Where's The Funding? Episode 8: Matching funds for Rural Electric Cooperatives and Telcos

Gary Bolton: All right, well, good morning everyone, and welcome to Where's The Funding? Hosted by the Fiber Broadband Association and sponsored by broadband.money. I'm Gary Bolton, the president and CEO of the Fiber Broadband Association. And this is our 8th episode of 2023. This is a 12-part series designed to help you understand, navigate, and obtain matching funds for Broadband grants. The NTIB program requires Broadband grant applicants to come to the table with a minimum of a 25% matching funds and a letter of credit upfront with the application. For many small and non-traditional providers and communities, this might sound daunting but it doesn't have to be. This 12-part series is designed to help you understand how and why meeting these requirements can be straightforward. Last month we had a great session where we discussed tapping municipal markets with Chris Perlitz, the Municipal Capital Markets Group.

Gary: And if you missed that, you can go to the FBA website under events or go to broadband.money.io and watch the replay. Today on Where's The Funding? We'll be discussing Matching funds for Rural Electric co-ops and Telcos with Darren Farnan, the Chief Operating Officer at United Fiber. Darren has worked for United Electric Co-op since 1994 and serves as a general manager of United Fiber. Darren has also served in roles as Chief Development Officer and Energy Services Manager for United. Darren's led the development and operations of United Fiber Networks, which has grown to 3200 miles of fiber and 54 employees and 25 million in annual revenue since turning up the first fiber customer and 2013. So Darren, you'll have to correct me if any of those are wrong 'cause I picked that up from the last time we got together. Currently United Fiber is approaching 25,000 combined residents and commercial fiber customers, and Darren received his BS in Business Management in 1991 and the MBA from Northwest Missouri State University.

Gary: And Darren served as the chair for the UTC Utilities Broadband Committee from 2018 to '21 and has provided numerous national presentations for the Fiber Broadband Association, Calix, UTC on the United Fiber business. He's involved in many local organizations, including economic development and civic organizations throughout the service area. So welcome Darren, and for our audience, please put in your questions in the chat as we go and we'll work them into our discussion. So Darren, other than some challenges here this morning... Before we get into the matching funds, let's start with a quick recap on how and why United Electric got into fiber and what you perceive as the positive impact that Fiber Broadband business is having on your electric business and the communities you're serving.

Darren Farnan: Sure. I just wanna make sure you can hear me okay, Gary. Everything good there? 

Gary: Perfect.

Darren: All right. So yeah, I appreciate it. I said, out of all the numbers you put out there, the one thing I'll update is from our last time we spoke is we just hit 30,000 subscribers this month. So we've made some progress since the last time we spoke. So we're excited about that and that's obviously a big milestone. But to your point, we really started off what really got us into this business was the funding opportunities that we had back in 2010 with the original American Recovery and Reinvestment Act. And that's... We had been in a DIRECTV business, we had been in the wireless and satellite internet business and saw that our membership kind of with the introduction of video and things like that our membership needed more than what we were able to provide with some of those services.

Darren: And we applied for basically a grant loan fund of about 21 million for some of our rural substations, a portion of our service territory. And we were able to get that. At that point, about 90% of those customers could not get four by one service. So we started off there and is what gave us the springboard into, to where we are today, but really that $21 million in those rural areas, which was about 5000 homes passed, is really what got us started. Never with the vision of being where we are today. It was really just to... As a co-op really just trying to get a service to our membership that we knew they needed. And that funding really got us started on that path.

Gary: Now, help our audience understand where you guys serve, kind of that northwest Missouri kind of where you between where? 

Darren: You bet. So our primary electric service area is around St. Joseph, Missouri up to Maryville, Missouri. So kind of in the extreme northwest corner of the state, basically from the Iowa border. We do have a few meters in Iowa, but basically from Iowa down near Kansas City. And then our fiber services area is obviously larger. Like I said, we have about 10,000 electric meters, 7500 members, and as I mentioned before, we now have 30,000 broadband subscribers. So we're basically on a member to subscriber basis. We're about four times the size now on broadband, which is pretty unique for an electric co-op in this type of a business. So our fiber footprint basically goes from the north edge of Kansas City to the Iowa border.

Gary: So when you look at just your electric business, I mean, it's pretty rural, right? You're like, what, two and a half meters per mile? 

Darren: Yes, we're one of the most rural co-ops, if not the most rural in the state of Missouri. So it's... To think we were gonna do fiber to the home, was not really a great possibility without some additional funding. And that's again, why we felt comfortable to get started back with that original, or a grant loan. And since then we've been able... We've been fortunate enough to do... We've participated in the Connect America Fund Auction, RDOF. We just recently were awarded about 8 million in funding from the state broadband office with some of the ARPA funds and also through some of our county funds as well, and other one and a half million there. So all in all, we've been able to get about $60 million in funding over the last 10 years to really spur that... To really help us hit those extremely rural markets, and then as obviously, we've done a lot of community builds. We've done about 45 community builds, which that has been kind of another resource for us along with the funding that's been a resource to help us continue to edge out in those extremely rural markets.

Gary: Well, I have to imagine that those... It's so critical that you're able to connect those 45 communities, 'cause, as I recall, I think Missouri's getting 1.7 billion from BEAD. Is that right? 

Darren: That is right. There's a huge... I think Missouri was number three on the amount of funding allocated through that process.

Gary: So how many co-ops are there in Missouri and how many of those have launched? 

Darren: There's gonna be a lot of them in Missouri for sure.

Gary: Yeah. How many co-ops are there in Missouri and how many launched? 

Darren: There's about about 45 co-ops total in the state. And then around 12 on the distribution side have either announced or are going full born projects. There's a couple others that have partnered with some other companies to do services, but still there's fewer than half of the co-ops in the state doing some form of broadband. There's more looking at it all the time, but it's just one of those things that it's... We're still not over the line of 50%.

Gary: Well, it seems crazy. With all your success, why wouldn't every rural electric co-op in Missouri and across the nation, there's like 900 rural electric co-ops. Why wouldn't everybody be offering broadband? 

Darren: You know, and I don't wanna speak for other co-ops, there can be a number of reasons, sometimes it just has to do with perceived competition in the area management or board preferences. Obviously we're managed by a board of directors of our membership. So it's usually a decision of the officers and the board members, ultimately the board members of whether or not companies get into this business. So in our area for example, there's a couple of rural telephone co-ops that have done a good job of bringing fiber to the home. Our board made the decision that we didn't have to provide fiber ourselves to every member because we are so rural in those areas where they're already getting fiber to the home from a rural telephone co-op, our board has said that we don't have to overbuild that in those areas because we really just wanna make sure that our membership...

Darren: The reason we got in this was to just make sure that our members that did not have broadband were able to get it, and that's what we've been able to accomplish through this. And that's been done again, through... For those that have been in an area where they've had fiber the home through another provider, so be it. And we're happy that they have it.

Gary: That's my favorite thing about rural electric co-ops, Darren, is that it's really about community development. And every time I visit a general manager, you walk in a restaurant, everybody knows their name, you go to a ball game, everybody know you go to church, everybody... So you are about the most accountable person on the planet and your community. Is that right? 

Darren: You have to be, everybody has your cell phone and everybody knows where your office is. So yeah, I don't know if it's by choice. No, it actually, we do, we take a lot of pride in what we do and a lot of satisfaction, it's... Even in the areas, even these communities, which we do not serve electrically, that's still where our membership goes. We'll go to school, they go to bank, they go to get their groceries, go to church, all those type of things. So we feel our board has given us the opportunity to take more of a regional approach rather than just a co-op approach. And we've really benefited from that because we've connected all the major healthcare providers in the area, a number of the clinics, schools, again, churches, so many of these that we do not serve electrically, but it's not only benefiting the region, it's benefiting our membership as well because we've been able to... We were the highest cost electric co-op in the state 10 years ago. And right now we've not taken a rate increase since, and we don't project any additional rate increases in the future at least because of what broadband's been able to bring to the co-ops.

Gary: Well, that's what I hear consistently is that you can't subsidize the broadband business with your electric business, but you can sure use that revenue from the broadband business to keep your rates low and really benefit your electric side of the house.

Darren: That's absolutely right. Plus we've had the opportunity, and I may have mentioned this to you the last time we spoke, but over the last five years, we've been able to give almost $10 million back to our membership through rate discounts, through capital credits, through just some other things we've been able to do often in December, like a rate discount in those months to just kind of give people some extra money around the holidays and it's been so well received. So even those members that do not have fiber necessarily from us, maybe they have fiber service from another provider, they're still seeing a benefit as a member. And it took a while for our members to understand that, it took a couple years, but they've really seen it and they love it now. There's probably as much more talk at our annual meeting about fiber now than there is electricity.

Gary: Yeah, it's funny, when I talk to RUS, they say that most of their funding, even their electric funding is getting into fiber from one way or the other, whether it's connecting substations or smart grid modernization and so forth. But let's get into the matching funds for co-ops. So we have matching funds. We have this huge looming thing called Letter of Credit that really is a big issue for some small and community providers. What advantage does a co-op have with respect to financing? 

Darren: The good thing because we're such a heavy infrastructure organization, we're used to getting long-term loans, taking long-term approaches, we're able to get... We've been fortunate to get very favorable loan packages through both CoBank and CFC, some of the major lenders on the electric co-op side of the house. So that's been a huge benefit to us. And thankfully building over the last 10 years, we've been able to get a lot of our network in at very low interest rates. Obviously there's a little bit more interest rate pressure now than there has been and inflation pressure than we've seen over the last couple of years. But we have a lot of infrastructure in, we can build cheaper on our existing polls than what you can do on an underground basis is often at about half the cost.

Darren: For those that are getting into the business, you can adopt, from an electric co-op. Again, we found that offering electric service and offering broadband service is very similar, just the way the networks are set up. And then it's it's just been a huge success for us, like I said, over that amount of time. And like I said, with the letters of credit, some of the concerns that that you brought up early, we're in a favorable position. There's some of those things that if we could change, we would, frankly. I mean, we don't like the fact of an upfront letter of credit, but with all the different things that you kind of brought up early on, I think we're in a position... Co-ops are in a good position to at least handle some of those challenges that come along with that, with the BEAD requirements.

Darren: So explain to me, like you had told me before, like the county can be a co-applicant on the matching funds. How does that work? 

Darren: So what happened with our... This was during the ARPA process and through the state broadband funds that were allocated in Missouri, we had some of the county commissioners that basically partnered and contributed some money from their county ARPA funds to help with kind of that matching piece. And as much as anything, it showed the interest as an applicant. United Fiber was obviously the applicant, but they signed on that they were supporting the United Fiber build in their counties. And all of them gave some type of monetary donation, some more than others, but some went up to 25%. So that was a huge benefit in the scoring, and I think that's a little bit different. We've been used to the last few years on CAF and RDOF funding, that has been more of a BEAD process where ARPA gave us a taste, I think a little bit of what the application process is gonna be more like for BEAD.

Darren: And so it's much more community based. It's much more locally based as far as working with partners, community benefit, plans. There's so many more pieces there than what we saw with CAF and RDOF. So it's a different process and like I said, we got a taste of that. So I think there's a few more things that'll be coming along with BEAD. But the thing I will say I'm thankful for in Missouri, I will give a shout out to our state broadband office. They've been very focused on working with providers that are local to the area and that they know are invested in the areas, whether that's rural telcos, rural electrics, whatever that is, their history in the state broadband fund allocations was very promising I think for what I hope we can expect during BEAD.

Gary: Well, certainly I would think the fact that both the rural electric co-ops and rural telephone cooperatives, both have huge impacts in the community and great track record. But you guys have been around for what, 100 years? Something like that.

Darren: Right. Right. Yeah. 80 plus years. Yes.

Gary: Yeah. So if you're a rural operator in that community, one, everybody knows you're gonna be around for the next 100, 200 years. And two, you guys already have a great track record. So what you're saying is that when you partner with the county who you already have a great relationship is they can pull out some capital projects, funds or ARPA money or other things to help match and help you guys on your applications? 

Darren: Absolutely. Just having that conversation with them and getting them involved early in the process has been extremely beneficial. As a matter of fact, one of the counties, we've done some projects with them outside of the state funds that they wanted to get service into some areas and have really built a trust and a partnership with them. And their ultimate goal is to get fiber to their whole county. And we've been forcing in a lot of these areas through these different... Like I said, through that $60 million that we brought into what are mostly high cost areas. There's many of the counties that if we don't serve it well, telephone co-ops have fiber in it. And some of these counties, we have one county that has just a little over 2000 people in it, and they now have fiber to the homes throughout the whole county. So those are the type of stories that just can't happen without some type of additional funding utilizing the programs that are available to us to get that network out in the areas that would never get it otherwise.

Gary: Absolutely. So what about other financing sources? So who are your go-to guys for financing? 

Darren: Yes. Mainly, like I said before, like with CoBank and CFC, they've been great partners. They understand, they've seen the success now of what not just us, but a number of other rural electric co-ops have done in this market and how the take rates and how effective it's been. Everything from NPS scores of 60, 70, 80, they see the satisfaction and the long-term benefit of companies like us providing broadband in these markets. So they've been great partners. Again, like I told you in the like past, it's like the other piece we do is these community builds, again, have not only... We look at it somewhat of a funding mechanism there as well. I know that's a little bit... It sounds a little bit odd, but we look at those balance out our homes per mile. When we can build communities that often don't have any other type of fiber service. Most of those, communities didn't have fiber service and many didn't even have a cable service. It was just low grade DSL. But we see the take rates very consistent even in communities that have cable services and things now. So when we build those areas, we look at that as an offset to those areas that have two, three, four customers per mile and it balances that out. So we continue to invest and continue to edge out in those areas where we know people need that service in those extremely rural markets.

Gary: So as an infrastructure provider, I mean, so you have great assets, right? Banks love assets. So is there an issue on pledging your electric assets for broadband builds or how do you leverage those assets when you're building? 

Darren: So I would say most co-ops, when they get into the business, the electric co-op probably guarantees those notes early on. We've gotten to the point now that we built such... Our asset bases is near the same on our fibre side now as what it is on the electric side. But getting into the business, that's an absolute benefit to be able to have the backing of the co-op. It's kind of like when my 18-year-old son wants a car or a credit card, I still have to sign on the line, but it's like that's what got us started. And having those relationships, having that existing infrastructure benefits you both, like I said, from not only from a construction standpoint, but from a financing standpoint as well.

Gary: All right. Well, great. No, I think that's a perfect analogy. 'Cause it's like our children, they come from a liability to become a huge asset. So it sounds like the broadband business provides great dividends back to the electric business. So let's get into that...

Darren: Yeah. And it's different stages, I think too. I think the stage of that is important because I think we've been in it for a decade now. We just celebrated our 10 years. So especially early on, that's a critical piece to help springboard and make those investments that you need to make to build a quality network.

Gary: Great. So it just seems like there's not only the assets you have that you can use as collateral and leveraging your electric side as that to get going, but also it sounds like you have some cross-pollinization of employees and other things? 

Darren: Right. Yeah, we do time studies and allocate those. We do a study, but we do, that's been a lot of the benefit is that there's some certain resources that we share easily, like HR and accounting and those type of things that you're able to offset the cost of both companies through those type of agreements.

Gary: So let's talk about Davis-Bacon prevailing wage and how that impacts on your match and your financing.

Darren: Yeah, so we saw that during our first build through that our build that there was a Davis-Bacon requirement with that. That does add to the cost, no doubt. So like you mentioned earlier on, that minimum 25% match, we saw about an additional 20% increase in cost in our area with those different Davis-Bacon requirements back at that time, I think. I think any company will [0:22:04.7] ____ and that was some back in 2010 and 2011, but there will be an project if that wording's still the same or how did the final rule shake out. But that's something to keep in mind and I think with this... I think for good for companies to partner with someone to help, because we've benefited in CAF and RDOF from being part of a consortium that BEAD, but the BEADs were pretty straightforward, right? There's more requirements as far as some of the... There's the... We've talked about the Bio American, we've talked about these community benefit plans. Again, we got a taste of this through ARP and we utilise one of our local [0:23:20.8] ____ regional planning that and see where those, and find a vendor, find someone that can help you through this process because this is gonna be a little bit more different than what we've seen in the past. Again, I would compare it more to what we've seen previously, like in the ReConnect grants or with back with the RDOF grants back in 2010.

Gary: So there's a lot of discussion on the chat about what are the best, most successful approaches encouraging cities and counties to contribute some ARPA funds to co-op broadband and CFP fits under ARPA. So what are you saying? What's the best approach is you just going and saying everything...

Darren: Yeah. I agree. I mean, they... Yeah, that's the first step is just communication, like it is with most things, right? It's just having the conversation and meeting the right people, getting in front of your county commissions or whatever that structure is, and then seeing what funds they have available. I know all those funds were basically listed whether if they haven't used some of their funding for other projects, I think it was water, wastewater, all the different things that they could use that maybe that they don't...

Darren: And I worry with us with ours for the status for the state of Missouri. It was not just beneficial for the money part. It was beneficial for the cooperation part kind of leveraging that public-private partnership to get service into an area, it showed the people scoring those different projects, a high level of cooperation and a high percentage chance of success. When you have the county commission and a...

Gary: Darren, your seem to be freezing there on your internet access. I think it's your Microsoft issue you were having earlier, but...

Darren: Yeah.

Gary: So what are some... There's some really good questions in the chat and one is on the... Get to the browsing. Was on the... Where is it here? On the buy America build America products? Are you monitoring that? Are you gonna be following that legislation and make sure that everybody's compliant? 

Darren: Definitely, I think that's something we all have to do. That's gonna be one other component of this to make sure that the vendors you're working with comply with that requirement.

Gary: All right, other really good question is, can you talk about your in kind contributions for fulfilling the 25% match. Such as waiving fees associated with access to ride aways, pole attachments, conduits easements, other types of infrastructure? 

Darren: We have never used any in kind contributions personally. But that is a good approach to take.

Gary: But Darren froze on me, but let me just kinda net out what I've heard from you. So you're basically saying, from a BEAD perspective might disadvantage small providers with the letter credit and the matching and stuff, but electric co-ops have an advantage because electric plant is an asset, can help guarantee the letter of credit and financing. It sounds that both sides of the house, both electric and broadband can code cipher loans as well as you could get involved with your county and so forth. And then also, there's a lot of really good advantages. And then the big kinda benefit right of all these, what you're seeing from your broadband business, it really benefits your 7500 electric members. Because that you're able to... I think you gave back $9 million to the electric rate base from the broadband business. You've also been able to build out the 45 communities that would not have got broadband and fiber otherwise.

Gary: And then you told me that these 45 communities have 50-100 customers per mile versus your electric rate base, which is 1-2 customers per mile. So it really helps to balance out your density. And then also you're able to add, you're what? 800 to 1000 broadband customers for months. So it sounds like that your broadband business now is four times bigger than electric, but that's gonna continue to outpace the electric, really benefiting your electric members because of keeping their rates low. So again, sorry that your connectivity is an issue, but really appreciate Darren sharing your insights on Matching funds for Rural Electric Co-ops and Telcos and the work that you and your team are doing to close our nation's digital equity gap, especially in Northwest Missouri, where 1.7 billion. So even with the work you've done, there's still lots of communities in Missouri that need to be connected with fiber. So thanks again for joining us and look forward to getting better together next month on our next episode of Where's The Funding? So we'll see everybody in September.

Darren: All right. Thank you, Gary.