The USDA’s Rural Utilities Service (RUS) recently announced that it is launching a new $600 million program to fund the deployment of broadband Internet access services throughout rural America. Applications will be accepted beginning on April 23, 2019 with filing deadlines on May 31, 2019, June 21, 2019, July 12, 2019; depending upon whether the application seeks a grant, a loan or a loan/grant combination. The new program, dubbed the “ReConnect Program,” will make funding available in the form of grants and loans (including a combination thereof). While the target of the ReConnect Program is similar to the FCC’s Connect Ameica Fund (CAF), as outlined below there are key differences between this funding opportunity and the CAF program. This advisory provides an overview of the ReConnect program and highlights key eligibility and application requirements.

I. FUNDING OPPORTUNITIES

The $600 million of available funding under this program will be divided evenly among three mechanisms: 1) loans, 2) grants, or 3) a combined loan/grant instrument.

Loans. $200 million has been set aside for participants seeking loans. The maximum loan amount that the RUS may issue is $50 million. All loans will be subject to a favorable fixed interest rate of 2 percent. Loan recipients must propose to build a network capable of providing service to every premise in the proposed funded service area at speeds of 25 Mbps downstream/3 Mbps upstream. 

Eligible areas for this type of loan are those in which 90 percent of the households lack broadband at speeds of at least 10 Mbps/1 Mbps. Applications can now be filed and will be considered on a rolling basis through July 12, 2019. Finally, if more than one application seeks funding for the same service area, RUS will generally consider those applications in the order in which they were received.

Grants. Another $200 million will be available for participants seeking grants. The maximum amount of any one grant that RUS may issue is $25 million. Grant recipients must provide a matching contribution of 25 percent of the cost of the overall project, and grant funding may only be used for certain eligible purposes, such as construction and improvement of facilities used to provision the minimum eligible level or service, or reasonable pre-application expenses up to 5 percent of the total award. Grants will be subject to the same 25 Mbps/3 Mbps speed requirement, although additional points will be awarded in the scoring of the application for applicants that propose to deliver 100 Mbps symmetrical service.

Notably, grants will only be available in areas completely lacking broadband speeds of at least 10 Mbps/1 Mbps (i.e., 100 percent of the locations in the proposed service area). Applications for grants will also be considered on a rolling basis ending on May 31, 2019. All eligible applications will be scored according to the criteria described below, and where there are applications for overlapping service areas, the higher scoring application will prevail.

Loan/Grant Combinations. The final $200 million tranche of funding will be available through instruments structured as combined loans/grants. The maximum loan amount that the RUS may issue under this mechanism is $50 million, which may be allocated in any proportion. The loan component of this instrument will be subject to a fixed interest rate will be set at the then-existing Treasury rate. Recipients of the loan/grant instrument must propose to build a network capable of providing 25 Mbps/3 Mbps broadband service to each premise in the service area.

Eligible areas for this type of funding are those in which 90 percent of the households lack 10 Mbps/1 Mbps broadband service. Applications for loan and grant combinations will be considered on a rolling basis, ending on June 21, 2019. All eligible applications will be scored according to the criteria described below, and where there are overlapping applications the higher scoring applicant will prevail.

Scoring Criteria. The scoring criteria for the grant and grant/loan applications are as follows.

• “Rurality” of proposed funded service area – 25 points will be awarded for serving the least dense rural areas, as measured by population per square mile.
• Farms served – possible 20 points total; applicant will receive 1 point for each farm that pre-subscribes for broadband service up to a maximum of 20 points.
• Performance of the offered service – 20 points for projects that propose to build a network capable of providing at least 100 Mbps “symmetrical service” to all premises.
• Businesses – possible 15 points total; applicants will be awarded 1 point for each business that pre-subscribes for broadband service up to a maximum of 15 points.
• Healthcare centers – possible 15 points total; applicants will be awarded 1 point for every healthcare center served up to a maximum of 15 points.
• Educational facilities – possible 15 points total; applicants will be awarded 1 point for every school served up to a maximum of 15 points.
• Critical community facilities – possible 15 points total; applicants will be awarded 1 point for every critical community facility (e.g. emergency response and other public safety activities, hospitals and clinics, libraries and schools) served up to a maximum of 15 points.
• Tribal lands – possible 5 points total available for applicants showing that, at a minimum, 50 percent of the geographical area of the proposed funded service area is to provide service on tribal lands.
• EM>State broadband activity – possible 20 points total; 10 points for projects proposed in states with a broadband plan that has been updated within the past five years; an additional 5 points will be awarded to projects located in states that do not restrict utilities from delivering broadband service; and 5 more points will be awarded for projects located in states that expedite right-of-way and environmental requirements.

II. ELIGIBILITY REQUIREMENTS AND RESTRICTIONS

Parties interested in applying for ReConnect funding should also be aware of a number of eligibility requirements and restrictions, both in terms of the areas that may be served and the entities that may apply.

Eligible Areas. ReConnect funding will available in rural areas where 90 percent (100 percent for grants) of households lack 10Mbps/1Mbps broadband service. The RUS’ announcement defines the term “rural area” as: “any area not located within: (1) A city, town, or incorporated that has a population of greater than 20,000 inhabitants; or (2) an urbanized area contiguous and adjacent to a city or town that has a population of greater than 50,000 inhabitants.” This definition differs slightly from the definition of the same term used in the context of RUS’ existing Community Connect grant program, which explicitly refers to areas “confirmed” as rural by the Census process. Although the ReConnect definition does not reference the Census, applicants may nevertheless wish to define their proposed service areas by referencing Census blocks or Census block groups.

Applications must include a map of the proposed funded service area. Existing providers will have 30 calendar days to challenge the application by filing a corrected map showing where they already provide broadband service of 10Mbps/1Mbps. In the case of an overlap in proposed service areas, RUS may request one or more applicants to modify the proposed territory, or it may choose the strongest application that covers the area of overlap.

Finally, the RUS’ announcement states that “[a]pplicants must propose to provide broadband service directly to the premises” in the proposed service area. Although it does not elaborate further, this language seems to indicate a requirement that it is not sufficient to build out middle-mile or backbone facilities that do not reach end users’ premises.

Financially Sound Applicants. While nearly any type of business, state or local government entity, or cooperative organization may apply for ReConnect funding, these entities must demonstrate that they are financially qualified. Applicants must submit unqualified, audited financial statements for the prior two years. The RUS has made clear that it will not consider financial statements that include any disclaimers or adverse opinions.

Financially Feasible and Sustainable Projects. Applications for ReConnect funding must include cost projections certified by a professional engineer, fully account for all funding sources, and include supporting documentation, such as bank account statements, equity partner letters of commitment, and loan documentation. Applicants may not commit as collateral to the ReConnect program any collateral used in support of any other loan. Moreover, applicants must demonstrate that the proposed project will generate sufficient revenues to cover expenses (including any debt service) and will result in a positive cash flow at the end of each year. Applicants with existing debt or that propose to borrow funds during the term of the project must also meet specific debt-to-earnings and debt-to-cash ratios.

Applications to receive ReConnect funding for service areas that had previously benefitted from RUS loans or grants, federal Connect America Fund subsidies or state funding, are subject to additional restrictions. For example, areas that had previously benefitted from RUS Broadband Initiatives Program (“BIP”) grant are eligible if the current service does not meet the 10/1 Mbps standard, but if the applicant is the same entity as the BIP grantee, then the applicant may only apply for a ReConnect loan.

Technically Feasible and Sustainable Projects. A professional engineer must certify the network design, network diagram, and a buildout timeline for each proposed ReConnect project, and successful applicants must complete their network buildouts within five years of the funding disbursement. A professional engineer must also certify that the proposed network will be capable of providing 10Mbps/1Mbps broadband service to all premises located in the proposed service area.

Please refer to the text of the federal register announcement or the RUS ReConnect website for an exhaustive list of all requirements and restrictions.

III. APPLICATION PROCESS AND REQUIREMENTS

Carriers that qualify to receive funding through the ReConnect Program must complete and submit an application that includes several components. Below we highlight the key application requirements that interested carriers should review to determine whether they would wish participate in the ReConnect program.

Many of the ReConnect program application requirements are similar to those found in the FCC’s Connect America Fund Phase II application, but there are some significant differences for ReConnect funding. Limit to One Application. 

Even though the ReConnect fund offers three different types of funding opportunities (100 percent loan, 50 percent loan/50 percent grant, and 100 percent loan) applicants are limited to a single application for only one type of funding.

Application Deadlines. Each type of funding has a separate deadline by which applications are due. The application deadline for each type of funding is as follows:

• 100 percent Grant – May 31, 2019
• Loan/Grant – June 21, 2019
• 100 percent Loan – July 12, 2019

Contents of the Application. Applications must include the following:

• The estimated dollar amount of the funding request.
• An executive summary of the proposed project.
  o This summary should at least include a detailed description of existing operations, discussion of key management and workforce, and interactions between affiliates and their part in the proposed project.
• A description of the proposed funded service area.
  o This should include the number of premises passed.
  o Applicants are also required to include a map of the proposed funded service areas utilizing the RUS Mapping Tool.
• Subscriber Projections
  o This should be broken down into number of subscribers for broadband, video and voice services, and any other service that may be offered, and a description of how the applicant plans to make the services affordable.
  o Notably, RUS includes a Pre-Subscription Form on the ReConnect website that applicants can use to demonstrate the presence of subscribers.
• Description of the advertised prices of service offering by competitors in the same area.
• Network Design Description
  o The network design description is perhaps one of the most important parts of the application. Applicants should include a description of the proposed technology used to deliver the broadband service, which demonstrates that all locations in the proposed funded service area can be offered broadband service.
  o Importantly, applicants must have a professional engineer certify that the proposed network can delivery broadband service to all premises in the proposed funded service area at the minimum required service level.  As described above, applicants proposing speeds of 100 Mbps symmetrical service will receive additional points. All applicants must complete a certification form that is signed by a professional engineer attesting to the performance of the proposed network.
• Resumes of Key Management Personnel
• Legal Opinion Letter
  o The legal opinion must: (1) address the applicant’s ability to enter into the award documents; (2) describe all material pending litigation matters; (3) address the applicant’s ability to pledge security as required by the award documents; and (4) address the applicant’s ability to provide broadband service under state law
• Itemized Budgets
  o The applicant must provide a summary and itemized budgets of the infrastructure costs of the proposed project.
• Working Capital
  o The applicant must provide a detailed description of working capital requirements and the source of the funds.
• Historical Financial Statements
  o Applicants must provide financial statements for the last four years consisting of a balance sheet, income statement, and cash flow statement. If an applicant has not been operational for four years, the statements must reflect the period of time the applicant has been operating.
• Audited Financial Statements
  o Applicants are required to provide audited financial statements for the previous two calendar years. 
  o As in the Connect America Fund Phase II application process, obtaining audited financial statements may be an issue for smaller applicants. Please contact DWT to discuss options.
• Pro Forma Financial Analysiso Applicants are required to provide a financial analysis in conformity with GAAP and the USDA’s guidance on grant accounting, which validates the sustainability of the project.
• RUS Application Attachments
• Scoring sheet for use by RUS.
• List of Outstanding and Contingent Obligations
  o Applicants are required to submit a list of outstanding obligations, including existing notes, loan and security agreements, guarantees, existing management or service agreements, etc.
• Environmental Information
  o Applicants are required to certify that the proposed construction meets the requirements of the National Environmental Policy Act.
• Applicant Certification
  o Applicants are required to certify that their agreements with, or obligations to investors, do not breach the obligations to RUS under the draft Award Documents.

Please refer to the text of the federal register announcement or the RUS ReConnect website for an exhaustive list of all application requirements.

Notice of Proposed Funded Service Areas.

After receiving a completed application, RUS will publish a public notice on the ReConnect website providing any existing service providers the opportunity to file documentation demonstrating that the area is already sufficiently served. RUS will request such service providers to file information regarding:

• The number of residential and business subscribers receiving 10/1 Mbps service in the applicant’s proposed funded service area(s);
• The number of residential and business subscribers receiving voice and video service and the associated rates in the applicant’s proposed funded service areas; and
• A map showing where the existing service provider’s services coincide with the applicant’s proposed funded service area

Once RUS has determined that an applicant should be awarded funding, the USDA will issue an offer letter and award documents with an award notification.