GOVERNMENT SUPPORT AND SPECTRUM MATTERS

9 Months Ended

Sep. 30, 2023

GOVERNMENT SUPPORT AND SPECTRUM MATTERS

GOVERNMENT SUPPORT AND SPECTRUM MATTERS

9. GOVERNMENT SUPPORT AND SPECTRUM MATTERS

Universal Service Fund and Connect America Fund Phase II Programs

The Company recognizes revenue from several government funded programs including the Universal Service Fund (“USF”), a subsidy program managed by the Federal Communications Commission (“FCC”), the Alaska Universal Service Fund (“AUSF”), a similar program managed by the Regulatory Commission of Alaska (the “RCA”), and the Emergency Connectivity Fund (“ECF”), a program to help schools and libraries support remote learning in underserved communities. USF funds are disbursed to telecommunication providers through four programs: the High Cost Program; the Low Income Program (“Lifeline Program”); the Schools and Libraries Program (“E-Rate Program”); and the Rural Health Care Support Program.  

The Company also recognizes revenue from the Connect America Fund Phase II program (“CAF II”) which offers subsidies to carriers to expand broadband coverage in designated areas. Under CAF II, the Company’s US Telecom segment will receive an aggregate of $27.7 million annually through December 2025 and an aggregate of $8.0 million annually from January 2026 through July 2028.

All of the programs are subject to certain operational and reporting compliance requirements. The Company believes it is in compliance with these requirements as of September 30, 2023. Revenue recognized from the USF and CAF II programs is recognized as revenue from government grants. Revenue from other programs is recognized in accordance with ASC 606.

RDOF (“Rural Digital Opportunities Fund”)

The Company expects to receive approximately $22.7 million over 10 years to provide broadband and voice coverage to over 10,000 households in the United States (not including Alaska) under the 2020 Rural Digital Opportunity Fund Phase I Auction (“RDOF”). Revenue recognized from the RDOF program is recognized as revenue from government grants.  

The Company recorded the amounts below as communication services revenue for the reported periods:    

	Three months ended						Three months ended
	September 30, 2023						September 30, 2022
	US Telecom		International Telecom		Total		US Telecom		International Telecom		Total
High cost support	$	2,288	$	1,397	$	3,685	$	991	$	943	$	1,934
CAF II		6,815		—		6,815		6,822		—		6,822
RDOF		608		—		608		478		—		478
Other Programs		14,817		5		14,822		8,795		—		8,795
Total	$	24,528	$	1,402	$	25,930	$	17,086	$	943	$	18,029

	Nine months ended						Nine months ended
	September 30, 2023						September 30, 2022
	US Telecom		International Telecom		Total		US Telecom		International Telecom		Total
High cost support	$	7,004	$	4,192	$	11,196	$	3,036	$	6,465	$	9,501
CAF II		20,445		—		20,445		20,466		—		20,466
RDOF		1,824		—		1,824		1,434		—		1,434
Other Programs		44,845		14		44,859		20,023		37		20,060
Total	$	74,118	$	4,206	$	78,324	$	44,959	$	6,502	$	51,461

In 2018, the FCC initiated a proceeding to replace the High Cost Program support received by Viya in the US Virgin Islands with a new Connect USVI Fund. On November 16, 2020, the FCC announced that Viya was not the recipient of the Connect USVI Fund award and authorized funding to be issued to the new awardee in June 2021. Pursuant to the terms of the program and effective in July 2021, Viya’s annual USF support was reduced from $16.4 million to $10.9 million. In July 2022, this support was reduced to $5.5 million for the annual period through June 2023. In April of 2023, the FCC issued an order extending the high cost support in the US Virgin Islands at the current $5.5 million per year received from July 2023 through December 31, 2025. In connection with this order, the FCC requires that the Company maintain its current footprint for voice and broadband services in the US Virgin Islands.

Construction Grants

The Company has also been awarded construction grants to build network connectivity for eligible communities. The funding of these grants, used to reimburse the Company for its construction costs, is distributed upon completion of a project. Completion deadlines begin in September 2023 and once these projects are constructed, the Company is obligated to provide service to the participants. The Company expects to meet all requirements associated with these grants, with the exception of grants the Company has transferred to third parties, as described below.  A roll forward of the Company’s grant awards is below (in thousands).

	Amount
Grants awarded, December 31, 2022	$	80,197
New grants		34,821
Construction complete		(7,725)
Transferred grants		(6,269)
Grants awarded, September 30, 2023	$	101,024

During the nine months ended September 30, 2023, the Company disbursed capital expenditures of $12.4 million under these programs and received reimbursement of $14.6 million. These cash flows are classified as investing activities in the Company’s statement of cash flows.

In addition, the Company partners with tribal governments to obtain grants under various government programs including the Tribal Broadband Connectivity Program ("TBCP") and the Rural Development Broadband ReConnect Program (“ReConnect”). The TBCP and ReConnect programs are administered by United States government agencies to deploy broadband connectivity in certain underserved areas. The Company was identified as a sub recipient of grants under these programs totaling $188.6 million as of September 30, 2023, but has not yet received any funding as of September 30, 2023.

Replace and Remove Program

On July 15, 2022, the Company was notified that it was an approved participant in the Federal Communication Commission’s Secure and Trusted Communications Networks Reimbursement Program (the “Replace and Remove Program”), designed to reimburse providers of communications services for reasonable costs incurred in the required removal, replacement, and disposal of covered communications equipment or services, that have been deemed to pose a national security risk, from their networks.  Pursuant to the Replace and Remove Program, the Company was allocated up to approximately $207 million in reimbursement amounts to cover documented and approved costs to remove and securely destroy all ZTE communications equipment and services in its U.S. networks and replace such equipment. The Replace and Remove Program requires that the Company complete the project no later than one year from submitting its initial reimbursement request, or July 2024. At this time, the Company anticipates that it will be able to meet the deadlines and requirements of the program. During the nine months ended September 30, 2023 and 2022, the Company incurred capital expenditures related to this project of $27.1 million and $1.6 million, respectively. At September 30, 2023, $25.3 million was accrued. The Company has a receivable of $36.6 million, including operation costs and capital expenditures, at September 30, 2023, which is expected to be reimbursed within the next twelve months. For the nine months ended September 30, 2023 the Company received $2.6 million of reimbursement under the program, of which $1.1 million was classified as operating cash inflows and $1.5 million was classified as investing cash inflows in the Company’s statement of cash flows.