Money Matters — Financial Feasibility for Broadband Projects
Episode ID S2E09
September 28, 2022
As many rural communities are looking to their electric co-ops to provide broadband, co-ops are scoping out what it means to enter, invest, and operate in this unfamiliar business. CoBank’s Tamra Reynolds and Doran Dennis talk due diligence and financial feasibility with Jeffrey Connor, the chief operating officer at the National Rural Electric Cooperative Association, and hear what co-ops should know before becoming broadband providers.
Teri Viswanath: Hi, I'm Teri Viswanath, lead economist at CoBank covering power, energy, and water. The digital divide remains a major issue in America when it comes to providing high-speed internet, particularly in rural areas and low-income communities. But we are now really seeing an important change with regard to public-private sector partnerships. The result is we're going to actually start to see these community center startups move a needle on internet access, where it's most needed.
I've asked my co-host and CoBank managing director, Tamra Reynolds, to take on a different role for today's podcast and shed light on what's happening to bring people into the digital economy. Joining Tamra is managing director Doran Dennis. Hello to both of you.
Teri: Tamra, you wrote this article, “It’s Time to Close the Rural-Urban Digital Divide,” and discussed how the financial equation might finally change for rural internet service. Let's talk about that.
Tamra Reynolds: Sure. CoBank has financed broadband for rural communities for a very long time, and we know just how important the service is to the community served in those rural areas. There are so many great stories that paint a picture for why we do what we do. I think about how co-ops like Co-Mo Electric and Northeast Oklahoma, some of the early movers and the electric co-op broadband space really paved the way for how folks are deploying high-speed internet today in rural communities at the electric co-op level.
Doran Dennis: Tamra, as electric co-ops enter the telecommunication space, we see pretty significant changes in how they're going to approach this particular segment. From an opportunity standpoint, we've seen co-ops who are maybe five or six years into their projects have tremendous success. In fact, they're generating more revenue from their telecommunications business than they are from the electric business in which they've been operating for 85 or more years, but there are also very significant risks involved. Operating in the telecommunications space is extraordinarily competitive. In addition, the sheer enormity of the upfront infrastructure cost for deploying one of these broadband networks can be quite daunting.
Tamra: Doran, you and I caught up with Jeffrey Connor, the chief operating officer at NRECA who's leading that association's efforts to help co-ops really navigate the challenges of deploying broadband. Here's what Jeffrey had to say about the opportunities and risks involved for member co-ops.
Tamra: Today we're speaking with Jeffrey Connor, COO of NRECA. Good morning, Jeffrey.
Jeffrey Connor: Good morning, Tamra. Good morning, Doran. I'm really pleased to be here with you. Thanks for having me.
Tamra: From a background perspective. What's NRECA's perspective on the role that rural broadband plays in creating a better life in rural America?
Jeffrey: The NRECA as an association is guided by the instructions really that our members provide to us to go out and execute against their mission in the communities that they serve and increasingly major component of that mission is thinking about how to expand rural broadband and opportunities to access modern speeds for internet, for a number of reasons, but mostly because it enhances the quality of life in those communities. It's about making sure that those communities, they have access to opportunities that anyone living anywhere else in the country would have.
Doran: You have recently launched the new broadband tier of service at NRECA. What would you say the goal of that service tier is?
Jeffrey: We estimate in a couple of years after the next round of FCC programs and infrastructure funding is dispersed, we may have as many as 330 or 350 electric cooperatives who are somehow in the broadband business. That means their member-owners are counting on them to provide not just one critical service to them, electricity, but two to include broadband service as well. We have to build the capabilities and the resources here to be able to represent them in the new industry that Washington frankly approaches in a different way than they approach energy issues.
Tamra: What would you say is in it for members signing up, compared to the investment that they're, that they're going to have to make to be a part of this new tier of service.
Jeffrey: Tamra, I've heard a lot from CEOs of electric co-ops who are getting into this business about recognizing the need for more governance education, more work with their board on telecommunications issues, thinking about employee training, thinking about taxability issues and a lot of it has an advocacy component to it, but there are also different ways and different things to communicate about these businesses.
There's also a nice dovetail for electric co-ops connectivity means a lot to the operation and the management of energy for consumers and for utilities these days and so our members who are investing in broadband businesses are also taking the opportunity to go out to their member owners and put new technology to work that benefits both the consumer and the electric co-op in terms of demand management, better data, better utility management, better load management technologies that can eliminate line loss.
Tamra: Jeffrey that's a great point how this is different than operating an electric system?
Jeffrey: It's a different business. It's an enabling technology just like electricity was 80 years ago, but the comparisons may end there.
This is a competitive space and that is different from the way the electricity utility operates. The experience that electric cooperatives have in the electricity business the reputation and the credibility of the electric cooperatives who are bringing their best effort to this new business.
Doran: We know that the Infrastructure Investment in Jobs Act was recently passed and there is funding in that act related to broadband. Maybe you could talk to us a little bit about what that funding is, how much funding there is out there, and what is NRECA doing to assist co-ops in accessing that funding?
Jeffrey: Policymakers want to make sure they're hearing what can we do in order to add to the likelihood that electric co-ops will get into this business, help take on these responsibilities, form new partnerships, and ultimately be successful in delivering broadband internet in places that are underserved or unserved today. Mapping and information about where we need this investment the most across the rural landscape today is extremely important because there's a lot of self-reported and incomplete data out there. It sometimes leads to less than fair outcomes for people who are living in communities where they're not getting the service. That they're promised by the provider, or maybe not getting the benefit of programs that are supposed to be improving the quality of service for broadband in the places where they live.
A lot of these programs have been in place for decades, but clearly, they haven't finished the work for which they were intended or for which Congress intended them to accomplish. It's going to require a new approach and our members are bringing a new approach to this issue. There is right now a significant amount of funding available through the Infrastructure Act that passed Congress and was signed into law. There is a lot of work to shape the rules about how those dollars are going to be dispersed, but through the BEAD program, you have about $42.5 billion-with a B-that's available.
Over all you have about $65 billion in the infrastructure bill that's dedicated in some way to broadband outcomes and improving broadband service across the country. I'm looking forward to the opportunity to engage on those types of issues as well, because it does start to look like a once-in-a-lifetime chance to put that kind of funding to work and leverage what it can do in the communities that's intended to help serve.
Doran: I would add, I think the NRECA does have some great opportunities, particularly around the BEAD program.
Jeffrey: NRECA cares about that, CoBank clearly cares about it. For those who don't follow, the acronyms of Washington, D.C., BEAD stands for Broadband Equity Access and Deployment program, and it's being run out of the department of commerce, but it does heavily depend on states to distribute these funds. To the extent that we work extremely well with statewide electric cooperative organizations. We want to make sure that our messaging is consistent and that the policymakers, not just at the federal level, but at the state level too, understand that consistency and a fair approach to deploying those dollars is going to result in the best benefit for the people in the states who are currently in need of better service, frankly. It's the deployment part of the BEAD program that interests me the most. Let's get these projects built. Let's think about how to finish the job and do what we say we will do, when we commit to serving a community.
Tamra: We believe that that proper due diligence and financial feasibility is still really critical when co-ops are looking at embarking on some of these, what we would call legacy projects like retail broadband, where you're, in some cases, doubling, or even more than that, tripling, balance sheets to take on these investments and these opportunities.
Jeffrey: Tamra you can't overstate the importance of due diligence in the consideration of whether anyone that, especially an electric co-op, is a willing and able to build a broadband project. It's an enormous investment of capital.
Oftentimes it's an investment of the reserves that the electric cooperative has built, from its member-owners over decades of service. They're leveraging that resource to go out and finance ambitious projects to build out broadband networks.
We really want to make sure that when we make the commitment, we're going to be successful, it's important to our reputation with the members and the owners of the electric cooperatives who are making these commitments because as you know the expectations in the community are often very, very high.
When an electric co-op says, we're going to take a leadership role now, and we're going to get involved, and we're going to make investments that are going to improve the quality of broadband service in this community or in this county.
Having partnerships with an entity like CoBank that has done this before and has done this for a long time, it really matters.
Doran: We've seen more than 100 projects that are performing better than expected. Their take rates are higher than they projected. Their financials are coming in better, faster than they projected. The only word of warning that comes with that though, is co-ops who are now thinking about engaging in a project.
We don't want them to get lulled into this sense that there's so much success that it's easy. Because I think if you ask any of the co-ops who are doing it today, they'll tell you there's nothing easy about it. Having a partner like CoBank, some of the consultants out there that are working with electric co-ops to help guide you to help you complete the necessary due diligence to talk about phasing the projects so that you're building revenue, as you're starting to incur some of these capital expenses associated with the project, are absolutely critical to the long-term success of the project.
Jeffrey: Doran, it's great advice because you're 100% correct. This is hard work. Building is hard. But once you have it up and running, that's also difficult.
There are going to be a lot of good conversations about once we've built the infrastructure, what's the best way to operate it.
In particular, our members look at that in terms of opportunities to enhance the efficiencies and the effectiveness of the telecommunication service they're providing. What that all adds up to to me is they're changing their communities when they make these investments. They're changing the demographics there. They're changing the shape of economic opportunities, and suddenly you find people who have always wanted to move back home or live in a rural community, and they're taking their jobs with them. Now, when they go and move into those communities.
Tamra: Well, Jeffrey, we really appreciate your time, your insights and comments.
Jeffrey: Thank you both.
Teri: There are opportunities emerging for new players to target America's digital divide, namely in the form of federal spending. Increasingly these new players are electric co-ops. The need to speak with one voice in Washington and to collaborate on common issues is really why NRECA came into an existence. . It's great to see this organization step up for our co-ops on broadband.
Tamra: Jeffrey mentioned that in a couple years, upwards of 350 co-ops might provide broadband service. For some time, we've been working with co-ops helping to finance that effort. We think that figure’s actually pretty accurate.
Teri: Doran and Tamra, I really want to shift gears here. I want to talk a little bit about what's motivating our electric co-ops to get into this business in the first place and a little bit about those business plans.
Tamra: Yes. I think the reason for co-ops to get into this business is there's a couple of driving factors. I think broadband access is now considered essential infrastructure, an essential lifeline business. That's one piece. The other important factor is that it actually can improve their electric service by supporting a smarter grid. Which Teri, you and I have talked about at length on other podcasts and why this is important and increasingly important in this area of technological advancement in utility space.
Doran: Tamra, electric co-ops began deploying fiber networks to serve their own electric purpose. Many times, they were needing to communicate with their down line devices, whether that be reclosers or other pieces of electrical equipment that were out in the substation. The existing communications network they had in place just became either unreliable or not providing the necessary throughput to communicate with those pieces of equipment effectively. Once they began deploying these fiber networks, it readily became apparent to them that there was an opportunity to provide a retail broadband service to many of their members.
Teri: Yes, you're absolutely correct.
Doran: In addition, these electric co-ops have vast experience in deploying these long-lived networks, just like when they began deploying their electric systems many years ago. They have the opportunity to leverage and more fully utilize the poles that they have already owned for many, many years and many of the other pieces of equipment that they already have in place. In addition, they have really strong relationships with their member-owners and this helps to reduce the cost of acquiring new subscribers to their broadband networks.
Tamra: The data that we have on hand for the projects that we've worked with have suggested that take rates are generally better than they've planned from the beginning. We actively finance over 80 broadband projects and we're a lender to many more co-ops that are deploying broadband in and around their service territories but for projects played into their construction phases and even for those that are complete we're seeing take rates consistently above 50%, in some cases higher than 60%, which as you recall is much more favorable than the 35% that most people were projecting early on with these projects.
Teri: That's pretty amazing. This discussion gets us back into due diligence that electric co-ops need to do when they're considering offering these services, right?
Doran: Yes. Feasibility studies, they're really important here. One of the things that we're finding is that these feasibility studies really serve as a starting point. Frankly, they’re living documents that change over time. Projects that once seemed unfeasible suddenly become feasible when there are federal grant dollars that can support the financial aspects of a project, or community support where counties or local governments start to contribute tax dollars to the infrastructure build.
What we find over and over again is that the feasibility studies are really the beginning point and co-ops very quickly shift from their original plans but they need to go back and make updates to these feasibility studies and particularly to their financial projections so that they have a better understanding of what the day to day decisions and the strategic decisions that they have to make as their plans shift and that impact upon the electric co-op and their financial ability, not only to borrow additional funds but to access different government grant programs to help support the build of the project.
Tamra: That's a great point with the feasibility study being the initial look at what this could possibly be. I think the other thing to also point out and to remember if you're a co-op sitting there looking at your first feasibility study is that consultants are hired to do feasibility studies and you can make a study look feasible on paper easily, depending on what factors go into that calculation.
You can make anything look good on paper but the decision the co-op board is making it really should come down to the question of are these assumptions that they're putting in front of us, are they reasonable based on their previous experience with building these projects? And are these reasonable based on the nuances of our service territory? Is this something that we think is achievable?
Teri: Doran, you had mentioned, so part of that, you had mentioned partnerships and part of that could be actually doing the feasibility study and taking it further and Tamra, I remember, I think it was back in earlier this spring, you and I talked to a number of potential partners in the process, right?
Tamra: Yes. Back for our May podcast we actually did a recap of our conversations at TechAdvantage and PowerXchange in Nashville, and Doran was there with us. We caught up with NRTC, TWN Communications, and Conexon—all consultants that approach working with electric co-ops on broadband projects each from a different angle. The end of the day the goal for all of these guys was getting these co-ops in their rural communities online quickly and affordably, but the approach to doing so may take form and shape very differently depending on where you are and who you serve, and so that was an important distinction that each one of them made in terms of their business model, but also who they work with and how they go about it.
Doran: Yes Tamra, I would also point out that there are co-ops who have evaluated these partnerships and decided that maybe they don't make sense in a particular case. We found co-ops who have been very successful doing these projects on their own with the support of a consultant, and then we found other cases where co-ops are having tremendous success in a full-blown partnership with these types of entities.
Teri: Doran, I'm going to sense that there are also co-ops that feel offering broadband service is really outside their wheelhouse of expertise, right?
Doran: That's certainly the case. There are quite a few co-ops who have done a deep dive and really evaluated whether broadband is right for them and ultimately made the decision that it's either not right at all, or maybe not right, right now. And that changes over time. Again, federal grant dollars can make a big difference in not only the feasibility of a project, but whether or not a co-op is going to pursue a project at all.
Teri: This is like a basic due diligence boot camp for broadband projects. What else am I missing here?
Doran: Yes. Teri, I said this earlier in the conversation, but I think it's important to reiterate. Due diligence isn't a one-time exercise. We encourage co-ops to take an assessment of their projects on a regular basis, and projects are living and breathing every single day and new decisions are being made about new opportunities, about new funding sources, about new areas that you're able to go into.
There will be towns and communities outside of an existing co-op service territory that will approach the co-op about building into their particular region or community. Due diligence is an ongoing process.
These are projects that have a good return on investment, that will pay back quickly, but what they're finding is their existing financial covenants that they have with the rural utility service or with their existing lenders, may make it increasingly difficult to get the funding necessary to pursue these projects. We must make sure that co-ops understand what the requirements are, and the covenants are, in their existing loan agreements because this will dictate how easily it will be for those co-ops to access the additional funding necessary to pursue these projects, and we encourage co-ops to stay on top of that.
Tamra: I think the other thing is, what we're starting to see now in a lot of my team's footprint is the opportunity for out-of-territory builds and that's a great situation to be in. That means your project was successful to begin with, most likely.
The thing that's important to keep in mind is that over time, those additional add-on opportunities are quite costly because of the types of density that can really add value to your cash flow and your bottom line when you're a broadband project, but they do tend to lever up co-ops and so that's another thing to consider is are you continuing to update your feasibility studies, are you checking with your lenders, are you really evaluating all the pieces that are so important?
Teri: I really appreciate your insights on what we have to think about and it's really exciting to see your passion about this area and where the industry's headed.
Tamra: I hope that you've enjoyed this discussion with us. Join us next month as we celebrate National Co-op Month.
Teri: Yes. This is going to be a really uplifting program, so we hope you'll join us then. Bye for now.