Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

[ ]

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 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2669023

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

30 North LaSalle Street, Suite 4000, Chicago, Illinois 60602

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (312) 630-1900

Yes

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.

[x]

[ ]

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[x]

[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

[x]

Accelerated filer

[ ]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ]

[x]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at March 31, 2016

Common Shares, $0.01 par value

101,822,914 Shares

Series A Common Shares, $0.01 par value

7,218,406 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2016

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		1
		Consolidated Statement of Operations		1
		Consolidated Statement of Comprehensive Income		2
		Consolidated Statement of Cash Flows		3
		Consolidated Balance Sheet		4
		Consolidated Statement of Changes in Equity		6
		Notes to Consolidated Financial Statements		8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		17
		Executive Overview		17
		Terms used by TDS		18
		Results of Operations — TDS Consolidated		20
		U.S. Cellular Operations		23
		TDS Telecom Operations		28
			Wireline Operations	30
			Cable Operations	33
			HMS Operations	36
		Liquidity and Capital Resources		37
		Consolidated Cash Flows		40
		Consolidated Balance Sheet Analysis		41
		Application of Critical Accounting Policies and Estimates		41
		Recent Accounting Pronouncements		41
		Regulatory Matters		42
		Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement		43
		Supplemental Information		46

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49

	Item 4.	Controls and Procedures		50

Part II.	Other Information

	Item 1.	Legal Proceedings		51

	Item1A.	Risk Factors		51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51

	Item 5.	Other Information		52

	Item 6.	Exhibits		53

Signatures

Part I. Financial Information

Item 1. Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations

(Unaudited)

			Three Months Ended
			March 31,
			2016		2015
(Dollars and shares in millions, except per share amounts)
Operating revenues
	Service		$	1,000	$	1,073
	Equipment and product sales			243		179
		Total operating revenues		1,243		1,252

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			288		294
	Cost of equipment and products			291		272
	Selling, general and administrative			431		438
	Depreciation, amortization and accretion			212		207
	(Gain) loss on asset disposals, net			6		5
	(Gain) loss on sale of business and other exit costs, net			–		(124)
	(Gain) loss on license sales and exchanges, net			–		(123)
		Total operating expenses		1,228		969

Operating income				15		283

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35		35
	Interest and dividend income			14		8
	Interest expense			(41)		(34)
		Total investment and other income		8		9

Income before income taxes				23		292
	Income tax expense			13		116
Net income				10		176
Less: Net income attributable to noncontrolling
interests, net of tax				2		30
Net income attributable to TDS shareholders				8		146
TDS Preferred dividend requirement				–		–
Net income available to TDS common shareholders			$	8	$	146

Basic weighted average shares outstanding				109		108
Basic earnings per share available to TDS common shareholders			$	0.07	$	1.35

Diluted weighted average shares outstanding				110		109
Diluted earnings per share available to TDS common shareholders			$	0.07	$	1.33

Dividends per share to TDS shareholders			$	0.148	$	0.141

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

Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

					Three Months Ended
					March 31,
					2016		2015
(Dollars in millions)
Net income					$	10	$	176
	Net change in accumulated other comprehensive income
		Change related to retirement plan
			Amounts included in net periodic benefit cost for the period
				Change in prior service cost		–		(1)
Comprehensive income						10		175
	Less: Net income attributable to noncontrolling interests, net of tax					2		30
Comprehensive income attributable to TDS shareholders					$	8	$	145

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

Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

				Three Months Ended
				March 31,
				2016		2015
(Dollars in millions)
Cash flows from operating activities
	Net income			$	10	$	176
	Add (deduct) adjustments to reconcile net income to net cash flows
	from operating activities
		Depreciation, amortization and accretion			212		207
		Bad debts expense			19		30
		Stock-based compensation expense			9		8
		Deferred income taxes, net			5		(47)
		Equity in earnings of unconsolidated entities			(35)		(35)
		Distributions from unconsolidated entities			14		13
		(Gain) loss on asset disposals, net			6		5
		(Gain) loss on sale of business and other exit costs, net			–		(124)
		(Gain) loss on license sales and exchanges, net			–		(123)
		Noncash interest expense			1		1
	Changes in assets and liabilities from operations
		Accounts receivable			20		21
		Equipment installment plans receivable			(41)		(36)
		Inventory			(1)		95
		Accounts payable			39		(14)
		Customer deposits and deferred revenues			(6)		13
		Accrued taxes			63		252
		Accrued interest			9		9
		Other assets and liabilities			(78)		(96)
			Net cash provided by operating activities		246		355

Cash flows from investing activities
	Cash paid for additions to property, plant and equipment				(159)		(166)
	Cash paid for acquisitions and licenses				–		(281)
	Cash received from divestitures and exchanges				2		274
	Other investing activities				–		3
			Net cash used in investing activities		(157)		(170)

Cash flows from financing activities
	Repayment of long-term debt				(3)		–
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments				1		–
	Repurchase of TDS Common Shares				(3)		–
	Repurchase of U.S. Cellular Common Shares				(2)		(2)
	Dividends paid to TDS shareholders				(16)		(15)
	Payment of debt issuance costs				–		(3)
	Other financing activities				3		(2)
			Net cash used in financing activities		(20)		(22)

Net increase in cash and cash equivalents					69		163

Cash and cash equivalents
	Beginning of period				985		472
	End of period			$	1,054	$	635

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

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

(Unaudited)

				March 31,		December 31,
				2016		2015
(Dollars in millions)
Current assets
	Cash and cash equivalents			$	1,054	$	985
	Accounts receivable
		Due from customers and agents, less allowances of $44 and $49, respectively			700		705
		Other, less allowances of $1 and $1, respectively			92		98
	Inventory, net				160		158
	Prepaid expenses				130		112
	Income taxes receivable				5		70
	Other current assets				32		30
			Total current assets		2,173		2,158

Assets held for sale					26		–

Licenses					1,818		1,844
Goodwill					766		766
Franchise rights					244		244
Other intangible assets, net of accumulated amortization of $148 and $144, respectively					43		47
Investments in unconsolidated entities					423		402

Property, plant and equipment
	In service and under construction				11,581		11,520
	Less: Accumulated depreciation and amortization				7,902		7,756
			Property, plant and equipment, net		3,679		3,764

Other assets and deferred charges					211		197

Total assets1				$	9,383	$	9,422

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

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

				March 31,		December 31,
				2016		2015
(Dollars and shares in millions, except per share amounts)
Current liabilities
	Current portion of long-term debt			$	14	$	14
	Accounts payable				355		349
	Customer deposits and deferred revenues				283		288
	Accrued interest				21		12
	Accrued taxes				36		41
	Accrued compensation				75		113
	Other current liabilities				106		127
			Total current liabilities		890		944

Deferred liabilities and credits
	Net deferred income tax liability				905		900
	Other deferred liabilities and credits				441		433

Long-term debt, net					2,437		2,440

Commitments and contingencies					–		–

Noncontrolling interests with redemption features					2		1

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares
			Authorized 290 shares (25 Series A Common and 265 Common Shares)
			Issued 133 shares (7 Series A Common and 126 Common Shares)
			Outstanding 109 shares (7 Series A Common and 102 Common Shares)
			Par Value ($.01 per share)		1		1
		Capital in excess of par value			2,372		2,365
		Treasury shares at cost:
			24 and 24 Common Shares, respectively		(726)		(727)
		Accumulated other comprehensive income (loss)			–		–
		Retained earnings			2,479		2,487
			Total TDS shareholders' equity		4,126		4,126

	Preferred shares				1		1
	Noncontrolling interests				581		577

		Total equity			4,708		4,704

Total liabilities and equity1				$	9,383	$	9,422

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


1		The consolidated total assets as of March 31, 2016 and December 31, 2015 include certain assets held by consolidated VIEs of $804 million and $658 million, respectively, which are not available to be used to settle the obligations of TDS. The consolidated total liabilities as of March 31, 2016 and December 31, 2015 include certain liabilities of consolidated VIEs of $16 million and $1 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of TDS. See Note 8 — Variable Interest Entities for additional information.

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

	TDS Shareholders
	Series A Common and Common shares		Capital in excess of par value		Treasury shares		Accumulated other comprehensive income (loss)		Retained earnings		Total TDS shareholders' equity		Preferred shares		Noncontrolling interests		Total equity
(Dollars in millions)
December 31, 2015	$	1	$	2,365	$	(727)	$	–	$	2,487	$	4,126	$	1	$	577	$	4,704
Net income attributable to TDS shareholders		–		–		–		–		8		8		–		–		8
Net income attributable to noncontrolling interests classified as equity		–		–		–		–		–		–		–		1		1
TDS Common and Series A Common share dividends		–		–		–		–		(16)		(16)		–		–		(16)
Repurchase of Common shares		–		–		(3)		–		–		(3)						(3)
Dividend reinvestment plan		–		1		2		–		–		3		–		–		3
Incentive and compensation plans		–		(1)		2		–		–		1		–		–		1
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		–		2		–		–		–		2		–		3		5
Stock-based compensation awards		–		4		–		–		–		4		–		–		4
Tax windfall (shortfall) from stock awards		–		1		–		–		–		1		–		–		1
March 31, 2016	$	1	$	2,372	$	(726)	$	–	$	2,479	$	4,126	$	1	$	581	$	4,708

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

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

	TDS Shareholders
	Series A Common and Common shares		Capital in excess of par value		Treasury shares		Accumulated other comprehensive income (loss)		Retained earnings		Total TDS shareholders' equity		Preferred shares		Noncontrolling interests		Total equity
(Dollars in millions)
December 31, 2014	$	1	$	2,337	$	(748)	$	6	$	2,330	$	3,926	$	1	$	528	$	4,455
Net income attributable to TDS shareholders		–		–		–		–		146		146		–		–		146
Net income attributable to noncontrolling interests classified as equity		–		–		–		–		–		–		–		24		24
TDS Common and Series A Common share dividends		–		–		–		–		(15)		(15)		–		–		(15)
Dividend reinvestment plan		–		1		1		–		-		2		–		–		2
Incentive and compensation plans		–		–		1		–		(1)		–		–		–		–
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		–		5		–		–		–		5		–		(1)		4
Stock-based compensation awards		–		2		–		–		-		2		–		–		2
March 31, 2015	$	1	$	2,345	$	(746)	$	6	$	2,460	$	4,066	$	1	$	551	$	4,618

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

Telephone and Data Systems, Inc.

Notes to Consolidated Financial Statements

Note 1 Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 84%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.

The unaudited consolidated financial statements included herein have been prepared by TDS pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2015.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the period ended March 31, 2016 are U.S. Cellular, Wireline, Cable, and Hosted and Managed Services (“HMS”) operations. TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned subsidiary Suttle-Straus, Inc. (“Suttle-Straus”). Suttle-Straus’ financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 10 — Business Segment Information for summary financial information on each business segment.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of TDS’ financial position as of March 31, 2016 and December 31, 2015, and its results of operations, cash flows, comprehensive income and changes in equity for the three months ended March 31, 2016 and 2015. These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, requiring the adoption of ASU 2014-09 on January 1, 2018 for TDS. Early adoption as of January 1, 2017 is permitted; however, TDS does not intend to adopt early. TDS is evaluating the effects that adoption of ASU 2014-09 will have on its financial position and results of operations.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires TDS to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. TDS is required to adopt the provisions of ASU 2014-15 for the annual period ending December 31, 2016, but early adoption is permitted. The adoption of ASU 2014-15 will not impact TDS’ financial position or results of operations but may impact future disclosures.

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11”), which requires inventory to be measured at the lower of cost or net realizable value. TDS is required to adopt ASU 2015-11 on January 1, 2017. Early adoption is permitted. TDS is evaluating the effects that adoption of ASU 2015-11 will have on its financial position and results of operations.

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This ASU introduces changes to current accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. TDS is required to adopt ASU 2016-01 on January 1, 2018. Certain provisions are eligible for early adoption. TDS is evaluating the effects that adoption of ASU 2016-01 will have on its financial position and results of operations.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impact lessor accounting. TDS is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, TDS expects a substantial increase to assets and liabilities on its balance sheet. TDS is still evaluating the full effects that adoption of ASU 2016-02 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-04, Liabilities – Extinguishments of Liabilities: Recognition of Breakage from Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 requires companies that sell prepaid stored-value products redeemable for goods, services or cash at third-party merchants to recognize breakage (i.e. the value that is ultimately not redeemed by the consumer) in a way that is consistent with how it will be recognized under the new revenue recognition standard. TDS is required to adopt ASU 2016-04 on January 1, 2018. Early adoption is permitted. TDS is evaluating the effects that adoption of ASU 2016-04 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). The amendments in ASU 2016-08 clarify the guidance on principal versus agent considerations as it relates to recognizing revenue. TDS is required to adopt ASU 2016-08 on January 1, 2018 in conjunction with the effective date of ASU 2014-09. Early adoption as of January 1, 2017 is permitted; however, TDS does not intend to adopt early. TDS is evaluating the effects that adoption of ASU 2016-08 will have on its financial position and results of operations.

In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 intends to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. TDS is required to adopt ASU 2016-09 on January 1, 2017. Early adoption is permitted. TDS is evaluating the effects that adoption of ASU 2016-09 will have on its financial position, results of operations and cash flows.

In April 2016, the FASB issued Accounting Standards Update 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 provides clarification around identifying performance obligations and accounting arrangements whereby a license is granted as it relates to ASC 606 – Revenue from Contracts with Customers. TDS is required to adopt ASU 2016-10 on January 1, 2018 in conjunction with the effective date of ASU 2014-09. Early adoption as of January 1, 2017 is permitted; however, TDS does not intend to adopt early. TDS is evaluating the effects that adoption of ASU 2016-10 will have on its financial position and results of operations.

Amounts Collected from Customers and Remitted to Governmental Authorities

TDS records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $23 million and $26 million for the three months ended March 31, 2016 and 2015, respectively.

Note 2 Fair Value Measurements

As of March 31, 2016 and December 31, 2015, TDS did not have any financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.

The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 or Level 1 assets.

TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

		Level within the Fair Value Hierarchy	March 31, 2016				December 31, 2015
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in millions)
Cash and cash equivalents		1	$	1,054	$	1,054	$	985	$	985
Long-term debt
	Retail	2		1,753		1,778		1,753		1,766
	Institutional	2		533		485		533		501
	Other	2		213		212		216		215

The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes, 7.25% Senior Notes due 2063 and 7.25% Senior Notes due 2064. TDS’ “Institutional” debt consists of U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS’ “Other” debt consists of a senior term loan credit facility and other borrowings with financial institutions. TDS estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.00% to 7.84% and 0.00% to 7.51% at March 31, 2016 and December 31, 2015, respectively.

Note 3 Equipment Installment Plans

TDS offers customers, through its owned and agent distribution channels, the option to purchase certain devices under equipment installment contracts over a specified time period. For certain equipment installment plans (“EIP”), after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. TDS values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. As of March 31, 2016 and December 31, 2015, the guarantee liability related to these plans was $77 million and $93 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.

TDS equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, TDS imputes interest. Equipment installment plan receivables had a weighted average effective imputed interest rate of 9.9% and 9.7% as of March 31, 2016 and December 31, 2015, respectively.

The following table summarizes unbilled equipment installment plan receivables as of March 31, 2016 and December 31, 2015. Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents and Other assets and deferred charges, where applicable.

	March 31, 2016		December 31, 2015
(Dollars in millions)
Short-term portion of unbilled equipment installment plan receivables, gross	$	300	$	279
Short-term portion of unbilled deferred interest		(23)		(21)
Short-term portion of unbilled allowance for credit losses		(16)		(14)
Short-term portion of unbilled equipment installment plan receivables, net	$	261	$	244

Long-term portion of unbilled equipment installment plan receivables, gross	$	91	$	76
Long-term portion of unbilled deferred interest		(3)		(2)
Long-term portion of unbilled allowance for credit losses		(7)		(6)
Long-term portion of unbilled equipment installment plan receivables, net	$	81	$	68

TDS assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of TDS customers on equipment installment plans are similar to those of TDS customers with traditional subsidized plans. Customers with a higher risk credit profile are required to make a deposit for equipment purchased through an installment contract.

Note 4 Earnings Per Share

Basic earnings per share available to TDS common shareholders is computed by dividing Net income available to TDS common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share available to TDS common shareholders is computed by dividing Net income available to TDS common shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

The amounts used in computing earnings per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

			Three Months Ended
			March 31,
			2016		2015
(Dollars and shares in millions, except per share amounts)
Basic earnings per share available to TDS common shareholders:
	Net income available to TDS common shareholders used in basic earnings per share		$	8	$	146
Adjustments to compute diluted earnings:
	Noncontrolling interest adjustment			–		(1)
	Net income available to TDS common shareholders
		used in diluted earnings per share	$	8