GOVERNMENT SUPPORT AND SPECTRUM MATTERS

3 Months Ended

Mar. 31, 2024

GOVERNMENT SUPPORT AND SPECTRUM MATTERS

GOVERNMENT SUPPORT AND SPECTRUM MATTERS

8. GOVERNMENT SUPPORT AND SPECTRUM MATTERS

Universal Service Fund and Other Domestic Funding 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”), and the Alaska Universal Service Fund (“AUSF”), a similar program managed by the Regulatory Commission of Alaska (the “RCA”). 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 (“RHC”).  The Company’s International Telecom segment receives $5.5 million of legacy frozen high cost support funding in the US Virgin Islands. This funding expires on December 31, 2025.  

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.

The Company also recognizes revenue from the FCC’s Affordable Connectivity Program (“ACP”) and the Emergency Connectivity Fund (“ECF”). The ACP provides eligible low-income consumers with a monthly subsidy for broadband connectivity and the ECF provides schools and libraries with subsidies for broadband connectivity. Funding under the ACP and ECF programs is set to expire in the second quarter of 2024.

The Company was awarded 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.  

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 March 31, 2024. 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.

The Company recorded the amounts below as communication services revenue for the reported periods (in thousands):    

	Three months ended
	March 31, 2024
	US Telecom		International Telecom		Total
High cost support	$	3,455	$	1,393	$	4,848
CAF II		6,787		—		6,787
RDOF		145		—		145
ECF		6,813		—		6,813
RHC		3,437		—		3,437
Other		6,701		315		7,016
Total	$	27,338	$	1,708	$	29,046

	Three months ended
	March 31, 2023
	US Telecom		International Telecom		Total
High cost support	$	2,494	$	1,397	$	3,891
CAF II		6,815		—		6,815
RDOF		608		—		608
ECF		8,067		—		8,067
RHC		2,900		—		2,900
Other		4,693		4		4,697
Total	$	25,577	$	1,401	$	26,978

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 generally distributed after the Company incurs reimbursable costs. Completion deadlines begin in 2024 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.  A roll forward of the Company’s grant awards is below (in thousands).

		Amount
Grants awarded, December 31, 2023	$	100,149
New grants		—
Construction complete		—
Grants awarded, March 31, 2024	$	100,149

During the three months ended March 31, 2024, the Company disbursed capital expenditures of $3.4 million under these programs and received reimbursement of $1.9 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 $192.6 million as of March 31, 2024. Through March 31, 2024, the Company has received $10.4 million of funding under these programs and spent $10.1 million on construction obligations. These amounts are recorded as operating cash flows in the company’s statement of cash flows.

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 by July 2024. In April 2024, the FCC granted the Company’s request to extend the program’s completion deadlines to the first quarter of 2025. At this time, the Company anticipates that it will be able to meet the deadlines and requirements of the program.

A summary of the amounts spent and reimbursed under the Replace and Remove Program is below (in thousands):

	Capital		Operating		Total
Total spend, December 31, 2023	$	49,262	$	15,126	$	64,388
Amounts spent		11,734		4,568		16,302
Total spend, March 31, 2024	$	60,996	$	19,694	$	80,690
Total reimbursements, December 31, 2023	$	(12,773)	$	(4,354)	$	(17,127)
Reimbursements received		(8,586)		(5,843)		(14,429)
Total reimbursements, March 31, 2024	$	(21,359)	$	(10,197)	$	(31,556)
Amount pending reimbursement	$	39,637	$	9,497	$	49,134

	Capital		Operating		Total
Total spend, December 31, 2022	$	1,836	$	1,489	$	3,325
Amounts spent		1,485		1,900		3,385
Total spend, March 31, 2023	$	3,321	$	3,389	$	6,710
Amount pending reimbursement	$	3,321	$	3,389	$	6,710

At March 31, 2024, $33.4 million of the capital expenditures were accrued and unpaid. The Company expects to be reimbursed for all amounts spent within the next twelve months. Amounts identified as capital are recorded as investing cash flows and amounts identified as operating are recorded as operating cash flows in the Company’s statement of cash flows.