BUDGETING IN A PART 32 WORLD-LEGACY VS. ACAM

Sharon Minor

2017 TSTCI Accounting and Marketing/Customer Service ConferenceJuly 12-14, 2017

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice.

This information is not intended to create, and receipt does not constitute, a legal relationship, including, but nor limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

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• FORECASTOFFUTUREFINANCIALRESULTS• FOCUSESONTHESHORT-TERMIMPACTOFCURRENTDECISIONS• USESSPECIFIC,MEASURABLEDATA• USESVERIFIABLEASSUMPTIONS• BECOMESAMEASUREMENTOFSUCCESS– ACTUALRESULTSCOMPAREDTOBUDGET

WHAT IS A BUDGET?

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• Notonlyisbudgetingandforecastingrequired,itisessentialforunderstandingyourbusiness

• Becausetheprocessproducescapital,operating andcashflowbudgets,personnelfromalldepartmentsanddivisionsofthecompany,accountants,consultants,engineers,etc.arenecessarytothebudgetprocess

• Thelocationandprocessareoptional– whateverbestfitsyourcompany• Itisnotaneasyprocess;Ittakestimeandpatience• Arobustbudgetingandforecastingculturemaytake2-3yearstodevelop• Oncedeveloped,itisacontinualprocess,notaone-timeevent• Budgetingisimportantforthefinancialstabilityandsurvivalofyourtelephonecompanyinthisever-changingenvironment(Part32World–ACAMvsLegacy)

BUDGETING IN SUMMARY

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• Part32Accountingruleso InvestmentsandReserves(CapitalBudget)o RevenueandExpenses(OperatingBudget)o Affiliatetransactionso RecordKeeping

• Other47CFRParts- Part64,65,36,69,54o RegulatedvsNon-regulatedo AllowedvsDisallowedo Allocationofcosts

§ Whichcostsgeneratethehighestrevenues§ Howdoesdemandchangeallocations/revenuestreams

PART 32 WORLD – (REGULATED WORLD)

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• NewOrders– USFReformo ACAM

§ Fixedamountofrevenuesfor10years§ Build-outrequirements§ Reportingrequirements

o Legacy§ Revenuesbasedoncosts§ CapitalandOperatingexpenselimitations§ BudgetControls§ Build-outrequirements§ Reportingrequirements

PART 32 WORLD – (REGULATED WORLD)

ACAM LEGACY

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• Identifytheamountofcapitaldollarstobespento Neededo Required/Plannedo Contract,Internal,orBoth

• Identifyassociatedretirements• Foreachexpenditure/project,identify

o Businessneedsuchasnewservices,growthinlines,build-outrequirements

o Expensesavingthatwillbegeneratedo Revenuestobegenerated

• CalculateDepreciationExpense• ConsiderLoanImplications

CAPITAL BUDGET – OVERALL CONSIDERATIONS

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• Purposeofadditionso Loopplanto Interexchangeplanto RegulatedorNon-regulated

• Natureofretirements• OverallNetworkchanges– collapse• Changesindemand

o Wideband/Etherneto Voice/Data– DataOnly

CAPITAL BUDGET – COST STUDY CONSIDERATIONS

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CAPITAL BUDGET – ACAM VS LEGACY CONSIDERATIONS

USF Reform Requirements ACAM LEGACY

Cost Study Still required – Special and DSL Required

Build-out 10/1 to 40% by YR 4, 50% by YR 5, 60% by YR 6…

25/3 to company specific number of locations by YR 10

10/1 to company specific numberof locations by YR 5

Reporting HUBB – all locations deployed in 2017 with 10/1 or greater by 3/1/18

All locations deployed in 2016 and earlier with 10/1 or greater by 3/1/19

HUBB – locations deployed with 10/1 or greater between 5/25/16 and 12/31/16 by 3/1/18

Limitations None Company Investment Allowance (AALPI)

Company specific construction limit per location (define project)

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• Includesexpensesandrevenueso CurrentbudgettendstobeginwithHistoricaldata/trendso Includeknown/expectedchanges

• Needtomeasure,monitor,andmaintainaccountability

OPERATING BUDGET – OVERALL CONSIDERATIONS

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• EmployeeRelatedo Salaries

§ NewHires/Retires§ ContractLabor§ Overtimerequirements

o Benefits

• TechnologyRelatedo Toolssuchascomputers,officesupplieso CircuitLeases(possiblynon-regulatedbutshouldbeconsidered)

• VendorRelated• Marketing/CommunityRelated• TaxRelated

o Increasedinvestmentscanincreasepropertytax

• InterestRelatedo Interestexpenseassociatedwithborrowedfunds

OPERATING BUDGET – OVERALL EXPENSE CONSIDERATIONS

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• LaborvsBenefitsvsOthero Growthpercentagescanbedifferentforeachelement

• RegulatedorNon-regulatedo Part64allocationscanchangefromyeartoyear

• AllowedorDisallowed

OPERATING BUDGET – EXPENSES – COST STUDY CONSIDERATIONS

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OPERATING BUDGET – EXPENSES –ACAM VS LEGACY

USF Reform Requirements ACAM LEGACY

Cost Study Still Required – Special and DSL Required

Limitations No new limitations (corporate cap still applies)

Corporate Cap still applies

Operating Expense Limitation (housing units, area in square miles, standard deviation log factor)

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• Demandchangeso Voiceo Voice/Data– DataOnlyo Widebands

• Ratechangeso SwitchedAccessRatesdecliningo Special/DSLrateimpacts

• Competitiono Impactondemando Impactonrates

OPERATING BUDGET – REVENUES –OVERALL CONSIDERATIONS

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• Changesincostsimpactsettlements• Changesindemandimpactsettlements• SwitchedAccessRevenueRequirementstillfrozenanddecliningby5%ayear(CAFICC)

OPERATING BUDGET – REVENUES –COST STUDY CONSIDERATIONS

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OPERATING BUDGET – REVENUES – ACAM VS LEGACY

USF Reform Requirements ACAM LEGACY

Cost Study Still Required – Special Access and DSL

Required – CAF BLS, Special Access, DSL

Federal USF Not Applicable – 01/01/17 Still Applicable

Model Based Support Fixed for 10 years (or transitioning based on a known schedule)

Not Applicable

Budget Control MechanismNot Applicable

CAF BLS (not applicable to broadband only)HCLS

Supported Locations Does your location count equal FCC’s count?

Competitive Overlap issues

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• StateUSF(TUSF)o SB586

§ SignedintolawonJune15,2017§ Amendsthestatue(Sec.56.032)§ ProvidesforaTUSFsupportprogramthroughSeptember1,2023

o T.A.C.§26.406§ Recoveryoffundsincertainsituations,includingreductioninfederaluniversalservicefundrevenues

• MiscellaneousRevenueso Rentrevenueo B&Crevenueo PublishedDirectoryRevenueo Other

• Non-regulatedRevenues

OPERATING BUDGET - REVENUES

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• StatementofCashflowdetailscashinflowsandoutflowsrelatedtoacompany’soperating,investing,andfinancingactivitiesoveraperiodoftime

• CashFlowismanageableo Maintainenoughcashonhandtomeetbusinessneedso Maximizereturnonsurpluscasho Managedebt

• CashFlowisdeterminedusingtheCapitalandOperatingBudgetinformation

CASH FLOW BUDGET

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CASH FLOW BUDGET – ACAM VS LEGACY

USF Reform Requirements ACAM LEGACY

Interstate Revenues Fixed for a 10 year period

No budget constraint

What happens after Year 10?

Based on your costs

Limited by budget constraints

Could be further impacted by rule changes after Year 5

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• Reviewthebudgeto AdjustCapitalandOperatingBudgetassumptionsasneededo Compareactualstothebudget– makeadjustmentsasneededo Communicatewithallpartiestoensureeveryoneisonthesamepath

CASH FLOW BUDGET

QuestionsSharon.minor@mossadams.com