GOVERNMENT SUPPORT AND SPECTRUM MATTERS

6 Months Ended

Jun. 30, 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. Additionally, the Company 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 expired in the second quarter of 2024. 

The Company’s US Telecom segment also recognizes High Cost support revenue from the Connect America Fund Phase II program (“CAF II”) and the Enhanced Alternative Connect America Cost Model program (“E-ACAM”). These programs offer subsidies to carriers to expand broadband coverage in designated areas. Under CAF II, the Company expects to 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. Under E-ACAM, the Company expects to receive a total of $118.2 million over a 15 year period beginning in 2024. The annual E-ACAM funding is approximately $9 million from 2024 through 2030 and ultimately decreasing over time to $6 million in 2038.

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. During the six months ended June 30, 2024, the Company entered into agreements to transfer $13.0 million of RDOF obligations.  The transfer applications are pending regulatory approval.

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 June 30, 2024. Revenue recognized from the USF High Cost Program, including the CAF II and E-ACAM 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						Three months ended
	June 30, 2024						June 30, 2023
	US Telecom		International Telecom		Total		US Telecom		International Telecom		Total
High cost support	$	3,483	$	1,393	$	4,876	$	2,222	$	1,397	$	3,619
CAF II		6,784		—		6,784		6,815		—		6,815
RDOF		145		—		145		608		—		608
ECF		498		—		498		6,813		—		6,813
RHC		3,682		—		3,682		2,887		—		2,887
Other		1,707		155		1,862		4,668		5		4,673
Total	$	16,299	$	1,548	$	17,847	$	24,013	$	1,402	$	25,415

	Six months ended						Six months ended
	June 30, 2024						June 30, 2023
	US Telecom		International Telecom		Total		US Telecom		International Telecom		Total
High cost support	$	6,937	$	2,786	$	9,723	$	4,716	$	2,795	$	7,511
CAF II		13,571		—		13,571		13,630		—		13,630
RDOF		290		—		290		1,216		—		1,216
ECF		7,312		—		7,312		14,880		—		14,880
RHC		7,119		—		7,119		5,787		—		5,787
Other		8,407		470		8,877		9,361		9		9,370
Total	$	43,636	$	3,256	$	46,892	$	49,590	$	2,804	$	52,394

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		—
Transferred grants		—
Grants awarded, June 30, 2024	$	100,149

During the six months ended June 30, 2024, the Company disbursed capital expenditures of $3.6 million under these programs and received reimbursement of $2.3 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 June 30, 2024. Through June 30, 2024, the Company has received $11.3 million of funding under these programs and spent $11.4 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		38,126		9,528		47,654
Total spend, June 30, 2024	$	87,388	$	24,654	$	112,042
Total reimbursements, December 31, 2023	$	(12,773)	$	(4,354)	$	(17,127)
Reimbursements received		(41,421)		(10,721)		(52,142)
Total reimbursements, June 30, 2024	$	(54,194)	$	(15,075)	$	(69,269)
Amount pending reimbursement	$	33,194	$	9,579	$	42,773

	Capital		Operating		Total
Total spend, December 31, 2022	$	1,836	$	1,489	$	3,325
Amounts spent		12,739		4,966		17,705
Total spend, June 30, 2023	$	14,575	$	6,455	$	21,030
Amount pending reimbursement	$	14,575	$	6,455	$	21,030

At June 30, 2024, $27.3 million of the capital expenditures were accrued and unpaid. The Company expects to be reimbursed, within the next twelve months, for all amounts spent to date. 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.