ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 20182020

TABLE OF CONTENTS

Cautionary Statement Regarding Forward Looking Statements and Analysts’Analysts’ Reports

This Form 10-K and future filings by Alaska Communications Systems Group, Inc. and its consolidated subsidiaries (“we”, “our”, “us”, the “Company” and “Alaska Communications”) on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend forward-looking statements to be covered by the safe harbor provisions for forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “seeks”, “should” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Forward-looking statements may be contained in this Form 10-K under “Item 1A, Risk Factors” and “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include:include (without limitation):

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a failure of information technology systems

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our ability to keep pacemaintain successful arrangements with rapid technological developmentsour represented employees

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our ability to attract, recruit, retain and changing standardsdevelop our workforce, and implement succession planning necessary for achieving our business plan

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unforeseen challenges when entering new markets and our ability to recognize and react to actions, products or services of competitors that threaten our competitive advantage in the marketplace

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the success of the Company’s expansion into managed IT services, including the execution of those services for customers

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structural declines for voice and other legacy services within the telecommunications industry

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A major public health issue, such as an epidemic or pandemic, and including on-going capital expenditures neededthe current COVID-19 pandemic, could adversely affect global, national, state and local economies, the operations and financial stability of our customers and vendors, and our operations, financial performance and liquidity

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geologic or other natural disturbances relevant to upgradethe location of our network to industry competitive speeds, particularly in light of expected 5G deployments by mobile wireless carriersoperations

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unanticipated damage to one or more of our undersea fiber optic cables resulting from construction or digging mishaps, fishing boats or other reasons

	•	structural declines for voice and other legacy services within the telecommunications industry
	•	a maintenance or other failure of our network or data centers
	•	a failure of information technology systems
	•	a third-party claim that the Company is infringing upon their intellectual property, resulting in litigation or licensing expenses, or the loss of our ability to sell or support certain products
	•	unanticipated costs required to fund our post-retirement benefit plans, or contingent liabilities associated with our participation in a multi-employer pension plan
	•	meet the success or failure of any future acquisitions or other major transactions
	•	geologic or other natural disturbances relevant to the locationterms of our operationsfinancing agreements and to draw down additional funds under the facility to meet our liquidity needs

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the cost and availability of future financing, at the terms, and subject to the conditions necessary, to support our business and pursue growth opportunities; our debt could also have negative consequences for our business; for example, it could increase our vulnerability to general adverse economic and industry conditions, or limit our flexibility in planning for, or reacting to, changes in our business and the telecommunications industry; in addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities; if we are unable to satisfy the financial covenants contained in those agreements, or are unable to generate cash sufficient to make required debt payments, the lenders and other parties to those arrangements could accelerate the maturity of some or all of our outstanding indebtedness

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the success or failure of any future acquisitions or other major transactions

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a third-party claim that the Company is infringing upon their intellectual property, resulting in litigation or licensing expenses, or the loss of our ability to sell or support certain products

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unanticipated costs required to fund our post-retirement benefit plans, or contingent liabilities associated with our participation in a multi-employer pension plan

	•	our success in providing broadband solutions to the North Slope and western Alaska
	•	our ability to maintain our cost structure as a focused broadband and managed information technology (“IT”) services company. Maintaining our cost structure is key to generating cash flow from operating activities. If we fail to effectively manage our costs, our financial condition will be impacted
	•	our ability to repurchase shares of our Common Stock under our repurchase program
	•	the success of the Company’s expansion into managed IT services, including the execution of those services for customers

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our internal control over financial reporting may not be effective, which could cause our financial reporting to be unreliable

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the matters described under “Item 1A, Risk Factors”Factors.”

In light of

Considering these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause the forward-looking events discussed in this Form 10-K or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-K.

Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Basis of Presentation

The Company is a smaller reporting company as defined in the Securities Act and Securities Exchange Act, as amended. Accordingly, it has utilized certain accommodations provided for scaled disclosures in its Annual Report on Form 10-K and proxy statement. Accommodations utilized include (i) a two-year presentation of the audited financial statements and related notes, and management’s discussion and analysis of financial condition and results of operations; (ii) reduced disclosures of certain executive compensation and stock performance information; and (iii) not disclosing selected financial data, contractual obligations and quantitative and qualitative disclosures about market risk. Financial information that is not in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”) is not presented in this report on Form 10-K. The definitions of any non-GAAP financial measures referenced in this report on Form 10-K, including Adjusted EBITDA and Adjusted Free Cash Flow, are provided on the Company’s investor relations website at www.alsk.com.

Dollar amounts presented are in thousands unless stated otherwise.

PART I

Item 1. Business

OVERVIEWOverview

We are a fiber broadband and managed IT services provider, offering technology and service enabled customer solutions to business and wholesale customers in and out of Alaska. We also provide telecommunication services to consumers in the most populated communities throughout the state. Our facilities basedfacilities-based communications network extends through the economically significant portions of Alaska and connects to the contiguous states via our two diverse undersea fiber optic cable systems. Our network is among the most expansive in Alaska and forms the foundation of service to our customers. We operate in a largely two-player terrestrial wireline market and we estimate our market share to be less than 25% statewide. However, we sponsored aA third-party market study conducted in the fourth quarter of 2018 which suggestsindicates that ourwe have market share inof close to 40% for “near net”, opportunities, that is, within one mile of our fiber footprint,network.

Merger

On December 31, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Project 8 Buyer, LLC (“Parent”) and Project 8 Merger Sub (“Merger Sub”), two newly- formed entities owned by ATN International, Inc. and Freedom 3 Capital, LLC. On December 31, 2020, the Company terminated the previously announced merger agreement under which the Company would be acquired by Macquarie Capital (USA) and GCM Grosvenor through its Labor Impact Fund.

On the terms, and subject to the conditions, of the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Parent. As a result of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by (i) the Company, Parent or Merger Sub and (ii) stockholders of the Company who have validly exercised and perfected their appraisal rights under Delaware law) will be converted at the Effective Time into the right to receive $3.40 in cash, without interest, subject to any applicable withholding taxes (the “Merger Consideration”).

Consummation of the Merger is subject to certain closing conditions, including, without limitation, (i) approval of the Merger by the Company’s stockholders, (ii) absence of certain legal impediments, (iii) the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); and (iv) receipt of regulatory approvals from the Federal Communications Commissions (the “FCC”) (and, if required as a precondition for FCC approval, the Committee for the Assessment of Foreign Participation in the U.S. Telecommunications Services Sector (“Team Telecom Committee”)) and from the Regulatory Commission of Alaska (the “RCA”). The waiting period under the HSR Act expired on February 16, 2021 at 11:59 p.m. Eastern Time.  Filings with each of the FCC and the RCA were made on January 20, 2021. The RCA gave public notice of the application and requested any public comments by February 12, 2021. On February 8, 2021, the RCA issued an order stating that it had determined that Parent’s application to acquire the Company was complete as filed on January 20, 2021. The order states that the RCA will issue a final order no later than July 19, 2021. The Company’s stockholders approved the Merger at a special meeting of stockholders held on March 12, 2021.

Certain terms of the Merger Agreement are summarized below. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated December 31, 2020 and filed with the SEC on January 4, 2021, which is incorporated in its entirety herein by reference to this Annual Report on Form 10-K.

Restricted Stock Units and Performance Share Units

Immediately prior to the Effective Time, each restricted stock unit award issued under the stock plan of the Company that is subject solely to time-based vesting (a “Company RSU Award”) and that is outstanding immediately prior to the Effective Time, whether or not vested, will be cancelled as of the Effective Time in exchange for an amount in cash equal to the product obtained by multiplying (i) the aggregate number of shares of Company Common Stock subject to such Company RSU Award by (ii) the Merger Consideration. Amounts payable with respect to the Company RSU Awards will be paid not later than the next regularly scheduled payroll date that is at least two business days following the closing of the Merger Agreement.

Immediately prior to the Effective Time, each restricted stock unit award issued under the stock plan of the Company that is subject solely to performance-based vesting (the “Company PSU Awards”) and that is outstanding immediately prior to the Effective Time will be cancelled as of the Effective Time in exchange for an amount in cash equal to the product obtained by multiplying (i) the aggregate number of shares of Company Common Stock subject to such Company PSU Award by (ii) the Merger Consideration. The aggregate number of shares of Common Stock subject to any Company PSU Awards will be determined based on the degree of achievement of the performance goals set forth in the applicable award agreement as of the Effective Time or such earlier time as determined by the compensation committee of the Company’s Board of Directors (the “Board”) and such Company PSU Awards will no longer be subject to any performance-based vesting conditions. Amounts payable with respect to Company PSU Awards that are subject to vesting based on the price of Company Common Stock will be paid not later than the next regularly scheduled payroll date that is at least two business days following the closing of the Merger Agreement, and amounts payable with respect to all other Company PSU Awards will be paid not later than the next regularly scheduled payroll date that is at least two business days following the earliest of (a) the applicable time-based vesting date of the canceled Company PSU Award, (b) the date that is one year following the Effective Time, and (c) the termination of the employment of the former holder of such Company PSU Award without “cause,” in any case without interest.

Immediately prior to the Effective Time, each share of Company Common Stock granted to the directors of the Company that is subject to a deferral election (a “Deferred Stock Award”) and that is outstanding immediately prior to the Effective Time will be cancelled as of the Effective Time in exchange for an amount in cash equal to the product obtained by multiplying (i) the aggregate number of shares of Company Common Stock subject to such Deferred Stock Award by (ii) the Merger Consideration.

Financing

Parent and Merger Sub secured committed financing, consisting of a combination of (i) equity financing (the “Equity Financing”) to be provided by ATN International, Inc. and Freedom 3 Investments IV, LP, which have each agreed to capitalize Parent, subject to the terms and conditions set forth in equity commitment letters with respect to the Merger and (ii) debt financing (the “Debt Financing”) to be provided by Fifth Third Bank, National Association, subject to the terms and conditions set forth in the debt financing commitment letter with respect to the Merger. The Equity Financing and the Debt Financing, in the aggregate, will be sufficient for Parent, Merger Sub and the Surviving Corporation to pay the amounts required to be paid in connection with the Merger and the other transactions contemplated by the Merger Agreement. The Merger is not subject to a financing condition. The Equity Investors have also entered into limited guarantees with the Company to guarantee Parent’s obligation to pay the Parent Termination Fee (as defined in the Merger Agreement) and certain indemnity and recovery costs.

No-Shop Period

From and after the date of the Merger Agreement until the earlier of the Effective Time of the Merger or termination of the Merger Agreement in accordance with its terms, the Company will be subject to customary “no-shop” restrictions, subject to certain exceptions and “fiduciary out” provisions, as set forth in the Merger Agreement.

Termination

The Merger Agreement contains certain customary termination rights for the Company and Parent. Among other termination rights, the Merger Agreement can be terminated by either Parent or the Company if (i) the Merger is not consummated on or before December 31, 2021 (the “End Date”), which may be closerextended in increments of 30 days to 40%. Thisno later than February 28, 2022 in connection with regulatory approvals, or (ii) any governmental authority of the United States or certain localities within the United States issues a final and non-appealable order permanently restraining or otherwise prohibiting the consummation of the transaction contemplated by the Merger Agreement.

In addition, the Merger Agreement includes certain termination fees payable by the Company or Parent if the Merger Agreement is consistentterminated under certain circumstances.

Parent and Merger Sub have agreed to a standstill pursuant to the Merger Agreement, with respect to the Company and its subsidiaries, from December 31, 2020 until the earlier of (i) the Effective Time and (ii) the first anniversary of the termination of the Merger Agreement.

The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature.

The Merger is currently expected to close in the third quarter of 2021, although there can be no assurance that it will occur by that date. The transaction will result in the Company becoming a consolidated, majority owned subsidiary of ATN International, Inc.

COVID-19 Pandemic

The COVID-19 pandemic has negatively impacted global, national and local economies, disrupted global supply chains and created significant volatility and disruptions to financial markets. The COVID-19 pandemic has also impacted the Company’s customers, suppliers, employees and other aspects of its business, including an increase in demand for its broadband and managed IT services. In response to economic pressures impacting the Company’s customers and the community at large as a result of the COVID-19 pandemic, we implemented the following actions in 2020:

The COVID-19 pandemic did not have a direct material effect on the Company’s revenue in 2020 but did directly result in an estimated $1.5 million increase in costs during that period. Additional current and potential financial impacts include the following:

We are continuing to assess the potential future impact of the COVID-19 pandemic. The situation continues to evolve, and we cannot predict the extent or duration of the pandemic, its effects on the global, national or local economy and its longer-term effects on the demand for our hypothesis that from a revenue performance perspective, relativeproducts and services, operations, financial condition, results of operations or cash flows, which could be material. We will continue to closely monitor the situation and make the appropriate adjustments to our largest competitoroperations as required and appropriate.

In March 2020, the Federal government passed legislation, including the CARES Act, intended to provide economic relief to individuals, families and businesses. This relief includes cash payments, additional unemployment benefits, grants, forgivable loans and additional funding (through the FCC) for telemedicine services and devices. The FCC has also relaxed competitive bidding rules and delayed certain deadlines under the E-Rate and rural health care programs. The CARES Act has provided for the accelerated receipt of the Company’s AMT credits.

In February 2021, the Company and the Municipality of Anchorage entered into an agreement under which utility relief will be made available to certain of the Company’s residential and small business customers located in Anchorage. The program is supported by a grant from the Municipality of Anchorage. These funds will be applied by the Company to the accounts of customers who have experienced financial hardship related to the COVID-19 pandemic and meet other requirements, subject to certain terms and conditions. Maximum funding under the grant is $0.7 million and will be recorded as a credit to accounts receivable and, in part, to the provision for doubtful accounts in 2021.

Operating Initiatives

We are focused on being a customer centric fiber broadband and managed IT company. Everything we do is focused around our customer, meeting and exceeding their needs through the application of technology. We are gainingfocused on delivering an exceptional customer experience throughout the customer lifecycle. This forms the foundation of our sustained differentiation, creating unique value for our customers to grow our market share, expand business with existing customers while minimizing churn.

Our future investments and subsequent initiatives are focused on building and strengthening the business in three areas:

These investment areas are not standalone and, in fact, are synergistic. We look to maximize each of these with any initiative for the marketshighest return.

We recognize that everything we do is only possible through our people. Our employees are serving.enablers that make any and all initiatives happen to serve our customers and earn their business. We focus on and make investments in employee engagement to maximize the realization of an exceptional customer experience and maximize the effectiveness of our investments.

We will continue to evaluate strategic opportunities that address scale, geographic diversification, and return value to our shareholders.

Our parent company, Alaska Communications Systems Group, Inc., was incorporated in 1998 under the laws of the state of Delaware. Our principal executive offices are located at 600 Telephone Avenue, Anchorage, Alaska 99503-6091. Our telephone number is (907) 297-3000 and our investor internet address is www.alsk.com. Our customer internet address is www.AlaskaCommunications.com.

Markets, Services and Products

We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below.

The brand pillars supporting our products and services are reliability, customer service, trustworthiness and local presence. These are represented by the promise we make to our customers: “You can always expect to get the service as promised to you by an Alaska Communications’ representative. If you are not satisfied, we will work with you to provide a solution that meets your satisfaction.”

See “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a description of our products and services and a summary of service and product revenues generated by each of the above three customer categories.

Network and Technology

There are twoAlaska Communications provides communications and IT solutions that connect Alaskans as well as customers in the continental United States to the world. This is based on an extensive facilities basedfacilities-based wireline telecommunications networksnetwork in Alaska. We operate one of these networks and General Communication, Inc. (“GCI”) operates the other.Alaska that we operate. We provide high-capacity Ethernet-baseddata networking, internet connectivity, voice communications and IT Services. Networking services include Ethernet and IP routed services as well as switched and dedicated voice and broadband services. In addition, we offer other value addedvalue-added services such as network hosting, managed IT services and long distancelong-distance services. We continuously upgrade our network to provide higher levels of performance, higher bandwidth speeds, increased levels of security and additional value addedvalue-added services to our customers. We operate 181,000 terrestrial and submarine fiber miles which serve as the backbone of our network as well as now serving over 900 buildings with fiber. Our networks are monitored for performance around the clock in redundant monitoring centers to provide a high level of reliability and performance. Our fiber network is made up of more than 130,000 terrestrial and submarine fiber miles and serves as the backbone of our network. It is extensive within Alaska’s urban areas and connects our largest markets, including Anchorage, Fairbanks and Juneau with each other and the contiguous states.states as well as many rural areas. We have recently addedcontinue to utilize Fixed Wireless towers and technology to reach even more customers. Both offer uscustomers, bringing total homes and businesses passed to more than 16,000 at the opportunity to provide our customersend of 2020. In 2020, we secured additional spectrum through the FCC auction for licenses in the shared Citizens Broadband Radio Service (“CBRS”). CBRS spectrum is effective in areas with a high level of network reliability and speed for voice and broadband applications.lower population densities. We also own and operate one of the most expansive Internet Protocolcontinue to expand our Multi-Dwelling Unit (“IP”MDU”) networks in Alaska using multi-protocol label switching (“MPLS”) and Metro Ethernet technology, alongoffering utilizing fiber or fixed wireless backhaul, with Software-Defined Networking (“SD-WAN”) capabilities. Our MPLS network provides customers with Quality of Service capabilities and prioritization of data based on data-type over our Metro Ethernet service, which we market to health care, businesses and government customers. Coupled with SD-WAN technology our customers receive highly reliable and highly affordable service. Metro Ethernet offers our customers scalable, high-speed broadband and customized IT products and services, as well as Internet connectivity. We are one of the few Metro Ethernet Forum certified carriers in the nation, providing the highest degree of assurance to our customers regarding the quality of our network and services.more than 7,000 MDUs now served.

We also own and operate two undersea fiber optic cable systems that diversely connect our Alaskan network to our facilities in Oregon and Washington. These facilities provide the most survivable service to and from Alaska, with key monitoring and disaster recovery capabilities for our customers. We also have usage rights on a third undersea fiber network connected to the lower-48.

Our network in Oregon and Washington includes terrestrial transport components linking our landing stations to a Network Operations Control Center in Hillsboro, Oregon and collocation facilities in Portland, Oregon and Seattle, Washington. In addition, AKORN^®AKORN®, one of our undersea fiber optic cable systems, connects our Alaska network from Homer, Alaska to our facilities in Florence, Oregon along a diverse path within Alaska, the Pacific Northwest and undersea in the Pacific Ocean. Northstar, our other undersea fiber optic system, has cable landing facilities in Whittier, Juneau, and Valdez, Alaska, and Nedonna Beach, Oregon. In 2020, we completed major network upgrades to the Northstar fiber line, increasing capacity by more than five times. Our subsea capacity including the AKORN^®AKORN® and Northstar systems provides a total of 7,800 route miles, or about 26,000 fiber miles, of submarine fiber. Together, these fiber optic cables provide extensive bandwidth as well as survivability protection designed to serve our own, as well as our most demanding customers’ critical communications requirements. In 2017, we upgraded the AKORN system to be able to support 100GB circuits for customers and in 2019 we will perform a similar upgradecustomers. Further upgrades to the NorthStar system.AKORN system were completed in 2019. Through our landing stations in Oregon, we also provide an at-the-ready landing point for other large fiber optic cables, and their operators, connecting the U.S. to networks in Asia and other parts of the world.

In April 2015, we entered into an agreement to purchase aOur terrestrial fiber network on the North Slope of Alaska. This networkAlaska allows us to provide broadband solutions to the oil and gas sector in a market that previously had no competition and continue to advance our sales of managed IT services.

In 2017, we began the development ofWe have developed a satellite earth station network and acquired C-band transponder space on Eutelsat’s E115WB satellite. In the fourth quarter of 2017, weWe began providing Internet backhaul connectivity in 2017, and continue to our first customerexpand the satellite service, adding customers and inupgrading equipment throughout 2018, we continued to provide service to customers in areas2019 and 2020.

Another Alaska carrier, Quintillion, has invested in a submarine network with landing stations in several northwest Alaska communities, including a terrestrial route from the North Slope to Fairbanks. The submarine network became operational in late 2017. We have acquired capacity on this system and began deliveringdeliver service to customers in this area, including a buildout of terrestrial fiber optic cable, in Utqiaġvik (formerly Barrow) to serve this new market. We are currently serving customers in Utqiaġvik, Nome, Kotzebue and Kotzebue.Deadhorse.

Competition

Management estimates the Alaska wireline telecom and IT services market to be approximately $1.65 billion. This market is comprised of the IT services market of approximately $840 million, the broadband market of approximately $700 million and the voice market of approximately $110 million. Management estimates that over 85% of this market opportunity is from the business and wholesale customer segment. We sponsoredBased on a third-party market study conducted in the fourth quarter of 2018, management believes that suggests approximately $250 million of the telecom opportunity is “near net,” that is, within one mile of our fiber infrastructure.

We expect to experience continued growth in managed IT services over time by providing these services to our broadband customers as well as creating new customer relationships. We believe the competition for managed IT services is fragmented.

We face strong competition in our markets from larger competitors with substantial resources. For traditional voice and broadband services, we compete with GCI and AT&T on a statewide basis, and smaller providers such as Matanuska Telephone Association, Inc. on a more localized basis.

As the largest facilities basedfacilities-based operator in Alaska, GCI is the dominant statewide provider of broadband, voice, wireless and video services. In the markets where we compete with GCI (broadband and voice), GCI has approximately 50% to 60% of market share across the consumer and business segments. GCI continues to expand its voice and data network, often taking advantage of subsidized government programs which create a monopoly for services in certain markets. AT&T’s primary focus is to be the provider of voice and broadband services to its nation-wide customers. AT&T tends to use its existing broadband network to serve these customers or it leases capacity from GCI or Alaska Communications to augment its existing network.

Matanuska Telephone Association (“MTA”) is a COOP owned telephone and internet service provider operating in the Matanuska regional area of Alaska. MTA is in the process of building a terrestrial fiber from Alaska to Canada which will interconnect with Northwestel. This fiber will provide a diverse route out of Alaska.

Overall competitive dynamics are significant, and our operating performance is impacted accordingly. For more information associated with the risks of our competitive environment see “Item 1A, Risk Factors.”

Marketing

Our marketing strategy relies on our understanding the Alaskan market, while increasingly using digital technologies to focus our marketing messages. We tailor our products and services based on understanding our customers’ needs, location, and type of service they desire. For business customers, we bundle our products and provide value added managed IT services using our local service delivery model and highly reliable network. For consumer customers, we focus on offeringbrand awareness, the product experience, providing improved service through new technology and price. Regarding pricing, we typically offer one flat rate price and no data usage caps for internet services, differentiating ourselves from GCI who charges for excess data usage or throttles bandwidth.

Sales and Distribution Channels

Our sales strategy combines primarily direct distribution channels to retain current customers and drive sales growth. Our focus in 2019 is toIn 2021, we will continue leveraging our direct sales channels’ focus on serving Business and Wholesale customers, our web and contact center channels for consumer customers, and expand our penetration of the military housing market for continued sustained performance. We are also continuing our efforts to improve customer service and move more consumer transactions to the web.

Customer Base

We generate our revenue through a diverse statewide customer base and there is no reliance on a single customer or small group of customers. Business and wholesale customers are our primary focus and they comprised 62%68% of our total revenue in 2018. Revenue from our rural health care customers, including the portion funded through the universal service support mechanism, is a component of business and wholesale2020. Regulatory revenue and represented approximately 8% of our consolidated revenue in 2018. Regulatoryconsumer revenue represented 22%17% and 15%, respectively, of the Company’s consolidated revenue in 2018.2020.

Seasonality

We believe our revenue is impacted by seasonal factors. This is due to Alaska’s northern latitude and the resulting wide swing in available daylight and weather conditions between summer and winter months. These conditions, unique to Alaska, affect business, tourism and telecom use patterns in the state. Our spending patterns are also impacted by seasonality as we incur more capital spending and operating spending during the summer and early fall periods of the year, reflecting the heightened economic activity from the summer months and our own construction activities during this time period.

Employees Human Capital

AsEverything we do is only possible through our people. Our employees enable any and all initiatives to serve our customers and earn their business. We focus on and make investments in employee engagement to maximize the realization of December 31, 2018, we employed 584 regular full-timean exceptional customer experience and maximize the effectiveness of our investments.

We depend on the availability of personnel with the requisite level of technical expertise in the telecommunications industry. Our ability to develop and maintain our networks and execute our business plan is dependent on the availability of technical engineering, IT, service delivery and monitoring, product development, sales, management, finance and other key personnel. Because our operations and customers are primarily based in Alaska, the recruiting and retention of employees 8 regular part-timecan be challenging.

In response to the COVID-19 pandemic, the Company has established remote working arrangements, including work-from-home, for most of our administrative employees. Management has also implemented processes for frequent virtual interaction between individual employees and 4 temporary employees. Approximately 53% of our employees are represented by the International Brotherhood of Electrical Workers, Local 1547 (“IBEW”). employee groups.

Our Master Collective Bargaining Agreement (“CBA”) with the IBEW, which is effective through December 31, 2023, governs the terms and conditions of employment for all IBEW represented employees working for us inus. The CBA has significant economic impacts on the stateCompany as it relates to wage and benefit costs and work rules. We believe our labor costs are higher than our competitors who employ a non-unionized workforce. Work rules under the CBA limit our ability to efficiently manage our workforce and make the incremental cost of Alaska. work performed outside normal work hours high.

As of December 31, 2020, we employed 564 regular full-time employees, 5 regular part-time employees and 5 temporary employees, compared with 569, 8 and 4, respectively at December 31, 2019. Approximately 54% of our employees are represented by the IBEW.

Management considers employee relations to be generally good.

Regulation

While a substantial amount of our revenue is derived from non-regulated or non-common carrier services, we continue to generate revenue from services that are regulated. Given the breadth of the regulatory framework, the following summary of the regulatory environment in which our business operates does not describe all present and proposed federal, state and local legislation and regulations affecting the telecommunications industry in Alaska.

Overview

Some of the telecommunications services we provide are subject to extensive federal, state and local regulation. These regulations govern, in part, our rates and the way we conduct our business, including the requirement to offer telecommunications services pursuant to nondiscriminatory rates, terms, and conditions, the obligation to comply with E-911 rules, the Communications Assistance for Law Enforcement Act (“CALEA”), the obligation to safeguard the confidentiality of customer proprietary network information (“CPNI”), as well as our obligation to maintain specialized records and file reports with the Federal Communications Commission (“FCC”) and state regulators.business. These requirements are subject to frequent change. Compliance is costly and limits our ability to respond to some of the demands of our increasingly competitive service markets.

We generate revenue from these regulated services through regulated charges to our retail and wholesale customers, access and other charges to other carriers, and federal and state universal service support mechanisms for telecommunications and broadband services. These revenues are recorded throughout our customer categories.

At the federal level, the FCC generally exercises jurisdiction over the interstate and international telecommunications services that regulated common carriers provide and their related communications facilities.

The Regulatory Commission of Alaska (“RCA”) generally exercises jurisdiction over a limited number of intrastate access telecommunications services that originate and terminate at points in Alaska.

In this section, “Regulation”, we refer to our local exchange carrier (“LEC”) subsidiaries individually as follows:

Federal Regulation

We must comply with the Communications Act of 1934, as amended (the “Communications Act”) and regulations promulgated thereunder, which together require, among other things, that we offer regulated interstate telecommunications common carrier services upon request at just, reasonable and non-discriminatory rates and terms. The Communications Act also requires us to offer competing carriers interconnection and non-discriminatory access to certain facilities and services designated as essential for local competition, and permits the FCC to deregulate us as markets become more competitive.competition. Under the Communications Act we are eligible for support revenues to help defray the cost of providing services in rural, high cost areas, and to low-income consumers, schools and libraries, and rural health care providers. In recent years, the FCC has modified these support mechanisms to incentivize wider availability of affordable broadband Internet access services, and promote additional deployment of equipment, facilities, and systems necessary to support such services. In ongoing administrative rulemaking proceedings, theThe FCC is continuing to propose changes in the size and scope of these mechanisms, and it is difficult to predict the impact such changes may have on our business.

Rate Regulation

Our LEC subsidiaries are regulated common carriers offering local voice and a limited set of telecommunications data services. In providing these regulated telecommunications services, these subsidiaries are subject to competitive market forces, as well as rate-of-return regulations for intrastate services that originate and terminate in Alaska and price-cap rate regulation for interstate services regulated by the FCC. Because they face competition, our LEC subsidiaries may not be able to charge their maximum permitted rates under price-cap regulation or realize their authorized intrastate rate of return even where they are rate-of-return regulated.return. A broader range of data and information services are offered by our unregulated affiliates or as unregulated services by our regulated companies.

In establishing their costs of regulated telecommunications services, our LEC subsidiaries determine their aggregate costs and place them within an FCC-prescribed Uniform System of Accounts, then allocate those costs between regulated and non-regulated services, then separate the regulated portion of these costs between the state and federal jurisdictions, and finally among specific inter- and intra-state services. This process is governed primarily by the FCC and the RCA rules and regulations. In August 2014, the FCC opened a proceeding to consider whether to modify or eliminate its cost accounting rules. On February 23, 2017, the FCC adopted an Order streamlining its regulatory accounting rules and harmonizing them with generally accepted accounting practices.

In addition, for more than two decades, the FCC has been considering whether to modify or eliminate the current jurisdictional separations process, and it has asked the Federal-State Joint Board on Jurisdictional Separations for recommendations for doing so. For most of that time, the jurisdictional separations rules have remained frozen. In December 2018, the FCC extended the current freeze for six additional years, through December 31, 2024, and directed that Joint Board in the short term to consider amending the jurisdictional separations rules to recognize that the rates of price cap carriers, like Alaska Communications, are no longer subject to them. Nevertheless, these questions remain pending with the FCC. The FCC’s decision, when it comes, could indirectly increase or reduce earnings of carriers subject to jurisdictional separations rules by affecting the way costs are divided between regulated and unregulated services, and the way regulated costs are divided between the federal and state jurisdictions. In addition, these changes could affect the ways in which the FCC and RCA evaluate the reasonableness of our regulated rates for telecommunications services.

Regulation of Broadband Internet Access Services

In March 2015, the FCC reclassified mass market broadband Internet access services as a “telecommunications service,” subject to common carrier pricing and other regulations under Title II of the Communications Act, which had historically applied only to traditional telephone service. The FCC thus departed from its long history of treating broadband Internet access services as “information services,” which are subject to far less intrusive federal oversight, though the FCC declared its intention not to require broadband Internet access service providers to file federal “tariffs” or otherwise obtain advance FCC review or approval of the rates, terms, and conditions under which they offer broadband Internet access service. In June 2016, the FCC’s decision was upheld on appeal by a panel of the United States Court of Appeals for the District of Columbia Circuit.

On December 14, 2017, the FCC reversed these actions and restored its classification of broadband Internet access service as an “information service” subject to “light touch” federal regulation. The FCC also repealed the broad “Internet Conduct” standard, which had created significant regulatory uncertainty among service providers. By taking these actions, the FCC also restored the jurisdiction of the Federal Trade Commission over consumer protection issues arising in connection with broadband Internet access services. The FCC’s new rules require Internet Service Providers to disclose information about their practices to consumers, entrepreneurs, and the Commission, including any blocking, throttling, paid prioritization, or affiliated prioritization, but no longer prohibit such practices. The FCC found that disclosure of these operational practices, coupled with market forces and antitrust and consumer protection laws, would achieve the goals of Title II regulation, at lower cost.

The new rules took effect, in part, on April 23, 2018, while the changes that amend information collection requirements took effect following the required Office of Management and Budget approval on June 11, 2018. While it remains difficult to assess the full extent of the impact of these changes on our business, the more narrowly tailored regulatory framework has the potential to improve the performance of our broadband Internet access services (by, among other things, permitting us to better manage network congestion), reduce our regulatory compliance costs, and facilitate new investment.

Interconnection with Local Telephone Companies and Access to Other Facilities

The Communications Act imposes a number of requirements on LECs. Generally, a LEC must: interconnect with other telecommunications carriers; not prohibit or unreasonably restrict the resale of its services; provide for telephone number portability so customers may keep the same telephone number if they switch service providers; provide access to their poles, ducts, conduits and rights-of-way on a reasonable, non-discriminatory basis; and, when a call originates on its network, compensate other telephone companies for terminating or transporting the call (see the “Interstate Access” discussion below).

All of our LEC subsidiaries are considered incumbent LECs (“ILECs”) and have additional obligations under the Communications Act:Act, including obligations to negotiateunbundle certain elements of their networks for purchase by competitive LECs.

In general, in good faith with any carrier requesting interconnection;recent years, the FCC has granted forbearance providing incremental relief from some of the obligations the Communications Act imposes uniquely on ILECs. Most recently, on October 28, 2020, the FCC released an Order relieving ILECs from most obligations to provide interconnection for the transmission and routing of telecommunications at any technically feasible point in our ILEC network on just, reasonable and non-discriminatory rates, terms and conditions; to provide access to unbundled network elements (“UNEs”), such asunbundle local loops at non-discriminatory, cost-based rates(DS-3, DS-1, DS-0, and narrowband voice-grade), as well as Operations Support Systems and dark fiber transport, in markets the FCC deems competitive subject to competing carriers that would be “impaired” without them; to offer retail local telephone services to resellers at discounted wholesale rates; to provide notice of changes in information needed for another carrier to transmittransition periods ranging between two and route services using its facilities; and to provide, at rates, terms and conditions that are just, reasonable, and non-discriminatory, physical collocation, which allows a competitive LEC (“CLEC”) to install and maintain its network termination equipment in an ILEC’s central office, or to obtain functionally equivalent forms of interconnection.

Our ACSN ILEC subsidiary is classified as a rural telephone company undereight years. Previously, on August 2, 2019, the statute and therefore falls within a federal statutory exemptionFCC relieved ILECs from the requirements imposed on most ILECsrequirement to provide UNEs to a CLEC. The RCA may terminate the exemption if it determines that interconnection is technically feasible, not unduly economically burdensomeunbundle two-wire and consistent with universal service. Although the RCA has not terminated ACSN’s UNE exemption, the RCA granted GCI, subject to certain conditions, approval to provide local exchange telephone service in the Glacier State study area and Sitka exchange of ACSN on its own facilities. Other than the City of Sitka, all other exchanges in the Sitka study area remain unserved by any CLEC at this time.

On December 28, 2006, the FCC conditionally and partially granted ACSA forbearancefour-wire analog voice-grade copper loops, as well as from the obligation to lease UNEsoffer a wholesale discount on its telecommunications services sold to our competitors. Thiscompetitive entrants for resale. While the obligation to offer telecommunications services for resale remains in effect (as it does for all local exchange carriers, incumbent and competitive entrants alike), we will no longer be obligated to offer any particular wholesale discount on those services. Both of those 2019 grants of forbearance was limitedare subject to five wire centers within the Anchorage service area. Even where relief was granted, however, the FCC hasa two-part transition period. First, for a six-month period that began on August 2, 2019, we were required ACSA to leasecontinue to accept new orders for analog voice-grade copper loops and sub-loops at commercially negotiated rates, or if there is no commercial agreement, atdiscounted wholesale services, in accordance with the rates for these UNEs in Fairbanks. As a result of this decision, on March 15, 2007, our LECs entered into a five-year global interconnection and resale agreement with GCI governing the provision of UNEs and other services. The successor to that agreement remains in effect.

On December 28, 2015, the FCC issued an order granting “forbearance” from certain ILEC obligations under the Communications Act and the FCC’sprevious rules. As of that date, the FCC has relieved our ILEC subsidiaries of “dialing parity” and “equal access” obligations that, formerly, required us to ensure that customers were able to route their calls to other telecommunications service providers without having to dial additional digits, and to allow each of our ILEC telephone service customers to choose among any available providers of stand-alone interstate long-distance service, which the customer could then reach simply by dialing “1.” WeSecond, we must continue to offerhonor existing arrangements, including those capabilitiesput in place during that initial six-month period, for a three-year period that also began on August 2, 2019, in order to any customer that has presubscribedpermit customers sufficient time to undertake a stand-alone interstate long-distance provider priortransition to December 28, 2015, but are not required to make long-distance presubscription available to new customers. In May 2017, the FCC rejected a Petition for Reconsideration that had sought to reinstate these obligations in “rural areas of Alaska.”alternative arrangements.

In the same 2015 order, the FCC granted our ILEC affiliates forbearance in two additional areas: (i) the FCC granted limited forbearance from our ILEC affiliates’ obligation to offer competitive access to newly-deployed entrance conduit running from the property line to a commercial building in “greenfield” situations where no service provider has an established presence; and (ii) our ILECs are no longer required to offer competitors unbundled access to a 64-kilobit-per-second voice channel in areas where we have replaced last mile copper loop connections to our customers with fiber optic cables.

On June 26, 2017, we filed a Petition with the FCC requesting that GCI be treated as the sole ILEC in our ACSA study area, and that ACSA be treated as a nondominant carrier and relieved of its ILEC obligations under the Communications Act. That Petition remains pending at the FCC.

Interstate Access Charges

The FCC regulates the prices that ILECs charge for the use of their local telephone facilities in originating or terminating interstate calls.

Special Access Pricing Flexibility and Business Data Services

Rates for interstate telecommunications services offered by our ILEC subsidiaries are determined using price cap regulation, under which the rates vary from year to year based on mathematical formulae, and not based on changes to our costs, including both inter-carrier rates and retail end user rates. Since 2010, ACSA, ACSF, and ACSAK have had the right under the FCC’s Phase I and Phase II pricing flexibility rules to offer flexible pricing arrangements such as volume and term discounts free from FCC rate structure and price-cap rules for qualifying services, including dedicated transport and special access services in the Anchorage, Juneau and Fairbanks areas.

On April 20, 2017, the FCC adopted an Order updating its regulations governing “business data services,” which are those circuit-switched or packet-switched services that offer our dedicated point-to-point transmission of data at certain guaranteed speeds and service levels using high-capacity connections, including special access services. The FCC left in place the Phase I and Phase II pricing flexibility it granted to us in 2010 and granted further price deregulation of all business data services with transmission speeds above 45 Megabits per second. For legacy circuit-switched business data services with speeds at or below that level (DS-3 or below), the FCC adopted a new competitive market test, finding that price regulation is no longer required in counties (or county-equivalents, such as Alaskan boroughs) where (a) 50 percent of the buildings in a county are within a half-mile of a location served by a competitive provider; or (b) 75 percent of the census blocks in a county have a cable provider present.test is satisfied. We are permitted to remove business data services in competitive areas from our tariffs over the next three years, following which time we will be required to do so. In areas that do not meet this competitive market test, the FCC adjusted its “price cap” rules governing rates for certain legacy services that will continue to be regulated, but also permitted us to offer those services with volume and term discounts, as well as under contract tariffs, which is the equivalent of the former Phase I pricing flexibility. We are still evaluating the impact of the FCC’s order but, in general, we expect this FCC Order to support the Company’s ability to be market competitive for its business data services.services in many of our most competitive markets.

On August 28, 2018, the United States Court of Appeals for the Eighth Circuit vacated portions of the FCC’s decision that ended prior regulation and tariffing of prices of legacy circuit-switched transport services offered by price cap carriers, like Alaska Communications, findingbecause it found that the FCC had not provided sufficient advance notice of that aspect of its decision. On October 24, 2018, in order to provideJuly 12, 2019, following additional proceedings, the necessary notice in lightFCC re-adopted the majority of the forbearance relief that the Eighth Circuit’s decision,Circuit had vacated, while leaving rate regulation in place on certain routes that the FCC issued a detailed proposalbelieved to re-adopt that relief. The comment cycle was delayed by the recent shutdown of the FCC as a result of a lapse in federal appropriations, and the matter remains pending.lack sufficient competition.

Transformation Order

Under aA 2011 FCC order (the “Transformation Order”), capped our ILEC interstate and intrastate switched access rates and reciprocal compensation rates (“ICC rates”) are capped, and declining towardinitiated a six-year transition of our terminating switched access and reciprocal compensation rates to zero, under a “bill-and-keep” model, in pursuit of the FCC’s goal that carriers will recover their costs from their end-users and, in some cases, universal service support mechanisms. That transition was complete as of July 1, 2018.

The transition unfolded over a six-year period beginning July 1, 2012. As a result:

The Transformation Order provides for a certain amount of compensation for lost revenue through two optional programs: (i) an access recovery charge on subscribers and (ii) a temporary access replacement support mechanism with broadband build-out obligations. However, the FCC does not intend the results of the changes necessarily to be revenue-neutral to any ILEC and various caps, limitations, market forces and, ultimately, phase-outs apply to both of these programs. Furthermore, we did not meet the required criteria for imposing an access recovery charge, and received no revenue from that source. As a result, the Company’s ILEC affiliates have experienced an overall decline in access charge revenues over the course of the transition. In a July 2016 Order, the FCC found that ILECs are non-dominant in the market for switched access services nationwide, but declined to provide any significant relief from existing levels of federal regulation as a result of that finding.

Federal Universal Service Support

The Communications Act requires the FCC to establish a universal service program to ensure that affordable, quality telecommunications services are available to all Americans. The Company has received universal support in several forms: (i) high cost support received by its ILEC subsidiaries for its wireline voice and broadband Internet access service business under the Connect America Fund; (ii) support for services that the Company provides to schools and libraries, provided through the federal schools and libraries universal service support mechanism (“E-Rate”); (iii) support from the federal Rural Health Care support mechanism, which supports communications services that enable telehealth and telemedicine services provided by eligible rural health care providers; and (iv) low income support under the FCC’s Lifeline program, which subsidizes telephone and broadband Internet access services for low-income consumers. These programs are administered under the direction of the FCC by the Universal Service Administrative Company (“USAC”).

Historically,

USF Contributions

Under the levelCommunications Act of high cost1934, as amended (the “Communications Act”) and FCC rules, telecommunications carriers and certain providers of telecommunications must contribute to the federal Universal Service Fund, which is the source of funding for the four support received by the Company’s LEC subsidiaries wasmechanisms described above. These contributions are based on end-user revenues from assessable interstate and international services. For the costs those subsidiaries incurredfirst calendar quarter of 2021, we are required to pay an amount equal to 31.8 percent of our interstate and international end-user telecommunications revenue towards the federal Universal Service Fund. That contribution rate changes every calendar quarter, and has increased sharply in providing telecommunications services, although a portionrecent years, both because of increases in demand for universal service support payments, and because the assessable revenue base has shrunk considerably over the past two decades. In the long term, the current contribution mechanism is likely to be unsustainable, and collapse of the support was frozen at the timeUniversal Service Fund would have a significant impact throughout our LEC subsidiaries converted to federal price cap regulation and, for ACSA, based on the results of a cost model. The 2011 Transformation Order made a number of changes, including replacing legacy high cost support mechanisms with the Connect America Fund (“CAF”) mechanism discussed below.industry.

Rural Health Care Universal Service Support Program

The FCC’s Rural Health Care Universal Service Support Mechanism (the “RHC program”) provides funding to help make broadband telecommunications and Internet access services provided by the Company and other service providers affordable for eligible rural health care providers. It is comprised of two parts. The Telecommunications Program covers the difference between the “urban rate” for telecommunications services that rural healthcare providers use to deliver healthcare at rural locations, and the “rural rate” that they would otherwise be required to pay. The Healthcare Connect Fund covers 65 percent of the cost of a wider variety of broadband telecommunications, networking, and Internet access services and certain associated equipment. Through June 30, 2017, the budget for the entire Rural Health Care Universal Service Support Mechanism was set at $400 million annually, including administrative expenses, a significant portionrevenues represented 5.3% of which is used to assist eligible rural health care providersthe Company’s consolidated revenue in Alaska.2020.

Beginning withThe Company has participated in the RHC program since 2008. For the 2017 Funding Year, 2016 (July 1, 2016 – June 30, 2017), demand for support under the program exceededFCC approved rural rates that were significantly reduced from the $400 million budget. The budget constraints prompted USAC to engage in substantially more rigorous review of requests for rural health care support, raising compliance costsrates proposed by the Company. For Funding Years 2018, 2019, and delaying issuance of support payments. The rising uncertainty and unpredictability in the Rural Health Care program caused a negative impact on revenue for the Company in 2017, and may2020, we have a negative impact on future revenue and demandlikewise obtained FCC approval for our services from rural healthcare providers.

For Funding Year 2017, which began July 1, 2017, demand for support fromrates, generally at levels consistent with the Rural Health Care support mechanism again exceeded the $400 million cap. As a result, USAC had announced that successful non-consortium applicants would receive approximately 84.4% of the support for which they would otherwise be eligible. On June 25, 2018,reduced rates approved by the FCC issued an Order retroactively increasing that cap to $571 million for Funding Year 2017. The increase permitted fullmulti-step process of obtaining FCC approval for rates and then subsequently obtaining funding commitment letters from USAC has introduced varying degrees of all Funding Year 2017 requests that USAC ordelay in the FCC determined were otherwise in compliance withprocess of obtaining support for the governing rules. In the near term,services we expect that the increasedeliver to reduce or eliminate the need for reductions in support payments as a result of FCC-imposed budget constraints, but it has not reduced the rigor with which USAC is now reviewing funding requests for rural health care support. We continueproviders. Most recently, we received FCC approval for our Funding Year 2020 rates in January 2021, more than halfway through the funding year to advocatewhich those rates relate (July 1, 2020 – June 30, 2021). USAC began issuing funding commitment letters in March 2021 and we are working with our healthcare provider customers to prepare and submit additional forms and documentation required to receive payment.

On March 27, 2020, the President signed into law the “Coronavirus Aid, Relief, and Economic Security Act,” which, among other things, appropriates $200 million for the FCC to adopt further increaseshelp health care providers provide connected care services to patients at their homes or mobile locations in response to the COVID-19 pandemic. Over the ensuing three months, the FCC used these funds to create the “COVID-19 Telehealth Program,” and made over 500 awards, comprising the entire sum, to health care providers in the budgetlower 48 contiguous states, the District of Columbia, and Guam, but none to health care providers in Alaska. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, appropriated a further $250 million for thisthe COVID-19 Telehealth Program, and directed that, to the extent feasible, at least one applicant in every state should receive an award of funding under the program.

Separately, USAC determined that it was unableThe same FCC Report and Order also created the “Connected Care Pilot Program,” which makes an additional $100 million in universal service funding available over three years to approve the vast majority of our rural healthcare customers’ Funding Year 2017 funding requests untilstudy how the FCC approved “rural rates”can help support the trend towards connected care services, particularly for use in computinglow-income Americans and veterans. The Connected Care Pilot Program will provide healthcare providers support amounts to be committed underfor 85 percent of the Telecommunications Program. On March 22, 2018, we filed a Petition with the FCC asking the FCC to direct USAC to issue funding commitments to our customers based on rates we proposed in the Petition. On July 18, 2018, we announced that the FCC had approved those rates for use in determining rural health care support levels for our rural health care customers for Funding Year 2017. USAC has now completed the initial administrative processes associated with our ruralcost of eligible services and network equipment, which include: (1) patient broadband internet access services, (2) health care provider customers’ requestsbroadband data connections, (3) other connected care information services, and (4) certain network equipment (e.g., equipment necessary to make a supported broadband service function such as routers). The FCC accepted applications for Connected Care Pilot Program support between November 6 and we have receivedDecember 7, 2020. On January 15, 2021, the associated support paymentsFCC announced its initial set of awards to healthcare providers in 12 states, but none in Alaska. While it is too soon to assess the ultimate impact, if any, of the Connected Care Pilot Program on our business, programs of this type that make the telehealth and telemedicine services more affordable could stimulate greater demand for those services delivered to our rural health care customers during Funding Year 2017. In a few cases, USAC denied funding based on other concerns, and appeals of those funding denials are now pending.in Alaska.

The FCC’s June 25, 2018 Order also directed thatOn August 1, 2019, the FCC adopted an order making comprehensive changes to the rules governing the competitive bidding process and the method for determining the urban and rural rates used to calculate the amount of RHC Telecommunications Program support payments for which a health care funding cap be indexed for inflation, so that,provider is eligible. The changes to the urban and rural rate rules take effect for Funding Year 2018, which began July 1, 2018, the cap is now $581 million. In addition, beginning with Funding Year 2018, any unused funds from one Funding Year may be carried forward for use in subsequent Funding Years. We again requested that the FCC approve rural rates for the services we provide to our rural healthcare customers that are seeking subsidies from the Rural Health Care support mechanism for Funding Year 2018, and the FCC approved those rates in November 2018. We have begun receiving funding commitments and payments for Funding Year 2018 receivables, reducing our carrying costs below Funding Year 2017 levels.

We are also working to reduce the level of regulatory and business uncertainty associated with our rural healthcare business in two additional ways. First, in November 2018, we requested FCC approval for rural rates for Funding Year 2019,2021, which will begin July 1, 2021, and rural healthcare providers were permitted to solicit bids for services to be supported in Funding Year 2021 beginning on July 1, 2020. Among other things, the FCC’s Order directed USAC to develop and publish a database by July 1, 2020, containing available rural rates and rate medians that will cap the amount of RHC support eligible healthcare providers may receive for a given service in a particular geographic zone. The FCC’s Order divided Alaska into four geographic zones, with the rural rate in each zone capped at the median of the rural rates for similar services offered in that zone, as identified by USAC. USAC published that rate database on July 1, 2020, following receipt of a June 30, 2020 letter providing significant guidance and directives from the FCC’s Wireline Competition Bureau (the “Bureau”). Among those directions, the Bureau directed USAC to provide an additional two months, until August 31, 2020, for interested parties to supplement the database with additional relevant rates. USAC announced on October 1, 2020 that it had incorporated those additional rates into the database.

On October 21, 2019, an appeal challenging the new method of setting rates for supported services was filed in order to shorten the USAC funding request approval process and bring greater certaintyUnited States Court of Appeals for the District of Columbia Circuit, adding further uncertainty to the competitive bidding processultimate outcome of this proceeding. Similarly, the Company and several other parties have filed Petitions for Reconsideration of the FCC’s August 2019 Report and Order, asking the FCC to reconsider some of its changes to the rural healthcare rate-setting process. Among other changes, we asked the FCC to give the Bureau instead of USAC responsibility for creating the database; to provide more detailed guidance directing the Bureau to differentiate among broadband services based on additional service level, security, reliability, and other factors when creating the rural rate database; to make the rate database applicable only in cases where the rural health care provider servicesreceived fewer than two competitive bids; and to set the rural rate cap, where applicable, based on the average rate, not the median, in the database. Both the action in the D.C. Circuit Court of Appeals and the Petitions for Reconsideration filed with the FCC remain pending.

We believe that began in January 2019. Second, weUSAC’s rural rate database, as currently constituted, is likely to have an adverse impact on our economic ability to continue to advocateserve some of our rural healthcare customers. In particular, the rates established by the database would negatively impact our ability to continue to offer our full range of telecommunications services to rural healthcare providers supported by the Telecommunications Program in the more remote, higher-cost areas of the state. We have requested that the full FCC review USAC’s effort and associated guidance from the Bureau concerning the database, delay the effectiveness of the new rural rates, and direct the Bureau to implement the changes we requested in our Petition for Reconsideration. On January 19, 2021, the FCC expeditiously to adopt rules to reform and modernize the Rural Health Care Telecommunications Program, on which the majority of healthcare providers in Alaska rely, in the proceeding that began in December 2017. In December 2018, FCC Chairman Pai committed in a letter to Alaska Senator Dan Sullivan to move forward withissued an order adopting new rules forwaiving the Rural Health Care Program in 2019, with a target of doing so in the first halfuse of the year. If the FCC meets that timeline, it is possible that new rules would bedatabase in place to govern the bidding and funding commitment processAlaska for Funding Year 2020, which will begin July 1,2021. The Order grants a similar waiver for Funding Year 2022, unless the Commission addresses the pending Petitions for Reconsideration within the coming year, i.e., by January 19, 2022. In lieu of the database, while the waiver remains in effect, the Order authorizes support based on the most recent rural rate that the FCC has approved for the same service at the same healthcare facility within the past three funding years. As an alternative, Telecommunications Program rural rates may be established under the previously applicable rate rules that were in effect through Funding Year 2020. As with the action in the D.C. Circuit Court of Appeals and the Petitions for Reconsideration, the other issues raised in our Application for Review remain pending.

At this time, it is impossibleWe are unable to predict the outcome or eventual impact of the D.C. Circuit’s review of the FCC’s Order, or the FCC’s decision on our Petition for Reconsideration or our Application for Review, but the January 2021 waiver offers a measure of short-term stability for the Telecommunications Program while those reviews continue.

USAC Audit of RHC Program Funding Requests

In addition to the prospective changes to the RHC program discussed above, the FCC and USAC have undertaken reviews of current and past funding requests. In June 2017, the Company received a letter from USAC’s auditors inquiring about past funding requests, all of which were previously approved by USAC. After clarifying the request, the Company responded to the auditors with the requested information through the remainder of 2017 and mid-way into 2018. Late in 2018, the auditors asked the Company to comment on some preliminary audit findings, and the Company responded with a letter dated December 21, 2018. After more than a year without further communication from the auditors, on February 24, 2020, the Company received a draft audit report from USAC that rulemaking processis described more fully in Note 21 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. The Company was invited to comment on this draft audit report and, as of September 1, 2020, we have provided USAC with extensive comments in response. Our comments seek correction of numerous factual and legal errors that we believe are contained in that report. In addition, the Company has had conversations with USAC’s auditors to discuss these perceived errors. As a result of these conversations and comments being submitted by the Company, USAC’s auditors may revise their findings, including the amounts they recommend USAC seek to recover. USAC’s auditors are expected to issue a final audit report incorporating the Company’s responses that will be sent to USAC’s Rural Health Care Division to review and determine if corrective action would be appropriate. In the event that the Company disagrees with USAC’s final audit report, the Company can appeal that decision to USAC’s Rural Health Care Division and/or the FCC. At this time, we cannot predict the contents or timing of the final USAC audit report, the outcome of the audit or the impact on our business, financial condition, results of operations, or liquidity.

FCC Inquiry into Company’s RHC Program Participation

The Company also received a Letter of Inquiry on March 18, 2018, from the new rules may have. We are continuing to evaluateFCC Enforcement Bureau requesting historical information regarding the impact of the funding cap constraints, ongoing uncertainty and unpredictabilityCompany’s participation in the FCC’s Rural Health Care Universal Service Support Mechanism,program. In response, the Company produced voluminous records throughout 2018 and into the potentialfirst quarter of 2019. On November 5, 2019, the Company received another letter from the FCC Enforcement Bureau requesting additional information, to which it responded on December 6, 2019. The Company is currently responding to an additional letter from the Enforcement Bureau dated January 22, 2020. As of the date of this Form 10-K, the FCC’s Enforcement Bureau has not asserted any claims or alleged any rule violations. The Company continues to work constructively with the FCC’s Enforcement Bureau to provide it the information it is seeking. At this time, we cannot predict the outcome of the FCC Enforcement Bureau’s inquiry or the impact of future rule changesit may have on our rural health care customers and revenues in lightbusiness, financial condition, results of these developments.operations or liquidity.

ConnectConnect America Fund

CAF Phase I

The FCC implementedTransformation Order also replaced the FCC’s previous set of explicit high-cost universal service support mechanisms for price cap carriers, like Alaska Communications, with the Connect America Fund in two primary phases. CAF Phase I froze our LECs’ high(“CAF”). While the previous mechanisms were focused on supporting a portion of the cost support, beginning in 2012, at the 2011 level, and requires us to use that support to provide broadband fixed services in high cost areas served by our price-cap LEC subsidiaries. In addition, in 2012 and 2013, the FCC made two rounds of additional CAF Phase I Incremental Support available to certain price-cap carriers serving the highest-cost wire centers, conditioned on the carriers deploying additional broadbandproviding voice telephone service, to unserved locations (or, in the case of Round 2 support, locations that are served by broadband, but that do not receive actual speeds of at least 3 Mbps/768 kbps) over the three-year period following the award of support. We completed our obligations associated with both CAF Phase I frozen support and Round 1 and Round 2 incremental support within the required three-year period.

CAF Phase II

CAF Phase II supplanted the CAF Phase I frozen support mechanism and requires recipientsshifted that focus to provideexpanding the availability of affordable broadband service to unserved locations throughout the designated coverage area by the end of a specified build-out period, as well as to meet interim milestone build-out obligations.

services. On October 31, 2016, the FCC released its order adoptingestablishing the requirements of CAF Phase II (“CAF II”) for price cap carriers in Alaska.Alaska, and specifically Alaska Communications, is the only price cap carrier in Alaska and, underAlaska. Under the CAF II order, we will receive approximately $19.7 million annually (the same amount we received as CAF I high cost frozen support) for the ten-year period starting January 1, 2016 and continuing through December 31, 2025. To receive this support, we committed2025, subject to provide voice andexplicit broadband Internet access service to approximately 31,500 locations in census blocks that are unserved or only partially served by any unsubsidized competitor. These will include approximately 26,000 locations that did not previously have access to broadband Internet access service.

On December 28, 2017, Alaska Communications filed a notice with the FCC proposing to serve 4,762 unique geocoded locations (encompassing 6,056 unserved customer locations because some are in multi-unit buildings) in partially-served census blocks to partially fulfill this requirement. On March 27, 2018, GCI filed a challenge at the FCC, asserting that it serves 3,099 of these locations, and we filed a response, disputing that assertion. On September 28, 2018, the FCC granted our request with respect to 1,713 unique geocoded locations, which will assist us in meeting our CAF Phase II deployment obligation.

In addition, on June 21, 2018, we filed a supplemental notice with the FCC proposing to serve an additional 3,253 unique geocoded locations (encompassing 4,691 unserved customer locations) in partially-served census blocks, again to partially fulfill our CAF Phase II deployment obligation. On September 4, 2018, GCI filed a challenge at the FCC, asserting that it serves 2,604 of those 3,253 locations. The FCC has not yet ruled on this challenge. As with the initial list, if the FCC ultimately determines that we are not able to satisfy our CAF Phase II deployment obligation by serving some or all of those locations, it may be more difficult and costly to meet our CAF Phase II deployment requirements at other locations.

On April 26, 2018, the FCC released an Order denying our request to modify the conditions on our use of CAF Phase II high cost support. The CAF locations may include up to 2,714 unserved locations in census blocks deemed “low-cost” by the FCC, so long as we certify that the capital expenditure to serve each such location was at least $5,000.00. The FCC denied our request to reduce that minimum capital expenditure requirement to $2,577.79. As a result of this denial, we may find it more difficult to identify eligible service locations to meet our CAF Phase II deployment requirement.conditions.

We are continuing to work toward meeting our CAF Phase II obligations in a capital-efficient manner, including the potential to deliverdelivery of broadband Internet access services meeting CAF Phase II requirements using a fixed wireless platform.platform and DSL in some instances. On July 21, 2020, we announced that we now offer voice and broadband service meeting our CAF Phase II commitments to over 16,000 rural Alaskans. The Company is therefore more than half way to the total number required by December 31, 2025 under CAF Phase II.

Call Authentication

On December 30, 2019, Congress enacted the Telephone Robocall Abuse Criminal Enforcement and Deterrence (TRACED) Act. Among other things, the TRACED Act seeks to reduce the number of unwanted calls (“robocalls”) in which the calling party deceive the recipient by falsifying the Caller ID information to make it appear that the call is from someone the recipient knows or can trust. To do so, the TRACED Act directs the FCC to require all voice service providers to implement “STIR/SHAKEN” standards developed by the Internet Engineering Task Force (IETF) and the Alliance for Telecommunications Industry Solutions (ATIS) for authenticating and verifying caller ID information for calls carried in the IP portions of their networks, and implement an effective caller ID authentication framework in the non-IP portions of their networks. The law requires service providers to take these steps no later than 18 months from enactment.

On March 31, 2020, the FCC issued a Report and Order implementing this law by mandating that all voice service providers implement the STIR/SHAKEN framework in the Internet Protocol (IP) portions of their networks by June 30, 2021. In a related Notice of Proposed Rulemaking, the FCC sought comment on additional issues, including a potential extension of time for small providers that serve 100,000 or fewer voice service subscriber lines, which would include us. On October 1, 2020, the FCC released an Order granting small providers, as proposed, an extension of time to implement STIR/SHAKEN until June 30, 2023.

The FCC’s March 31, 2020 Notice of Proposed Rulemaking also sought comment on proposals for implementing the law with respect to “intermediate” providers of voice service, which, with respect to a call, is a provider that carries that call at any point, but neither originates nor terminates it. The FCC’s October 1, 2020 Order requires us, by June 30, 2021, in our role as an intermediate provider, to implement the STIR/SHAKEN authentication framework in the IP portions of our network, in general so that IP calls retain caller ID authentication information throughout the entire call path. Specifically, with certain exceptions, we must be able to (a) pass any authenticated caller identification information received with a SIP call, to the subsequent provider; and (b) authenticate caller identification information for all calls we receive for which the caller identification information has not already been authenticated, if we will exchange the call with another provider using SIP. We are currently in the process of implementing these requirements.

On July 17, 2020, the FCC released a further Report and Order concerning the blocking of illegal and unwanted robocalls before they reach consumers. To encourage the blocking of scam robocalls and maliciously spoofed telemarketing campaigns under the TRACED Act, the FCC adopted two safe harbors from liability for the unintended or inadvertent blocking of wanted calls. The first safe harbor protects phone companies from liability that use reasonable analytics, including caller ID authentication information, to identify and block illegal or unwanted calls. The second safe harbor protects providers that block call traffic from bad actor upstream voice service providers that pass illegal or unwanted calls along to other providers, when those upstream providers have been notified but fail to take action to stop these calls. The FCC has announced that these rules took effect on October 14, 2020.

Network Equipment

On March 12, 2020, the Secure and Trusted Communications Networks Act of 2019 was signed into law, prohibiting the use of federal universal service funds to obtain communications equipment or services from a company that poses a national security risk to U.S. communications networks. In addition, under the law, each communications provider must submit an annual report to the FCC regarding whether it has purchased, rented, leased, or otherwise obtained any prohibited equipment and, if so, provide a detailed justification for such action. Previously, in November 2019, the FCC preliminarily designated Huawei and ZTE as companies that pose such risks. Currently, Alaska Communications believes that little or no equipment from those manufacturers is present in our network. On July 16, 2020, the FCC adopted a Second Further Notice of Proposed Rulemaking, seeking comment on additional questions concerning the implementation of that Act.

National Suicide Prevention Lifeline

On July 16, 2020, the FCC adopted a Report and Order designating the three-digit code “988” as the National Suicide Prevention Lifeline, and directed all service providers to enable use of that code to reach suicide prevention and crisis intervention services no later than July 16, 2022. There are 87 area codes across the country, including the “907” area code used throughout Alaska, where local calls may be dialed using seven digits, and where “988” is used as a three-digit telephone exchange prefix. To ensure that calls are not erroneously routed to the National Suicide Prevention Hotline when a user intends to dial a seven-digit call starting with “988,” the FCC required all 87 of the affected area codes to transition to ten-digit dialing for all calls during the transition period. As a result of these changes, Alaska Communications will need to upgrade and reprogram its switches throughout the state, and assist with consumer education efforts with respect to these new dialing patterns. We are unable to predict with certainty that it will be possible to implement all of the necessary changes within the time required, or the effect of these changes on our business expenses and results.

Lifeline

Revenue generated from our lifeline customers representedrepresents less than 1% of our total revenue for each of the twelve-month periods ended December 31, 2018 and 2017.revenue. The FCC’s Lifeline support mechanism today subsidizes the cost of voice services for low-income consumers, as well as broadband in CAF II locations.

The Lifeline mechanismConsolidated Appropriations Act, 2021 appropriated $3.2 billion to create the “Emergency Broadband Connectivity Fund,” and directed the FCC to use that fund to establish a new “Emergency Broadband Benefit Program” (“EBBP”). The EBBP will provide eligible low-income consumers and students with a monthly subsidy for the purchase of broadband Internet access service from service providers that elect to participate in the program. While the monthly subsidy is $50 in most of the nation, the EBBP will provide $75 monthly throughout the state of Alaska, which is encompassed within the statute’s definition of “Tribal lands.” On Jan. 4, 2021, the FCC issued a Public Notice seeking comment on various implementation questions related to the EBBP, including the process by which service providers will formally elect to participate in the program and designate the broadband offerings that are eligible for the subsidy. While we cannot predict with certainty until after the FCC adopts final rules for the EBBP, we are carefully examining the benefits this new program may offer for Alaska.

E-Rate

The Company has provided telecommunications services, broadband Internet access services, and internal connections supported by the FCC’s Schools and Libraries Universal Service Support Mechanism (“E-rate”) for many years. E-rate support provides an invaluable means by which elementary and secondary schools in Alaska can afford those services, particularly in rural and remote, high-cost areas. Historically, E-rate has primarily supported services that connect eligible school buildings. On January 26, 2021, the Schools, Health & Libraries Broadband (“SHLB”) Coalition filed a higher level ofPetition seeking a declaratory ruling and associated rule waivers to permit schools and libraries temporarily to receive E-rate support for low-income consumers living on Tribal Lands, including“off-campus” services used to support remote learning for students that lack reliable home broadband. If the entire state of Alaska. Under reforms adopted inFCC were to grant the FCC’s January 2012 Lifeline Order, we are required to recertify each ofrelief that the Petition seeks, it could increase demand for our Lifeline customers annually to verify continued eligibility for Lifeline service. In part as a result of those efforts, our Lifeline enrollment decreased, and we will face continuing compliance obligations with respect to Lifeline customers served by our LEC subsidiaries. There are a number of matters under consideration thathome broadband services, but also could increase the Company’s regulatoryadministrative burden and compliance obligations and customer administrative responsibilities, and impact revenue received from regulatory funding sources.

Lifeline Reform

On April 27, 2016, the FCC released the text of new rules making stand-alone broadband service, as well as bundled voice and data service packages, eligible for Lifeline support, in additionrisks associated with those services. We are unable to traditional voice service. After receiving approval from the Office of Management and Budget, the rules making Lifeline a supported service took effect on December 2, 2016. The Company’s ILECs have obtained forbearance from the FCC obligation to provide Lifeline broadband in those locations not funded by CAF Phase II.

In the same order, the FCC established a process for creating a national Lifeline eligibility verifier to ensure that all Lifeline subscribers meet the program’s eligibility requirements, which is becoming operational in stages over the next several years. The national Lifeline eligibility verifier launched in Alaska in February 2019. While it is too soon to assesspredict the impact of this change, the availability ofPetition, if any, at this service could potentially reduce our costs of compliance with Lifeline eligibility certification and recertification rules.time.

Satellite ServicesServices

On February 16, 2018, the FCC granted our application for a license to operate a network of C-band satellite earth stations to be used to serve our customers that cannot be reached by terrestrial middle mile facilities. Under that license, we are authorized to use up to 72 MHz of C-band spectrum on Eutelsat’s satellite, E115WB, for a term of 15 years. In June 2018, the FCC granted our application to expand thatWe have steadily expanded this network to include new customerserve over 40 sites, primarily in rural and we have since requested authority to doubleremote areas of the amount of spectrum we are authorized to use, up to 144 MHz, and serve additional sites.state. We expect this arrangementapproach to provide us with greater predictability and stability in the availability and cost of long-haul transport connectivity to our customers that must be served by satellite.

Our C-band satellite earth stations use the 3.7 - 4.2 GHz band to receive downlink transmissions from geostationary satellites. On April 19, 2018, the Wireless Telecommunications, International, and Public Safety Bureaus ofMarch 3, 2020, the FCC announced an immediate, temporary freeze onreleased a Report and Order clearing the filinglower portion of new or modification applications for fixed-satellite service earth station licenses, receive-only earth station registrations, and fixed microwave licensesthat band (3.7-4.0 GHz) of virtually all satellite services in the 3.7 - 4.2 GHz portion48 contiguous United States and the District of the C-band spectrum, in order to preserve the current landscape of authorized operations in that band while the Commission continues to examine opportunities to permit expanded terrestrialColumbia. The Report and Order allows continued use of that bandspectrum for mobile broadbandsatellite services in other areas of the nation, including Alaska, essentially preserving the status quo. As a result, the FCC’s decision has little to no effect on our authority to continue to offer C-band satellite communications services to our Alaska customers.

Acquisition by ATN International, Inc.

On January 20, 2021, we filed a series of applications seeking FCC approval for the transfer of control of our licenses and additional fixed services. On July 13, 2018,authorizations to ATN International, Inc. We have discussed those applications with the FCC staff, and, on February 16, 2021, the FCC issued a Public Notice of Proposed Rulemaking seeking public comment on options for expanding terrestrial use of the 3.7 - 4.2 GHz band for “5G” services. In response, we have filed comments and reply comments advocating for continued access to this spectrum for satellite downlink operations in Alaska. We are unable to predict the outcome of this proceeding. If the FCC adopts rules that limit our ability to register additional satellite earth stations in this band, or expands terrestrial transmissions in the 3.7 - 4.2 GHz band, it may become more difficult or costly for us to use this band, or necessitate relocation of our services to alternative spectrum bands.

In October 2018, the FCC also opened a proceeding to examine possible new terrestrial uses of the 6 GHz band, including the 5.925-6.425 GHz spectrum used for C-band satellite uplink transmissions originating from terrestrial earth stations to geostationary satellites in orbit. Because C-band earth stations are transmitting in that band, not receiving, we expect any increase in terrestrial use of the 6 GHz band to have a less severe impact on our satellite C-band network than would use of the 3.7-4.2 GHz receive band. Nevertheless, we are unable at this time to predict the outcome of these proceedings, or to assess any potential future impact on our C-band satellite services.

Other Federal Regulations

In August 2015, the FCC adopted new rules to govern aspects of the ongoing transition from legacy copper transmission facilities to new IP-based networks. In general, those rules impose an additional 180-day advance disclosure requirement when incumbent local exchange carriers, such as the Company, plan to retire copper transmission lines connecting to our customers’ premises or replace them, in whole or in part, with fiber optic cable.

In November 2017, the FCC narrowed the scope of the copper retirement rules, simplified the notice process, shortened the required notice period from 180 days to 90 days, and adopted an expedited 15-day notice period applicable where the affected copper facilities are no longer being used to provide service. In comparison to the 2015 rules, we expect these revisions to make it easier for us to comply with the regulatory processes associated with network upgrades from copper to fiber facilities, but we have found it necessary to request waivers of the FCC’s 90-day notice period when necessary to conform to the timing of pole-removal activities announced by electric power utilities that own the poles on which our copper facilities are located. In its November 2017 Order, the FCC also streamlined its rules governing the discontinuance of legacy low-speed voice and data services of less than 1.544 Mbps, which will also facilitate the transition to modern network technologies and services.

In August 2015, with respect to residential, fixed, facilities-based voice services that do not receive electrical power through the telephone line (such as fiber-to-the-home services), the FCC adopted rules requiring us to offer our customers the option to purchase equipment providing eight hours of standby backup power. Effective as of February 13, 2019, the FCC’s rules require us to offer these customers the option to purchase equipment that provides 24 hours of standby backup power.proposed transaction.

State Regulation

Telecommunication companiesProviders of intrastate telecommunication services in Alaska are required to obtain certificates of public convenience and necessity from the RCA prior to operating as a public utility in Alaska.RCA. In addition, RCA approval is required if an entity acquires a controlling interest in any of our certificated subsidiaries, acquires a controlling interest in another intrastate utility or discontinues an intrastate service. The RCA also regulatesOn August 29, 2019, Governor Dunleavy signed into law new legislation that eliminated the requirement for Alaska Communications to maintain RCA-filed tariffs for rates, terms, and conditions for legacy phone and networking services in Alaska, However, rates, terms, and conditions for basic residential local intrastate accesstelephone service must, under the bill, be uniform within each study area. Alaska Communications implemented changes to tariffs, terms and intrastate long distance services, supervises the administration of theconditions and other service related policies effective November 27, 2019.

Alaska Universal Service Fund

The Alaska Universal Service Fund (“AUSF”) and decides on Eligible Telecommunications Carrier (“ETC”) status for purposes of qualifying for federal USF. The Communications Act specifies that resale and UNE rates are to be negotiated among the parties subject to the approval or arbitration of the RCA. Our ILECs have entered into interconnection agreements with a number of entities.

The FCC’s March 2015 order reclassifying broadband Internet access service as a telecommunications service also sought to limit the authority of state regulators over the service by finding that it is jurisdictionally interstate in nature. The FCC prohibited state regulators from imposing new state universal service contribution obligations on broadband Internet access services, and announced its intent to preempt any attempts by state regulators to impose entry certification restrictions, rate regulation, or tariff filing requirements in connection with broadband Internet access service.

Alaska Universal Service Fund 

The AUSF complements the federal Universal Service Fund, but is focused on obligations to meet intrastate service obligations. The RCA has opened an “information docket” to evaluate and scope a comprehensive AUSF reform rulemaking that might include consideration of the Fund’s continued need. The RCA also opened a rulemaking to review the regulations specific to AUSF shortfalls. A final decision in that matter was issued in late December, 2017. These rules were transmitted to the Lt. Governor for signature and became effective April, 2018. They eliminate the hierarchy of shortfall payments except for Lifeline and administrative operating expenses.

In January 2018, the RCA opened a rulemaking to repeal the AUSF effective July 31, 2019 and sought comments and reply comments. The Alaska Telephone Association and its members filed a plan to cap the fund and distributions. AT&T, GCI, and Alaska Communications also filed comments and reply comments. A hearing was scheduled in April. A final order was issued by the RCA on October 24, 2018 withstopped short of repealing the AUSF but made changes to the distribution to be effective January 1, 2019, and capped contributions at 10% of intrastate telecommunications revenues. These changes resulted in shortfalls to carriers beginning in 2019. The RCA has announced its intent to open a new docket to consider further AUSF reforms in June 2021.

Prior to changes to the AUSF distribution, AUSF supported a portion of certain higher cost carriers’ switching costs, the costs of Lifeline service (which supports rates of low-income customers), the Carrier of Last Resort (“COLR”), Carrier Common Line (“CCL”) support program and other costs associated with regulated service. These funding mechanisms have been eliminated and replaced with a new funding mechanism called Essential Network Support (“ENS”). In addition, the AUSF surcharge has been capped at 10%.Telecommunications Modernization Act

In response to the FCC’s order eliminating Lifeline qualifying programs approved by state regulatory commissions, the Alaskan telecommunications industry has proposed a waiver of the state qualifying programs to align the state and federal qualifying programs. The RCA granted that waiver prior tolate December 2, 2016 when the new rules went into effect. In August 2017,2019, the RCA opened a docket, R-17-002, on LifelineR-19-002 to alignconsider the programs with the federal rules andAlaska Telephone Associations Petition to revise the certificationRCA’s regulation as a result of SB 83 or the Telecommunications Modernization Act. The comment and verification proceduresreply comment period ended February 3, 2020. The RCA continues to reflect revised federal procedures. Lifeline service providers have been operating under an RCA order that aligns some issues and companies made tariff filings to align their procedures. This rulemaking is somewhat ministerial in nature but may become moot depending on the outcomes of the AUSF docket R-18-001. Comments were submitted in September 2017. The regulation docket has a final decision deadline of August 25, 2019. consider this matter.

Other State Regulatory MattersAC Systems Group and ATN International, Inc. Joint Application

The RCA opened three dockets on July 27, 2016Docket U-21-003 to investigateconsider the continued needjoint application filed by ATN International, Inc. and Alaska Communications Systems Group, Inc. for COLR fundingATN International, Inc. to acquire an indirect controlling interest in competitive areas. Twothe ACS of Alaska, LLC, ACS of Anchorage, LLC, ACS of Fairbanks, LLC, ACS of the dockets investigating the continued need for COLR funding affect the FairbanksNorthland, LLC, ACS Long Distance, LLC, and Juneau markets. On May 24, 2017, theAlaska Fiber Star, LLC.  The RCA issued an order approvinga public notice seeking comments on the 2016 COLR filingapplication and has established a schedule for ACSF but denyingcompleting its review of the 2016 COLR filing for ACSAK and terminating its COLR status and related support. ACSAK petitioned for reconsideration which was denied, and onapplication by July 14, 2017 ACSAK filed a notice of appeal in the Anchorage Superior Court. ACSAK filed its appellant brief on March 1, 2018 simultaneously with MTA. Due to requests for extensions for extraordinary and compelling reasons, the RCA appellee brief was due on June 19, 2018 and ACSAK has an extension for its reply brief due on August 10, 2018. Oral arguments were originally scheduled for November 8, 2018 but were recently rescheduled for January 10, 2019.

The RCA denied ACSAK’s request for 2017 COLR filing and reinstatement of COLR status. The Company filed for 2017 COLR funding for ACSN and ACSF. The RCA suspended these filings on July 31, 2017. Adjudication of these matters was dismissed when the RCA opened the docket to repeal AUSF. AUSF COLR support for these two markets will continue subject to the RCA’s final decision. ACSF, ACSN, and ACSAK filed for 2018 COLR funding on June 18, 2018 and received notification of approval from the RCA on July 27, 2018.2021.

Website Access to Reports

Our investor relations website Internet address is www.alsk.com. The information on our website is not incorporated by reference in this annual report on Form 10-K. We make available, free of charge, on our investor relations website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports are available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

Code of Ethics

We post our code of business conduct and ethics entitled “Code of Ethics”, on our investor website at www.alsk.com. Our code of business conduct and ethics complies with Item 406 of SEC Regulation S-K and the rules of Nasdaq. We intend to disclose any changes to the code that affect the provisions required by Item 406 of Regulation S-K and any waivers of the code of ethics for our executive officers, senior financial officers or directors, on that website.

Additional Business Information

See “Item 1A, Risk Factors,” “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 320 “Joint Venture” and Note 1823 “Business Segments” in the Notes to Consolidated Financial Statements for additional information, which is incorporated herein by reference.

Item 1A. Risk Factors

We face a variety of risks that may affect our business, financial condition and results of operations, some of which are beyond our control. The risks described below are not the only ones we face and should be considered in addition to the other cautionary statements and risks described elsewhere and the other information contained in this report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. Additional risks and uncertainties not known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed.

Risks Relating to the Merger Agreement with ATN International, Inc. and Freedom 3 Capital, LLC

There are material uncertainties and risks associated with the Merger Agreement.

On December 31, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Project 8 Buyer, LLC (“Parent”) and Project 8 Merger Sub (“Merger Sub”), newly formed entities owned by ATN International, Inc. and Freedom 3 Capital, LLC. Pursuant to the Merger Agreement, the Company will continue as the surviving corporation and a wholly-owned subsidiary of Parent. Below are material uncertainties and risks associated with the Merger Agreement and proposed Merger. If any of the risks develop into actual events, then the Company’s business, financial condition, results and ongoing operations, share price or prospects could be adversely affected.

The proposed Merger may not be completed in a timely manner or at all.

Consummation of the Merger is subject to certain closing conditions, including, without limitation, (i) approval of the Merger by the Company’s stockholders, (ii) absence of certain legal impediments, (iii) the expiration or termination of the required waiting period under the HSR Act and (iv) receipt of regulatory approvals from the FCC (and, if required as a precondition for FCC approval, Team Telecom Committee) and from the RCA. The waiting period under the HSR Act expired on February 16, 2021 at 11:59 p.m. Eastern Time.  Filings with each of the FCC and the RCA were made on January 20, 2021. The RCA gave public notice of the application and requested any public comments by February 12, 2021. On February 8, 2021, the RCA issued an order stating that it had determined that Parent’s application to acquire the Company was complete as filed on January 20, 2021. The order states that the RCA will issue a final order no later than July 19, 2021. The Company’s stockholders approved the Merger at a special meeting of stockholders held on March 12, 2021.

The Merger Agreement may require the Company and Parent to comply with conditions imposed by regulatory entities, and neither the Company nor Parent is required to take certain actions as described in the Merger Agreement in connection with satisfying such conditions. There can be no assurance that regulators will not impose conditions, terms, obligation or restrictions and that such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Merger. There can be no assurance that all the required approvals and clearances will be obtained or will be obtained on a timely basis. In addition, certain other factors such as the change in administrative policy as a result of a new federal administration and the COVID-19 pandemic may also result in delays to the receipt of certain regulatory approvals required to consummate the Merger.

The obligation of each of the Company, Parent and Merger Sub to consummate the Merger is also conditioned on, subject to certain materiality and other qualifiers, the accuracy of the representations and warranties of the other party and the performance or compliance in all material respects by the other party of all its covenants and obligations under the Merger Agreement. While the Merger Agreement is not subject to any financing condition, if Parent or Merger Sub fails to obtain financing, the Merger may not be consummated. Each of the Company and Parent has the right to terminate the Merger Agreement under certain circumstances, as described in the Merger Agreement.

Failure to complete the Merger could negatively impact the Company’s business, financial results and stock price.

If the Merger is delayed or not completed, the Company’s ongoing businesses may be adversely affected and will be subject to several risks and consequences, including the following:

The Company has incurred, and will incur, substantial direct and indirect costs as a result of the Merger.

The Company has incurred, and will continue to incur, significant costs, expenses and fees for professional advisors and other transaction costs in connection with the Merger, and some of these fees and costs are payable by the Company regardless of whether the Merger is consummated.

While the Merger Agreement is in effect, the Company is subject to restrictions on its business activities.

While the Merger Agreement is in effect, the Company is subject to restrictions on its business activities, generally requiring it to conduct its business in the ordinary course, consistent with past practice, and subjecting it to a variety of specified limitations absent Parent’s prior consent. These limitations include, among other things, restrictions on the Company’s ability to merge or, other than in the ordinary course of business substantially consistent with past practice, enter into a strategic alliance or similar legal partnership; subject to certain exceptions increase the salary, wages, benefits, bonuses or other cash compensation payable the Company’s employees, officers, directors or independent contractors; hire, engage or terminate the employment or engagement of (other than for cause, as determined by the Company) any employee, officer, director, or independent contractor whose annual base cash compensation exceeds $250; acquire other businesses and assets with a purchase price of $500 individually or $2,000 in the aggregate (other than inventory, supplies, intellectual property assets, raw materials, equipment or similar assets in the ordinary course of business and in amounts substantially consistent with past practice); sell, lease, pledge, transfer, abandon, subject to any lien or otherwise, dispose of its assets or properties in each case having a value in excess of $500 individually or $5,000 in the aggregate (except in the ordinary course of the Company’s or its subsidiaries’ business substantially consistent with past practice), institute, settle or agree to settle any proceedings, subject to certain exceptions; repurchase or issue securities, pay dividends, make capital expenditures above certain amounts; enter into any new line of business; voluntarily terminate, amend or fail to renew certain communications licenses; enter into any exclusivity or non-competition agreement; take certain actions relating to intellectual property; amend its organizational documents; and incur indebtedness. These restrictions could prevent the Company from pursuing strategic business opportunities, taking actions with respect to its business that it may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially and adversely affect its business, results of operations and financial condition.

Shareholder Litigation

Between January 27, 2021 and February 17, 2021, twelve lawsuits were filed by stockholders of the Company in connection with the Merger Agreement. These shareholder lawsuits, and any additional litigation that could be filed, may prevent or delay the closing of the Merger, and/or result in significant costs to the Company in connection with defense, indemnification, and liability.

On January 27, 2021, the first such lawsuit was filed in the United States District Court for the Southern District of New York, captioned Stein v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-00760, against the Company, members of the Board, ATN, F3C IV, F3C, Parent and Merger Sub; this case was voluntarily dismissed by the plaintiff on March 15, 2021. On February 1, 2021, three additional such lawsuits were filed against the Company and members of the Board: (i) Zilch v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-00890, filed in the United States District Court for the Southern District of New York; this case was voluntarily dismissed by the plaintiff on March 15, 2021; (ii) Coraci v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-00887, filed in the United States District Court for the Southern District of New York; this case was voluntarily dismissed by the plaintiff on March 15, 2021; and (iii) Coulibaly v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-00131, filed in the United States District Court for the District of Delaware. On February 2, 2021, the fifth such lawsuit against the Company and members of Board was filed in the United States District Court for the Eastern District of Pennsylvania, captioned Palkon v. Alaska Communications Systems Group, Inc. On February 4, 2021, the sixth such lawsuit was filed against the Company and members of the Board in the United States District Court for the Southern District of New York, captioned Raul v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-00988. On February 6, 2021, the seventh such lawsuit was filed against the Company and members of the Board in the United States District Court for the Eastern District of New York, captioned Holodnak v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-00656 (this case was voluntarily dismissed by the plaintiff on March 8, 2021). On February 8, 2021, the eighth such lawsuit was filed against the Company and members of the Board in the United States District Court for the Southern District of New York, captioned Cazort v. Alaska Communications Systems Group, Inc., et al., Case No. 1:21-cv-1139. On February 11, 2021, the ninth such lawsuit was filed against the Company and members of the Board in the United States District Court for the Southern District of New York, captioned Bergquist v. Alaska Communications Group, Inc., et al., Case No. 1:21-cv-01226; this case was voluntarily dismissed by the plaintiff on March 15, 2021.  On February 17, 2021, three additional such lawsuits were filed against the Company and members of the Board:  (i) Ryan v. Alaska Communications Group, Inc., et al., Case No. 1:21-cv-00222, filed in the United States District Court for the District of Delaware; (ii) Flood v. Alaska Communications Group, Inc., et al., Case No. 1:21-cv-00224, filed in the United States District Court for the District of Delaware; and (iii) Jenkins v. Alaska Communications Group, Inc., et al., Case No. 1:21-cv-01409, filed in the United States District Court for the Southern District of New York.   On February 19, 2021, the Company and members of its Board filed a Motion for Transfer of Actions with the United States Judicial Panel on Multidistrict Litigation, requesting to centralize the twelve then-pending actions before one court.

In general, these lawsuits assert that the defendants failed to make adequate disclosures in the Company’s preliminary and/or definitive proxy statement, filed with the SEC on January 25, 2021 and February 9, 2021, respectively, regarding the Merger Agreement. The Company believes that these allegations are without merit.

Risks Relating to Our Industry

Competition

The telecommunications industry in Alaska is competitive and creates pressure on our pricing and customer retention efforts.efforts.

Strong competitors make it more difficult for us to attract and retain customers, which could result in lower revenue, cash flow from operating activities and Adjusted Free Cash Flow.

Our principal facilities-based competitor for voice and broadband services is GCI, who is also the dominant cable television provider in Alaska. In the business and wholesale market, GCI holds a dominant position through its extensive fiber optic, microwave and satellite based middle mile network as well as its undersea fiber cable network, where it owns and operates two of the four existing undersea fiber optic cables connecting Alaska to the contiguous states. In the consumer market, GCI bundles its cable video services with voice, broadband and mobile wireless services. We do not offerBecause the video service and mobile wireless and thus,services we offer are limited, we are unable to offer competing bundles.

GCI continues to expand its statewide reach, including through its Terra Southwest project which is funded with federal subsidies, consisting of grants from the USDA Rural Utilities Service and federal low-interest loans. This subsidy gives GCI a substantial competitive advantage in the markets served by Terra Southwest, and GCI receives substantial additional funding for services offered over this facility from the federal E-Rate and Rural Health Care universal service support mechanisms. GCI has indicated it intends to replicate this government subsidized model in other markets in Alaska, which will create monopoly-type conditions in these markets which are subject to minimal regulatory oversight.

With a long history of operating in Alaska, AT&T has a terrestrial long-haul network in Alaska where the focus is on serving certain national customers. AT&T’s primary mass market focus in Alaska is providing mobile wireless services.

As we compete more extensively in the managed IT services business, we are likely to face new competition, both local and national. An example of this new competition is World Wide Technologies, a large equipment value add reseller. More recently we have seen a smaller Rural Local Exchange Carrier (RLEC), Matanuska Telephone Association (MTA), that operates predominantly in the Wasilla and Palmer communities north of Anchorage, acquire a data center and IT services provider called AlasConnect. With this acquisition, we now see MTA as a competitor for managed IT services particularly in our Anchorage and Fairbanks markets. There are many smallerother small firms that compete for IT business in Alaska. WeOverall, however, we believe that competition for managed IT services is fragmented in Alaska with no clear or dominant provider.

We may be unable to negotiate reasonable rates for interconnection with other voice providers in certain rural markets.

As our wholesale voice providers review their legacy service offerings, reduce their service availability, and increase their pricing, we may be unable to find replacement services and providers at reasonable costs.

Diversification of Our Sources of Revenue

We may not be able to adequately diversify our revenue stream which could create risk to our ability to generate cash and bottom-line growth.

The telecommunications industry faces frequent and rapid changes in products and services provided to customers. If we do not adequately investigate and assess the expansion of our existing sources of revenue, including new products and services and strategic acquisition opportunities, our business, financial position, results of operations and liquidity may be impacted.

Our Cost Structure

We may not be able to maintainmaintain our cost structurewhich would create risk to our ability to generate bottom-line growth.growth.

As a smaller, focused broadband and managed IT services company, maintaining a lower cost structure is key to generating cash flow from operating activities. If we fail to maintain this cost structure, our financial conditionposition, results of operations and liquidity will be impacted.

Technological Advancements and Changes in Telecommunications Standards

If we do not adapt to rapid technological advancements and changes in telecommunications standards, our ability to compete could be strained, and as a result, we would lose customers.

Our success will likely depend on our ability to adapt and fund the rapid technological changes in our industry. Our failure to adopt a new technology or our choice of one technology over another may have an adverse effect on our ability to compete or meet the demands of our customers. Technological changes could, among other things, reduce the barriers to entry facing our competitors providing local service in our service areas. The pace of technology change and our ability to deploy new technologies may be constrained by insufficient capital and/or the need to generate sufficient cash to make interest payments on our debt.

New products and services may arise out of technological developments and our inability to keep pace with these developments may reduce the attractiveness of our services. Some of our competitors may have greater resources to respond to changing technology than we do. If we fail to adapt successfully to technological changes or fail to obtain access to new technologies, we could lose customers and be unable to attract new customers and/or sell new services to our existing customers. We may be unable to successfully deliver new products and services, and we may not generate anticipated revenues from such products or services.

To be competitive we need to maintain an on-going investment program to continuously upgrade our access network. We define the access network as the connection from the end user location – either a home or a business – to the first aggregation point in the network. The connection can be copper or fiber and the aggregation point is typically a central office or remote serving node. The access network determines the speeds we are able to deliver to our end customer. We may not be able to maintain the level of investment needed for long term competitiveness in offering broadband speeds to all segments of our market.

As we seek to grow as the leading Cloud Enabler for businesses in Alaska, we will have to partner with various IT technology and cloud services providers. Technology trends and developments in thisthe area of IT and cloud services can be far more disruptive and tend to change in shorter cycles compared to telecommunications technologies. Our ability to invest in the training, certifications, and skills required to develop these partnerships will be important in determining our success in this area of managed IT services.

Our limited access to middle mile infrastructure limits our ability to compete in certain geographic and customer segments in Alaska.

We define middle mile as the connection between the first aggregation point into a local community and the interconnection point to the internet or switch which connects the community to the outside world. These are typically high capacity connections and can span hundreds of miles in the case of Alaska. It is unlikely that we will have the capital needed for middle mile investments, and GCI controls significant elements of the middle mile network in Alaska, and through its government funded programs is creating monopoly conditions in certain areas of the state. This limits our ability to compete in certainthose markets.

Risks Relating to Our Debt

Our debt could adversely affect our financial health, financing options and liquidity position. Due to uncertainty in the capital markets, we may be unable to retire or refinance our long-term debt when it becomes due, or if we are able to refinance it, we may not be able to do so with attractive interest rates or terms.

2019 Senior Credit Facility

On January 15, 2019, we entered into an amended and restated credit facility consisting of an Initial Term A Facilitya term facility in the amount of $180 million, a Revolving Facilityrevolving facility in an amount not to exceed $20 million and a Delayed-Draw Term A Facilitydelayed-draw term facility in an amount not to exceed $25 million (together the “2019 Senior Credit Facility”). The 2019 Senior Credit Facility also provides for Incremental Term A Loansincremental term loans up to an aggregate principal amount of the greater of $60 million andor trailing twelve monthtwelve-month EBITDA as defined. On January 15, 2019, proceeds from(as defined in the Initial Term A Facility of $180 million were used to repay in full the outstanding principal balance of the Term A-1 Facility and Term A-2 Facility under the Company’s 2017 Senior Credit Facility totaling $171.8 million, plus accrued and unpaid interest, pay fees and expenses associated with the Agreement and for general corporate purposes. The 2017 Senior Credit Facility was terminated on January 15, 2019.facility).

Principal payments on the Initial Term A Facility, Delayed-Draw A Facility and any amounts outstanding under the Incremental Term A Loans areterm facilities were due commencing in the third quarter of 2019 as follows: the third quarter of 2019 through the second quarter of 2020 – 0.625%$1,125 per quarter; the third quarter of 2020 through the second quarter of 2022 – 1.25%$2,250 per quarter; the third quarter of 2022 through the second quarter of 2023 – 1.875%$3,375 per quarter; and the third quarter of 2023 through the fourth quarter of 2023 – 2.5%$4,500 per quarter. The remaining outstanding principal balance, including any amounts outstanding under the Revolving Facility,revolving facility, is due on January 15, 2024. This schedule is subject to mandatory prepayments under certain conditions, including the Company’s generation of excess cash flow as defined in the facility.

The obligations under the 2019 Senior Credit Facility are secured by substantially all of the personal property and real property of the Company, subject to certain agreed exceptions.Company.

The 2019 Senior Credit Facility contains customary representations, warranties and covenants, including covenants limiting the incurrence of debt, the payment of dividends and repurchase of the Company’s common stock.

The 2019 Senior Credit Facility provides for events of default customary for credit facilities of this type, including non-payment defaults on other debt, misrepresentation, breach of covenants, representations and warranties, change of control, and insolvency and bankruptcy.

Our debt also exposes us to adverse changes in interest rates. As a component of our cash flow hedging strategy and as required under the terms of the 2019 Senior Credit Facility, we hold a pay-fixed, receive-floating interest rate swapswaps in the total initial notional amount of $90.0$135.0 million at 6.49425%6.1735%, inclusive of a 5.0%4.5% LIBOR spread, through June 2019,2022. The anticipated elimination of LIBOR and will obtain another hedging instrument to be effective subsequent to that date.replacement with an alternative base rate could negatively impact our cost of borrowing.

SeeAdditional information is in the “First Amended and Restated Credit Agreement, dated as of January 15, 2019, by and among Alaska Communications, as the borrower, the Company and certain of its direct and indirect subsidiaries, as guarantors, ING Capital LLC, as administrative agent, and the lenders party thereto,” filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 22, 2019, and Note 21 “Subsequent Events” in the Notes to Consolidated Financial Statements, which areis incorporated herein by reference, for additional information.

Continuing global, national, and state fiscal insecurity, as well as uncertainty regarding our future performance adds refinancing risk to the Company.reference.

We are also subject to credit risk related to our counterparties on the swaps and to interest rate fluctuations on interest generated by our debt in excess of the notional term loans referenced above.

Risks Related to our Business

Rural Health Care Universal Service Support Program

We may not receive some of the subsidies for Rural Health Care for which our customers have applied and amounts previously received may be challenged by the FCC.challenged.

In response to the demand for support under the Rural Health Care Universal Service Support Program exceeding the available budget for Funding Year 2016 (July 1, 2016 – June 30, 2017) and Funding Year 2017 (July 1, 2017 – June 30, 2018), the FCC raised the annual program funding cap from $400 million to $571 million. The revised cap was initially applied to Funding Year 2017 to fully fund eligible funding requests for that year. The FCC also provided annual adjustments to the cap to reflect inflation and established a process to carry forward unused funds from past funding years, effete with Funding Year 2018.

The increased demand also prompted USAC, which administers the program, to engage in substantially more rigorous reviews of rural health care support, raising compliance costs and delaying issuance of support payments. In connection with that review, the Company has received certain inquiries and requests for information from USAC, which administers the program, in connection with both current funding requests and, beginning with a letter dated June 2, 2017 from USAC’s auditors, prior period support payments. After the Company responded to the initial request for information about support payments prior to 2017, USAC’s auditors asked the Company to comment on some preliminary audit findings, and the Company responded with a letter dated December 21, 2018. On February 24, 2020, the Company received a draft audit report from USAC that is described more fully in Note 21 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements. The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. The Company has engaged in dialogue with USAC’s auditors and looks forward to resolving all of USAC’s concerns. At this time, the Company is unable to predict the outcome of this audit. Similar audits of other companies have resulted in the FCC recouping certain previously awarded support funds, which could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The Company also received a Letter of Inquiry on March 18, 2018, from the FCC Enforcement Bureau. Bureau requesting historical information regarding the Company’s participation in the FCC’s Rural Health Care program. In response, the Company produced voluminous records throughout 2018 and into the first quarter of 2019. On November 5, 2019, the Company received another letter from the FCC Enforcement Bureau requesting additional information, to which it responded on December 6, 2019. The Company is currently responding to an additional letter from the Enforcement Bureau dated January 22, 2020. As of the date of this Form 10-K, the FCC’s Enforcement Bureau has not asserted any claims or alleged any rule violations. The Company continues to work constructively with the FCC’s Enforcement Bureau to provide it the information it is seeking. At this time, we cannot predict the outcome of the FCC Enforcement Bureau’s inquiry or the impact it may have on our business, financial condition, results of operations or liquidity.

This rising uncertaintyUncertainty and unpredictability in the Rural Health Care program negatively impacted the Company’s revenueCompany in 2017 and 2018,through 2020 as revenue realized through the program declined in each of those years, and may have a negative impact on future revenue and demand for our services from rural healthcare providers.

Also, we may be subject to further investigation foraudits, inquiries or investigations of the Company’s compliance with FCC and USAC rules regulations, and practicesgoverning the Rural Healthcare Program for prior periods. Such investigationsWe are unable to predict the duration, scope, or outcome of other companiesany audit, inquiry or investigation into these matters, and any remedial action taken against the Company could have resulted in refunding certain previously awarded funds, as well as finesa material adverse effect on our business, financial position, results of operations, and penalties.liquidity.

Access and High Cost Support Revenue

Revenues from access charges will continue to decline and revenue from various regulated support mechanisms is subject to rule changes at the FCC and the RCA.RCA.

We received approximately 2.0%1.4% and 2.2%1.7% of our operating revenues for the years ended December 31, 20182020 and 2017,2019, respectively, from access charges. The amount of revenue that we receive from these access charges is calculated in accordance with requirements set by the FCC and the RCA. Any change in these requirements may reduce our revenues and earnings. Access charges have consistently decreased in past years and we expect this trend to continue due to declines in voice usagelegacy regulated products, changes in regulations, and migration to VoIP services which do not generate access revenue for us.

Interstate switchedSome access has been on a phase-out schedule for several years, and according to the schedule set forth by the FCC, it reached its final phase in July 2017 and was reduced to zero on July 1, 2018. Interstate switched access was a relatively small component of all access revenue, and modest declines are anticipated at this time for other components of interstate access revenue. Traditional intrastate access revenuescharges have already been reduced replaced in part by COLR support. Effective January 1, 2019, the RCA eliminated COLR support and adopted a new ENS mechanism that distributes a lower level of support.

Furthermore, the FCC has actively reviewed new mechanisms for inter-carrier compensation that will eliminate certain access charges entirely. Eliminationto zero. Further elimination of access chargesrevenue would have a material adverse effect on our revenue and earnings. Similarly, the RCA has adopted regulations modifying intrastate access charges that may reduce our revenue.

As a result of the CAF II order issued by the FCC in 2016, we currently expect our high cost support revenue to be relatively unchanged for the next seven years. Substantial changes are expected to be enacted by the FCC regarding our future high cost loop support funding and obligations thereunder. It is difficult to predict the future growth in this source of revenue as well as the future obligations that we will be required to accept that are tied to this funding.

Regulations

New governmental regulations may impose obligations on us to upgrade our existing technology or adopt new technology that may require additional capital and we may not be able to comply in a timely or economic manner with these new regulations.

Some of our markets are regulated and weWe cannot predict the extent to which the government will impose new unfunded mandates on us. Such mandates have included those related to emergency location, emergency “E-911” calling, law enforcement assistance and local number portability. Each of these government mandates has imposed new requirements for capital that we could not have predicted with any precision. Along with these obligations, the FCC has imposed deadlines for compliance with these mandates. We may not be able to provide services that comply with these or other regulatory mandates. Further, we cannot predict whether other mandates from the FCC or other regulatory authorities will occur in the future or the demands they may place on our capital expenditures. For more information on our regulatory environment and the risks it presents to us, see “Item 1, Business – Regulation”.

There is a risk that FCC Orders will materially impact our revenue.

The 2011 Transformation Order established a new framework for high cost universal service support that replaced existing support mechanisms that provide support to carriers, like us, that serve high-cost areas with new CAF support mechanisms and service obligations that are focused on broadband Internet access services. We recognized $19.7 million in federal high cost universal service payment revenues to support our wireline operations in high cost areas in each of the twelve months ended December 31, 20182020 and 2017.2019. The FCC released its CAF Phase II order, specific to the Company, on October 31, 2016. As a result, we currently expect our high cost support revenue to be relatively unchanged for the next five years. Substantial changes are expected to be enacted by the FCC regarding our high cost support funding after 2025, and there is uncertainty regarding the future level of revenue as well as the future obligations tied to this funding. If we fail to meet our obligations under the CAF Phase II order, our revenue, results of operations and liquidity may be impacted.

In addition, the FCC has imposed strict new compliance requirements governing enrollment of low-income subscribers in the FCC’s Lifeline program, which provides carriers like us with USF support to reduce the cost of wireline and wireless services to low-income consumers. For the twelve months ended December 31, 2018, we recognized wireline lifeline revenue of $0.3 million. Over the same period the number of wireline lifeline customers we served decreased from 934 to 827. We expect the amount of Lifeline USF support we receive in connection with our wireline customers to continue to decrease, because we expect that it will be more difficult for low-income consumers to qualify for Lifeline, and to remain enrolled in Lifeline, than it was under the former rules.

Alaska’s Economic Conditions

The successful operation and growth of our businesses depends on economic conditions in Alaska which may deteriorate due to reductions in crude oil prices and other factors.factors.

The vast majority of our customers and operations are located in Alaska. Due to our geographical concentration, the successful operation and growth of our businesses depends on economic conditions in Alaska. The Alaska economy, in turn, depends upon many factors, including:

The population of Alaska, which has declined marginally in 2018,every year since 2016, is approximately 740,000730,000 with Anchorage, Fairbanks and Juneau serving as the primary population and economic centers in the state.

It is estimated that one-third of Alaska’s economy is dependent on federal spending, one-third on natural resources, in particular the production of crude oil, and the remaining one-third on driversother activities such as tourism, mining, timber, seafood, international air cargo and miscellaneous support services.

Alaska’s economy is dependent on investment by oil companies, and state tax revenues correlate with the price of oil as the State assesses a tax based on the retail pricevalue of the oil that transits the pipeline from the North Slope. British Petroleum, one of the world’s major oil companies, is exiting Alaska and its Alaska operations and holdings are being taken over by a much smaller local company. The priceimpact of crude oil dropped substantially during 2014 through 2016, and increased marginally in 2017 and 2018. The decline in the price of crude oil has impacted the state in two ways:

Economists anticipate that slowly increasing oil prices and growing industry optimism bode well for continued new development and increased activitythis change on the North Slope in 2019, supporting an increase in the volume of oil moving through the pipeline and the generation of revenue for the state government.State’s economy is uncertain.

Economists believe the Alaskan economy entered a moderate recession beginning in the second half of 2015, which they currently expect to end during 2019. Employment levels in the state declined approximately 0.3% in 2018 (compared with a 1.3% decline in 2017) driven by declines in the oil and gas industry, construction, and Federal and state government, offset by increases in health care and local government. The negative effects of the recession have been mitigated by diversity in the Alaskan economy, including growth in the health care and tourism industries. However, economists believe that, without a long-term solution to the state budget deficit, a fullOverall economic recovery may remain elusive.

Our terrestrial fiber network on the North Slope of Alaska (described below) which allows us to provide broadband solutions to the oil and gas sector may be negatively impacted by declining crude oil prices in the near term. Additionally, overall macro impacts from a sustained lower price of crude oil and population declines, if maintained over time, will ultimately impact our growth in the future.

Public Health Issues

A major public health issue, such as an epidemic or pandemic, and including the current COVID-19 pandemic, could adversely affect our operations and financial performance.

The COVID-19 pandemic has negatively impacted the global, national and state of Alaska economies. It has caused disruption to certain of our business customers’ operations and could result in changes to our wholesale customers’ operations and reductions in consumer spending, all of which could negatively impact our revenue, collection of accounts receivable and cash flows. Disruptions to the financial markets could limit our access to debt and other sources of capital. Our operations, including the provision of services and products to our customers and maintenance of the supporting infrastructure, rely on products, resources and our employees inside and outside the state of Alaska. A major public health issue, including the COVID-19 pandemic, could disrupt the timely receipt of those products and resources, the productivity of our employees, our provision of products and services to our customers and negatively affect our operations, financial results and liquidity. Adverse effects on our operations to date include delayed implementation of dark fiber agreements with suppliers and customers, delays in the provision of other services to certain customers, disruption in the operations of certain of our business and wholesale customers, negative impacts on the Alaskan economy and the delayed provision of services from certain vendors.

North Slope Fiber Optic Network

Our project to provide broadband solutions to the North Slope and western Alaska may not prove to be as successful as currently anticipated.

During the second quarter ofIn 2015, we acquired a fiber optic network on the North Slope of Alaska and initiated a project to operate and expand the network. This network enables commercially-available, high-speed connectivity where only high-cost microwave and satellite communications were previously available. The success of this project is dependent, in part, on the utilization of the network by other telecom carriers.

Our partnerco-owner in this project has invested in a submarine network with landing stations in several northwest Alaska communities, including a terrestrial route from the North Slope to Fairbanks. The network became operational in late 2017 and we began delivering service to customers in 2018 through capacity we acquired on the system. Delays in acquiring customers and providing those customers with service could negatively impact our investment in the joint venturesystem and our financial results.

Erosion of Access Lines

We provide services to many customers over access lines, and if we continue to lose access lines, our revenues, earnings and cash flow from operating activities may decrease.

Our business generates revenue by delivering voice and data services over access lines. We have experienced net access line loss over the past few years and the rate of loss has been accelerating. During the years ended December 31, 20182020 and 20172019 our business access line erosion was 2,3172,948 and 2,278,1,140, respectively, while over the same period our consumer access line erosion was 3,4782,251 and 4,1562,955 respectively. We expect to continue to experience net access line loss in our markets, affecting our revenues, earnings and cash flow from operating activities.

Network / E-911 Failure

A failure of our network could cause significant delays or interruptions of service, which could cause us to lose customers.

To be successful, we will need to continue to provide our customers reliable service over our network. Our network and infrastructure are constantly at risk of physical damage as a result of human, natural or other factors. These factors may include pandemics, acts of terrorism, sabotage, natural disasters, power surges or outages, software defects, contractor or vendor failures, labor disputes and other disruptions that may be beyond our control. Should we experience a prolonged system failure or a significant service interruption, our customers may choose a different provider and our reputation may be damaged. Further, we may not have adequate insurance coverage, which would result in unexpected expense. Notably, similar to other undersea fiber optic cable operators, we do not carry insurance that would cover the cost of repair of our undersea cables and, thus, we would bear the full cost of any necessary repairs.

A failure of enhanced emergency calling services associated with our network may harm our business.

We provide E-911 service to our customers where such service is available. We also contract from time to time with municipalities to upgrade their dispatch capabilities such that those facilities become capable of receiving our transmission of a 911 caller’s location information and telephone number. If the emergency call center is unable to process such information, the caller is provided only basic 911 services. In these instances, the emergency caller may be required to verbally advise the operator of such caller’s location at the time of the call. Any inability of the dispatchers to automatically recognize the caller’s location or telephone number, whether or not it occurs as a result of our network operations, may cause us to incur liability or cause our reputation or financial results to suffer.

Actions of Activist Stockholders

Actions of activist stockholders against us could be disruptive and costly and the possibility that activist stockholders may wage proxy contests or seek representation on, or control of, our Board could cause uncertainty about the strategic direction of our business, and an activist campaign that results in a change in control of our Board could trigger change in control provisions or payments under certain of our material contracts and agreements.

Stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or board nominations or otherwise attempt to effect changes, assert influence or acquire some level of control over us.

On February 9, 2018, TAR Holdings LLC, an entity for which Karen Singer serves as the sole member, purported to notify the Company that it intends to nominate three candidates for election to our Board at our 2018 Annual Meeting of Stockholders. According to the Schedule 13D filed with the SEC by Ms. Singer and TAR Holdings LLC (the “Singer 13D Group”), Ms. Singer and TAR Holdings LLC beneficially own in the aggregate approximately 5.0% of our outstanding common stock. On May 9, 2018, pursuant to a Cooperation Agreement between the Company and the Singer 13D Group, the Company increased the size of its Board of Directors from six to eight and appointed two of the Singer 13D Group’s intended candidates to those two seats. Both individuals were subsequently elected to the Board of Directors by the Company’s shareholders.

On December 31, 2018, Aegis Financial Corporation, for which Scott L. Barbee serves as the president and sole shareholder, purported to notify the Company that it may engage in communications with one or more shareholders, officers or directors of the Company, including discussions regarding the Company’s strategic direction, corporate governance, named executive officer compensation, and Board of Directors representation, among other things.

While our Board and management team strive to maintain constructive, ongoing communications with all of the Company’s stockholders, including the Singer 13D Group and Aegis Financial Corporation, and welcomes their views and opinions with the goal of enhancing value for all stockholders, an activist campaign such as the one threatened by the Singer 13D Group that seeks to replace more than a majority of the members of our Board and, thereby seek control of the Company’s Board, could have an adverse effect on us because:

Employees

We depend on the availability of personnel with the requisite level of technical expertise in the telecommunications industry.

Our ability to develop and maintain our networks and execute our business plan is dependent on the availability of technical engineering, IT, service delivery and monitoring, product development, sales, management, finance and other key personnel within our geographic location.

Labor costs and the terms of our principal collective bargaining agreement can negatively impact our ability to remain competitive, which could cause our financial performance to suffer.

Labor costs are a significant component of our expenses and, as of December 31, 2018,2020, approximately 53%54% of our workforce is represented by the IBEW. The CBAcollective bargaining agreement between the Company and the IBEW, which is effective through December 31, 2023, governs the terms and conditions of employment for all IBEW represented employees working for the Company in the state of Alaska and has significant economic impacts on the Company as it relates to wage and benefit costs and work rules that affect our ability to provide superior service to our customers.rules. We believe our labor costs are higher than our competitors who employ a non-unionized workforce because we are required by the CBA to contribute to the IBEW Health and Welfare Trust and the Alaska Electrical Pension Fund (“AEPF”) for benefit programs, including defined benefit pension plans and health benefit plans, that are not reflective of the competitive marketplace. Furthermore, work rules under the existing agreement limit our ability to efficiently manage our workforce and make the incremental cost of work performed outside normal work hours high. In addition, we may make strategic and operational decisions that require the consent of the IBEW. While we believe our relationship with the IBEW is constructive, and although the IBEW generally has provided necessary consents, the IBEW may not provide consent when we need it, it may require additional wages, benefits or other consideration be paid in return for its consent, or it may call for a work stoppage against the Company. The Company considered relations with the IBEW to be stable in 2018;2020; however, any deterioration in the relationship with the IBEW would have a negative impact on the Company’s operations.

The expansion of represented employees outside of Alaska could affect our cost structure and the success of any strategic expansion opportunities.

Vendors

We rely on a limited number of key suppliers and vendors for timely supply of equipment and services for our network infrastructure and customer support services. If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain the equipment and services we require to operate our business successfully.

We depend on a limited number of suppliers and vendors for equipment and services for our network and certain customer services. If suppliers of our equipment or providers of services on which we rely experience financial difficulties, service or billing interruptions, patent litigation or other problems, subscriber growth and our operating results could suffer.

Suppliers that use proprietary technology, effectively lock us into one or a few suppliers for key network components. Other suppliers require us to maintain exclusive relationships under a contract. As a result, we have become reliant upon a limited number of suppliers of network equipment. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive terms on a timely basis, or at all, which could increase costs and may cause disruption in service.