10-Q 1 tmus09302017form10-q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from     to

Commission File Number: 1-33409
tmuslogo.jpg
T-MOBILE US, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
 
20-0836269
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
12920 SE 38th Street, Bellevue, Washington
 
98006-1350
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(425) 378-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     x                        Accelerated filer             ¨
Non-accelerated filer     ¨ (Do not check if a smaller reporting company)    Smaller reporting company     ¨
Emerging growth company    ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Shares Outstanding as of October 19, 2017

Common Stock, $0.00001 par value per share
 
831,964,098




T-Mobile US, Inc.
Form 10-Q
For the Quarter Ended September 30, 2017





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

T-Mobile US, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except share and per share amounts)
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
739

 
$
5,500

Accounts receivable, net of allowances of $86 and $102
1,734

 
1,896

Equipment installment plan receivables, net
2,136

 
1,930

Accounts receivable from affiliates
24

 
40

Inventories
999

 
1,111

Asset purchase deposit

 
2,203

Other current assets
1,817

 
1,537

Total current assets
7,449

 
14,217

Property and equipment, net
21,570

 
20,943

Goodwill
1,683

 
1,683

Spectrum licenses
35,007

 
27,014

Other intangible assets, net
256

 
376

Equipment installment plan receivables due after one year, net
1,100

 
984

Other assets
858

 
674

Total assets
$
67,923

 
$
65,891

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued liabilities
$
6,071

 
$
7,152

Payables to affiliates
288

 
125

Short-term debt
558

 
354

Deferred revenue
790

 
986

Other current liabilities
396

 
405

Total current liabilities
8,103

 
9,022

Long-term debt
13,163

 
21,832

Long-term debt to affiliates
14,586

 
5,600

Tower obligations
2,599

 
2,621

Deferred tax liabilities
5,535

 
4,938

Deferred rent expense
2,693

 
2,616

Other long-term liabilities
967

 
1,026

Total long-term liabilities
39,543

 
38,633

Commitments and contingencies (Note 10)


 


Stockholders' equity
 
 
 
5.50% Mandatory Convertible Preferred Stock Series A, par value $0.00001 per share, 100,000,000 shares authorized; 20,000,000 and 20,000,000 shares issued and outstanding; $1,000 and $1,000 aggregate liquidation value

 

Common Stock, par value $0.00001 per share, 1,000,000,000 shares authorized; 833,418,809 and 827,768,818 shares issued, 831,963,343 and 826,357,331 shares outstanding

 

Additional paid-in capital
39,058

 
38,846

Treasury stock, at cost, 1,455,466 and 1,411,487 shares issued
(4
)
 
(1
)
Accumulated other comprehensive income
4

 
1

Accumulated deficit
(18,781
)
 
(20,610
)
Total stockholders' equity
20,277

 
18,236

Total liabilities and stockholders' equity
$
67,923

 
$
65,891


The accompanying notes are an integral part of these condensed consolidated financial statements.

3


T-Mobile US, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
(in millions, except share and per share amounts)
 
 
(As Adjusted - See Note 1)
 
 
 
(As Adjusted - See Note 1)
Revenues
 
 
 
 
 
 
 
Branded postpaid revenues
$
4,920

 
$
4,647

 
$
14,465

 
$
13,458

Branded prepaid revenues
2,376

 
2,182

 
7,009

 
6,326

Wholesale revenues
274

 
238

 
778

 
645

Roaming and other service revenues
59

 
66

 
151

 
170

Total service revenues
7,629

 
7,133

 
22,403

 
20,599

Equipment revenues
2,118

 
1,948

 
6,667

 
5,987

Other revenues
272

 
224

 
775

 
670

Total revenues
10,019

 
9,305

 
29,845

 
27,256

Operating expenses
 
 
 
 
 
 
 
Cost of services, exclusive of depreciation and amortization shown separately below
1,594

 
1,436

 
4,520

 
4,286

Cost of equipment sales
2,617

 
2,539

 
8,149

 
7,532

Selling, general and administrative
3,098

 
2,898

 
8,968

 
8,419

Depreciation and amortization
1,416

 
1,568

 
4,499

 
4,695

Cost of MetroPCS business combination

 
15

 

 
110

Gains on disposal of spectrum licenses
(29
)
 
(199
)
 
(67
)
 
(835
)
Total operating expense
8,696

 
8,257

 
26,069

 
24,207

Operating income
1,323

 
1,048

 
3,776

 
3,049

Other income (expense)
 
 
 
 
 
 
 
Interest expense
(253
)
 
(376
)
 
(857
)
 
(1,083
)
Interest expense to affiliates
(167
)
 
(76
)
 
(398
)
 
(248
)
Interest income
2

 
3

 
15

 
9

Other income (expense), net
1

 
(1
)
 
(89
)
 
(6
)
Total other expense, net
(417
)
 
(450
)
 
(1,329
)
 
(1,328
)
Income before income taxes
906

 
598

 
2,447

 
1,721

Income tax expense
(356
)
 
(232
)
 
(618
)
 
(651
)
Net income
550

 
366

 
1,829

 
1,070

Dividends on preferred stock
(13
)
 
(13
)
 
(41
)
 
(41
)
Net income attributable to common stockholders
$
537

 
$
353

 
$
1,788

 
$
1,029

 
 
 
 
 
 
 
 
Net Income
$
550

 
$
366

 
$
1,829

 
$
1,070

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net of tax effect $0, $1, $2 and $1
1

 
2

 
3

 
2

Other comprehensive income
1

 
2

 
3

 
2

Total comprehensive income
$
551

 
$
368

 
$
1,832

 
$
1,072

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.65

 
$
0.43

 
$
2.15

 
$
1.25

Diluted
$
0.63

 
$
0.42

 
$
2.10

 
$
1.24

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
831,189,779

 
822,998,697

 
829,974,146

 
821,626,675

Diluted
871,420,065

 
832,257,819

 
871,735,511

 
831,241,027


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


T-Mobile US, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2017
 
2016
 
2017
 
2016
Operating activities
 
 
 
 
 
 
 
Net income
$
550

 
$
366

 
$
1,829

 
$
1,070

Adjustments to reconcile net income to net cash provided by operating activities

 
 
 
 
 
 
Depreciation and amortization
1,416

 
1,568

 
4,499

 
4,695

Stock-based compensation expense
82

 
59

 
221

 
171

Deferred income tax expense
347

 
219

 
595

 
623

Bad debt expense
123

 
118

 
298

 
358

Losses from sales of receivables
67

 
59

 
242

 
157

Deferred rent expense
21

 
32

 
61

 
97

Gains on disposal of spectrum licenses
(29
)
 
(199
)
 
(67
)
 
(835
)
Changes in operating assets and liabilities
 
 
 
 
 
 
 
Accounts receivable
(119
)
 
(155
)
 
(166
)
 
(462
)
Equipment installment plan receivables
(154
)
 
104

 
(520
)
 
556

Inventories
113

 
301

 
(28
)
 
(497
)
Deferred purchase price from sales of receivables
6

 
(16
)
 
(12
)
 
(199
)
Other current and long-term assets
(184
)
 
(98
)
 
(330
)
 
31

Accounts payable and accrued liabilities
(12
)
 
(731
)
 
(607
)
 
(1,568
)
Other current and long term liabilities
60

 
112

 
(84
)
 
326

Other, net
75

 
1

 
(27
)
 
10

Net cash provided by operating activities
2,362

 
1,740

 
5,904

 
4,533

Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment, including capitalized interest of $29, $17, $111 and $71
(1,441
)
 
(1,159
)
 
(4,316
)
 
(3,843
)
Purchases of spectrum licenses and other intangible assets, including deposits
(15
)
 
(705
)
 
(5,820
)
 
(3,544
)
Sales of short-term investments

 

 

 
2,998

Other, net
1

 
5

 
(2
)
 
3

Net cash used in investing activities
(1,455
)
 
(1,859
)
 
(10,138
)
 
(4,386
)
Financing activities
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt
500

 

 
10,480

 
997

Proceeds from borrowing on revolving credit facility
1,055

 

 
2,910

 

Repayments of revolving credit facility
(1,735
)
 

 
(2,910
)
 

Repayments of capital lease obligations
(141
)
 
(54
)
 
(350
)
 
(133
)
Repayments of short-term debt for purchases of inventory, property and equipment, net
(4
)
 

 
(296
)
 
(150
)
Repayments of long-term debt

 
(5
)
 
(10,230
)
 
(15
)
Tax withholdings on share-based awards
(6
)
 
(3
)
 
(101
)
 
(52
)
Dividends on preferred stock
(13
)
 
(13
)
 
(41
)
 
(41
)
Other, net
(5
)
 
8

 
11

 
17

Net cash (used in) provided by financing activities
(349
)
 
(67
)
 
(527
)
 
623

Change in cash and cash equivalents
558

 
(186
)
 
(4,761
)
 
770

Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
181

 
5,538

 
5,500

 
4,582

End of period
$
739

 
$
5,352

 
$
739

 
$
5,352

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Interest payments, net of amounts capitalized, $0, $0, $79 and $0 of which recorded as debt discount (Note 7)
$
343

 
$
478

 
$
1,565

 
$
1,292

Income tax payments
2

 
4

 
23

 
23

Changes in accounts payable for purchases of property and equipment
(141
)
 
(79
)
 
(458
)
 
(307
)
Leased devices transferred from inventory to property and equipment
262

 
234

 
775

 
1,175

Returned leased devices transferred from property and equipment to inventory
(165
)
 
(186
)
 
(635
)
 
(422
)
Issuance of short-term debt for financing of property and equipment
1

 

 
291

 
150

Assets acquired under capital lease obligations
138

 
384

 
735

 
679

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


T-Mobile US, Inc.
Index for Notes to the Condensed Consolidated Financial Statements



6


T-Mobile US, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1 – Basis of Presentation

The unaudited condensed consolidated financial statements of T-Mobile US, Inc. (“T-Mobile,” “we,” “our,” “us” or the “Company”) include all adjustments of a normal recurring nature necessary for the fair presentation of the results for the interim periods presented. The results for the interim periods are not necessarily indicative of those for the full year. The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

The condensed consolidated financial statements include the balances and results of operations of T-Mobile and our consolidated subsidiaries. We consolidate majority-owned subsidiaries over which we exercise control, as well as variable interest entities (“VIE”) where we are deemed to be the primary beneficiary and VIEs which cannot be deconsolidated, such as those related to Tower obligations (Tower obligations are included in VIEs related to the 2012 Tower Transaction. See Note 8 - Tower Obligations included in the Annual Report on Form 10-K for the year ended December 31, 2016). Intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires our management to make estimates and assumptions which affect the financial statements and accompanying notes. Estimates are based on historical experience, where applicable, and other assumptions which our management believes are reasonable under the circumstances. These estimates are inherently subject to judgment and actual results could differ from those estimates.

Change in Accounting Principle

Effective January 1, 2017, the imputed discount on Equipment Installment Plan (“EIP”) receivables, which is amortized over the financed installment term using the effective interest method, and was previously presented within Interest income in our Condensed Consolidated Statements of Comprehensive Income, is now presented within Other revenues in our Condensed Consolidated Statements of Comprehensive Income. We believe this presentation is preferable because it provides a better representation of amounts earned from our major ongoing operations and aligns with industry practice thereby enhancing comparability. We have applied this change retrospectively and presented the effect on the three and nine months ended September 30, 2017 and 2016, in the tables below:
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
(in millions)
Unadjusted
 
Change in Accounting Principle
 
As Adjusted
 
As Filed
 
Change in Accounting Principle
 
As Adjusted
Other revenues
$
198

 
$
74

 
$
272

 
$
165

 
$
59

 
$
224

Total revenues
9,945

 
74

 
10,019

 
9,246

 
59

 
9,305

Operating income
1,249

 
74

 
1,323

 
989

 
59

 
1,048

Interest income
76

 
(74
)
 
2

 
62

 
(59
)
 
3

Total other expense, net
(343
)
 
(74
)
 
(417
)
 
(391
)
 
(59
)
 
(450
)
Net income
550

 

 
550

 
366

 

 
366


 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
(in millions)
Unadjusted
 
Change in Accounting Principle
 
As Adjusted
 
As Filed
 
Change in Accounting Principle
 
As Adjusted
Other revenues
$
571

 
$
204

 
$
775

 
$
481

 
$
189

 
$
670

Total revenues
29,641

 
204

 
29,845

 
27,067

 
189

 
27,256

Operating income
3,572

 
204

 
3,776

 
2,860

 
189

 
3,049

Interest income
219

 
(204
)
 
15

 
198

 
(189
)
 
9

Total other expense, net
(1,125
)
 
(204
)
 
(1,329
)
 
(1,139
)
 
(189
)
 
(1,328
)
Net income
1,829

 

 
1,829

 
1,070

 

 
1,070



7


The change in accounting principle did not have an impact on basic or diluted earnings per share for the three and nine months ended September 30, 2017 and 2016, or Accumulated deficit as of September 30, 2017 or December 31, 2016.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), and has since modified the standard with several ASUs. The standard is effective for us, and we will adopt the standard, on January 1, 2018.

The standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.

The guidance permits two methods of adoption, the full retrospective method applying the standard to each prior reporting period presented, or the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of initial application. The standard also allows entities to apply certain practical expedients at their discretion. We are adopting the standard using the modified retrospective method with a cumulative catch up adjustment and will provide additional disclosures comparing results to previous GAAP.

We currently anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant potential impacts include the following items:

Whether our EIP contracts contain a significant financing component, which is similar to our current practice of imputing interest, and would similarly impact the amount of revenue recognized at the time of an EIP sale and whether or not a portion of the revenue is recognized as interest and included in other revenues, rather than equipment revenues. We currently expect to recognize the financing component in our EIP contracts, including those financing components that are not considered to be significant to the contract. We believe that this application will be consistent with our current practice of imputing interest.
As we currently expense contract acquisition costs, we believe that the requirement to defer incremental contract acquisition costs and recognize them over the term of the initial contract and anticipated renewal contracts to which the costs relate will have a significant impact to our consolidated financial statements. We plan to utilize the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less which we expect will typically result in expensing commissions paid to acquire branded prepaid service contracts. Currently, we believe that incremental contract acquisition costs of approximately $450 million to $550 million that were incurred during the nine months ended September 30, 2017, which consists primarily of commissions paid to acquire branded postpaid service contracts, would require capitalization and amortization under the new standard. We expect that deferred contract costs will have an average amortization period of approximately 24 months, subject to being monitored and updated every period to reflect any significant change in assumptions. In addition, the deferred contract cost asset will be assessed for impairment on a periodic basis.
We expect that promotional bill credits offered to customers on equipment sales that are paid over time and are contingent on the customer maintaining a service contract will result in extended service contracts, which impacts the allocation and timing of revenue recognition between service revenue and equipment revenue.
Overall, with the exception of the aforementioned impacts, we do not expect that the new standard will result in a substantive change to the method of allocation of contract revenues between various services and equipment, nor to the timing of when revenues are recognized for most of our service contracts.

We are still in the process of evaluating these impacts, and our initial assessment may change due to changes in the terms and mix of the contractual arrangements we have with customers. New products or offerings, or changes to current offerings may yield significantly different impacts than currently expected.

We are in the process of implementing significant new revenue accounting systems, processes and internal controls over revenue recognition which will assist us in the application of the new standard.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The standard requires all lessees to report a right-of-use asset and a lease liability for most leases. The income statement recognition is similar to existing lease accounting and is based on lease classification. The standard requires lessees and lessors to classify most leases using principles similar to existing lease accounting. For lessors, the standard modifies the classification criteria and the accounting for sales-type and

8


direct financing leases. We are currently evaluating the standard, which will require recognizing and measuring leases at the beginning of the earliest period presented using a modified retrospective approach. We plan to adopt the standard when it becomes effective for us beginning January 1, 2019, and expect the adoption of the standard will result in the recognition of right of use assets and lease liabilities that have not previously been recorded, which will have a material impact on our condensed consolidated financial statements.

We are in the process of implementing significant new lease accounting systems, processes and internal controls over lease recognition which will ultimately assist in the application of the new standard.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectibility of the reported amount. The standard will become effective for us beginning January 1, 2020, and will require a cumulative-effect adjustment to Accumulated deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). Early adoption is permitted for us as of January 1, 2019. We are currently evaluating the impact this guidance will have on our condensed consolidated financial statements and the timing of adoption.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard is intended to reduce current diversity in practice and provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard is effective for us, and we will adopt the standard, on January 1, 2018. The standard will require a retrospective approach. The standard will impact the presentation of cash flows related to beneficial interests in securitization transactions, which is the deferred purchase price, resulting in a reclassification of cash inflows from Operating activities to Investing activities of approximately $1.0 billion for the three months ended September 30, 2017 and 2016, and $2.8 billion for the nine months ended September 30, 2017 and 2016, in our condensed consolidated statement of cash flows. The standard will also impact the presentation of cash payments for debt prepayment or debt extinguishment costs, resulting in a reclassification of cash outflows from Operating activities to Financing activities of $188 million for the nine months ended September 30, 2017, in our condensed consolidated statement of cash flows. We had no cash payments for debt prepayment or debt extinguishment costs for the three months ended September 30, 2017.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. The standard will become effective for us beginning January 1, 2018, and will require any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. Early adoption is permitted. We are currently evaluating the standard, but expect that it will not have a material impact on our condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The standard requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU does not define the terms “restricted cash” and “restricted cash equivalents.” The standard will be effective for us beginning January 1, 2018, and will require a retrospective approach. Early adoption is permitted. We are currently evaluating the standard, but expect that it will not have a material impact on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (“the Step 2 test”) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The standard will become effective for us beginning January 1, 2020, and must be applied to any annual or interim goodwill impairment assessments after that date. Early adoption is permitted. We are currently evaluating the standard and timing of adoption, but expect that it will not have a material impact on our condensed consolidated financial statements.


9


Note 2 – Significant Transactions

Hurricane Impacts

During the third quarter of 2017, our operations in Texas, Florida and Puerto Rico experienced losses related to hurricanes. Based on our preliminary assessment, the negative impact to operating income and net income for both the three and nine months ended September 30, 2017, from lost revenue, assets damaged or destroyed and other hurricane related costs incurred was $148 million and $90 million, respectively. As of September 30, 2017, our loss assessment is ongoing and we expect additional expenses to be incurred and customer activity to be impacted in the fourth quarter of 2017, primarily related to our operations in Puerto Rico. We have not recognized any potential insurance recoveries related to those hurricane losses as we continue to assess the damage and work with our insurance carriers.

Purchase of Iowa Wireless

On September 18, 2017, we entered into a Unit Purchase Agreement (“UPA”) to acquire the remaining equity in INS Wireless, Inc. (“INS”), a 54% owned unconsolidated subsidiary, for a purchase price of $25 million. We account for our existing investment in INS under the equity method as we have significant influence, but not control. Upon the close of the transaction, which is expected within the next six months, subject to regulatory approvals and customary closing conditions, INS will become a wholly-owned consolidated subsidiary.

Spectrum Transactions

During the nine months ended September 30, 2017, we entered into agreements with third parties for the exchange of certain spectrum licenses and were the winning bidder of 1,525 licenses in the 600 MHz spectrum auction. See Note 5 - Spectrum License Transactions for further information.

Debt

During the nine months ended September 30, 2017, we completed significant transactions with both third parties and affiliates related to the issuance, borrowing and redemption of debt. See Note 7 - Debt for further information.

Power Purchase Agreements

During the nine months ended September 30, 2017, we entered into two renewable energy purchase agreements with third parties. These agreements each consist of two components, an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility and a commitment to purchase the energy credits associated with the energy output generated by the facility. See Note 10 – Commitments and Contingencies for further information.

Note 3 – Equipment Installment Plan Receivables

We offer certain retail customers the option to pay for their devices and accessories in installments over a period of up to 24 months using an EIP.

The following table summarizes the EIP receivables:
(in millions)
September 30,
2017
 
December 31,
2016
EIP receivables, gross
$
3,599

 
$
3,230

Unamortized imputed discount
(233
)
 
(195
)
EIP receivables, net of unamortized imputed discount
3,366

 
3,035

Allowance for credit losses
(130
)
 
(121
)
EIP receivables, net
$
3,236

 
$
2,914

 
 
 
 
Classified on the balance sheet as:
 
 
 
Equipment installment plan receivables, net
$
2,136

 
$
1,930

Equipment installment plan receivables due after one year, net
1,100

 
984

EIP receivables, net
$
3,236

 
$
2,914



10


We use a proprietary credit scoring model that measures the credit quality of a customer at the time of application for mobile communications service using several factors, such as credit bureau information, consumer credit risk scores and service plan characteristics. Based upon customer credit profiles, we classify EIP receivables into the credit categories of “Prime” and “Subprime.” Prime customer receivables are those with lower delinquency risk and Subprime customer receivables are those with higher delinquency risk. Subprime customers may be required to make a down payment on their equipment purchases. In addition, certain customers within the Subprime category are required to pay an advance deposit.

EIP receivables for which invoices have not yet been generated for the customer are classified as Unbilled. EIP receivables for which invoices have been generated but which are not past the contractual due date are classified as Billed – Current. EIP receivables for which invoices have been generated and the payment is past the contractual due date are classified as Billed – Past Due.

The balance and aging of the EIP receivables on a gross basis by credit category were as follows:
 
September 30, 2017
 
December 31, 2016
(in millions)
Prime
 
Subprime
 
Total
 
Prime
 
Subprime
 
Total
Unbilled
$
1,471

 
$
1,903

 
$
3,374

 
$
1,343

 
$
1,686

 
$
3,029

Billed – Current
60

 
90

 
150

 
51

 
77

 
128

Billed – Past Due
25

 
50

 
75

 
25

 
48

 
73

EIP receivables, gross
$
1,556

 
$
2,043

 
$
3,599

 
$
1,419

 
$
1,811

 
$
3,230


Activity for the nine months ended September 30, 2017 and 2016, in the unamortized imputed discount and allowance for credit losses balances for the EIP receivables was as follows:
(in millions)
September 30,
2017
 
September 30,
2016
Imputed discount and allowance for credit losses, beginning of period
$
316

 
$
333

Bad debt expense
215

 
185

Write-offs, net of recoveries
(205
)
 
(201
)
Change in imputed discount on short-term and long-term EIP receivables
163

 
103

Impacts from sales of EIP receivables
(126
)
 
(133
)
Imputed discount and allowance for credit losses, end of period
$
363

 
$
287


The EIP receivables had weighted average effective imputed interest rates of 9.7% and 9.0% as of September 30, 2017 and December 31, 2016, respectively.

Note 4 – Sales of Certain Receivables

We have entered into transactions to sell certain service and EIP accounts receivables. The transactions, including our continuing involvement with the sold receivables and the respective impacts to our financial statements, are described below.

Sales of Service Receivables

Overview of the Transaction

In 2014, we entered into an arrangement to sell certain service accounts receivables on a revolving basis and in November 2016, the arrangement was amended to increase the maximum funding commitment to $950 million (the “service receivable sale arrangement”) and extend the scheduled expiration date to March 2018. As of September 30, 2017 and December 31, 2016, the service receivable sale arrangement provided funding of $899 million and $907 million, respectively. Sales of receivables occur daily and are settled on a monthly basis. The receivables consist of service charges currently due from customers and are short-term in nature.

In connection with the service receivable sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity to sell service accounts receivables (the “Service BRE”). The Service BRE does not qualify as a VIE, and due to the significant level of control we exercise over the entity, it is consolidated. Pursuant to the arrangement, certain of our wholly-owned subsidiaries transfer selected receivables to the Service BRE. The Service BRE then sells the receivables to an unaffiliated entity (the “Service VIE”), which was established to facilitate the sale of beneficial ownership interests in the receivables to certain third parties.


11


Variable Interest Entity

We determined that the Service VIE qualifies as a VIE as it lacks sufficient equity to finance its activities. We have a variable interest in the Service VIE, but are not the primary beneficiary as we lack the power to direct the activities that most significantly impact the Service VIE’s economic performance. Those activities include committing the Service VIE to legal agreements to purchase or sell assets, selecting which receivables are purchased in the service receivable sale arrangement, determining whether the Service VIE will sell interests in the purchased service receivables to other parties, funding of the entity and servicing of receivables. We do not hold the power to direct the key decisions underlying these activities. For example, while we act as the servicer of the sold receivables, which is considered a significant activity of the Service VIE, we are acting as an agent in our capacity as the servicer and the counterparty to the service receivable sale arrangement has the ability to remove us as the servicing agent of the receivables at will with no recourse available to us. As we have determined we are not the primary beneficiary, the results of the Service VIE are not consolidated into our condensed consolidated financial statements.

The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to our variable interest in the Service VIE:
(in millions)
September 30,
2017
 
December 31,
2016
Other current assets
$
225

 
$
207

Accounts payable and accrued liabilities
13

 
17

Other current liabilities
155

 
129


Sales of EIP Receivables

Overview of the Transaction

In 2015, we entered into an arrangement to sell certain EIP accounts receivables on a revolving basis and in August 2017, the EIP sale arrangement was amended to reduce the maximum funding commitment to $1.2 billion (the “EIP sale arrangement”) and extend the scheduled expiration date to November 2018. As of both September 30, 2017 and December 31, 2016, the EIP sale arrangement provided funding of $1.2 billion. Sales of EIP receivables occur daily and are settled on a monthly basis. The receivables consist of customer EIP balances, which require monthly customer payments for up to 24 months.

In connection with this EIP sale arrangement, we formed a wholly-owned subsidiary, which qualifies as a bankruptcy remote entity (the “EIP BRE”). Pursuant to the EIP sale arrangement, our wholly-owned subsidiary transfers selected receivables to the EIP BRE. The EIP BRE then sells the receivables to a non-consolidated and unaffiliated third-party entity for which we do not exercise any level of control, nor does the entity qualify as a VIE.

Variable Interest Entity

We determined that the EIP BRE is a VIE as its equity investment at risk lacks the obligation to absorb a certain portion of its expected losses. We have a variable interest in the EIP BRE and determined that we are the primary beneficiary based on our ability to direct the activities which most significantly impact the EIP BRE’s economic performance. Those activities include selecting which receivables are transferred into the EIP BRE and sold in the EIP sale arrangement and funding of the EIP BRE. Additionally, our equity interest in the EIP BRE obligates us to absorb losses and gives us the right to receive benefits from the EIP BRE that could potentially be significant to the EIP BRE. Accordingly, we determined that we are the primary beneficiary, and include the balances and results of operations of the EIP BRE in our condensed consolidated financial statements.

The following table summarizes the carrying amounts and classification of assets, which consists primarily of the deferred purchase price and liabilities included in our Condensed Consolidated Balance Sheets that relate to the EIP BRE:
(in millions)
September 30,
2017
 
December 31,
2016
Other current assets
$
357

 
$
371

Other assets
90

 
83

Other long-term liabilities
2

 
4



12


In addition, the EIP BRE is a separate legal entity with its own separate creditors who will be entitled, prior to any liquidation of the EIP BRE, to be satisfied prior to any value in the EIP BRE becoming available to us. Accordingly, the assets of the EIP BRE may not be used to settle our general obligations and creditors of the EIP BRE have limited recourse to our general credit.

Sales of Receivables

The transfers of service receivables and EIP receivables to the non-consolidated entities are accounted for as sales of financial assets. Once identified for sale, the receivable is recorded at the lower of cost or fair value. Upon sale, we derecognize the net carrying amount of the receivables. We recognize the net cash proceeds in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

The proceeds are net of the deferred purchase price, consisting of a receivable from the purchasers that entitles us to certain collections on the receivables. We recognize the collection of the deferred purchase price in Net cash provided by operating activities as it is dependent on collection of the customer receivables and is not subject to significant interest rate risk. The deferred purchase price represents a financial asset that is primarily tied to the creditworthiness of the customers and which can be settled in such a way that we may not recover substantially all of our recorded investment, due to default by the customers on the underlying receivables. We elected, at inception, to measure the deferred purchase price at fair value with changes in fair value included in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. The fair value of the deferred purchase price is determined based on a discounted cash flow model which uses primarily unobservable inputs (Level 3 inputs), including customer default rates. As of September 30, 2017 and December 31, 2016, our deferred purchase price related to the sales of service receivables and EIP receivables was $671 million and $659 million, respectively.

The following table summarizes the impacts of the sale of certain service receivables and EIP receivables in our Condensed Consolidated Balance Sheets:
(in millions)
September 30,
2017
 
December 31,
2016
Derecognized net service receivables and EIP receivables
$
2,362

 
$
2,502

Other current assets
582

 
578

of which, deferred purchase price
581

 
576

Other long-term assets
90

 
83

of which, deferred purchase price
90

 
83

Accounts payable and accrued liabilities
13

 
17

Other current liabilities
155

 
129

Other long-term liabilities
2

 
4

Net cash proceeds since inception
1,963

 
2,030

Of which:
 
 
 
Change in net cash proceeds during the year-to-date period
(67
)
 
536

Net cash proceeds funded by reinvested collections
2,030

 
1,494


We recognized losses from sales of receivables of $67 million and $59 million for the three months ended September 30, 2017 and 2016, respectively, and $242 million and $157 million for the nine months ended September 30, 2017 and 2016, respectively. These losses from sales of receivables were recognized in Selling, general and administrative expense in our Condensed Consolidated Statements of Comprehensive Income. Losses from sales of receivables include adjustments to the receivables’ fair values and changes in fair value of the deferred purchase price.

Continuing Involvement

Pursuant to the sale arrangements described above, we have continuing involvement with the service receivables and EIP receivables we sell as we service the receivables and are required to repurchase certain receivables, including ineligible receivables, aged receivables and receivables where write-off is imminent. We continue to service the customers and their related receivables, including facilitating customer payment collection, in exchange for a monthly servicing fee. As the receivables are sold on a revolving basis, the customer payment collections on sold receivables may be reinvested in new receivable sales. While servicing the receivables, we apply the same policies and procedures to the sold receivables as we apply to our owned receivables, and we continue to maintain normal relationships with our customers. Pursuant to the EIP sale arrangement, under certain circumstances, we are required to deposit cash or replacement EIP receivables primarily for contracts terminated by customers under our Just Upgrade My Phone (“JUMP!”) Program.

13



In addition, we have continuing involvement with the sold receivables as we may be responsible for absorbing additional credit losses pursuant to the sale arrangements. Our maximum exposure to loss related to the involvement with the service receivables and EIP receivables sold under the sale arrangements was $1.2 billion as of September 30, 2017. The maximum exposure to loss, which is a required disclosure under GAAP, represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby we would not receive the deferred purchase price portion of the contractual proceeds withheld by the purchasers and would also be required to repurchase the maximum amount of receivables pursuant to the sale arrangements without consideration for any recovery. As we believe the probability of these circumstances occurring is remote, the maximum exposure to loss is not an indication of our expected loss.

Note 5 – Spectrum License Transactions

The following table summarizes our spectrum license activity during the nine months ended September 30, 2017:
(in millions)
Spectrum Licenses
Balance at December 31, 2016
$
27,014

Spectrum license acquisitions
8,247

Spectrum licenses transferred to held for sale
(271
)
Costs to clear spectrum
17

Balance at September 30, 2017
$
35,007


Spectrum License Exchange

In March 2017, we closed on an agreement with a third party for the exchange of certain spectrum licenses. Upon closing of the transaction, we recorded the spectrum licenses received at their estimated fair value of approximately $123 million and recognized a gain of $37 million included in Gains on disposal of spectrum licenses in our Condensed Consolidated Statements of Comprehensive Income.

In September 2017, we closed on an agreement with a third party for the exchange of certain AWS and PCS spectrum licenses. Upon closing of the transaction, we recorded the spectrum licenses received at their estimated fair value of approximately $115 million and recognized a gain of $29 million included in Gains on disposal of spectrum licenses in our Condensed Consolidated Statements of Comprehensive Income.

In September 2017, we entered into an agreement with a third party for the exchange of certain AWS and PCS spectrum licenses. The transaction is expected to close during the first quarter of 2018, subject to regulatory approvals and customary closing conditions. Our spectrum licenses to be transferred as part of the exchange transaction were reclassified as assets held for sale and were included in Other current assets in our Condensed Consolidated Balance Sheets at their carrying value of $184 million as of September 30, 2017.

Spectrum License Purchase

In September 2017, we entered into a UPA to purchase the remaining equity of INS. We expect to receive the INS spectrum licenses at the close of the transaction within the next 6 months, subject to regulatory approvals and customary closing conditions. See Note 2 - Significant Transactions for further information.

Broadcast Incentive Auction

In April 2017, the Federal Communications Commission (the “FCC”) announced that we were the winning bidder of 1,525 licenses in the 600 MHz spectrum auction for an aggregate price of $8.0 billion. At inception of the auction in June 2016, we deposited $2.2 billion with the FCC which, based on the outcome of the auction, was sufficient to cover our down payment obligation due in April 2017. In May 2017, we paid the FCC the remaining $5.8 billion of the purchase price using cash reserves and by issuing debt to Deutsche Telekom AG (“DT”), our majority stockholder, pursuant to existing purchase commitments. See Note 7 - Debt for further information. The licenses are included in Spectrum licenses as of September 30, 2017, on our Condensed Consolidated Balance Sheets. We began deployment of these licenses on our network in the third quarter of 2017.


14


Note 6 – Fair Value Measurements

The carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts receivable from affiliates, accounts payable, and borrowings under our senior secured revolving credit facility with DT approximate fair value due to the short-term maturities of these instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying amounts and fair values of our assets and liabilities measured at fair value on a recurring basis included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
September 30, 2017
 
December 31, 2016
(in millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Deferred purchase price assets
3
 
$
671

 
$
671

 
$
659

 
$
659

Liabilities:
 
 
 
 
 
 
 
 
 
Guarantee liabilities
3
 
121

 
121

 
135

 
135


The principal amounts and fair values of our long-term debt included in our Condensed Consolidated Balance Sheets were as follows:
 
Level within the Fair Value Hierarchy
 
September 30, 2017
 
December 31, 2016
(in millions)
 
Principal Amount
 
Fair Value
 
Principal Amount
 
Fair Value
Liabilities:
 
 
 
 
 
 
 
 
 
Senior Notes to third parties
1
 
$
11,850

 
$
12,605

 
$
18,600

 
$
19,584

Senior Notes to affiliates
2
 
7,500

 
7,897

 

 

Incremental Term Loan Facility to affiliates
2
 
4,000

 
4,020

 

 

Senior Reset Notes to affiliates
2
 
3,100

 
3,290

 
5,600

 
5,955

Senior Secured Term Loans
2
 

 

 
1,980

 
2,005


Long-term Debt

The fair value of our Senior Notes to third parties was determined based on quoted market prices in active markets, and therefore was classified as Level 1 within the fair value hierarchy. The fair values of the Senior Notes to affiliates, Incremental Term Loan Facility to affiliates, Senior Reset Notes to affiliates and Senior Secured Term Loans were determined based on a discounted cash flow approach using quoted prices of instruments with similar terms and maturities and an estimate for our standalone credit risk. Accordingly, our Senior Notes to affiliates, Incremental Term Loan Facility to affiliates, Senior Reset Notes to affiliates and Senior Secured Term Loans were classified as Level 2 within the fair value hierarchy.

Although we have determined the estimated fair values using available market information and commonly accepted valuation methodologies, considerable judgment was required in interpreting market data to develop fair value estimates for the Senior Notes to affiliates, Incremental Term Loan Facility to affiliates, Senior Reset Notes to affiliates and Senior Secured Term Loans to affiliates. The fair value estimates were based on information available as of September 30, 2017 and December 31, 2016. As such, our estimates are not necessarily indicative of the amount we could realize in a current market exchange.

Deferred Purchase Price Assets

In connection with the sales of certain service and EIP receivables pursuant to the sale arrangements, we have deferred purchase price assets measured at fair value that are based on a discounted cash flow model using unobservable Level 3 inputs, including customer default rates. See Note 4 – Sales of Certain Receivables for further information.

Guarantee Liabilities

We offer certain device trade-in programs, including JUMP!, which provide eligible customers a specified-price trade-in right to upgrade their device. For customers who are enrolled in a device trade-in program, we defer the portion of equipment revenues which represents the estimated fair value of the specified-price trade-in right guarantee incorporating the expected

15


probability and timing of the handset upgrade and the estimated fair value of the used handset which is returned. Accordingly, our guarantee liabilities were classified as Level 3 within the fair value hierarchy. When customers upgrade their device, the difference between the trade-in credit to the customer and the fair value of the returned device is recorded against the guarantee liabilities. Guarantee liabilities are included in Other current liabilities in our Condensed Consolidated Balance Sheets.

The total estimated remaining gross EIP receivable balances of all enrolled handset upgrade program customers, which are the remaining EIP amounts underlying the JUMP! guarantee, including EIP receivables that have been sold, was $2.2 billion as of September 30, 2017. This is not an indication of our expected loss exposure as it does not consider the expected fair value of the used handset or the probability and timing of the trade-in.

Note 7 – Debt

The following table sets forth the debt balances and activity as of, and for the nine months ended, September 30, 2017:
(in millions)
December 31,
2016
 
Issuances and Borrowings (1)
 
Note Redemptions (1)
 
Extinguishments (1)
 
Repayments
 
Other (2)
 
September 30,
2017
Short-term debt
$
354

 
$

 
$

 
$
(20
)
 
$

 
$
224

 
$
558

Long-term debt
21,832

 
1,495

 
(8,365
)
 
(1,947
)
 

 
148

 
13,163

Total debt to third parties
22,186

 
1,495

 
(8,365
)
 
(1,967
)
 

 
372

 
13,721

Short-term debt to affiliates

 
2,910

 

 

 
(2,910
)
 

 

Long-term debt to affiliates
5,600

 
8,985

 

 

 

 
1

 
14,586

Total debt to affiliates
5,600

 
11,895

 

 

 
(2,910
)
 
1

 
14,586

Total debt
$
27,786

 
$
13,390

 
$
(8,365
)
 
$
(1,967
)
 
$
(2,910
)
 
$
373

 
$
28,307

(1)
Issuances and borrowings, note redemptions and extinguishments are recorded net of related issuance costs, discounts and premiums. Issuances and borrowings for Short-term debt to affiliates represent net outstanding borrowings on our senior secured revolving credit facility.
(2)
Other includes: $299 million of issuances of short-term debt related to vendor financing arrangements, of which $291 million is related to financing of property and equipment. During the nine months ended September 30, 2017, we repaid $296 million under the vendor financing arrangements. As of September 30, 2017, vendor financing arrangements totaled $3 million. Vendor financing arrangements are included in Short-term debt within Total current liabilities in our Condensed Consolidated Balance Sheets. Additional activity in Other includes capital leases and the amortization of discounts and premiums. As of September 30, 2017 and December 31, 2016, capital lease liabilities totaled $1.8 billion and $1.4 billion, respectively.

Debt to Third Parties

Issuances and Borrowings

During the nine months ended September 30, 2017, we issued the following Senior Notes:
(in millions)
Principal Issuances
 
Issuance Costs
 
Net Proceeds from Issuance of Long-Term Debt
4.000% Senior Notes due 2022
$
500

 
$
2

 
$
498

5.125% Senior Notes due 2025
500

 
2

 
498

5.375% Senior Notes due 2027
500

 
1

 
499

Total of Senior Notes Issued
$
1,500

 
$
5

 
$
1,495


On March 16, 2017, T-Mobile USA and certain of its affiliates, as guarantors, issued a total of $1.5 billion of public Senior Notes with various interest rates and maturity dates. Issuance costs related to the public debt issuance totaled $5 million for the nine months ended September 30, 2017. We used the net proceeds of $1.495 billion from the transaction to redeem callable high yield debt.


16


Notes Redemptions

During the nine months ended September 30, 2017, we made the following note redemptions:
(in millions)
Principal Amount
 
Write-off of Premiums, Discounts and Issuance Costs (1)
 
Call Penalties (1) (2)
 
Redemption
Date
 
Redemption Price
6.625% Senior Notes due 2020
$
1,000

 
$
(45
)
 
$
22

 
February 10, 2017
 
102.208
%
5.250% Senior Notes due 2018
500

 
1

 
7

 
March 4, 2017
 
101.313
%
6.250% Senior Notes due 2021
1,750

 
(71
)
 
55

 
April 1, 2017
 
103.125
%
6.464% Senior Notes due 2019
1,250

 

 

 
April 28, 2017
 
100.000
%
6.542% Senior Notes due 2020
1,250

 

 
21

 
April 28, 2017
 
101.636
%
6.633% Senior Notes due 2021
1,250

 

 
41

 
April 28, 2017
 
103.317
%
6.731% Senior Notes due 2022
1,250

 

 
42

 
April 28, 2017
 
103.366
%
Total note redemptions
$
8,250

 
$
(115
)
 
$
188

 
 
 
 
(1)
Write-off of premiums, discounts, issuance costs and call penalties are included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income. Write-off of premiums, discounts and issuance costs are included in Other, net within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.
(2)
The call penalty is the excess paid over the principal amount. Call penalties are included within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

Debt to Affiliates

Issuances and Borrowings

During the nine months ended September 30, 2017, we made the following borrowings:
(in millions)
Net Proceeds from Issuance of Long-Term Debt
 
Extinguishments
 
Write-off of Discounts and Issuance Costs (1)
LIBOR plus 2.00% Senior Secured Term Loan due 2022
$
2,000

 
$

 
$

LIBOR plus 2.00% Senior Secured Term Loan due 2024
2,000

 

 

LIBOR plus 2.750% Senior Secured Term Loan (2)

 
(1,980
)
 
13

Total
$
4,000

 
$
(1,980
)
 
$
13

(1)
Write-off of discounts and issuance costs are included in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income and Other, net within Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.
(2)
Our Senior Secured Term Loan extinguished during the nine months ended September 30, 2017 was Third Party debt.

On January 25, 2017, T-Mobile USA, Inc. (“T-Mobile USA”), and certain of its affiliates, as guarantors, entered into an agreement to borrow $4.0 billion under a secured term loan facility (“Incremental Term Loan Facility”) with DT, our majority stockholder, to refinance $1.98 billion of outstanding senior secured term loans under its Term Loan Credit Agreement dated November 9, 2015, with the remaining net proceeds from the transaction used to redeem callable high yield debt. The Incremental Term Loan Facility increased DT’s incremental term loan commitment provided to T-Mobile USA under that certain First Incremental Facility Amendment dated as of December 29, 2016, from $660 million to $2.0 billion and provided T-Mobile USA with an additional $2.0 billion incremental term loan commitment.

On January 31, 2017, the loans under the Incremental Term Loan Facility were drawn in two tranches: (i) $2.0 billion of which bears interest at a rate equal to a per annum rate of LIBOR plus a margin of 2.00% and matures on November 9, 2022, and (ii) $2.0 billion of which bears interest at a rate equal to a per annum rate of LIBOR plus a margin of 2.25% and matures on January 31, 2024. In July 2017, we repriced the $2.0 billion Incremental Term Loan Facility maturing on January 31, 2024, with DT by reducing the interest rate to a per annum rate of LIBOR plus a margin of 2.00%. No issuance fees were incurred related to this debt agreement for the nine months ended September 30, 2017.

On March 31, 2017, the Incremental Term Loan Facility was amended to waive all interim principal payments. The outstanding principal balance will be due at maturity.


17


During the nine months ended September 30, 2017, we issued the following Senior Notes to DT:
(in millions)
Principal Issuances (Redemptions)
 
Discounts (1)
 
Net Proceeds from Issuance of Long-Term Debt
4.000% Senior Notes due 2022
$
1,000

 
$
(23
)
 
$
977

5.125% Senior Notes due 2025
1,250

 
(28
)
 
1,222

5.375% Senior Notes due 2027 (2)
1,250

 
(28
)
 
1,222

6.288% Senior Reset Notes due 2019
(1,250
)
 

 
(1,250
)
6.366% Senior Reset Notes due 2020
(1,250
)
 

 
(1,250
)
Total
$
1,000

 
$
(79
)
 
$
921

(1)
Discounts reduce Proceeds from issuance of long-term debt and are included within Net cash (used in) provided by financing activities in our Condensed Consolidated Statements of Cash Flows.
(2)
In April 2017, we issued to DT $750 million in aggregate principal amount of the 5.375% Senior Notes due 2027, and in September 2017, we issued to DT the remaining $500 million in aggregate principal amount of the 5.375% Senior Notes due 2027.

On March 13, 2017, DT agreed to purchase a total of $3.5 billion in aggregate principal amounts of Senior Notes with various interest rates and maturity dates (the “new DT Notes”).

Through net settlement in April 2017, we issued to DT a total of $3.0 billion in aggregate principal amount of the new DT Notes and redeemed the $2.5 billion in outstanding aggregate principal amount of Senior Reset Notes with various interest rates and maturity dates (the “old DT Notes”).

The redemption prices of the old DT Notes were 103.144% and 103.183%, resulting in a total of $79 million in early redemption fees. These early redemption fees were recorded as discounts on the issuance of the new DT Notes.

In September 2017, we issued to DT $500 million in aggregate principal amount of 5.375% Senior Notes due 2027, which is the final tranche of the new DT Notes. We were not required to pay any underwriting fees or issuance costs in connection with the issuance of the notes.

Net proceeds from the issuance of the new DT Notes were $921 million and are included in Proceeds from issuance of long-term debt in our Condensed Consolidated Statements of Cash Flows.

On May 9, 2017, we exercised our option under existing purchase agreements and issued the following Senior Notes to DT:
(in millions)
Principal Issuances
 
Premium
 
Net Proceeds from Issuance of Long-Term Debt
5.300% Senior Notes due 2021
$
2,000

 
$

 
$
2,000

6.000% Senior Notes due 2024
1,350

 
40

 
1,390

6.000% Senior Notes due 2024
650

 
24

 
674

Total
$
4,000

 
$
64

 
$
4,064


The proceeds were used to fund a portion of the purchase price of spectrum licenses won in the 600 MHz spectrum auction. Net proceeds from these issuances include $64 million in debt premiums. See Note 5 - Spectrum License Transactions for further information.

Revolving Credit Facility

We had no outstanding borrowings under our $1.5 billion senior secured revolving credit facility with DT as of September 30, 2017 and December 31, 2016. Proceeds and borrowings from the revolving credit facility are presented in Proceeds from borrowing on revolving credit facility and Repayments of revolving credit facility within Net cash (used in) provided by financing activities in our Condensed Consolidated Statements of Cash Flows.

Note 8 – Income Taxes

Within our Condensed Consolidated Statements of Comprehensive Income, we recorded an Income tax expense of $356 million and $232 million for the three months ended September 30, 2017 and 2016, respectively, and $618 million and $651 million for the nine months ended September 30, 2017 and 2016, respectively. The change for the three months ended September 30, 2017 was primarily from higher income before income taxes. The change for the nine months ended September

18


30, 2017 was primarily from a lower effective tax rate partially offset by higher income before income taxes. The effective tax rate was 39.3% and 38.8% for the three months ended September 30, 2017 and 2016, respectively, and 25.3% and 37.8% for the nine months ended September 30, 2017 and 2016, respectively. The change in the effective income tax rate for the nine months ended September 30, 2017, was primarily due to a reduction in the valuation allowance against deferred tax assets in certain state jurisdictions that resulted in the recognition of $270 million in tax benefits in the first quarter of 2017 and the recognition of an additional $19 million in tax benefits through the third quarter of 2017. Total tax benefits related to the reduction in the valuation allowance were $289 million through September 30, 2017. The effective tax rate was further decreased by the recognition of $62 million of excess tax benefits related to share-based payments for the nine months ended September 30, 2017, compared to $24 million for the same period in 2016.

During the first quarter of 2017, due to ongoing analysis of positive and negative evidence related to the utilization of the deferred tax assets, we determined that a portion of the valuation allowance was no longer necessary. Positive evidence supporting the release of a portion of the valuation allowance included reaching a position of cumulative income over a three-year period in the state jurisdictions as well as projecting sustained earnings in those jurisdictions. Due to this positive evidence, we reduced the valuation allowance which resulted in a decrease to Deferred tax liabilities in our Condensed Consolidated Balance Sheets. We will continue to monitor positive and negative evidence related to the utilization of the remaining deferred tax assets for which a valuation allowance continues to be provided. It is possible that we may release additional portions of the remaining valuation allowance within the next three months.

Note 9 – Earnings Per Share

The computation of basic and diluted earnings per share was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except shares and per share amounts)
2017
 
2016
 
2017
 
2016
Net income
$
550

 
$
366

 
$
1,829

 
$
1,070

Less: Dividends on mandatory convertible preferred stock
(13
)
 
(13
)
 
(41
)
 
(41
)
Net income attributable to common stockholders - basic
537

 
353

 
1,788

 
1,029

Add: Dividends related to mandatory convertible preferred stock
13

 

 
41

 

Net income attributable to common stockholders - diluted
$
550

 
$
353

 
$
1,829

 
$
1,029

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
831,189,779

 
822,998,697

 
829,974,146

 
821,626,675

Effect of dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options and unvested stock awards
7,992,286

 
9,259,122

 
9,523,365

 
9,614,352

Mandatory convertible preferred stock
32,238,000

 

 
32,238,000

 

Weighted average shares outstanding - diluted
871,420,065

 
832,257,819

 
871,735,511

 
831,241,027

 
 
 
 
 
 
 
 
Earnings per share - basic
$
0.65

 
$
0.43

 
$
2.15

 
$
1.25

Earnings per share - diluted
$
0.63

 
$
0.42

 
$
2.10

 
$
1.24

 
 
 
 
 
 
 
 
Potentially dilutive securities:
 
 
 
 
 
 
 
Outstanding stock options and unvested stock awards

 
278,675

 
4,760

 
287,375

Mandatory convertible preferred stock

 
32,238,000

 

 
32,238,000


Unless converted earlier, each share of preferred stock will convert automatically on December 15, 2017 into between 1.6119 (the minimum conversion rate) and 1.9342 (the maximum conversion rate) shares of our common stock, subject to customary anti-dilution adjustments and depending on the applicable market value of our common stock. Using the minimum conversion rate, we would issue 32,238,000 shares of our common stock upon conversion.

Potentially dilutive securities were not included in the computation of diluted earnings per share if to do so would have been anti-dilutive.


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Note 10 – Commitments and Contingencies

Commitments

Operating Leases and Purchase Commitments

During the nine months ended September 30, 2017, we entered into a purchase commitment with a handset Original Equipment Manufacturer, resulting in a material increase to the future minimum payments for purchase commitments summarized below.

Future minimum payments for non-cancelable operating leases and purchase commitments are as follows:
(in millions)
Operating Leases
 
Purchase Commitments
Year ending September 30,
 
 
 
2018
$
2,397

 
$
2,477

2019
2,153

 
1,210

2020
1,867

 
1,015

2021
1,472

 
759

2022
1,163

 
661

Thereafter
2,240

 
904

Total
$
11,292

 
$
7,026


Renewable Energy Purchase Agreements

In January 2017, T-Mobile USA entered into a REPA with Red Dirt Wind Project, LLC. The agreement is based on the expected operation of a wind energy-generating facility located in Oklahoma and will remain in effect until the twelfth anniversary of the facility’s entry into commercial operation. Commercial operation of the facility is expected to occur by the end of 2017. The REPA consists of two components: (1) an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility and (2) a commitment to purchase the renewable energy credits (“RECs”) associated with the energy output generated by the facility. T-Mobile USA will net settle the forward agreement and acquire the RECs monthly by paying, or receiving, an aggregate net payment based on two variables (1) the facility’s energy output, which has an estimated maximum capacity of approximately 160 megawatts and (2) the difference between (a) an initial fixed price, subject to annual escalation, and (b) current local marginal energy prices during the monthly settlement period. We have determined that the REPA does not meet the definition of a derivative because the expected energy output of the facility may not be reliably estimated (the arrangement lacks a notional amount). The REPA does not contain any unconditional purchase obligations because amounts under the agreement are not fixed and determinable. Our participation in the REPA did not require an upfront investment or capital commitment. We do not control the activities that most significantly impact the energy-generating facility nor do we receive specific energy output from it. No amounts were settled under the agreement during the nine months ended September 30, 2017.

In August 2017, T-Mobile USA entered into a REPA with Solomon Forks Wind Project, LLC. The agreement is based on the expected operation of a wind energy-generating facility located in Kansas and will remain in effect until the fifteenth anniversary of the facility’s entry into commercial operation. Commercial operation of the facility is expected to occur by the end of 2018. The REPA consists of two components: (1) an energy forward agreement that is net settled based on energy prices and the energy output generated by the facility and (2) a commitment to purchase the environmental attributes (“EACs”) associated with the energy output generated by the facility. T-Mobile USA will net settle the forward agreement and acquire the EACs monthly by paying, or receiving, an aggregate net payment based on two variables (1) the facility’s energy output, which has an estimated maximum capacity of approximately 160 megawatts and (2) the difference between (a) an initial fixed price, subject to annual escalation, and (b) current local marginal energy prices during the monthly settlement period. We have determined that the REPA does not meet the definition of a derivative because the expected energy output of the facility may not be reliably estimated (the arrangement lacks a notional amount). The REPA does not contain any unconditional purchase obligations because amounts under the agreement are not fixed and determinable. Our participation in the REPA did not require an upfront investment or capital commitment. We do not control the activities that most significantly impact the energy-generating facility nor do we receive specific energy output from it. No amounts were settled under the agreement during the nine months ended September 30, 2017.


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Contingencies and Litigation

We are involved in various lawsuits, claims, government agency investigations and enforcement actions, and other proceedings (“Litigation Matters”) that arise in the ordinary course of business, which include numerous court actions alleging that we are infringing various patents. Virtually all of the patent infringement cases are brought by non-practicing entities and effectively seek only monetary damages, although they occasionally seek injunctive relief as well. The Litigation Matters described above have progressed to various stages and some of them may proceed to trial, arbitration, hearing or other adjudication that could include an award of monetary or injunctive relief in the coming 12 months, if they are not otherwise resolved. We have established an accrual with respect to certain of these matters, where appropriate, which is reflected in the condensed consolidated financial statements but that we do not consider, individually or in the aggregate, material. An accrual is established when we believe it is both probable that a loss has been incurred and an amount can be reasonably estimated. For other matters, where we have not determined that a loss is probable or because the amount of loss cannot be reasonably estimated, we have not recorded an accrual due to various factors typical in contested proceedings, including but not limited to: uncertainty concerning legal theories and their resolution by courts or regulators; uncertain damage theories and demands; and a less than fully developed factual record. While we do not expect that the ultimate resolution of these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, an unfavorable outcome of some or all of these proceedings could have a material adverse impact on results of operations or cash flows for a particular period. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.

Note 11 – Guarantor Financial Information

Pursuant to the applicable indentures and supplemental indentures, the long-term debt to affiliates and third parties, excluding Senior Secured Term Loans and capital leases, issued by T-Mobile USA (“Issuer”) is fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by T-Mobile (“Parent”) and certain of the Issuer’s 100% owned subsidiaries (“Guarantor Subsidiaries”).

In January 2017, T-Mobile USA, and certain of its affiliates, as guarantors, borrowed $4.0 billion under the Incremental Term Loan Facility to refinance $1.98 billion of outstanding secured term loans under its Term Loan Credit Agreement dated November 9, 2015, with the remaining net proceeds from the transaction intended to be used to redeem callable high yield debt.

In March 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $500 million in aggregate principal amount of public 4.000% Senior Notes due 2022, (ii) issued $500 million in aggregate principal amount of public 5.125% Senior Notes due 2025 and (iii) issued $500 million in aggregate principal amount of public 5.375% Senior Notes due 2027.

In April 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $1.0 billion in aggregate principal amount of 4.000% Senior Notes due 2022, (ii) issued $1.25 billion in aggregate principal amount of 5.125% Senior Notes due 2025 and (iii) issued $750 million in aggregate principal amount of 5.375% Senior Notes due 2027. Additionally, T-Mobile USA and certain of its affiliates, as guarantors, redeemed through net settlement, the $1.25 billion outstanding aggregate principal amount of the 6.288% Senior Reset Notes to affiliates due 2019 and $1.25 billion in aggregate principal amount of the 6.366% Senior Reset Notes to affiliates due 2020.

In May 2017, T-Mobile USA and certain of its affiliates, as guarantors, (i) issued $2.0 billion in aggregate principal amount of 5.300% Senior Notes due 2021, (ii) issued $1.35 billion in aggregate principal amount of 6.000% Senior Notes due 2024 and (iii) issued $650 million in aggregate principal amount of 6.000% Senior Notes due 2024.

In September 2017, T-Mobile USA and certain of its affiliates, as guarantors, issued the remaining $500 million in aggregate principal amount of 5.375% Senior Notes due 2027.

See Note 7 - Debt for further information.

The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indentures and credit facilities governing the long-term debt contain covenants that, among other things, limit the ability of the Issuer and the Guarantor Subsidiaries to: incur more debt; pay dividends and make distributions; make certain investments; repurchase stock; create liens or other encumbrances; enter into transactions with affiliates; enter into transactions that restrict dividends or distributions from subsidiaries; and merge, consolidate, or sell, or otherwise dispose of, substantially all of their assets. Certain provisions of each of the credit facilities, indentures and supplemental indentures relating to the long-term debt restrict the ability of the Issuer to loan funds or make payments to Parent. However, the Issuer

21


and Guarantor Subsidiaries are allowed to make certain permitted payments to the Parent under the terms of the indentures and the supplemental indentures.

Presented below is the condensed consolidating financial information as of September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016.

22


Condensed Consolidating Balance Sheet Information
September 30, 2017
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating and Eliminating Adjustments
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
29

 
$
2

 
$
678

 
$
30

 
$

 
$
739

Accounts receivable, net

 

 
1,504

 
230

 

 
1,734

Equipment installment plan receivables, net

 

 
2,136

 

 

 
2,136

Accounts receivable from affiliates

 
6

 
24

 

 
(6
)
 
24

Inventories

 

 
999

 

 

 
999

Other current assets

 

 
1,241

 
576

 

 
1,817

Total current assets
29

 
8

 
6,582

 
836

 
(6
)
 
7,449

Property and equipment, net (1)

 

 
21,248

 
322

 

 
21,570

Goodwill

 

 
1,683

 

 

 
1,683

Spectrum licenses

 

 
35,007

 

 

 
35,007

Other intangible assets, net

 

 
256

 

 

 
256

Investments in subsidiaries, net
19,823

 
37,943

 

 

 
(57,766
)
 

Intercompany receivables and note receivables
425

 
8,903

 

 

 
(9,328
)
 

Equipment installment plan receivables due after one year, net

 

 
1,100

 

 

 
1,100

Other assets

 
3

 
778

 
292

 
(215
)
 
858

Total assets
$
20,277

 
$
46,857

 
$
66,654

 
$
1,450

 
$
(67,315
)
 
$
67,923

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$

 
$
201

 
$
5,626

 
$
244

 
$

 
$
6,071

Payables to affiliates

 
250

 
38

 

 

 
288

Short-term debt

 
3

 
555

 

 

 
558

Short-term debt to affiliates

 

 
6

 

 
(6
)
 

Deferred revenue

 

 
790

 

 

 
790

Other current liabilities

 

 
219

 
177

 

 
396

Total current liabilities

 
454

 
7,234

 
421

 
(6
)
 
8,103

Long-term debt

 
11,913

 
1,250

 

 

 
13,163

Long-term debt to affiliates

 
14,586

 

 

 

 
14,586

Tower obligations (1)

 

 
395

 
2,204

 

 
2,599

Deferred tax liabilities

 

 
5,750

 

 
(215
)
 
5,535

Deferred rent expense

 

 
2,693

 

 

 
2,693

Negative carrying value of subsidiaries, net

 

 
596

 

 
(596
)
 

Intercompany payables and debt

 

 
9,119

 
209

 
(9,328
)
 

Other long-term liabilities

 
81

 
884

 
2

 

 
967

Total long-term liabilities

 
26,580

 
20,687

 
2,415

 
(10,139
)
 
39,543

Total stockholders' equity (deficit)
20,277

 
19,823

 
38,733

 
(1,386
)
 
(57,170
)
 
20,277

Total liabilities and stockholders' equity
$
20,277

 
$
46,857

 
$
66,654

 
$
1,450

 
$
(67,315
)
 
$
67,923

(1)
Assets and liabilities for Non-Guarantor Subsidiaries are primarily included in VIEs related to the 2012 Tower Transaction. See Note 8 – Tower Obligations included in the Annual Report on Form 10-K for the year ended December 31, 2016.


23


Condensed Consolidating Balance Sheet Information
December 31, 2016
(in millions)
Parent
 
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries