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Investment in Unconsolidated Entities | 6 Months Ended
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Jun. 30, 2013
Disclosure Text Block |
Investment in Unconsolidated Entities | 7. Investments in Unconsolidated Entities Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. These investments are accounted for using either the equity or cost method. Equity in earnings of unconsolidated entities totaled $35.6 million and $25.2 million in the three months ended June 30, 2013 and 2012, respectively, and $62.4 million and $46.8 million in the six months ended June 30, 2013 and 2012, respectively; of those amounts, U.S. Cellular's investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $19.8 million and $19.2 million in the three months ended June 30, 2013 and 2012, respectively, and $40.4 million and $36.3 million in the six months ended June 30, 2013 and 2012, respectively. U.S. Cellular held a 5.5% ownership interest in the LA Partnership during these periods.
| The following table, which is based on information provided in part by third parties, summarizes the combined results of operations of U.S. Cellular’s equity method investments. Such combined results of operations include the results of the NY1 & NY2 Partnerships from April 3, 2013, the effective date of their deconsolidation as discussed below.
|  |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|  |  | 2013 |  | 2012 |  | 2013 |  | 2012
| (Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |
| Revenues | $ | 1,544,564 |  | $ | 1,420,492 |  | $ | 3,037,290 |  | $ | 2,851,865
| Operating expenses |  | 1,095,809 |  |  | 1,014,995 |  |  | 2,162,776 |  |  | 2,086,883
| Operating income |  | 448,755 |  |  | 405,497 |  |  | 874,514 |  |  | 764,982
| Other income, net |  | 1,113 |  |  | 1,320 |  |  | 1,701 |  |  | 2,236
| Net income | $ | 449,868 |  | $ | 406,817 |  | $ | 876,215 |  | $ | 767,218
NY1 & NY2 Deconsolidation U.S. Cellular holds a 60.00% interest in NY1 and a 57.14% interest in NY2 (together with NY1, the “Partnerships”). The remaining interests in the Partnerships are held by Cellco Partnership d/b/a Verizon Wireless (“Verizon Wireless”). The Partnerships are operated by Verizon Wireless unde r the Verizon Wireless brand. Prior to April 3, 2013, b ecause U.S. Cellular own ed a greater than 50% interest in each of these markets and based on U.S. Cellular's rights under the Partnership Agreements, U.S. Cellular consolidated the financial results of these markets in accordance with GAAP. On April 3, 2013, U.S. Cellular entered into an agreement relating to the Partnerships. The agreement amends the Partner ship Agreements in several ways which provide Verizon Wireless with substantive participating rights that allow Verizon Wireless to make decisions that are in the ordinary course of business of the Partnerships and which are significant to directing and executing the activities of the business. Accordingly, as required by GAAP, U.S. Cellular deconsolidated the Partnerships effective as of April 3, 2013 and thereafter reported them as equity method investments in its consolidated financial statements. After the NY1 & NY2 Deconsolidation, U.S. Cellular retained the same ownership percentage s in the Partnerships and will continue to report the same percentage s of income from the Partnerships, which will be recorded in Equity in earnings of unconsolidated entities in the Consolidated Statement of Operations. In addition to the foregoing described arrangements, U.S. Cellular has certain other arm's length, ordinary business relationships with Verizon Wireless and its affiliates. In accordance with GAAP, as a result of the NY1 & NY2 Deconsolidation, U.S. Cellular's interest in the Partnerships is reflected in Investments in unconsolidated entities at a fair value of $114.8 million as of April 3, 2013. Recording U.S. Cellular's interest in the Partnerships required allocation of the excess of fair value over book value to customer lists, licenses, a favorable contract and goodwill of the Partnerships. Amortization expense related to customer lists and the favorable contract will be recognized over their respective useful lives and is included in Equity in earnings of unconsolidated entities in the Consolidated Statement of Operations. In addition, U.S. Cellular recognized a non-cash pre-tax gain of $18.5 million. The gain was recorded in Gain on investment s in the Consolidated Statement of Operations for the three months and six months ended June 30, 2013. The Partnerships were valued using a discounted cash flow approach and a publicly-traded guideline company method. The discounted cash flow approach uses value drivers and risks specific to the industry and current economic factors. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value and may not be indicative of U.S. Cellular specific assumptions. The most significant assumptions made in this process were the revenue growth rate, the long-term and terminal growth rate, discount rate and projected capital expenditures. The assumptions were as follows:
Key assumptions |
Weighted-average expected revenue growth rate (next ten years) |  | 2.0 | %
Long-term and terminal revenue growth rate (after year ten) |  | 2.0 | %
Discount rate |  | 10.5 | %
Capital expenditures as a percentage of revenue |  | 14.9-18.8 | %
The publicly-traded guideline company method develops an indication of fair value by calculating average market pricing multiples for selected publicly-traded companies using multiples of: Revenue and Earnings before Interest, Taxes, and Depreciation and Amortization (EBITDA). The developed multiples were applied to applicable financial measures of the Partnerships to determine fair value. The discounted cash flow approach and publicly-traded guideline company method were weighted to arrive at the total fair value of the Partnerships.

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