This document discusses broadband implementation in rural areas and CoBank's role in financing such projects. It provides an overview of CoBank, including its mission to provide credit to rural industries. The document then discusses CoBank's existing communications loans by industry and common loan structures for fiber-to-the-home projects undertaken by electric cooperatives. It outlines best practices for evaluating broadband feasibility and financial risks from a lender's perspective. The document concludes by summarizing two example fiber broadband loans recently underwritten by CoBank and providing general financial model expectations.

1. Broadband
Implementation in
Rural America
Great River Energy Meeting 7-19-2016
Disclaimer: This presentation is for the exclusive use of Great River Energy.
Distribution in whole or in part to third parties without the expressed written
consent of CoBank is strictly prohibited.

2. Cooperative Strength: Safety & Soundness for Rural America
 A broad-based cooperative financial services organization
with a mission to serve as a dependable credit provider to vital
industries across rural America:
 Agribusiness
 Energy
 Communications
 Water
 Community Facilities
 CoBank maintains a financially strong and growing capital
base
 16 consecutive years of increased earnings and record patronage
payout of $514.1 million for 2015
 Headquartered outside Denver, CO; regional offices and
banking centers throughout the country
 Largest member of the Farm Credit System, a Government
Sponsored Enterprise with $300Bn+ in assets
AA-
Rated by S&P and Fitch
(standalone basis)
One of America’s
Top 100 Coops

3. CoBank Communications Loans by Industry
Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015
LEC 2,155 1,889 1,600 1,443 1,362 1,210 1,146 1,087
Cable 554 497 404 369 349 363 518 757
Wireless 474 427 474 482 481 484 572 893
CLEC 109 126 42 62 41 44 82 105
Fiber Transport 64 80 120 270 292 308 586 606
Data Center - - - 6 38 60 164 232
Other Industry Group - - 1 0 0 0 - -
Total 3,355 3,018 2,640 2,632 2,563 2,470 3,068 3,681
Total Portfolio Net Outstanding Balance ($ millions)

4. Broadband Deployment- A Digital Divide is not an Option

5. Approximately 300 ED coop’s have a member density > 8/mile making fiber to the
home very feasible.
Each transaction is different but generally takes on one of three structures:
Direct loan to the ED coop
Direct loan to the telecommunication subsidiary/JV guaranteed by the parent
Direct loan to a stand alone telecommunications entity
ED coop advantages: Accustomed to investing in long term infrastructure, popular
with members drives good take rates, fewer legal restrictions, smart grid and fiber
go hand in hand, and low cost capital is available.
FTTH Electric Distribution Loan Structures
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6. Cooperative ( Parent) Provider ( Subsidiary)
Owns dark fiber Provides smart grid communication
Costs recovered in lease payment Lease fiber from coop-assigned to lender
All financing or guaranty Lights fiber
5-7% annual ROI Owns electronics
100% equity in subsidiary Fiber construction management
Provides administrative services
Most Common FTTH Electric Distribution Loan Structure
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7. Broadband Feasibility- Evaluation Best Practices
 Areas of Evaluation
 Feasibility Study with Pilot Program
Completed by third party examining demographics, population density, and price elasticity.
Member survey is necessary to gauge take rates
Board commitment is essential
 Competitive Analysis
Existing providers,- area covered, services offered, price, speeds, bundles, service.
 Partners
Determined by marketing strategy and services offered.
 Management Expertise
Knowledgeable management covers – engineering, marketing, IT, finance, and sales/customer service
Consultants may offer a turnkey solution
Contingency plans
 Capital Costs
Timeline, design, network equipment, construction, customer premise
Project milestones with phased approach, budget modeling, 10 year projections
Controls over budgeting and progress reporting
 Technology
Scalability- exit points, phased approach?
Confidential and Proprietary 7

8. Evaluating Feasibility from a Lender’s Perspective
 Financial Risk
 Credit Enhancements
• Parent company as obligor
• Parent company as guarantor
 Subsidiary Only Loan- Equity Capitalization
• Comes in up front- 50% target, shorter tenor, phased funding, draw requests
 Collateral
• First lien on project assets
• Special project-specific subsidiary
 Additional Credit Concerns
• Impact on leverage
• Ongoing monitoring
 Contingency Plans
• What happens if project runs behind schedule/cost overruns?
• What happens if penetration rates are insufficient post completion?
• Commitment of members to deal with rate increases
• Board and membership support

9.  No Comparisons; what is the enterprise value of an electric distribution broadband subsidiary?
(Telecommunications valuations aren’t applicable).
 Ongoing monitoring; borrowers not accustomed to providing and we’re not accustomed to tracking.
 CoBANK will be funding initial operating losses,-relationship impact of unsuccessful projects.
 Members without broadband service subsidizing members with broadband service and the overall
impact on member rates.
 Execution risk.
 Incumbent competitors.
 Unfunded business plans.
 Weak structures; either a guarantee is necessary or it’s not – targets set today may not be relevant
to conditions in the future.
Key Concerns
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10.  Co-Mo Electric Cooperative, Inc/Co-Mo Communications
 $30 million multiple advance term loan
 Purpose: Capex funding for final phase of FTTH project
 Availability: Up to three years from closing, up to ten tranche advances
 Maturity: Up to 30 years from end of availability
 Security: Existing mortgage
 Payments: Interest only during availability period, fully amortizing P&I after, no fees
 Fiber leased to operating subsidiary
 Operating subsidiary operates, installs, lights, and markets the network
Recently Underwritten FTTH Loans
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11.  Co-Mo Electric Cooperative, Inc/Co-Mo Connect
Co-Mo Electric Coop Co-Mo Connect
4,000 miles of distribution Subsidiary of Co-Mo Electric
32,000 meters Exclusive lease of fiber
2,300 square miles 11,000 active
Does not serve small towns 14,000 subscribed
Owns fiber on distribution lines Owns all electronics
2,800 miles of FTTH mainline 40% average take rate
300 miles remaining Provides smart grid connections
Constructing 80 miles per month Adding 500-600 subscribers/month
7.8 meters per mile
No government grants/loans
Recently Underwritten FTTH Loans
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12.  Illinois Rural Telecommunication Co. (“IRTC”) subsidiary of Illinois Electric
Cooperative (IREC)
 $2.5 million multiple advance term loan
 Purpose: To finance the first phase of the fiber-to-the-home (“FTTH”) project.
 Availability: Up to 5 years from closing.
 Payments : Interest only during availability period, no fees
 Maturity: Up to 15 years from the end of availability.
 Unsecured
 Continuing Guarantee from IREC which also maintains the network
 Lease agreement between IRTC and IREC with respect to the fiber assets
 IRTC lights fiber, manages construction
Recently Underwritten FTTH loans
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13. General Guidelines: Will vary by project duration, financing costs, density, products
Net Income Breakeven – 5 years
Positive Equity-7 years
EBITDA Positive-3 years
Cash Flow Positive- 5 years
Breakeven Take Rate- 35%
Loan Covenants- typically DSC 1.35 and Equity/Assets >28%
FTTH Financial Model Expectations
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14. Thank You