Note 8 – Tower Transaction and Related Long-Term Financial Obligation
In November 2012, T-Mobile conveyed to Crown Castle International Corp. (“CCI”) the exclusive right to manage and operate approximately 7,100 T-Mobile owned wireless communication tower sites in exchange for net proceeds of $2.5 billion (“Tower Transaction”), of which the Company distributed $2.4 billion as a dividend to Deutsche Telekom. Rights to approximately 6,200 of the tower sites were transferred to CCI via a Master Prepaid Lease with site lease terms ranging from 23 to 37 years (“MPL Sites”), while the remaining tower sites were sold to CCI (“Sale Sites”). In connection with the Tower Transaction, assets that are essential to operate the tower sites (including ground lease agreements or deeds for the land on which the towers are situated, the towers themselves, and existing subleasing agreements with other mobile network operator tenants, who lease space at the tower sites) and liabilities associated with the operation of the tower sites (including the obligation to pay ground lease rentals, property taxes and other executory costs) were transferred to bankruptcy-remote SPEs. Upon closing of the transaction, CCI acquired all of the equity interests in the SPEs containing the Sale Sites and an option to acquire the MPL Sites at the end of their respective lease terms. T-Mobile and CCI contemporaneously entered into a master lease agreement under which T-Mobile agreed to lease back space at all of the tower sites involved in the Tower Transaction for an initial term of ten years, followed by eight optional five-year renewal terms for a total potential term of up to 50 years. Leaseback rentals will escalate annually based on changes in the Consumer Price Index.
The Company determined that the SPEs containing the MPL Sites (“MPL Site SPEs”) are VIEs as the Company's equity investment lacks (i) the power to direct the activities that most significantly impact the economic performance of the VIEs (such as managing existing tenants, finding new tenants, managing the underlying ground leases, and performing repair and maintenance on the towers); (ii) the obligation to absorb expected losses (such as credit risk associated with current and future tenants); and (iii) the right to receive the expected future residual returns of the SPEs (because CCI holds a purchase option whereby it may purchase the leased properties at a fixed price at the end of the Master Prepaid Lease term). For the aforementioned reasons, the Company determined that it does not have a controlling financial interest and is not the primary beneficiary of the MPL Site SPEs.
Due to its continuing involvement with the tower sites, T-Mobile determined that it was precluded from applying sale-leaseback accounting to either the MPL Sites or the Sale Sites and has accounted for the transaction as financing. Consequently, the Company did not derecognize the tower site assets or accrued ground leases that had a carrying value of $806 million and $135 million, respectively. Tower site assets continue to be reported in property and equipment and depreciated. As of December 31, 2013 and 2012, the tower site assets were $1,463 million. As of December 31, 2013 and 2012, the accumulated depreciation was $756 million and $657 million, respectively. Upon closing of the transaction, the Company recorded a long-term financial obligation in the amount of the net proceeds received from CCI, as well as interest on the financial obligation at a rate of approximately 8% using the effective interest method. As of December 31, 2013 and 2012, the long-term financial obligation was $2,496 million and $2,461 million, respectively. The financial obligation is increased by accrued interest expense and amortized through contractual leaseback payments made by T-Mobile to CCI and through estimated future net cash flows generated and retained by CCI from operation of the tower sites.
Future minimum payments related to the financial obligation as of December 31, 2013 are summarized below:
|
| | | |
(dollars in millions) | Total |
Year Ending December 31, | |
2014 | $ | 164 |
|
2015 | 164 |
|
2016 | 164 |
|
2017 | 164 |
|
2018 | 164 |
|
Thereafter | 1,303 |
|
| $ | 2,123 |
|
In addition, the Company is contingently liable for future ground lease payments through the remaining term of the MPL as the Company remains an obligor on the ground leases related to the sites. These contingent obligations are not included in the above table as any amount due under ground leases is contractually owed by CCI based on the T-Mobile's subleasing arrangement with CCI. See Note 12 – Commitments and Contingencies for further information.
