pellet, size of little finger nail, contains

the same amount of energy as 149 gallons of oil, 157 gallons of gas, 17,000 cubic feet of

natural gas, and 1,789 pounds of coal.

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Energy Efficiency Program

Provide loan guarantee to rural electric utility for energy efficiency projects.

Goals:• Ensure energy efficiency at the end user level• Increase electric system reliability by reducing overall system

demand• Increase load factors, allowing for efficient utilization of existing

electrical distribution systems• Use existing electric capacity more efficiently at distribution,

transmission, and generation levels• Attract new businesses and create new jobs to rural communities

by providing energy efficiency jobs

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Smart Grid• RUS is an active participant on the Smart Grid

Task Force, established under Title XIII of the Energy Independence and Security Act of 2007

• Task Force includes experts from seven different federal agencies

• The Smart Grid Task Force mission is to ensure awareness, coordination and integration related to Federal Government activities in Smart Grid technology

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RUS and the Smart GridRUS:

• Monitors the standards making process related to the National Institute of Science and Technology (NIST) Smart Grid Interoperability Standards Project to ensure that the resulting standards are relevant to the electric systems owned and operated by the rural electric cooperatives.

• Reviews and evaluates smart grid related materials and equipment that borrowers propose to use in upgrading their power grids.

• Provides loan funds to eligible borrowers to purchase and integrate smart grid equipment into their existing utility plant.

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Telecommunications Programs Loan and Grant Programs

• Infrastructure Loan Program: Loans to local telecoms in rural communities

• Broadband Access Loan Program and Community Connect Grant Program: Loans and grants for local telecoms and other providers who offer broadband services in eligible communities

• Distance Learning/Telemedicine (DLT) Loan and Grant Program: Loans and grants for providing Distance Learning and Telemedicine services to rural residents

• American Recovery and Reinvestment Act of 2009 (ARRA) Broadband Initiatives Program: Loans, grants and loan/grant combinations for broadband in rural communities

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Telecommunications Program Budget Levels

2009 Obligations 2010 Budget

Infrastructure Loans $690.0 million $690.0 million

Broadband Loans $6.0 million $532.0 million

Distance Learning and Telemedicine Grants

$36.3 million $29.7 million

Community Connect Grants

$13.4 million $13.4 million

Recovery Act (ARRA) Loans and Grants

N/A $2.5 billion (budget authority; approx $3-4B

in funding available)

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Community Connect Grant Program

• Nationally competitive grant program to provide service to the most rural and economically challenged communities

• Since inception, program has provided 197 grants and invested $88.2M

• One community, recognized by US Census or Rand McNally, currently unserved

• 20,000 population or less• Minimum $50,000 – Maximum $1,000,000• 15% matching funds required

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DLT Loan and Grant Program

• Provides rural communities with opportunities to obtain educational and medical services from distant locations using communications technologies

• $403 M in DLT loans and grants have been awarded since the inception of the program

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Distance Learning and Telemedicine Program (modification)

• Re-authorized through 2012

• Places emphasis on ensuring that “libraries” are included as eligible purposes/entities

• $29.7 Million available in DLT Grants for FY10 (including carryover)

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American Recovery and Reinvestment Act of 2009 Broadband Funding

National Telecommunications Information Administration (NTIA) $4.7 Billion

Rural Utilities Service (RUS) $2.5 Billion

Total $7.2 Billion

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American Recovery and Reinvestment Act of 2009 Broadband Funding

USDA RUS: $2.5 billion total budget authority authorized under the

ARRA in the form of loans, grants and loan/grant combinations for broadband infrastructure – the RUS Broadband Initiatives Program (BIP)

First NOFA: $2.4 billion program level funding• Up to $1.2 billion for Last Mile projects• Up to $800 million for Middle Mile projects• Up to $325 million for a National Reserve

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RUS BIP Project Requirements • 75 percent of the areas to be served by a project receiving funds from such grants or loans shall be in a rural area without sufficient access to high speed broadband service to facilitate rural economic development;

• Priority shall be given to:– Projects that will deliver end users a choice of more than one service provider;

– Projects that provide service to the highest proportion of rural residents that do not have access to broadband service;

– Current or former RUS Title II borrowers– Projects that commence immediately upon approval.

ARRA Broadband Funding

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Announced Rural Broadband Projects

Announcement Date

Number of Projects

States Covered

Project Amounts

12/17/2009 8 9 $ 53.8M

1/25/2010 14 11 $ 309.9M

2/17/2010 11 9 $ 277.3M

3/4/2010 22 18 $ 254.6M

3/23/2010 12 8 $ 150.0M

3/31/2010 1 1 $ 10.9M

68 $ 1,067.0M

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Projects Taking Place in 32 States or Territories

Alabama Kansas New York

Alaska Kentucky North Dakota

American Samoa Louisiana Ohio

Arizona Michigan Oklahoma

California Minnesota Oregon

Colorado Mississippi South Dakota

Georgia Missouri Tennessee

Hawaii Montana Texas

Idaho Nebraska Virginia

Indiana New Hampshire West Virginia

Iowa New Mexico

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RUS expects to use approximately $2 billion to provide grants, while the remaining funds will finance loans, for potential total investment in rural broadband of around $3-$4 billion, which may vary depending on the demand for grants versus loans.

RUS will award all funds no later than September 30, 2010.

Two rounds of funding:Round 1: window has closed; $1.067 B in awards have been announced

Round 2: window has closed; $2.2 billion is available


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Round 2 Funding (“NOFA 2”):AVAILABLE FUNDS

Last Mile: $1,700,000,000Middle Mile: 300,000,000Satellite: 100,000,000TA & Library: 5,000,000Reserve: 95,000,000

TOTAL $2,200,000,000 Repooling: RUS retains the discretion to divert funds from one category of projects to another.

SEE NOFA FOR COMPLETE DETAILS ON PROGRAM FUNDING AND REQUIREMENTS

NOFA=Notice of Funds Availability. Please visit www.broadbandusa.gov for more information.


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RUS-NTIA Joint Public Workshops

• Portland, OR• Reno, NV• Denver, CO• San Antonio, TX• Eureka, MO

• Sioux Falls, SD• Dearborn, MI• Fayetteville, NC• Atlanta, GA

Total of more than 2,500 participants attended.

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ARRA Broadband FundingNOFA 2 FUNDING OPPORTUNITIES 1. Last Mile Projects

Must predominantly provide broadband service directly to the premises or to end users. Only those applications whose proposed funded service area contains 75 percent or more rural areas, within which not more than 50 percent of the premises in the rural areas have High Speed Access will be considered for funding.

2. Middle Mile ProjectsRUS strongly encourages applications for Middle Mile projects from current RUS loan and grant recipients. Applicants must propose that at least 75 percent of the interconnection points be in rural areas with no more than 50 percent of the premises having High Speed Access. The communities in which the interconnection points terminate shall be used to determine the percentage of High Speed Access.

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ARRA Broadband FundingNOFA 2 FUNDING OPPORTUNITIES continued

3. Satellite ProjectsApplicants must propose to serve only unserved rural premises in any of 8 regions. Applicants may propose to serve more than one region; however, Applicants must submit applications which are broken out for each region. Only 1 Applicant will be selected to serve a region.

At a minimum, an application must commit to providing broadband service, to providing customer-premises equipment (CPE) to subscribers at no cost (including no costs for installation, activation, or other hidden fees) and to providing to such subscribers at least a 25 percent reduction in the Applicant’s service rates as of 12/1/2009, for a term of at least one year.

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ARRA Broadband FundingNOFA 2 FUNDING OPPORTUNITIES continued

4. Technical Assistance GrantsAwardees under the First Round NOFA or Applicants under this NOFA may submit a request for an additional grant for funding for the purpose of developing regional broadband development strategies in rural areas. Technical Assistance grants may be used for the development of a USDA-recognized regional strategy.

5. Rural Library Broadband GrantsAwardees from the First Round NOFA or Applicants under this NOFA may submit a request for a grant to reimburse the associated costs for connecting any rural library in their proposed funded service area, being constructed, or to be constructed, with funding from an award from USDA’s Community Facilities program of the Rural Housing Service. Such costs need not have been addressed in the original application submitted under the First Round NOFA or Second Round NOFA.

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Accounting Issues

• Grant Accounting

• Tax Treatment of Grants

• 2010 CPA Seminars

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The Basics – Accounting for the Grant Proceeds

Letter Guidance issued January 7, 2010

Note: This guidance applies only to non-regulated entities and the non-regulated activities of regulated entities.

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Grants Related to Expenses

Dr. Cash $XXX,XXX

Cr. Expense Accounts $XXX,XXX

To record the receipt of a government grant related to current expenses.

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Grants Related to Expenses in Future Periods

In the year the grant is received:Dr. Cash $XXX,XXX

Cr. Deferred Credits $XXX,XXXTo record the receipt of a government grant related to expenses in future periods.

In the future period when expenses are incurred:Dr. Deferred Credits $XXX,XXX

Cr. Expense Accounts $XXX,XXXTo properly offset the grant received against expenses incurred.

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Grants Related to Fixed AssetsIn the year the grant is received:Dr. Cash $XXX,XXX

Cr. Deferred Revenue $XXX,XXXTo record receipt of a government grant related to the purchase or construction of fixed assets.

In the year the fixed asset is put into service and each year after during the useful life of the fixed asset:

Dr. Deferred Revenue $XXXCr. Grant Revenue $XXXTo record the grant revenue earned by the passage of time (the amount of revenue earned is calculated as 1/nth of the original grant where n equals the useful life of the asset purchased or constructed).

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Taxability of ARRA Grants?

• Requests for Guidelines– NARUC Request – March 10, 2010 Letter

– Department of Commerce Request

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Response to ARRA Taxability Question

• IRS Letter dated March 4, 2010, to Dept of Commerce dealing with tax treatment of ARRA Broadband Grants

• “Taxpayers other than nonprofit or governmental entities must include governmental grants in gross income absent a specific exclusion.”

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• Only exclusion that could apply, in some circumstances, is Section 118 of the Internal Revenue Code.

• Section 118(a) of the Code provides that, in the case of a corporation, gross income does not include any contribution of the capital of the corporation.

• Section 118(a) applies to contributions to capital made by a person other than a shareholder, for example, property contributed to a corporation by a governmental unit for the purpose of enabling the corporation on expand its operating facilities.

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In United States v Chicago, Burlington & Quincy Railroad Co. the Supreme Court adopted a two-part inquiry to identify a nonshareholder contribution of capital:1. The intent or motive of the transferor; and

2. The economic effect on the transferee corporation


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• The transferor’s intent must be to enlarge the transferee corporation's capital to expand its trade or business for the benefit of the community at large and not to receive a direct or specific benefit for the transferor.


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• The following five factors must be present for the requisite economic effect on the transferee corporation:1. The contribution certainly must become a permanent

part of the transferee's working capital structure,

2. The contribution must not be compensation, such as a direct payment for a specific, quantifiable service provided fo the transferor by the transferee,

(Cont’d)


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3. The contribution must be bargained for,

4. The contributed asset, foreseeably, must result in benefit to the transferee in an amount commensurate with its value; and

5. The contributed asset ordinarily, if not always, will be employed in or contribute to the production of additional income and its value assured in that respect.


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A grant payment that is made to a corporation restricted solely to the acquisition of capital assets to be used to expend the corporate grant recipient’s trade or business and that satisfied the five factors is exclude from the corporation’s gross income as a nonshareholder contribution to capital under section 118(a). A grant payment made to a corporation that may be used for operating expenses, however, will not qualify as a section 118(a) contribution to capital and so must be included in the corporation's gross income.


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Another limitation on section 118(a) is that it applies only to corporation, including Limited Liability Companies (LLCs) treated as a corporation for federal income tax purposes. Section 118(a) does not apply to noncorporate entities such as partnerships, including LLCs treated as a partnership for federal income tax purposes. In the case of an LLC treated as a “disregarded entity” for federal income tax purposed, we would look to the owner of the disregarded entity, i.e. a corporate owner could qualify for the exclusion while a disregarded LLC owned by a partnership would not.


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If a grant recipient must include a grant payment in gross income, the grant recipient is allowed to deduct against the grant proceeds and other gross income all deductible business expenses, net operating losses, and other allowable deductions for that year.


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2010 RUS CPA Seminars

Locations Dates

Denver, CO August 16 – 17

Oklahoma City, OK September 20 – 21

St. Petersburg, FL October 18 – 19

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http://www.usda.gov/rus/[email protected]

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Questions

Documents

1 Rural Utilities Service DIANA C ALGER Chief, Technical Accounting and Auditing Staff Program Accounting and Regulatory Analysis Florida Finance and Accounting