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  1. Rural Utilities Service DIANA C ALGER Chief, Technical Accounting and Auditing Staff Program Accounting and Regulatory Analysis Florida Finance and Accounting Meeting Ocala, Florida May 21, 2010

  2. Topics • Electric Program • Telecommunications Program (as it applies to Electric borrowers) • Broadband Stimulus Funding (ARRA) • Accounting Issues • RUS CPA Seminars

  3. Electric Program

  4. Electric Portfolio Overview • As of 12/31/2009 • 682 Active Borrowers • 626 Distribution • 56 Power Supply • RUS Principle Outstanding $12,587,698,358 • FFB Principle Outstanding $28,230,575,896 • Total $40,818,274,254



  7. Summary of Loan ProgramElectric Programs Budget(Dollars in Million) Loan 2008 2009 2010 Program: Actual Actual Budget Direct 5% 99.3 100.0 100.0 Municipal Rate 0.0 0.0 0.0 Direct Treasury Rate 0.0 0.0 0.0 FFB Guaranteed 6,500.0 6,500.0 6,500.0 Non-FFB Guaranteed 0.0 0.0 0.0 Total Loan Program 6,599.3 6,600.0 6,600.0

  8. Loan ProgramsFY 2010 – As of 5/4/10

  9. Loan Levels 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

  10. 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.

  11. GIS Applications

  12. 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.

  13. COAL FIRED GENERATION • 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.

  14. US Power Generation by Fuel Source • US EIA Projections • Annual Energy Outlook 2009

  15. 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

  16. ALTERNATIVESRenewables (continued) • 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.

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

  18. 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

  19. 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

  20. RUS and the Smart Grid RUS: • 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.

  21. 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

  22. Telecommunications Program Budget Levels

  23. 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

  24. 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

  25. 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)

  26. 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

  27. American Recovery and Reinvestment Act of 2009Broadband 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

  28. 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

  29. Announced Rural Broadband Projects

  30. Projects Taking Place in 32 States or Territories

  31. 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 ARRABroadband Funding

  32. Round 2 Funding (“NOFA 2”): AVAILABLE FUNDS Last Mile: $1,700,000,000 Middle Mile: 300,000,000 Satellite: 100,000,000 TA & Library: 5,000,000 Reserve: 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 for more information. ARRABroadband Funding

  33. Portland, OR Reno, NV Denver, CO San Antonio, TX Eureka, MO Sioux Falls, SD Dearborn, MI Fayetteville, NC Atlanta, GA RUS-NTIA Joint Public Workshops Total of more than 2,500 participants attended.

  34. ARRABroadband Funding NOFA 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 Projects RUS 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.

  35. ARRABroadband Funding NOFA 2 FUNDING OPPORTUNITIEScontinued 3. Satellite Projects Applicants 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.

  36. ARRABroadband Funding NOFA 2 FUNDING OPPORTUNITIEScontinued 4. Technical Assistance Grants Awardees 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 Grants Awardees 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.

  37. Accounting Issues • Grant Accounting • Tax Treatment of Grants • 2010 CPA Seminars

  38. 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.

  39. 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.

  40. Grants Related to Expenses in Future Periods In the year the grant is received: Dr. Cash $XXX,XXX Cr. Deferred Credits $XXX,XXX To 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,XXX To properly offset the grant received against expenses incurred.

  41. Grants Related to Fixed Assets In the year the grant is received: Dr. Cash $XXX,XXX Cr. Deferred Revenue $XXX,XXX To 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 $XXX Cr. Grant Revenue $XXX To 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).

  42. Taxability of ARRA Grants? • Requests for Guidelines • NARUC Request – March 10, 2010 Letter • Department of Commerce Request

  43. 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.”

  44. Response to ARRA Taxability Question • 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.

  45. Response to ARRA Taxability Question In United States v Chicago, Burlington & Quincy Railroad Co. the Supreme Court adopted a two-part inquiry to identify a nonshareholder contribution of capital: • The intent or motive of the transferor; and • The economic effect on the transferee corporation

  46. Response to ARRA Taxability Question • 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.

  47. Response to ARRA Taxability Question • The following five factors must be present for the requisite economic effect on the transferee corporation: • The contribution certainly must become a permanent part of the transferee's working capital structure, • 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)

  48. Response to ARRA Taxability Question • The contribution must be bargained for, • The contributed asset, foreseeably, must result in benefit to the transferee in an amount commensurate with its value; and • 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.

  49. Response to ARRA Taxability Question 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.

  50. Response to ARRA Taxability Question 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.