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UNITED STATES CELLULAR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[May 02, 2014]

UNITED STATES CELLULAR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) United States Cellular Corporation ("U.S. Cellular") owns, operates and invests in wireless markets throughout the United States. U.S. Cellular is an 84%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS") as of March 31, 2014.



U.S. Cellular provides wireless telecommunications services to approximately 4.7 million customers in 23 states. As of March 31, 2014, U.S. Cellular's average penetration rate in its consolidated operating markets was 14.8%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network.

The following discussion and analysis should be read in conjunction with U.S.


Cellular's interim consolidated financial statements and notes included in Item 1 above, and with the description of U.S. Cellular's business, its audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in U.S. Cellular's Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 2013.

OVERVIEW The following is a summary of certain selected information contained in the comprehensive Management's Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management's Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.

Financial and operating highlights in the three months ended March 31, 2014 included the following: † In March 2014, U.S. Cellular sold the majority of its St. Louis area non-operating market license for $92.3 million. As a result of this sale, a gain of $75.8 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

† In February 2014, U.S. Cellular completed a license exchange in Milwaukee. As a result of this transaction, a gain of $15.7 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

† Total consolidated customers were 4,684,000 at March 31, 2014, including 4,530,000 retail customers (97% of total).

The following operating information is presented for Core Markets. As used here, Core Markets is defined as all consolidated markets in which U.S. Cellular currently conducts business and, therefore, excludes the Divestiture Markets and the NY1 & NY2 Partnerships. Core Markets as defined also includes any other income or expenses due to U.S. Cellular's direct or indirect ownership interests in other spectrum in the Divestiture Markets which was not included in the Divestiture Transaction and other retained assets from the Divestiture Markets.

See Note 5 - Acquisitions, Divestitures and Exchanges and Note 7 - Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

† Retail customer net losses were 80,000 in 2014 compared to net losses of 2,000 in 2013. In the postpaid category, there were net losses of 93,000 in 2014, compared to net losses of 33,000 in 2013. Postpaid defections increased due to billing system conversion issues and aggressive promotions by other carriers. Prepaid net additions were 13,000 in 2014 compared to net additions of 31,000 in 2013. The decline resulted from lower net additions in the national retail channel.

† Postpaid customers comprised approximately 92% of U.S. Cellular's retail customers as of March 31, 2014. The postpaid churn rate was 2.3% in 2014 compared to 1.6% in 2013. Billing system conversion issues and aggressive competitive offerings contributed to the increase in postpaid churn. The prepaid churn rate was 6.9% in 2014 compared to 5.6% in 2013.

† Billed average revenue per user ("ARPU") increased to $53.93 in 2014 from $50.93 in 2013 reflecting an increase in postpaid ARPU due to increases in smartphone adoption and corresponding revenues from data products and services.

Service revenue ARPU increased to $60.19 in 2014 from $57.14 in 2013 due primarily to an increase in postpaid ARPU, offset by decreases in inbound roaming revenue and prepaid ARPU.

† Postpaid customers on smartphone service plans increased to 53% as of March 31, 2014 compared to 43% as of March 31, 2013. In addition, smartphones represented 73% of all devices sold in 2014 compared to 62% in 2013.

15 -------------------------------------------------------------------------------- Table of Contents The following financial information is presented for U.S. Cellular consolidated results: † Retail service revenues of $764.8 million decreased $119.2 million, or 13%, in 2014 due to a decrease of 1,036,000 in the average number of customers (including approximately 750,000 due to the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) partially offset by an increase in billed ARPU.

† Cash flows from operating activities were $63.5 million. At March 31, 2014, Cash and cash equivalents and Short-term investments totaled $438.6 million and there were no outstanding borrowings under the revolving credit facility.

† Total additions to Property, plant and equipment were $89.6 million, including expenditures to deploy fourth generation Long-term Evolution ("4G LTE") equipment, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, and enhance billing and other customer management related systems and platforms. Total cell sites in service decreased 23% year-over-year to 6,165 primarily as a result of the NY1 & NY2 Deconsolidation and the deactivation of certain cell sites in the Divestiture Markets.

† Operating income increased $6.4 million, to $7.8 million in 2014.

Excluding the (gain) loss on license sales and exchanges, operating income decreased due to lower service revenues and higher equipment subsidies exceeding reductions in operating expenses.

† Net income attributable to U.S. Cellular shareholders increased $14.6 million to $19.5 million in 2014 compared to $4.9 million in 2013, due primarily to the net impact of higher operating income and interest expense. Basic earnings per share and Diluted earnings per share were $0.23 in 2014, which was $0.17 higher than in 2013.

U.S. Cellular anticipates that its future results may be affected by the following factors: † Effects of industry competition on service and equipment pricing; † U.S. Cellular completed the migration of its customers to a new Billing and Operational Support System ("B/OSS") in the third quarter of 2013.

Intermittent system outages and delayed system response times negatively impacted customer service and sales operations at certain times. System enhancements continue to be implemented to address these issues, and customer service and sales operations response times have improved. However, any future operational problems associated with the new billing system could have adverse effects on U.S. Cellular's business (in areas such as overall customer satisfaction, customer attrition, uncollectible accounts receivable, gross customer additions, or operating expenses). All of these factors could have a material adverse effect on U.S. Cellular's results of operations or cash flows; † Impacts of selling Apple iPhone products; † Impacts of selling devices under retail installment contracts; † Relative ability to attract and retain customers in a competitive marketplace in a cost effective manner; † Expanded distribution of products and services in third-party national retailers; † Potential increases in prepaid customers, who generally generate lower ARPU and higher churn, as a percentage of U.S. Cellular's customer base in response to changes in customer preferences and industry dynamics; † The nature and rate of growth in the wireless industry, requiring U.S.

Cellular to grow revenues primarily from selling additional products and services to its existing customers, increasing the number of multi-device users among its existing customers, increasing data products and services and attracting wireless customers switching from other wireless carriers; † Continued growth in revenues and costs related to data products and services and declines in revenues from voice services; † Rapid growth in the demand for new data devices and services which may result in increased cost of equipment sold and other operating expenses and the need for additional investment in network capacity and enhancements; † Further consolidation among carriers in the wireless industry, which could result in increased competition for customers and/or cause roaming revenues to decline; † Uncertainty related to various rulemaking proceedings underway at the Federal Communications Commission ("FCC"); 16 -------------------------------------------------------------------------------- Table of Contents † The ability to negotiate satisfactory 4G LTE data roaming agreements with other wireless operators.

Pro Forma Financial Information Refer to U.S. Cellular's Form 8-K filed on May 3, 2013 for pro forma financial information related to the Divestiture Transaction and the NY1 & NY2 Deconsolidation for the three months ended March 31, 2013, as if the transactions had occurred at the beginning of the period.

REGULATORY DEVELOPMENTS FCC Interoperability Order On October 25, 2013, the FCC adopted a Report and Order and Order of Proposed Modification confirming a voluntary industry agreement on interoperability in the Lower 700 MHz spectrum band. The FCC's Report and Order laid out a roadmap for the voluntary commitments of AT&T and DISH Network Corporation ("DISH") to become fully binding. The FCC implemented the AT&T commitments in an Order adopted in the first quarter of 2014 that modified AT&T's Lower 700 MHz licenses. Pursuant to these commitments, AT&T will begin incorporating changes in its network and devices that will foster interoperability across all paired spectrum blocks in the Lower 700 MHz Band and support LTE roaming on AT&T networks for carriers with compatible Band 12 devices, consistent with the FCC's rules on roaming. AT&T will be implementing the foregoing changes in phases starting with network software enhancement taking place possibly through the third quarter of 2015 with the AT&T Band 12 device roll-out to follow. In addition, the FCC has adopted changes in its technical rules for certain unpaired spectrum licensed to AT&T and DISH in the Lower 700 MHz band to enhance prospects for Lower 700 MHz interoperability. AT&T's network and devices currently interoperate across only two of the three paired blocks in the Lower 700 MHz band. U.S. Cellular's LTE deployment, carried out in conjunction with its partner, King Street Wireless, utilizes spectrum in all three of these blocks and, consequently, was not interoperable with the AT&T configuration.

U.S. Cellular believes that the FCC action will broaden the ecosystem of devices available to U.S. Cellular's customers over time.

RESULTS OF OPERATIONS Summary Operating Data for U.S. Cellular Consolidated Markets Following is a table of summarized operating data for U.S. Cellular's Consolidated Markets. Consolidated Markets herein refers to markets which U.S.

Cellular currently consolidates, or previously consolidated in the periods presented, and is not adjusted in prior periods for subsequent divestitures or deconsolidations. Unless otherwise noted, figures reported in Results of Operations are representative of consolidated results.

As of or for Three Months Ended March 31, 2014 2013 Retail Customers Postpaid Total at end of period 4,174,000 5,060,000 Gross additions 197,000 191,000 Net additions (losses) (93,000) (74,000) ARPU(1) $ 57.59 $ 54.85 Churn rate(2) 2.3 % 1.7 % Smartphone penetration(3)(4) 53.1 % 43.5 % Prepaid Total at end of period 356,000 446,000 Gross additions 85,000 104,000 Net additions (losses) 13,000 23,000 ARPU(1) $ 32.22 $ 33.31 Churn rate(2) 6.9 % 6.2 % Total customers at end of period 4,684,000 5,736,000 Billed ARPU(1) $ 53.93 $ 51.13 Service revenue ARPU(1) $ 60.19 $ 57.63 Smartphones sold as a percent of total devices sold 73.0 % 61.7 % Total Population Consolidated markets(5) 54,817,000 93,943,000 Consolidated operating markets(5) 31,729,000 47,440,000 Market penetration at end of period Consolidated markets(6) 8.5 % 6.1 % Consolidated operating markets(6) 14.8 % 12.1 % Capital expenditures (000s) $ 89,581 $ 118,410 Total cell sites in service 6,165 8,027 Owned towers 4,448 4,411 17 -------------------------------------------------------------------------------- Table of Contents Summary Operating Data for U.S. Cellular Core Markets Following is a table of summarized operating data for U.S. Cellular's Core Markets. For comparability, Core Markets as presented here excludes the results of the Divestiture Markets and NY1 and NY2 Partnerships as of or for the three months ended March 31, 2013.

As of or for Three Months Ended March 31, 2014 2013 Retail Customers Postpaid Total at end of period 4,174,000 4,463,000 Gross additions 197,000 176,000 Net additions (losses) (93,000) (33,000) ARPU(1) $ 57.59 $ 54.21 Churn rate(2) 2.3 % 1.6 % Smartphone penetration(3)(4) 53.1 % 43.0 % Prepaid Total at end of period 356,000 373,000 Gross additions 85,000 91,000 Net additions (losses) 13,000 31,000 ARPU(1) $ 32.22 $ 32.92 Churn rate(2) 6.9 % 5.6 % Total customers at end of period 4,684,000 5,005,000 Billed ARPU(1) $ 53.93 $ 50.93 Service revenue ARPU(1) $ 60.19 $ 57.14 Smartphones sold as a percent of total devices sold 73.0 % 62.1 % Total Population Consolidated markets(5) 54,817,000 84,025,000 Consolidated operating markets(5) 31,729,000 31,822,000 Market penetration at end of period Consolidated markets(6) 8.5 % 6.0 % Consolidated operating markets(6) 14.8 % 15.7 % Capital expenditures (000s) $ 89,581 $ 107,907 Total cell sites in service 6,165 6,113 Owned towers 3,883 3,846 (1) ARPU metrics are calculated by dividing a revenue base by an average number of customers by the number of months in the period. These revenue bases and customer populations are shown below: a. Postpaid ARPU consists of total postpaid service revenues and postpaid customers.

b. Prepaid ARPU consists of total prepaid service revenues and prepaid customers.

c. Billed ARPU consists of total postpaid, prepaid and reseller service revenues and postpaid, prepaid and reseller customers.

d. Service revenue ARPU consists of total retail service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller customers.

(2) Churn metrics represent the percentage of the postpaid or prepaid customers that disconnect service each month. These metrics represent the average monthly postpaid or prepaid churn rate for each respective period.

(3) Smartphones represent wireless devices which run on an Android, Apple, BlackBerry or Windows Mobile operating system, excluding tablets.

(4) Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid customers.

18 -------------------------------------------------------------------------------- Table of Contents (5) Used only to calculate market penetration of consolidated markets and consolidated operating markets, respectively. See footnote (6) below.

(6) Market penetration is calculated by dividing the number of wireless customers at the end of the period by the total population of consolidated markets and consolidated operating markets, respectively, as estimated by Claritas.

Components of Operating Income Percentage Three Months Ended March 31, 2014 2013 Change Change (Dollars in thousands) Retail service $ 764,801 $ 883,991 $ (119,190) (13) % Inbound roaming 50,126 65,874 (15,748) (24) % Other 38,686 46,484 (7,798) (17) % Service revenues 853,613 996,349 (142,736) (14) % Equipment sales 72,198 85,397 (13,199) (15) % Total operating revenues 925,811 1,081,746 (155,935) (14) % System operations (excluding Depreciation, amortization and accretion reported below) 180,607 216,299 (35,692) (17) % Cost of equipment sold 270,474 241,691 28,783 12 % Selling, general and administrative 395,564 420,080 (24,516) (6) % Depreciation, amortization and accretion 167,753 189,845 (22,092) (12) % (Gain) loss on asset disposals, net 1,934 5,434 (3,500) (64) % (Gain) loss on sale of business and other exit costs, net (6,900) 6,931 (13,831) >(100) % (Gain) loss on license sales and exchanges (91,446) - (91,446) N/M Total operating expenses 917,986 1,080,280 (162,294) (15) % Operating income $ 7,825 $ 1,466 $ 6,359 >100 % Operating Revenues Service revenues Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services, provided to U.S. Cellular's retail customers and to end users through third party resellers ("retail service"); (ii) charges to other wireless carriers whose customers use U.S. Cellular's wireless systems when roaming; and (iii) amounts received from the Federal Universal Service Fund ("USF").

Retail service revenues Retail service revenues decreased by $119.2 million, or 13%, in 2014 to $764.8 million due to a decrease in U.S. Cellular's average customer base (including the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) partially offset by an increase in billed ARPU.

Billed ARPU increased to $53.93 in 2014 from $51.13 in 2013. This overall increase is due primarily to an increase in postpaid ARPU to $57.59 in 2014 from $54.85 in 2013, reflecting increases in smartphone adoption and corresponding revenues from data products and services.

U.S. Cellular expects continued pressure on revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage. In addition, beginning in the second quarter of 2014, U.S. Cellular expanded its offerings involving equipment installment contracts. To the extent customers adopt these plans, U.S. Cellular expects it to reduce retail service revenue and ARPU and increase equipment revenue.

Inbound roaming revenues Inbound roaming revenues decreased by $15.7 million, or 24%, in 2014 to $50.1 million. The decrease was due primarily to the impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation.

19 -------------------------------------------------------------------------------- Table of Contents Other revenues Other revenues decreased by $7.8 million, or 17%, in 2014 compared to 2013, due primarily to decreases in eligible telecommunications carriers ("ETC") support.

Pursuant to the FCC's Reform Order ("Reform Order"), U.S. Cellular's current ETC support is being phased down at the rate of 20% per year beginning July 1, 2012. If the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will continue to receive 60% of its baseline support until the Phase II Mobility Fund is operational. At this time, U.S. Cellular cannot predict the net effect of the FCC's changes to the USF high cost support program in the Reform Order. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S.

Cellular's business, financial condition or results of operations.

Equipment sales revenues Equipment sales revenues include revenues from sales of wireless devices and related accessories to both new and existing customers, as well as revenues from sales of devices and accessories to agents. All Equipment sales revenues are recorded net of rebates.

U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices; in addition, customers on currently offered rate plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings involving equipment installment contracts. To the extent customers adopt these plans, U.S. Cellular expects it to reduce retail service revenue and ARPU and increase equipment revenue. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers.

Equipment sales revenues decreased $13.2 million, or 15%, in 2014 to $72.2 million. The decrease was due primarily to the effects of the Divestiture Transaction and the NY1 & NY2 Deconsolidation and fewer device sales in the Core Markets, primarily feature phones. The decrease also reflected a reduction in average revenue per device sold due to industry price competition.

Operating Expenses System operations expenses (excluding Depreciation, amortization and accretion) System operations expenses (excluding Depreciation, amortization, and accretion) include charges from telecommunications service providers for U.S. Cellular's customers' use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S.

Cellular's network, long-distance charges, outbound roaming expenses and payments to third­party data product and platform developers.

System operations expenses decreased $35.7 million, or 17%, to $180.6 million.

Key components of the net changes in System operations expense were as follows: † Customer usage expenses decreased by $17.7 million, or 25%, driven by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation and decreases in certain data costs due to 4G LTE migration and lower fees for platform and content providers.

† Maintenance, utility and cell site expenses decreased $12.2 million, or 12%, driven primarily by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation and lower headcount.

† Expenses incurred when U.S. Cellular's customers used other carriers' networks while roaming decreased $5.9 million, or 13%, due primarily to the Divestiture Transaction and NY1 & NY2 Deconsolidation. Such expenses also decreased in the Core Markets due to lower voice volume, offset by an increase in data roaming usage.

U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage.

However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.

20 -------------------------------------------------------------------------------- Table of Contents Cost of equipment sold Cost of equipment sold increased by $28.8 million, or 12%, in 2014 to $270.5 million. The increase was driven by a 37% increase in the average cost per device sold, which more than offset the impact of selling fewer devices. Average cost per device sold increased due to general customer preference for higher-priced 4G LTE smartphones. Smartphones sold as a percentage of total devices sold were 73.0% and 61.7% in 2014 and 2013, respectively. The total number of devices sold decreased by 16%, primarily due to the Divestiture Transaction.

U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $198.3 million and $156.3 million for 2014 and 2013, respectively. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as wireless carriers continue to use device availability and pricing as a means of competitive differentiation. In addition, U.S. Cellular expects increasing sales of data centric wireless devices to result in higher equipment subsidies over time; these devices generally have higher purchase costs which cannot be recovered through proportionately higher selling prices to customers under the standard contract/subsidy model the industry has operated with for many years. However, U.S. Cellular is beginning to offer new equipment pricing constructs such as installment plans which U.S. Cellular expects will mitigate loss on equipment to some degree.

Selling, general and administrative expenses Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses.

Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.

Key components of the $24.5 million, or 6%, decrease to $395.6 million were as follows: † Selling and marketing expense decreased by $5.5 million, or 3%, due primarily to the Divestiture Transaction and NY1 & NY2 Deconsolidation, offset by increases in commissions and advertising expenses.

† General and administrative expense decreased by $19.0 million, or 8%, due primarily to the Divestiture Transaction and NY1 & NY2 Deconsolidation, offset by an increase in bad debts expense.

Depreciation, amortization and accretion Depreciation, amortization and accretion decreased $22.1 million, or 12%, in 2014 to $167.8 million due primarily to the higher amount of accelerated depreciation, amortization and accretion in the Divestiture Markets that occurred in 2013. The impact of the acceleration was $13.1 million in 2014 compared to $38.1 million in 2013. The accelerated depreciation, amortization and accretion in the Divestiture Markets was completed in the first quarter of 2014.

(Gain) loss on asset disposals, net (Gain) loss on asset disposals, net was a loss in both 2014 and 2013 due primarily to the write-off and disposals of certain network assets.

(Gain) loss on sale of business and other exit costs, net The net gain in 2014 and the net loss in 2013 resulted from the Divestiture Transaction. See Note 5 - Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges The net gain in 2014 resulted from the sale of the St. Louis area non-operating market license and the license exchange in Milwaukee. See Note 5 - Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

21 -------------------------------------------------------------------------------- Table of Contents Components of Other Income (Expense) Percentage Three Months Ended March 31, 2014 2013 Change Change (Dollars in thousands, except per share amounts) Operating income $ 7,825 $ 1,466 $ 6,359 >100 % Equity in earnings of unconsolidated entities 37,075 26,835 10,240 38 % Interest and dividend income 884 903 (19) (2) % Interest expense (14,862) (10,910) (3,952) (36) % Other, net 86 (215) 301 >100 % Total investment and other income 23,183 16,613 6,570 40 % Income before income taxes 31,008 18,079 12,929 72 % Income tax expense 12,604 7,369 5,235 71 % Net income 18,404 10,710 7,694 72 % Less: Net income (loss) attributable to noncontrolling interests, net of tax (1,078) 5,796 (6,874) >(100) % Net income attributable to U.S.

Cellular shareholders $ 19,482 $ 4,914 $ 14,568 >100 % Basic earnings per share attributable to U.S. Cellular shareholders $ 0.23 $ 0.06 $ 0.17 >100 % Diluted earnings per share attributable to U.S. Cellular shareholders $ 0.23 $ 0.06 $ 0.17 >100 % Equity in earnings of unconsolidated entities U.S. Cellular's investment in the Los Angeles SMSA Limited Partnership ("LA Partnership") contributed $21.2 million and $20.6 million to Equity in earnings of unconsolidated entities in 2014 and 2013, respectively.

On April 3, 2013, U.S. Cellular deconsolidated the NY1 & NY2 Partnerships and began reporting them as equity method investments in its consolidated financial statements as of that date. See Note 7 - Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

In 2014, U.S. Cellular's investments in the NY1 & NY2 Partnerships contributed $8.0 million.

Interest expense The increase in interest expense was due primarily to a decrease in capitalized interest related to network and systems projects. Interest cost capitalized was $0.9 million and $4.7 million for 2014 and 2013, respectively.

Income tax expense See Note 3 - Income Taxes in the Notes to Consolidated Financial Statements for a discussion of the overall effective tax rate on Income before income taxes.

Net income attributable to noncontrolling interests, net of tax The decrease from 2013 to 2014 is due primarily to the elimination of the noncontrolling interest as a result of the NY1 & NY2 Deconsolidation on April 3, 2013.

22 -------------------------------------------------------------------------------- Table of Contents RECENT ACCOUNTING PRONOUNCEMENTS Recent accounting pronouncements are not expected to have a significant effect on U.S. Cellular's financial condition or results of operations. See Note 1 - Basis of Presentation in the Notes to Consolidated Financial Statements for additional information.

FINANCIAL RESOURCES U.S. Cellular operates a capital- and marketing-intensive business. U.S.

Cellular utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and disposition of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions, capital expenditures and other factors. The table below and the following discussion in this Financial Resources section summarize U.S.

Cellular's cash flow activities for the three months ended March 31, 2014 and 2013.

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