Exhibit 13
 
Telephone and Data Systems, Inc.
 
 
 
 
 
 
 
 
 
Financial Reports Contents
Page No.
 
 
 


Table of Contents

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Telephone and Data Systems, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
The following Management’s Discussion and Analysis (MD&A) should be read in conjunction with the audited consolidated financial statements and notes of Telephone and Data Systems, Inc. (TDS) for the year ended December 31, 2019, and with the description of TDS’ business included herein. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers.
This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.
TDS uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason TDS determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-K Report.

The following MD&A omits discussion of 2018 compared to 2017. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in TDS' Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 22, 2019, for that discussion.

General
TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million connections nationwide. TDS provides wireless services through its 82%-owned subsidiary, United States Cellular Corporation (U.S. Cellular). TDS also provides wireline and cable services, through its wholly-owned subsidiary, TDS Telecommunications LLC (TDS Telecom). TDS’ segments operate entirely in the United States. See Note 20Business Segment Information in the Notes to Consolidated Financial Statements for additional information about TDS’ segments.
 

2019 Operating Revenues by Segment
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TDS Mission and Strategy
TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities. In pursuing this mission, TDS seeks to grow its businesses, create opportunities for its associates and employees, and build value over the long-term for its shareholders. Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.
TDS’ long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions and financial performance, while also returning value to TDS shareholders primarily through the payment of a regular quarterly cash dividend.

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In 2019, TDS continued to focus on investing in the networks that are the backbone of its commitment to provide outstanding communications services to its customers. TDS believes these investments strengthen its competitive position and improve operating performance. TDS expects to continue to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products.
Invest in the business to improve returns and pursue initiatives that align with long-term strategies
Consistent with its strategy, TDS made significant investments in 2019 to improve the performance of its networks.
U.S. Cellular continues to devote efforts to enhance its network capabilities. VoLTE technology is now available to nearly 70% of U.S Cellular's subscribers, and deployments in additional operating markets are expected in 2020 and 2021. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services and offers enhanced services such as high definition voice and simultaneous voice and data sessions.
U.S. Cellular has begun to deploy 5G technology in its network and expects to launch commercial 5G services in selected markets in 2020. 5G technology is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed, reliability and low latency. U.S. Cellular is working with leading companies in the wireless infrastructure and handset ecosystem to provide rich 5G experiences for customers, initially focused on mobility services and using its low band spectrum. At the same time, as discussed below, U.S. Cellular has begun acquiring high band spectrum to enable the delivery of additional 5G services in the future. In addition to the deployment of 5G technology, U.S. Cellular is also modernizing its 4G LTE network to further enhance 4G LTE speeds.
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions. In June 2019, the FCC announced that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 were granted by the FCC on December 11, 2019. On July 11, 2019, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). Auction 103 is offering 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas. On September 9, 2019, U.S. Cellular filed an application to participate in Auction 103 and was announced as a qualified bidder on October 31, 2019. Bidding in this auction commenced on December 10, 2019. The initial phase of this auction closed on January 30, 2020 and the assignment phase commenced on February 18, 2020.
TDS Telecom’s Wireline business continues to focus on driving growth in its broadband and video services by investing in fiber deployment in new out-of-territory markets and in existing markets. Construction has begun in two new out-of-territory clusters, mid-central Wisconsin and Idaho. With support from the FCC's A-CAM program and state broadband grants, Wireline is also deploying higher speed broadband to unserved and under-served service addresses in rural areas within its current markets.
On December 31, 2019, TDS acquired substantially all of the assets of MI Connection Communications System, dba Continuum, for $80 million in cash, subject to working capital adjustments. Continuum is a cable company that passes approximately 40,000 service addresses in North Carolina and offers broadband, video and voice services, which complement the TDS Telecom portfolio of products.
TDS Telecom’s Cable business continues to increase its broadband penetration by making network capacity investments and by offering more advanced services in its markets.
TDS Telecom's Wireline and Cable businesses also are investing in a next generation video platform called TDS TV+ to enhance video services.

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Return value to shareholders
During 2019, TDS paid $75 million in regular quarterly cash dividends. TDS increased the dividend per share paid to its investors by 3% in 2019 which marks the 45th consecutive year of dividend increases and in February 2020, TDS increased its quarterly dividend per share from $0.165 to $0.170. During 2019, U.S. Cellular repurchased 590,300 Common Shares for $21 million at an average cost per share of $35.45. At December 31, 2019, the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,311,000. There were no TDS share repurchases in 2019. As of December 31, 2019, the maximum dollar value of TDS Common Shares that may yet be purchased under TDS' program was $199 million. There is no assurance that TDS will continue to increase the dividend rate or pay dividends and no assurance that TDS or U.S. Cellular will make any significant amount of share repurchases in the future.
 
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Terms Used by TDS
The following is a list of definitions of certain industry terms that are used throughout this document:
4G LTE – fourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology.
5G – fifth generation wireless technology that is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed and reliability as well as low latency.
Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.
Alternative Connect America Cost Model (A-CAM) – a USF support mechanism for rate-of-return carriers, which provides revenue support through 2028. This support comes with an obligation to build defined broadband speeds to a certain number of locations.
Auctions 101, 102, and 103 – Auction 101 was an FCC auction of 28 GHz wireless spectrum licenses that started in November 2018 and concluded in January 2019. Auction 102 was an FCC auction of 24 GHz wireless spectrum licenses that started in March 2019 and concluded in May 2019. Auction 103 is an FCC auction of 37, 39, and 47 GHz wireless spectrum licenses that started in December 2019. The spectrum auctioned in each of these auctions, referred to as Millimeter Wave spectrum, is expected to be used primarily to deliver 5G technology.
Broadband Connections – refers to the number of Wireline customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies or the Cable billable number of lines into a building for high-speed data services.
Churn Rate – represents the percentage of the connections that disconnect service each month. These rates represent the average monthly churn rate for each respective period.
Connected Devices – non-handset devices that connect directly to the U.S. Cellular network. Connected devices include products such as tablets, wearables, modems, and hotspots.
DOCSIS – Data Over Cable Service Interface Specification is an international telecommunications standard that permits the addition of high-bandwidth data transfer to an existing cable TV (CATV) system. DOCSIS 3.1 is a system specification that increases data transmission rates.
EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Eligible Telecommunications Carrier (ETC) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms.
Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.
IPTV Connections – represents the number of Wireline customers provided video services using IP networking technology.
ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period.
OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.
Out-of-Territory Fiber Buildsrepresents construction of facilities-based market expansions outside of TDS' ILEC and CLEC footprint.
Partial Economic Areas – service areas of certain FCC wireless spectrum licenses based on geography.
Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
Retail Connections – the sum of U.S. Cellular postpaid connections and U.S. Cellular prepaid connections.
Tax Act – refers to comprehensive federal tax legislation enacted on December 22, 2017, which made broad changes to the U.S. tax code. Now titled H.R.1, the Tax Act was originally identified as the Tax Cuts and Jobs Act of 2017.
Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
U.S. Cellular Connections – individual lines of service associated with each device activated by a customer. Connections include all types of devices that connect directly to the U.S. Cellular network.
Video Connections – generally, a home or business receiving video programming counts as one video connection. In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.
Voice Connections – refers to the individual circuits connecting a customer to Wireline’s central office facilities that provide voice services or the Cable billable number of lines into a building for voice services. 
VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.

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Wireline Residential Revenue per Connection – is calculated by dividing total Wireline residential revenue by the average number of Wireline residential connections and by the number of months in the period.

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Results of Operations — TDS Consolidated
Year Ended December 31,
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Operating revenues
 

 
 

 
 
U.S. Cellular
$
4,022

 
$
3,967

 
1
 %
TDS Telecom
930

 
927

 

All other1
224

 
215

 
4
 %
Total operating revenues
5,176

 
5,109

 
1
 %
Operating expenses
 

 
 

 
 

U.S. Cellular
3,910

 
3,809

 
3
 %
TDS Telecom
823

 
834

 
(1
)%
All other1
264

 
261

 
1
 %
Total operating expenses
4,997

 
4,904

 
2
 %
Operating income (loss)
 

 
 

 
 

U.S. Cellular
112

 
158

 
(29
)%
TDS Telecom
107

 
93

 
15
 %
All other1
(40
)
 
(46
)
 
12
 %
Total operating income
179

 
205

 
(13
)%
Investment and other income (expense)
 

 
 

 
 

Equity in earnings of unconsolidated entities
168

 
160

 
5
 %
Interest and dividend income
29

 
26

 
15
 %
Interest expense
(165
)
 
(172
)
 
4
 %
Other, net

 
2

 
N/M

Total investment and other income
32

 
16

 
92
 %
 
 
 
 
 
 
Income before income taxes
211

 
221

 
(5
)%
Income tax expense
64

 
46

 
37
 %
 
 
 
 
 
 
Net income
147

 
175

 
(16
)%
Less: Net income attributable to noncontrolling interests, net of tax
26

 
40

 
(36
)%
Net income attributable to TDS shareholders
$
121

 
$
135

 
(10
)%
 
 
 
 
 
 
Adjusted OIBDA (Non-GAAP)2
$
1,122

 
$
1,079

 
4
 %
Adjusted EBITDA (Non-GAAP)2
$
1,319

 
$
1,267

 
4
 %
Capital expenditures3
$
1,032

 
$
767

 
35
 %
N/M - Percentage change not meaningful
1 
Consists of corporate and other operations and intercompany eliminations.
2 
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
3 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
Refer to individual segment discussions in this MD&A for additional details on operating revenues and expenses at the segment level.

Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method. TDS’ investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed $78 million and $77 million in 2019 and 2018, respectively.

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Income tax expense
The effective tax rate on Income before income taxes for 2019 was 30.3%. The effective tax rate includes the impact of federal and state tax, as well as other increases due primarily to nondeductible interest expenses.
TDS’ effective tax rate on Income before income taxes for 2018 was 21.0%. The effective tax rate was lower than a normalized rate inclusive of federal and state tax, due primarily to an income tax accounting method change that accelerated depreciation of certain assets for the 2017 tax year, resulting in discrete tax benefit recorded in 2018.
See Note 5Income Taxes in the Notes to Consolidated Financial Statements for additional information.
Net income attributable to noncontrolling interests, net of tax
Year Ended December 31,
2019
 
2018
(Dollars in millions)
 
 
 
U.S. Cellular noncontrolling public shareholders’
$
23

 
$
26

Noncontrolling shareholders’ or partners’
3

 
14

Net income attributable to noncontrolling interests, net of tax
$
26

 
$
40

 
Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income, the noncontrolling shareholders’ or partners’ share of certain U.S. Cellular subsidiaries’ net income and other TDS noncontrolling interests.
 
Earnings
(Dollars in millions)
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Net income decreased in 2019 due primarily to increased depreciation and other operating expenses, as well as higher income taxes and less gains recorded in 2019, partially offset by higher revenues. Adjusted EBITDA increased in 2019 due primarily to higher revenues, partially offset by higher selling, general and administrative expenses.




*Represents a non-GAAP financial measure. Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
 

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U.S. CELLULAR OPERATIONS
Business Overview
U.S. Cellular owns, operates, and invests in wireless markets throughout the United States. U.S. Cellular is an 82%-owned subsidiary of TDS. U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus.
OPERATIONS
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Serves customers with 4.9 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections
Operates in 20 states
Employs approximately 5,500 associates
4,166 owned towers
6,578 cell sites in service
 
 

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U.S. Cellular Mission and Strategy
U.S. Cellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the mid-sized and rural markets served.
U.S. Cellular continues to execute on its strategies to grow and protect its customer base, grow revenues, drive improvements in the overall cost structure, and invest in its network and system capabilities. Strategic efforts include:
U.S. Cellular offers economical and competitively priced service plans and devices to its customers and is focused on increasing revenues from sales of related products such as accessories and device protection plans and from new services such as LTE home internet. In addition, U.S. Cellular is focused on expanding its solutions available to business and government customers, including a growing suite of connected machine-to-machine solutions and software applications across various categories.
U.S. Cellular continues to devote efforts to enhance its network capabilities. VoLTE technology is now available to nearly 70% of U.S Cellular's subscribers, and deployments in additional operating markets are expected in 2020 and 2021. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services and offers enhanced services such as high definition voice and simultaneous voice and data sessions.
U.S. Cellular has begun to deploy 5G technology in its network and expects to launch commercial 5G services in selected markets in 2020. 5G technology is expected to help address customers' growing demand for data services as well as create opportunities for new services requiring high speed, reliability and low latency. U.S. Cellular is working with leading companies in the wireless infrastructure and handset ecosystem to provide rich 5G experiences for customers, initially focused on mobility services and using its low band spectrum. At the same time, as discussed below, U.S. Cellular has begun acquiring high band spectrum to enable the delivery of additional 5G services in the future. In addition to the deployment of 5G technology, U.S. Cellular is also modernizing its 4G LTE network to further enhance 4G LTE speeds.
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, U.S. Cellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions. In June 2019, the FCC announced that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 were granted by the FCC on December 11, 2019. On July 11, 2019, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). Auction 103 is offering 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas. On September 9, 2019, U.S. Cellular filed an application to participate in Auction 103 and was announced as a qualified bidder on October 31, 2019. Bidding in this auction commenced on December 10, 2019. The initial phase of this auction closed on January 30, 2020 and the assignment phase commenced on February 18, 2020.

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Operational Overview
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As of December 31,
2019
 
2018
Retail Connections – End of Period
Postpaid
4,383,000
 
4,472,000
Prepaid
506,000
 
516,000
Total
4,889,000
 
4,988,000

Year Ended December 31,
2019
 
2018
 
2019 vs. 2018
Postpaid Activity and Churn
 
 
 
 
 
Gross Additions
 
 
 
 
 
Handsets
458,000
 
475,000
 
(4)%
Connected Devices
148,000
 
150,000
 
(1)%
Total Gross Additions
606,000
 
625,000
 
(3)%
Net Additions (Losses)
 
 
 
 
 
Handsets
(24,000)
 
23,000
 
N/M
Connected Devices
(65,000)
 
(69,000)
 
6%
Total Net Additions (Losses)
(89,000)
 
(46,000)
 
(93)%
Churn
 
 
 
 
 
Handsets
1.04
%
 
0.98
%
 
 
Connected Devices
3.24
%
 
2.96
%
 
 
Total Churn
1.31
%
 
1.25
%
 
 
Postpaid net losses increased in 2019 due to lower handset gross additions and higher handset defections, which are due primarily to aggressive industry-wide competition on both service plans and devices.
Total postpaid churn increased in 2019 due primarily to higher handset defections.
Postpaid Revenue
Year Ended December 31,
2019
 
 2018
 
 2019 vs. 2018
Average Revenue Per User (ARPU)
$
46.01

 
$
44.98

 
2%
Average Revenue Per Account (ARPA)
$
119.80

 
$
118.93

 
1%
Postpaid ARPU and Postpaid ARPA increased in 2019 due primarily to (i) having proportionately more handset connections, which on a per-unit basis contribute more revenue than connected devices, (ii) a shift to higher priced service plans, and (iii) an increase in device protection plan revenue. Such factors were partially offset by an increase in sales promotion costs.

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Financial Overview — U.S. Cellular
Year Ended December 31,
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Retail service
$
2,650

 
$
2,623

 
1
 %
Inbound roaming
174

 
154

 
13
 %
Other
211

 
201

 
5
 %
Service revenues
3,035

 
2,978

 
2
 %
Equipment sales
987

 
989

 

Total operating revenues
4,022

 
3,967

 
1
 %
 
 
 
 
 
 
System operations (excluding Depreciation, amortization and accretion reported below)
756

 
758

 

Cost of equipment sold
1,028

 
1,031

 

Selling, general and administrative
1,406

 
1,388

 
1
 %
Depreciation, amortization and accretion
702

 
640

 
10
 %
(Gain) loss on asset disposals, net
19

 
10

 
80
 %
(Gain) loss on sale of business and other exit costs, net
(1
)
 

 
N/M

(Gain) loss on license sales and exchanges, net

 
(18
)
 
98
 %
Total operating expenses
3,910

 
3,809

 
3
 %
 
 
 
 
 
 
Operating income
$
112

 
$
158

 
(29
)%
 
 
 
 
 
 
Net income
$
133

 
$
164

 
(19
)%
Adjusted OIBDA (Non-GAAP)1
$
832

 
$
790

 
5
 %
Adjusted EBITDA (Non-GAAP)1
$
1,015

 
$
963

 
5
 %
Capital expenditures2
$
710

 
$
515

 
38
 %
N/M - Percentage change not meaningful
1 
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.

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Operating Revenues
(Dollars in millions)
chart-391be0d207855c2b8a4.jpg
 


Service revenues consist of: 
Retail Service – Charges for voice, data and value added services and recovery of regulatory costs
Inbound Roaming – Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming
Other Service – Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenues
Equipment revenues consist of:
Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors
 
Key components of changes in the statement of operations line items were as follows:
Total operating revenues
Retail service revenues increased in 2019 primarily as a result of the increase in Postpaid ARPU as previously discussed in the Operational Overview section.
Inbound roaming revenues increased in 2019 primarily driven by data revenues, with significantly higher usage partially offset by lower rates.
Other service revenues increased in 2019, due primarily to an increase in tower rental revenues resulting from (i) an increase in new agreements and increases in rental rates and (ii) an out-of-period adjustment recorded in the third quarter of 2019. See Note 11 — Leases in the Notes to Consolidated Financial Statements for additional information.
Selling, general and administrative expenses
Selling, general and administrative expenses increased in 2019 due primarily to an increase in costs driven by information system initiatives, as well as an increase in bad debts expense.
Depreciation, amortization and accretion
Depreciation, amortization, and accretion increased in 2019 due to (i) additional network assets being placed into service and (ii) accelerated depreciation of certain assets due to changes in network technology, which will continue in 2020 and beyond.
(Gain) loss on asset disposals, net
Loss on asset disposals, net increased in 2019 due primarily to the disposal of technologically obsolete equipment.
(Gain) loss on license sales and exchanges, net
Net gains in 2018 were due to license sale and exchange transactions with various third parties.


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TDS TELECOM OPERATIONS
Business Overview
TDS Telecom provides a wide range of communications services to residential and commercial customers. TDS Telecom operates in two segments: Wireline, which includes fiber out-of-territory builds, and Cable. 
 
OPERATIONS
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Serves 1.2 million connections in 32 states.
Employs approximately 2,900 employees.
Wireline operates incumbent local exchange carriers (ILEC), competitive local exchange carriers (CLEC) and out-of-territory builds in 27 states.
Cable operates primarily in Colorado, New Mexico, North Carolina, Oregon, Texas and Utah.
 

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Trends and Developments
Growth Initiatives:
In 2017, TDS Telecom acquired and built an advanced fiber network in Sun Prairie, Wisconsin. Several additional locations are currently being built with fiber to expand its footprint into attractive markets that are underserved today. TDS Telecom's Madison, Wisconsin cluster will include an additional 27,000 services addresses, its Central Wisconsin cluster will include 36,000 service addresses, and its new Coeur d'Alene, Idaho cluster will include 42,000 service addresses. At the end of 2019, TDS Telecom has installed fiber to approximately 33,000 service addresses in these out-of-territory markets.
TDS Telecom is also pursuing a strategy to invest in fiber in markets within its current footprint. Increased fiber deployment provides the opportunity to deliver more robust residential and consumer products which drives growth. At the end of 2019, TDS Telecom has installed fiber to approximately 207,000 service addresses within its existing footprint.
On December 31, 2019, TDS acquired substantially all of the assets of MI Connection Communications System, dba Continuum, for $80 million in cash, subject to working capital adjustments. Continuum is a cable company that passes approximately 40,000 service addresses in North Carolina and offers broadband, video and voice services, which complement the TDS Telecom portfolio of products. TDS Telecom will continue to pursue acquisitions that meet its criteria of having favorable competitive environments, attractive market demographics and the ability to grow broadband penetration.
Technology & Support Systems:
TDS Telecom’s Wireline segment continues to upgrade and expand its network to respond to the needs of its customers for greater bandwidth and advanced technologies. At December 31, 2019, fiber has been deployed to approximately 30% of service addresses. Fiber technology allows broadband speeds of up to 1 Gigabit per second (Gbps). In non-fiber markets, TDS Telecom has deployed advanced technologies to increase data speeds up to 100 Megabits per second (Mbps) to reach approximately 38% of service addresses. TDS Telecom continues to utilize federal and state funding mechanisms in order to extend broadband service to unserved and underserved markets.
TDS Telecom’s Cable segment continues to make capacity investments in line with its strategy to increase broadband penetration in its markets. DOCSIS 3.0 technology is deployed to nearly all of Cable’s service addresses which allows it to offer enhanced transmission speeds and TDS Telecom has begun to enable a next generation DOCSIS 3.1 broadband network that will offer significant higher speeds of up to 1 Gbps. TDS Telecom’s Cable segment is also offering up to 1 Gbps service through fiber investments in new construction in its largest markets.
Services and Products:
TDS Telecom’s Wireline segment strives to be the preferred broadband provider in its markets with the ability to provide value-added bundling services with video and voice service options. TDS Telecom continues to invest in its network to offer higher speed data service and to expand its fiber footprint. At December 31, 2019, 67% of residential broadband connections had 10 Mbps or faster service and 30% had 100 Mbps or faster service.
TDS Telecom’s Wireline segment offers IPTV, branded as TDS TV, in order to leverage its high-speed network. TDS TV provides customers with connected-home DVRs, video-on-demand and TV Everywhere. TDS Telecom offers TDS TV in 40 markets, enabling 267,000 or roughly 34% of its service addresses. Where TDS TV is not available, TDS Telecom partners with a satellite TV provider to allow for triple or double play bundling. 
TDS Telecom's commercial operations lead with a broadband service bundled with voice and TDS TV for small- to medium-sized businesses.
TDS Telecom’s Cable segment seeks to expand broadband services and leverage that growth by bundling with video and voice services. In addition to providing enhanced broadband speeds through DOCSIS 3.1 technology, TDS Telecom also provides customers with a whole home entertainment solution branded as CatchTV.


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Financial Overview — TDS Telecom
Year Ended December 31,
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Operating revenues
 
 
 
 
 
Wireline
$
683

 
$
699

 
(2
)%
Cable
247

 
230

 
8
 %
TDS Telecom operating revenues1
930

 
927

 

 
 
 
 
 
 
Operating expenses
 

 
 

 
 

Wireline
587

 
604

 
(3
)%
Cable
236

 
231

 
2
 %
TDS Telecom operating expenses1
823

 
834

 
(1
)%
 
 
 
 
 
 
TDS Telecom operating income
$
107

 
$
93

 
15
 %
 


 


 


Net income
$
92

 
$
89

 
4
 %
Adjusted OIBDA (Non-GAAP)2
$
300

 
$
303

 
(1
)%
Adjusted EBITDA (Non-GAAP)2
$
313

 
$
313

 

Capital expenditures3
$
316

 
$
232

 
36
 %
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
1 
Includes eliminations between the Wireline and Cable segments.
2 
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
3 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
 
Operating Revenues
(Dollars in millions)
chart-58586a9934515d7aab1.jpg

 





Operating revenues were flat in 2019 as Wireline and Cable broadband growth and Wireline video connection growth were offset by declines in Wireline wholesale access revenue and voice and commercial revenues.
 
 


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Total operating expenses
Operating expenses decreased in 2019 due primarily to decreases in employee-related expenses and depreciation expense and an increase in gain on the sale of assets.

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tdslogoa10.gif
WIRELINE OPERATIONS
Business Overview
TDS Telecom’s Wireline business provides broadband, video and voice services. These services are provided to residential, commercial, and wholesale customers in a mix of rural, small town and suburban markets, with the largest concentration of its customers in the Upper Midwest and the Southeast. TDS Telecom’s residential strategy is to focus on broadband bundled with video and voice services. In its commercial business, TDS Telecom’s focus is on small- to medium-sized businesses and its sales efforts emphasize providing broadband with an array of voice services.
Operational Overview
 
chart-d63a2e6e55f178e36be.jpg
Total residential connections were relatively flat as growth in broadband and video connections were offset by the decline in voice connections.
 
chart-5ae13407c5b5564084b.jpg
Residential broadband customers continue to choose higher speeds with 67% taking speeds of 10 Mbps or greater and 30% choosing speeds of 100 Mbps or greater.
1 
Includes ILEC and out-of-territory

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chart-b5c2bb8e175f5d95b3e.jpg



Residential revenue per connection increased 3% due to video and broadband connection growth as well as an increase in broadband speeds.
 
chart-73dc3b929c6a44bfccf.jpg
Total commercial connections decreased by 9% due primarily to declines in connections in CLEC markets.
 

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Financial Overview — Wireline
Year Ended December 31,
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Residential
$
328

 
$
321

 
2
 %
Commercial
168

 
184

 
(9
)%
Wholesale
186

 
191

 
(2
)%
Service revenues
682

 
697

 
(2
)%
Equipment and product sales
1

 
2

 
(26
)%
Total operating revenues
683

 
699

 
(2
)%
 
 
 
 
 
 
Cost of services (excluding Depreciation, amortization and accretion reported below)
263

 
266

 
(1
)%
Cost of equipment and products
1

 
1

 
(24
)%
Selling, general and administrative
199

 
197

 
1
 %
Depreciation, amortization and accretion
132

 
142

 
(7
)%
(Gain) loss on asset disposals, net
(8
)
 
(3
)
 
N/M

Total operating expenses
587

 
604

 
(3
)%
 
 
 
 
 
 
Operating income
$
96

 
$
95

 
1
 %
 
 
 
 
 
 
Income before income taxes
$
110

 
$
106

 
3
 %
Adjusted OIBDA (Non-GAAP)1
$
220

 
$
234

 
(6
)%
Adjusted EBITDA (Non-GAAP)1
$
231

 
$
243

 
(5
)%
Capital expenditures2
$
243

 
$
176

 
38
 %
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
1 
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.

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Operating Revenues
(Dollars in millions)
chart-56d935427a135f1fbd7.jpg
 




Residential revenues consist of:
Broadband services, including fiber- and copper-based high-speed internet, security and support services
Video services, including IPTV and satellite offerings
Voice services

Commercial revenues consist of:
High-speed and dedicated business internet services
Voice services

Wholesale revenues consist of:
Network access services primarily to interexchange and wireless carriers for carrying data and voice traffic on TDS Telecom’s network
Federal and state USF support, including A-CAM
 
Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential revenues increased in 2019 due primarily to growth in broadband and video connections, as well as price increases, partially offset by a decline in voice connections. Broadband and video connections grew 3% and 8%, respectively, while voice connections declined 4%.
Commercial revenues decreased in 2019 due primarily to declining connections in CLEC markets.
Wholesale revenues decreased in 2019 due to decreases in legacy transport services, primarily for special access.
Cost of services
Cost of services decreased in 2019 due to lower employee-related expenses and decreases in the costs of provisioning legacy services, partially offset by increases in video programming charges and plant and maintenance expense.
Selling, general and administrative
Selling, general and administrative expenses increased in 2019 due primarily to increased legal and advertising expenses, offset by lower employee-related costs.
Depreciation, amortization and accretion
Depreciation, amortization and accretion decreased in 2019 as certain assets became fully depreciated, partially offset by depreciation on new fiber assets.
(Gain) loss on asset disposals, net
Gain on asset disposals increased due to the sale of fiber assets in certain CLEC markets.

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cableopsa03.gif
CABLE OPERATIONS
Business Overview
TDS Telecom’s Cable strategy is to expand its broadband services and leverage that growth by bundling with video and voice services. TDS Telecom seeks to be the leading provider of broadband services in its targeted markets by leveraging its core competencies in network management and customer focus. 
Operational Overview
 
chart-b8b1a6a6384756f8a82.jpg
 






Cable connections grew 10% in 2019 due to an increase in broadband connections and the acquisition of Continuum, which included 15,800 broadband connections, 9,400 video connections and 5,800 voice connections.

 


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Financial Overview — Cable
Year Ended December 31,
2019
 
2018
 
2019 vs. 2018
(Dollars in millions)
 
 
 
 
 
Residential
$
205

 
$
188

 
9
 %
Commercial
43

 
42

 
3
 %
Total operating revenues
247

 
230

 
8
 %
 
 
 
 
 
 
Cost of services (excluding Depreciation, amortization and accretion reported below)
105

 
104

 
2
 %
Selling, general and administrative
62

 
57

 
8
 %
Depreciation, amortization and accretion
68

 
69

 
(2
)%
(Gain) loss on asset disposals, net
1

 
1

 
(48
)%
Total operating expenses
236

 
231

 
2
 %
 
 
 
 
 
 
Operating income (loss)
$
11

 
$
(2
)
 
N/M

 
 
 
 
 
 
Income (loss) before income taxes
$
13

 
$
(1
)
 
N/M

Adjusted OIBDA (Non-GAAP)1
$
80

 
$
69

 
16
 %
Adjusted EBITDA (Non-GAAP)1
$
82

 
$
70

 
17
 %
Capital expenditures2
$
73

 
$
56

 
31
 %
Numbers may not foot due to rounding.
N/M - Percentage change not meaningful
1 
Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.
2 
Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.
 
Operating Revenues
(Dollars in millions)
chart-0d09481e99be5011b0f.jpg
 




Residential and Commercial revenues consist of:
Broadband services, including high-speed internet, security and support services
Video services including premium programming in HD, multi-room and TV Everywhere offerings
Voice services




 

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Key components of changes in the statement of operations items were as follows:
Total operating revenues
Residential and commercial revenues increased 8% in 2019 due to price increases and growth in broadband connections.
Cost of services
Cost of services increased 2% in 2019 due primarily to increases in maintenance activities.
Selling, general and administrative
Selling, general and administrative expenses increased in 2019 due primarily to higher employee-related expenses and closing costs related to the acquisition of Continuum.
Depreciation, amortization and accretion
Depreciation, amortization and accretion decreased in 2019 as certain assets became fully depreciated.

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Liquidity and Capital Resources
Sources of Liquidity
TDS and its subsidiaries operate capital-intensive businesses. Historically, TDS has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, TDS’ existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including undrawn term loans and other long-term debt, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions. There is no assurance that this will be the case in the future. See Market Risk for additional information regarding maturities of long-term debt.
TDS has incurred negative free cash flow at times in the past and this could occur in the future. However, TDS believes that existing cash and investment balances, funds available under its revolving credit, term loan and receivables securitization agreements, and expected cash flows from operating and investing activities will provide sufficient liquidity for TDS to meet its normal day-to-day operating needs and debt service requirements for the coming year. 
TDS may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of cable, wireless or wireline telecommunications services, IT services or other businesses, wireless spectrum license or system acquisitions, capital expenditures, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments, including new technologies and out of territory builds. It may be necessary from time to time to increase the size of the existing revolving credit agreements, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures. TDS, through U.S. Cellular, expects to participate in a wireless spectrum auction in 2020 (see Regulatory Matters - Millimeter Wave Spectrum Auctions) and also expects capital expenditures in 2020 to be higher than in 2019, due primarily to investments at U.S. Cellular to enhance network speed and capacity and to continue deploying VoLTE and 5G technology on its network, and at TDS Telecom to increase levels of fiber investment. TDS’ liquidity would be adversely affected if, among other things, TDS is unable to obtain financing on acceptable terms, TDS makes significant wireless spectrum license purchases, TDS makes significant business acquisitions, the LA Partnership discontinues or significantly reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments decline. 
TDS’ credit rating currently is sub-investment grade. There can be no assurance that sufficient funds will continue to be available to TDS or its subsidiaries on terms or at prices acceptable to TDS. Insufficient cash flows from operating activities, changes in TDS' credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of TDS or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of wireless spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends. Any of the foregoing developments would have an adverse impact on TDS' businesses, financial condition or results of operations. TDS cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. 

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Table of Contents

Cash and Cash Equivalents
Cash and cash equivalents include cash and money market investments. The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal. Cash held by U.S. Cellular is for use in its operations and acquisition, capital expenditure and business development programs. TDS does not have direct access to U.S. Cellular cash unless U.S. Cellular pays a dividend on its common stock. U.S. Cellular has no current intention to pay a dividend to its shareholders.
 
Cash and Cash Equivalents
(Dollars in millions)
chart-0b13f3c435805f0098c.jpg
 



At December 31, 2019, TDS’ consolidated Cash and cash equivalents totaled $465 million compared to $921 million at December 31, 2018
The majority of TDS’ Cash and cash equivalents are held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies across a range of eligible money market investments that may include, but are not limited to, government agency repurchase agreements, government agency debt, U.S. Treasury repurchase agreements, U.S. Treasury debt, and other securities collateralized by U.S. government obligations. TDS monitors the financial viability of the money market funds and the financial institutions with which TDS has deposits and believes that the credit risk associated with these funds and institutions is low.
 


Financing
Revolving Credit Agreements
TDS and U.S. Cellular have unsecured revolving credit agreements available for general corporate purposes including acquisitions, wireless spectrum license purchases and capital expenditures. In May 2018, TDS entered into a $400 million revolving credit agreement with certain lenders and other parties and U.S. Cellular entered into a $300 million revolving credit agreement with certain lenders and other parties. Amounts under the revolving credit agreements may be borrowed, repaid and reborrowed from time to time until maturity in May 2023. As of December 31, 2019, there were no outstanding borrowings under the revolving credit agreements, except for letters of credit, and TDS and U.S. Cellular’s unused capacity under their revolving credit agreements was $399 million and $298 million, respectively.
See Note 13Debt in the Notes to Consolidated Financial Statements for additional information regarding the revolving credit agreements.
Term Loans
On January 6, 2020, TDS entered into an unsecured $200 million senior term loan credit agreement. The term loan is available for general corporate purposes, including working capital and capital expenditures. As of February 25, 2020, no borrowings have been made under the agreement. The term loan may be drawn in one or more advances by the one-year anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date of the term loan is January 6, 2027 and would accelerate in the event of a change in control.
In January 2015, U.S. Cellular entered into an unsecured senior term loan credit agreement. This agreement was entered into for general corporate purposes, including working capital, spectrum purchases and capital expenditures. In July 2015, U.S. Cellular borrowed the full amount of $225 million available under this agreement in two separate draws. This term loan credit agreement was amended and restated in June 2016, and further amended in May 2018 and March 2019. In October 2019, U.S. Cellular made a $100 million principal prepayment on the outstanding balance of the loan. The remaining unpaid balance will be due and payable in January 2022

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Table of Contents

See Note 13Debt in the Notes to Consolidated Financial Statements for additional information regarding the U.S. Cellular term loan. 
Receivables Securitization Agreement
In December 2017, U.S. Cellular, through its subsidiaries, entered into a $200 million credit agreement to permit securitized borrowings using its equipment installment receivables for general corporate purposes. In September 2019, U.S. Cellular amended this agreement extending the expiration date of the agreement to December 15, 2021. There were no significant changes to other key terms of the agreement. U.S. Cellular entered into a performance guaranty whereby U.S. Cellular guarantees the performance of certain wholly-owned subsidiaries of U.S. Cellular under the agreement. Amounts under the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until maturity in December 2021, which may be extended from time to time as specified therein. As of December 31, 2019, there were no outstanding borrowings under the receivables securitization agreement, and the entire unused capacity of $200 million was available, subject to sufficient collateral to satisfy the asset borrowing base provisions of the agreement. 
See Note 13Debt in the Notes to Consolidated Financial Statements for additional information regarding the receivables securitization agreement. 
Financial Covenants
The TDS and U.S. Cellular revolving credit agreements, senior term loan agreements and the U.S. Cellular receivables securitization agreement require TDS or U.S. Cellular, as applicable, to comply with certain affirmative and negative covenants, which include certain financial covenants. In particular, under these agreements, TDS and U.S. Cellular are required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter. TDS and U.S. Cellular also were required to maintain the Consolidated Leverage Ratio at a level not to exceed 3.25 to 1.00 as of the end of any fiscal quarter through June 30, 2019. From July 1, 2019 and thereafter, the Consolidated Leverage Ratio is not to exceed 3.00 to 1.00 as of the end of any fiscal quarter. TDS and U.S. Cellular believe they were in compliance as of December 31, 2019, with all such financial covenants. 
Other Long-Term Financing
TDS and U.S. Cellular each have an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities. The proceeds from any such issuances may be used for general corporate purposes, including: the possible reduction of other short-term or long-term debt; spectrum purchases; capital expenditures; acquisition, construction and development programs; working capital; additional investments in subsidiaries; or the repurchase of shares. The TDS shelf registration permits TDS to issue at any time and from time to time senior or subordinated debt securities in one or more offerings in an indeterminate amount. The U.S. Cellular shelf registration statement permits U.S. Cellular to issue at any time and from time to time senior or subordinated debt securities in one or more offerings, up to the amount registered, which is currently $500 million. The ability of TDS or U.S. Cellular to complete an offering pursuant to such shelf registration statements is subject to market conditions and other factors at the time.
TDS believes that it and/or its subsidiaries were in compliance as of December 31, 2019, with all covenants and other requirements set forth in the TDS and U.S. Cellular long-term debt indentures. The TDS and U.S. Cellular long-term debt indentures do not include any financial covenants. TDS and U.S. Cellular have not failed to make nor do they expect to fail to make any scheduled payment of principal or interest under such indentures.
Refer to Market Risk — Long-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt.
TDS and U.S. Cellular, at their discretion, may from time to time seek to retire or purchase their outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
See Note 13Debt in the Notes to Consolidated Financial Statements for additional information on long-term financing.
Credit Ratings
In certain circumstances, TDS’ and U.S. Cellular’s interest cost on their various agreements may be subject to increase if their current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised. The agreements do not cease to be available nor do the maturity dates accelerate solely as a result of a downgrade in TDS’ or U.S. Cellular’s credit rating. However, downgrades in TDS’ or U.S. Cellular’s credit rating could adversely affect their ability to renew the agreements or obtain access to other credit agreements in the future.
TDS and U.S. Cellular are rated at sub-investment grade. TDS and U.S. Cellular’s credit ratings as of December 31, 2019, and the dates such ratings were re-affirmed were as follows:
Rating Agency
Rating
Outlook
Moody's (TDS) (re-affirmed September 2019)
Ba2
stable outlook
Moody's (U.S. Cellular) (re-affirmed September 2019)
Ba1
stable outlook
Standard & Poor's (re-affirmed October 2019)
BB
stable outlook
Fitch Ratings (re-affirmed June 2019)
BB+
stable outlook

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Capital Requirements
The discussion below is intended to highlight some of the significant cash outlays expected during 2020 and beyond and to highlight the spending incurred in prior years for these items. This discussion does not include cash required to fund normal operations, and is not a comprehensive list of capital requirements. Significant cash requirements that are not routine or in the normal course of business could arise from time to time.
Capital Expenditures
TDS makes substantial investments to acquire, construct and upgrade telecommunications networks and facilities to remain competitive and as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities (such as 5G and VoLTE technology in the Wireless business and fiber in the Wireline business) have required substantial investments in potentially revenue-enhancing and cost-saving upgrades to TDS’ networks to remain competitive; this is expected to continue in 2020 and future years with the continued deployment of 5G technology and VoLTE in the Wireless business, and the continued deployment of fiber in the Wireline business.
Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, in 2019 and 2018 were as follows:
 

Capital Expenditures
(Dollars in millions)
chart-96c79cfed3e35df5a75.jpg

 


U.S. Cellular’s capital expenditures in 2019 were $710 million compared to $515 million in 2018. In 2019, these capital expenditures were used for the following purposes:

Enhance and maintain U.S. Cellular's network coverage, including continuing to deploy VoLTE technology in certain markets and providing additional speed and capacity to accommodate increased data usage by current customers;
Begin deploying 5G technology on its network; and
Invest in information technology to support existing and new services and products.

Capital expenditures for 2020 are expected to be between $850 million and $950 million. These expenditures are expected to be used for similar purposes as those listed above.
TDS Telecom’s capital expenditures in 2019 were $316 million compared to $232 million in 2018. In 2019, these capital expenditures were used for the following purposes:
Expand fiber deployment inside and outside of current footprint;
Maintain and enhance existing infrastructure including build-out requirements to meet state broadband and A-CAM programs;
Upgrade broadband capacity and speeds;
Support success-based spending for broadband and video growth; and
Build TDS TV+, a cloud-based video platform.

Capital expenditures in 2020 are expected to be between $300 million and $350 million. These expenditures are expected to be used for similar purposes as those listed above.
 
TDS intends to finance its capital expenditures for 2020 using primarily Cash flows from operating activities, existing cash balances and, if required, its receivables securitization, term loan and/or revolving credit agreements. 

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Acquisitions, Divestitures and Exchanges
TDS may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum licenses and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement. TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and increasing its long-term return on capital. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum licenses, including pursuant to FCC auctions; and telecommunications, cable or other possible businesses.
In June 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in its 28 GHz auction (Auction 101) and 282 wireless spectrum licenses in its 24 GHz auction (Auction 102) for an aggregate purchase price of $256 million. U.S. Cellular paid substantially all of the $256 million in the first half of 2019. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 were granted by the FCC on December 11, 2019.
On December 31, 2019, TDS acquired substantially all of the assets of MI Connection Communications System, dba Continuum, for $80 million in cash, subject to working capital adjustments. Continuum is a cable company that passes approximately 40,000 service addresses in North Carolina and offers broadband, video and voice services, which complement the TDS Telecom portfolio of products.
Total Cash paid for acquisitions and licenses was $346 million and $16 million in 2019 and 2018 respectively. Total Cash received from divestitures and exchanges was $41 million and $29 million in 2019 and 2018 respectively. 
Subsequent to December 31, 2019, TDS committed to purchase assets in the amount of $146 million, subject to regulatory approval.
Variable Interest Entities
TDS consolidates certain “variable interest entities” as defined under GAAP. See Note 16Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations. 
Common Share Repurchase Programs
As of December 31, 2019, the maximum dollar value of TDS Common Shares that may yet be purchased under TDS' program was $199 million.
During 2019, U.S. Cellular repurchased 590,300 Common Shares for $21 million at an average cost per share of $35.45. At December 31, 2019, the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,311,000.
Depending on its future financial performance, construction, development and acquisition programs, and available sources of financing, TDS and U.S. Cellular may not have sufficient liquidity or capital resources to make significant share repurchases. Therefore, there is no assurance that TDS and U.S. Cellular will make any significant share repurchases in the future. 
For additional information related to the current TDS and U.S. Cellular repurchase authorizations, see Note 18Common Shareholders’ Equity in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.
Dividends
TDS paid quarterly dividends per outstanding share of $0.165 in 2019 and $0.160 in 2018. TDS increased the dividend per share to $0.170 in the first quarter of 2020. TDS has no current plans to change its policy of paying dividends.

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Table of Contents

Contractual and Other Obligations
At December 31, 2019, the resources required for contractual obligations were as follows:
 
 
 
Payments Due by Period
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
(Dollars in millions)
 
 
 
 
 
 
 
 
 
Long-term debt obligations1
$
2,390

 
$
9

 
$
84

 
$

 
$
2,297

Interest payments on long-term debt obligations
5,473

 
161

 
318

 
315

 
4,679

Operating leases2, 3
1,434

 
159

 
304

 
236

 
735

Finance leases2, 4
22

 
1

 
2

 
2

 
17

Purchase obligations5
2,408

 
1,065

 
1,203

 
103

 
37

 
$
11,727

 
$
1,395

 
$
1,911

 
$
656

 
$
7,765

1 
Includes current and long-term portions of debt obligations. The total long-term debt obligation differs from Total long-term debt, net due to finance leases, debt issuance costs and unamortized discounts. See Note 13Debt in the Notes to Consolidated Financial Statements for additional information.
2 
Includes future lease costs related to telecommunications plant facilities, office space, retail sites, cell sites, data centers and equipment. See Note 11Leases in the Notes to Consolidated Financial Statements for additional information.
3 
Includes $7 million of legally binding lease payments for leases signed but not yet commenced and excludes $20 million of legally binding lease payments for leases signed but not yet commenced for which the payment timing is unknown.
4 
Includes $2 million of legally binding lease payments for leases signed but not yet commenced.
5 
Includes obligations payable under non-cancellable contracts, commitments for device purchases, network facilities and transport services, agreements for software licensing, long-term marketing programs, as well as certain agreements to purchase goods or services. For certain contracts, TDS calculates its obligation based on termination fees that can be paid to exit the contract. 
The table above excludes potential liabilities related to “unrecognized tax benefits” as defined by GAAP because TDS is unable to predict the outcome or period of settlement of such liabilities. Such unrecognized tax benefits were $49 million at December 31, 2019. See Note 5Income Taxes in the Notes to Consolidated Financial Statements for additional information.
See Note 15Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information.

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Consolidated Cash Flow Analysis
TDS operates a capital- and marketing-intensive business. TDS makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade communications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to TDS’ networks. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, and short-term and long-term debt financing to fund its acquisitions (including wireless spectrum 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 and divestitures, capital expenditures and other factors. The following discussion summarizes TDS’ cash flow activities in 2019 and 2018.
2019 Commentary
TDS’ Cash, cash equivalents and restricted cash decreased $453 million. Net cash provided by operating activities was $1,016 million due to net income of $147 million plus non-cash items of $984 million and distributions received from unconsolidated entities of $162 million, including $75 million in distributions from the LA Partnership. This was offset by changes in working capital items which decreased net cash by $277 million. The more significant working capital changes were increases in accounts receivables and equipment installment plan receivables and a decrease in accounts payable.
Cash flows used for investing activities were $1,249 million. Cash paid for additions to property, plant and equipment totaled $957 million and Cash paid for acquisitions and licenses totaled $346 million. This was partially offset by cash received from the redemption of short-term Treasury bills of $29 million and Cash received from divestitures and exchanges of $41 million.
Cash flows used for financing activities were $220 million, reflecting a $100 million principal prepayment on the U.S. Cellular senior term loan, the repurchase of $21 million of U.S. Cellular Common Shares and ordinary activity such as the payment of dividends and the scheduled repayments of debt.
2018 Commentary
TDS’ Cash, cash equivalents and restricted cash increased $305 million. Net cash provided by operating activities was $1,017 million due to net income of $175 million plus non-cash items of $906 million and distributions received from unconsolidated entities of $153 million, including $68 million in distributions from the LA Partnership. This was partially offset by changes in working capital items which decreased net cash by $217 million. The working capital changes were influenced primarily by a $149 million increase in equipment installment plan receivables.
Cash flows used for investing activities were $680 million. Cash paid for additions to property, plant and equipment totaled $776 million. This was partially offset by cash received from the redemption of shorter-term Treasury bills of $100 million.
Cash flows used for financing activities were $32 million, reflecting ordinary activity such as the payment of dividends and the scheduled repayments of debt, partially offset by cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plans.

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Consolidated Balance Sheet Analysis
The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2019 were as follows:
Cash and cash equivalents
See the Consolidated Cash Flow Analysis above for a discussion of cash and cash equivalents.
Income taxes receivable
Income taxes receivable increased $24 million due to estimated tax payments made in excess of the tax liability for the year. See Note 5Income Taxes in the Notes to Consolidated Financial Statements for additional information.
Assets held for sale
Assets held for sale decreased $54 million. Certain sale and exchange agreements that U.S. Cellular entered into in 2018 closed in the first quarter of 2019.
Licenses
Licenses increased $285 million due primarily to wireless spectrum licenses acquired through FCC auctions. See Note 8Intangible Assets in the Notes to Consolidated Financial Statements for additional information.
Operating lease right-of-use assets
Operating lease right-of-use assets increased $972 million due to the adoption of Accounting Standards Codification (ASC) 842. See Note 11Leases in the Notes to Consolidated Financial Statements for additional information.
Short-term operating lease liabilities
Short-term operating lease liabilities increased $116 million due to the adoption of ASC 842. See Note 11Leases in the Notes to Consolidated Financial Statements for additional information.
Long-term operating lease liabilities
Long-term operating lease liabilities increased $931 million due to the adoption of ASC 842. See Note 11Leases in the Notes to Consolidated Financial Statements for additional information.
Other deferred liabilities and credits
Other deferred liabilities and credits decreased $60 million due primarily to the adoption of ASC 842. See Note 11Leases in the Notes to Consolidated Financial Statements for additional information.



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Application of Critical Accounting Policies and Estimates
TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting policies are discussed in detail in Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements, Note 2Revenue Recognition and Note 11Leases in the Notes to Consolidated Financial Statements.
Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of TDS’ consolidated financial statements.
Intangible Asset Impairment
Licenses and Goodwill represent a significant component of TDS’ consolidated assets. These assets are considered to be indefinite-lived assets and, therefore, are not amortized but rather are tested at least annually for impairment. TDS performs annual impairment testing of Licenses and Goodwill as of November 1 of each year, or more frequently if triggering events occur. Significant negative events, such as changes in any of the assumptions described below or decreases in forecasted cash flows, could result in an impairment in future periods. Licenses are tested for impairment at the level of reporting referred to as a unit of accounting. Goodwill is tested for impairment at the level of reporting referred to as a reporting unit.
See Note 8Intangible Assets in the Notes to Consolidated Financial Statements for information related to Licenses and Goodwill activity in 2019 and 2018.
Wireless Spectrum Licenses – U.S. Cellular
U.S. Cellular performs its annual impairment assessment of wireless spectrum licenses as of November 1 of each year, or more frequently if there are events or circumstances that cause U.S. Cellular to believe it is more likely than not that the carrying value of wireless spectrum licenses exceeds fair value. For purposes of its impairment testing, U.S. Cellular separated its FCC wireless spectrum licenses into eight units of accounting, which consisted of one unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and seven geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses). U.S. Cellular performed a quantitative impairment assessment in 2019, and a qualitative impairment assessment in 2018, to determine whether an impairment existed. 
In 2019, a market approach was used to value the wireless spectrum license portfolio. Within each unit of accounting, the wireless spectrum licenses were pooled by type and by geographic area. The market approach calculates estimated market values using observable pricing multiples from wireless spectrum license purchase and auction transactions to estimate fair value for each pool of wireless spectrum licenses. The sum of the fair values of each of the pools represents the estimated fair value of U.S. Cellular's wireless spectrum licenses. The most significant assumption made in this process was the pricing multiples, which are units of value expressed in relation to the bandwidth and population covered by a wireless spectrum license. Based on the assessment, the fair values of the wireless spectrum license units of accounting exceeded their respective carrying values by amounts ranging from 39% to greater than 100%. It was determined that the carrying value of wireless spectrum licenses acquired through Auction 101 and 102 approximated fair value based on the recency of the auctions. Therefore, no impairment of wireless spectrum licenses existed.
In 2018, U.S. Cellular considered several qualitative factors, including analysts’ estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent U.S. Cellular and other market participant transactions and other industry and market factors. Based on this assessment, U.S. Cellular concluded that it was more likely than not that the fair value of the wireless spectrum licenses in each unit of accounting exceeded their respective carrying values. Therefore, no impairment of wireless spectrum licenses existed and no Step 1 quantitative impairment evaluation was completed.
Goodwill – TDS Telecom
TDS Telecom has recorded Goodwill as a result of the past acquisitions of wireline and cable businesses. For purposes of the 2019 and 2018 Goodwill impairment tests, TDS Telecom had two reporting units: Wireline and Cable. 
Based on the results of the TDS Telecom annual Goodwill impairment assessment performed as of November 1, 2019, the fair values of the Wireline and Cable reporting units exceeded their carrying values. Therefore, no impairment of Goodwill was recorded for these reporting units. 
The discounted cash flow approach and guideline public company method were used to value the Wireline and Cable reporting units. The discounted cash flow approach develops an indication of fair value using various inputs and considers current economic factors as well as risks specific to the industry and the reporting unit. The most significant assumptions made in this process were the revenue growth rate (shown as a compound annual growth rate in the table below), the terminal revenue growth rate and the discount rate. The guideline public company method develops an indication of fair value by calculating average market pricing multiples for selected publicly-traded companies. The developed multiples were applied to applicable financial measures of the respective reporting unit to determine fair value. The discounted cash flow approach and guideline public company method were weighted to arrive at the total fair value used for impairment testing. The weighting of methods was consistently applied in both 2019 and 2018.

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For purposes of the discounted cash flow approach, the following table represents key assumptions used in estimating the fair value of the Wireline and Cable reporting units as of November 1, 2019. There are uncertainties associated with these key assumptions and potential events and/or circumstances that could have a negative effect on the key assumptions described below.
Key Assumptions
Wireline
Cable
Revenue growth rate1
(2.2
)%
6.5
%
Terminal revenue growth rate1
 %
2.0
%
Discount rate2
6.0
 %
8.0
%
1 
There are risks that could negatively impact the projected revenue growth rate, including but not limited to macroeconomic and industry factors. 
2 
The discount rate is derived based on a set of guideline public companies and is an indicator of the cost of capital for a market participant in TDS Telecom's industries. The discount rate may increase if borrowing costs rise, market participants weight more of their capital structure towards equity vs. debt, long-term risk free interest rates increase, Wireline's or Cable's risk in relation to its peers increases, or other elements affecting the estimated cost of equity or debt increase.
Provided all other assumptions remained the same, the Wireline and Cable discount rates would have to increase to 9.6% and 13.3%, respectively, to yield estimated fair values equal to their respective carrying values at November 1, 2019. Further, provided all other assumptions remained the same, the Wireline and Cable terminal revenue growth rate assumptions would need to decrease to negative 5.5% and negative 6.2%, respectively, to yield an estimate of fair value equal to the carrying value of the respective reporting units at November 1, 2019.
The Goodwill balances of the reporting units tested for impairment as of November 1, 2019, and the percentage by which the estimated fair value of the corresponding reporting units exceeded their carrying values, as a percentage of carrying value, was as follows:
Reporting unit
Goodwill balance
 
Excess of estimated Fair Value over Carrying Value
(Dollars in millions)
 
 
 
Wireline
$
409

 
31.0
%
Cable
$
100

 
54.4
%
Income Taxes
The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to TDS’ financial condition and results of operations.
The preparation of the consolidated financial statements requires TDS to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities, which are included in TDS’ Consolidated Balance Sheet. TDS must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management’s judgment is required in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets.
TDS recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on management’s judgment as to the possible outcome that has a greater than 50% cumulative likelihood of being realized upon ultimate resolution.
See Note 5Income Taxes in the Notes to Consolidated Financial Statements for additional information.

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Other Items
Inflation
Management believes that inflation affects TDS’ business to no greater or lesser extent than the general economy.
Seasonality
TDS’ profitability historically has been lower in the fourth quarter as a result of U.S. Cellular’s significant marketing and promotional activity during the holiday season.
Recently Issued Accounting Pronouncements
See Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements and Note 11Leases in the Notes to Consolidated Financial Statements for information on recently issued accounting pronouncements.
Certain Relationships and Related Transactions
See Note 22Certain Relationships and Related Transactions in the Notes to Consolidated Financial Statements.

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Regulatory Matters
FCC Mobility Fund/5G Fund
In October 2011, the FCC adopted its USF/Intercarrier Compensation Transformation Order (USF Order). Pursuant to this order, U.S. Cellular’s then current Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012. The USF Order contemplated the establishment of a new mobile USF program (i.e., the Phase II Connect America Mobility Fund or "MF2") and provided for a pause in the phase down if that program was not timely implemented by July 2014. MF2 was not operational as of July 2014 and, therefore, as provided by the USF Order, the phase down was suspended at 60% of the baseline amount until such time as the FCC had taken steps to establish the MF2. In February 2017, the FCC adopted the MF2 Order addressing the framework for MF2 and the resumption of the phase down. The MF2 Order establishes a support fund of $453 million annually for ten years to be distributed through a market-based, multi-round reverse auction. For areas that receive support under MF2, legacy support to MF2 Auction winners will terminate and be replaced with MF2 support effective the first day of the month following release of the public notice closing the auction. Legacy support in areas where the legacy support recipient is not an MF2 winner will be subject to phase down over two years unless there is no winner in a particular census block, in which case it will be continued for one legacy support recipient only. The MF2 Order further states that the phase down of legacy support for areas that were not eligible for support under MF2 will commence on the first day of the month following the completion of the auction and will conclude two years later. 
In August 2017, the FCC adopted the MF2 Challenge Process Order, which laid out procedures for establishing areas that would be eligible for support under the MF2 program. This included a collection process to be followed by a challenge window, a challenge response window, and finally adjudication of any coverage disputes. In September 2017, the FCC issued a public notice initiating the collection of 4G LTE coverage data. Responses submitting the collected data were due on January 4, 2018. 
On February 27, 2018, the FCC issued public notices providing detailed challenge procedures and a schedule for the challenge process. Pursuant to these notices, the challenge window began on March 29, 2018, and closed on November 26, 2018. Under the MF2 Challenge Process Order, no earlier than thirty days after the FCC processes the challenges, the FCC would open a thirty-day challenge response window. Following the challenge response window, the FCC would then adjudicate any disputes. This entire process must be completed before an auction can be commenced. 
On December 7, 2018, the FCC announced that it was investigating whether one or more carriers had submitted inaccurate maps. Pending the outcome of this investigation, the FCC suspended the challenge process. On December 4, 2019, the FCC released a staff report concluding that the maps submitted by carriers were too inaccurate to provide the basis for the MF2 auction. Contemporaneously with the release of this staff report, the Chairman of the FCC announced that he intended to propose the creation of a new fund for 5G deployment in rural areas with $9 billion in available funding. This new 5G fund would replace the MF2 fund. No further details are available but in a letter to Members of Congress dated January 24, 2020, the Chairman of the FCC stated that he planned to circulate a Notice of Proposed Rulemaking in the coming months for the Commission's consideration.
U.S. Cellular cannot predict at this time when the 5G fund auction will occur, if ever, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the 5G fund auction will provide opportunities to U.S. Cellular to offset any loss in existing support.
FCC Connect America Fund
In 2017, TDS began receiving $75 million per year for 10 years (with incremental funding for transition in the early years for certain states) for operating and maintaining its network along with the obligation to provide broadband service at various speeds to about 160,000 locations. In May 2018, TDS Telecom accepted an offer issued by the FCC to receive an additional $3 million of support per year for ten years retroactive to January 2017 along with corresponding build-out obligations. In December 2018, the FCC authorized additional funding for companies that elected Alternative Connect America Model (A-CAM) support. On February 25, 2019, as directed within the order, the Wireline Competition Bureau (the Bureau) released a public notice offering TDS Telecom an additional $198 million in funding along with additional buildout obligations and extended the term of the revised offer by two years until December 31, 2028, which TDS Telecom accepted. On April 29, 2019, the Bureau authorized and directed the Universal Service Administrative Company (USAC) to obligate and disburse this revised support to those carriers that accept this revised offer. The offer provides A-CAM support up to $200 per location which increases annual support under the program to $82 million excluding transitional amounts, retroactive to January 1, 2019, and extending through 2028.
FCC Rulemaking – Restoring Internet Freedom
In December 2017, the FCC approved rules reversing or revising decisions made in the FCC’s 2015 Open Internet and Title II Order (Restoring Internet Freedom). The 2017 action reversed the FCC’s 2015 decision to reclassify Broadband Internet Access Services as telecommunications services subject to regulation under Title II of the Telecommunications Act. The 2017 action also reversed the FCC’s 2015 restrictions on blocking, throttling and paid prioritization, and modified transparency rules relating to such practices. Several parties filed suit in federal court challenging the 2017 actions. On October 1, 2019, the Court of Appeals for the D.C. Circuit issued an order reaffirming the FCC in most respects, but limiting the FCC's ability to preempt state and local net neutrality laws.
A number of states, including certain states in which TDS operates, have adopted or considered laws intended to reinstate aspects of the foregoing net neutrality regulations that were reversed or revised by the FCC in 2017. To the extent such laws are enacted, it is expected that legal proceedings will be pursued challenging such laws, subject now to the DC Circuit ruling limiting the FCC's preemptive authority in this matter. TDS cannot predict the outcome of these proceedings or the impact on its business.

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Millimeter Wave Spectrum Auctions
During 2018 and 2019, the FCC conducted two auctions of wireless spectrum licenses in the 28 GHz and 24 GHz bands. The 28 GHz auction (Auction 101) commenced on November 14, 2018 and closed on January 24, 2019. Auction 101 offered two 425 MHz wireless spectrum licenses in the 28 GHz band over portions of the United States that do not have incumbent licensees. The 24 GHz auction (Auction 102) commenced on March 14, 2019 and closed on May 28, 2019. Auction 102 offered up to seven 100 MHz wireless spectrum licenses in the 24 GHz band in Partial Economic Areas covering most of the United States. On June 3, 2019, the FCC announced by way of public notice that U.S. Cellular was the provisional winning bidder for 408 wireless spectrum licenses in Auction 101 and 282 wireless spectrum licenses in Auction 102 for an aggregate purchase price of $256 million. The wireless spectrum licenses from Auction 101 were granted by the FCC on October 2, 2019, and the wireless spectrum licenses from Auction 102 were granted by the FCC on December 11, 2019.
On July 11, 2019, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103). On August 21, 2019, the FCC released a Public Notice announcing that all 39 GHz incumbents have agreed to relinquish their wireless spectrum licenses in return for incentive payments. Consequently, Auction 103 is offering 34 100 MHz blocks in the Upper 37 GHz, 39 GHz, and 47 GHz bands in all Partial Economic Areas. On September 9, 2019, U.S. Cellular filed an application to participate in Auction 103 and was announced as a qualified bidder on October 31, 2019. Bidding in this auction commenced on December 10, 2019. The initial phase of this auction closed on January 30, 2020 and the assignment phase commenced on February 18, 2020.
USTelecom Forbearance Petition
In response to the USTelecom Forbearance Petition, the FCC took a series of actions to provide relief from rules adopted pursuant to the Telecommunications Act of 1996. On July 12, 2019, the FCC issued an Order granting partial forbearance relief from rules that require ILECs to provide dedicated transport facilities between wire centers to their competitors on an unbundled basis at regulated rates. On August 2, 2019, the FCC granted ILECs relief from adopted rules (i) a requirement they offer competitors "analog voice-grade copper loops" on an unbundled basis at regulated rates and (ii) a requirement they offer legacy services for resale at regulated rates. To enable CLECs and their customers to make alternative service arrangements following forbearance, the Order provides a three-year transition period during which time ILECs and CLECs may negotiate commercial agreements. As a result of these orders, CLECs could potentially see a change in prices for the use of facilities currently purchased from other ILECs. TDS Telecom is exploring the options available to it brought forward by these decisions.

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Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward‑looking statements, but are not the exclusive means of identifying them. Such forward‑looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward‑looking statements. Such risks, uncertainties and other factors include, but are not limited to, those set forth below. See “Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2019, for a further discussion of these risks. Each of the following risks could have a material adverse effect on TDS’ business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.
Intense competition in the markets in which TDS operates could adversely affect TDS’ revenues or increase its costs to compete.
A failure by TDS to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, fiber builds, divestitures and exchanges) or allocate resources or capital effectively could have an adverse effect on TDS’ business, financial condition or results of operations.
Uncertainty in TDS’ future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, other changes in TDS’ performance or market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases and/or the payment of dividends.
TDS has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt.
Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact TDS’ ability to service its customers in geographic areas where TDS does not have its own network, which could have an adverse effect on TDS’ business, financial condition or results of operations.
A failure by TDS to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on TDS’ business, financial condition or results of operations.
To the extent conducted by the FCC, TDS may participate in FCC auctions for additional spectrum or for funding in certain Universal Service programs in the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on TDS.
Failure by TDS to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect TDS’ business, financial condition or results of operations.
An inability to attract people of outstanding talent throughout all levels of the organization, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on TDS' business, financial condition or results of operations.
TDS’ assets and revenue are concentrated primarily in the U.S. telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
TDS’ smaller scale relative to larger competitors that may have greater financial and other resources than TDS could cause TDS to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.
Changes in various business factors, including changes in demand, consumer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on TDS’ business, financial condition or results of operations.

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Advances or changes in technology could render certain technologies used by TDS obsolete, could put TDS at a competitive disadvantage, could reduce TDS’ revenues or could increase its costs of doing business.
Complexities associated with deploying new technologies present substantial risk and TDS’ investments in unproven technologies may not produce the benefits that TDS expects.
TDS receives regulatory support and is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of the support and fees are subject to great uncertainty, which could have an adverse effect on TDS’ business, financial condition or results of operations.
Changes in TDS’ enterprise value, changes in the market supply or demand for wireless spectrum licenses, wireline or cable markets or IT service providers, adverse developments in the businesses or the industries in which TDS is involved and/or other factors could require TDS to recognize impairments in the carrying value of its wireless spectrum licenses, goodwill, franchise rights and/or physical assets or require re-evaluation of the indefinite-lived nature of such assets.
Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’ business, financial condition or results of operations.
A failure by TDS to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations.
Difficulties involving third parties with which TDS does business, including changes in TDS’ relationships with or financial or operational difficulties of key suppliers or independent agents and third party national retailers who market TDS’ services, could adversely affect TDS’ business, financial condition or results of operations.
TDS has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on TDS’ financial condition or results of operations.
A failure by TDS to maintain flexible and capable telecommunication networks or information technology, or a material disruption thereof, could have an adverse effect on TDS’ business, financial condition or results of operations.
TDS has experienced, and in the future expects to experience, cyber-attacks or other breaches of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on TDS' business, financial condition or results of operations.
Changes in facts or circumstances, including new or additional information, could require TDS to record adjustments to amounts reflected in the financial statements, which could have an adverse effect on TDS’ business, financial condition or results of operations.
Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede TDS’ access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on TDS’ business, financial condition or results of operations.
Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on TDS’ business, financial condition or results of operations.
The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices such as pacemakers, could have an adverse effect on TDS’ wireless business, financial condition or results of operations.
Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent TDS from using necessary technology to provide products or services or subject TDS to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on TDS’ business, financial condition or results of operations.
Certain matters, such as control by the TDS Voting Trust and provisions in the TDS Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of TDS or have other consequences.
The market price of TDS’ Common Shares is subject to fluctuations due to a variety of factors.
Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from TDS’ forward-looking estimates by a material amount.

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Market Risk
Long-Term Debt
As of December 31, 2019, the majority of TDS’ long-term debt was in the form of fixed-rate notes with remaining maturities ranging up to 45 years. Fluctuations in market interest rates can lead to significant fluctuations in the fair value of these fixed-rate notes.
The following chart presents the scheduled principal payments on long-term debt by maturity dates at December 31, 2019:
 tdsmarketriska06.jpg
The following table presents the scheduled principal payments on long-term debt, finance lease obligations, and other installment arrangements, and the related weighted average interest rates by maturity dates at December 31, 2019:
 
Principal Payments Due by Period
 
Long-Term Debt Obligations1
 
Weighted-Avg. Interest Rates on Long-Term Debt Obligations2
(Dollars in millions)
 
 
 
2020
$
10

 
1.0
%
2021
2

 
4.0
%
2022
83

 
3.6
%
2023

 
6.5
%
2024

 
6.5
%
Thereafter
2,303

 
6.9
%
Total
$
2,398

 
6.7
%
1 
The total long-term debt obligation differs from Long-term debt in the Consolidated Balance Sheet due to unamortized debt issuance costs on all non-revolving debt instruments, unamortized discounts related to U.S. Cellular's 6.7% Senior Notes, and unamortized discounts related to the Installment payment agreement. See Note 13Debt in the Notes to Consolidated Financial Statements for additional information.
2 
Represents the weighted average stated interest rates at December 31, 2019, for debt maturing in the respective periods.

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Fair Value of Long-Term Debt
At December 31, 2019 and 2018, the estimated fair value of long-term debt obligations, excluding finance lease obligations, other installment arrangements, the current portion of such long-term debt and debt financing costs, was $2,474 million and $2,309 million, respectively. See Note 3Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information.
Other Market Risk Sensitive Instruments
The substantial majority of TDS’ other market risk sensitive instruments (as defined in Item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents. Accordingly, TDS believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments.

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Supplemental Information Relating to Non-GAAP Financial Measures
TDS sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with U.S. GAAP to evaluate the performance of its business. Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Specifically, TDS has referred to the following measures in this Form 10-K Report:
EBITDA
Adjusted EBITDA
Adjusted OIBDA
Free cash flow

Following are explanations of each of these measures:
EBITDA, Adjusted EBITDA and Adjusted OIBDA
EBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. TDS does not intend to imply that any such items set forth in the reconciliation below are non-recurring, infrequent or unusual; such items may occur in the future.
Adjusted EBITDA is a segment measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. See Note 20Business Segment Information in the Notes to Consolidated Financial Statements for additional information.
Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability and, therefore, reconciliations to applicable GAAP income measures are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of TDS’ operating results before significant recurring non-cash charges, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of TDS’ financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following tables reconcile EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income or Income (loss) before income taxes and Operating income (loss). Income tax expense is not provided at the individual segment level for Wireline and Cable. TDS calculates income tax expense for TDS Telecom in total.
TDS - CONSOLIDATED
2019
 
2018
(Dollars in millions)
 
 
 
Net income (GAAP)
$
147

 
$
175

Add back or deduct:
 
 
 
Income tax expense
64

 
46

Interest expense
165

 
172

Depreciation, amortization and accretion
932

 
883

EBITDA (Non-GAAP)
1,308

 
1,276

Add back or deduct:
 
 
 
(Gain) loss on asset disposals, net
12

 
9

(Gain) loss on sale of business and other exit costs, net
(1
)
 

(Gain) loss on license sales and exchanges, net

 
(18
)
Adjusted EBITDA (Non-GAAP)
1,319

 
1,267

Deduct:
 
 
 
Equity in earnings of unconsolidated entities
168

 
160

Interest and dividend income
29

 
26

Other, net

 
2

Adjusted OIBDA (Non-GAAP)
1,122

 
1,079

Deduct:
 
 
 
Depreciation, amortization and accretion
932

 
883

(Gain) loss on asset disposals, net
12

 
9

(Gain) loss on sale of business and other exit costs, net
(1
)
 

(Gain) loss on license sales and exchanges, net

 
(18
)
Operating income (GAAP)
$
179

 
$
205


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Table of Contents

U.S. CELLULAR
2019
 
2018
(Dollars in millions)
 
 
 
Net income (GAAP)
$
133

 
$
164

Add back or deduct:
 
 
 
Income tax expense
52

 
51

Interest expense
110

 
116

Depreciation, amortization and accretion
702

 
640

EBITDA (Non-GAAP)
997

 
971

Add back or deduct:
 
 
 
(Gain) loss on asset disposals, net
19

 
10

(Gain) loss on sale of business and other exit costs, net
(1
)
 

(Gain) loss on license sales and exchanges, net

 
(18
)
Adjusted EBITDA (Non-GAAP)
1,015

 
963

Deduct:
 
 
 
Equity in earnings of unconsolidated entities
166

 
159

Interest and dividend income
17

 
15

Other, net

 
(1
)
Adjusted OIBDA (Non-GAAP)
832

 
790

Deduct:
 
 
 
Depreciation, amortization and accretion
702

 
640

(Gain) loss on asset disposals, net
19

 
10

(Gain) loss on sale of business and other exit costs, net
(1
)
 

(Gain) loss on license sales and exchanges, net

 
(18
)
Operating income (GAAP)
$
112

 
$
158

TDS TELECOM
2019
 
2018
(Dollars in millions)
 
 
 
Net income (GAAP)
$
92

 
$
89

Add back or deduct:
 
 
 
Income tax expense
30

 
16

Interest expense
(3
)
 
(2
)
Depreciation, amortization and accretion
200

 
212

EBITDA (Non-GAAP)
320

 
315

Add back or deduct:
 
 
 
(Gain) loss on asset disposals, net
(7
)
 
(2
)
Adjusted EBITDA (Non-GAAP)
313

 
313

Deduct:
 

 
 

Interest and dividend income
12

 
8

Other, net

 
2

Adjusted OIBDA (Non-GAAP)
300

 
303

Deduct:
 
 
 
Depreciation, amortization and accretion
200

 
212

(Gain) loss on asset disposals, net
(7
)
 
(2
)
Operating income (GAAP)
$
107

 
$
93

Numbers may not foot due to rounding.

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WIRELINE
2019
 
2018
(Dollars in millions)
 
 
 
Income before income taxes (GAAP)
$
110

 
$
106

Add back or deduct:
 
 
 
Interest expense
(3
)
 
(2
)
Depreciation, amortization and accretion
132

 
142

EBITDA (Non-GAAP)
239

 
247

Add back or deduct:
 

 
 

(Gain) loss on asset disposals, net
(8
)
 
(3
)
Adjusted EBITDA (Non-GAAP)
231

 
243

Deduct:
 

 
 

Interest and dividend income
10

 
7

Other, net

 
3

Adjusted OIBDA (Non-GAAP)
220

 
234

Deduct:
 

 
 

Depreciation, amortization and accretion
132

 
142

(Gain) loss on asset disposals, net
(8
)
 
(3
)
Operating income (GAAP)
$
96

 
$
95

Numbers may not foot due to rounding. 

CABLE
2019
 
2018
(Dollars in millions)
 
 
 
Income (loss) before income taxes (GAAP)
$
13

 
$
(1
)
Add back:
 

 
 

Depreciation, amortization and accretion
68

 
69

EBITDA (Non-GAAP)
81

 
69

Add back or deduct:
 

 
 

(Gain) loss on asset disposals, net
1

 
1

Adjusted EBITDA (Non-GAAP)
82

 
70

Deduct:
 

 
 

Interest and dividend income
2

 
1

Adjusted OIBDA (Non-GAAP)
80

 
69

Deduct:
 

 
 

Depreciation, amortization and accretion
68

 
69

(Gain) loss on asset disposals, net
1

 
1

Operating income (loss) (GAAP)
$
11

 
$
(2
)
Numbers may not foot due to rounding.
Free Cash Flow
The following table presents Free cash flow, which is defined as Cash flow from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment.
 
2019
 
2018
(Dollars in millions)

 

Cash flows from operating activities (GAAP)
$
1,016

 
$
1,017

Less: Cash paid for additions to property, plant and equipment
957

 
776

Free cash flow (Non-GAAP)
$
59

 
$
241


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Financial Statements
Telephone and Data Systems, Inc.
Consolidated Statement of Operations
 
Year Ended December 31,
2019
 
2018
 
2017
(Dollars and shares in millions, except per share amounts)
 
 
 
 
 
Operating revenues
 
 
 
 
 
Service
$
4,059

 
$
3,999

 
$
3,979

Equipment and product sales
1,117

 
1,110

 
1,065

Total operating revenues
5,176

 
5,109

 
5,044

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Cost of services (excluding Depreciation, amortization and accretion reported below)
1,202

 
1,206

 
1,164

Cost of equipment and products
1,135

 
1,130

 
1,195

Selling, general and administrative
1,717

 
1,694

 
1,689

Depreciation, amortization and accretion
932

 
883

 
844

Loss on impairment of goodwill

 

 
262

(Gain) loss on asset disposals, net
12

 
9

 
21

(Gain) loss on sale of business and other exit costs, net
(1
)
 

 
(1
)
(Gain) loss on license sales and exchanges, net

 
(18
)
 
(22
)
Total operating expenses
4,997

 
4,904

 
5,152

 
 
 
 
 
 
Operating income (loss)
179

 
205

 
(108
)
 
 
 
 
 
 
Investment and other income (expense)
 
 
 
 
 
Equity in earnings of unconsolidated entities
168

 
160

 
137

Interest and dividend income
29

 
26

 
15

Interest expense
(165
)
 
(172
)
 
(170
)
Other, net

 
2

 
4

Total investment and other income (expense)
32

 
16

 
(14
)
 
 
 
 
 
 
Income (loss) before income taxes
211

 
221

 
(122
)
Income tax expense (benefit)
64

 
46

 
(279
)
Net income
147

 
175

 
157

Less: Net income attributable to noncontrolling interests, net of tax
26

 
40

 
4

Net income attributable to TDS shareholders
$
121

 
$
135

 
$
153

 
 
 
 
 
 
Basic weighted average shares outstanding
114

 
112

 
111

Basic earnings per share attributable to TDS shareholders
$
1.06

 
$
1.20

 
$
1.39

 
 
 
 
 
 
Diluted weighted average shares outstanding
116

 
114

 
112

Diluted earnings per share attributable to TDS shareholders
$
1.03

 
$
1.17

 
$
1.37

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

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Table of Contents

Telephone and Data Systems, Inc.
Consolidated Statement of Comprehensive Income
 
Year Ended December 31,
2019
 
2018
 
2017
(Dollars in millions)
 
 
 
 
 
Net income
$
147

 
$
175

 
$
157

Net change in accumulated other comprehensive income
 
 
 
 
 
Change related to retirement plan
 
 
 
 
 
Amounts included in net periodic benefit cost for the period
 
 
 
 
 
Net actuarial gains
1

 

 
2

Prior service cost

 
(10
)
 
(3
)
Amortization of prior service cost
1

 
(1
)
 
(2
)
 
2

 
(11
)
 
(3
)
Change in deferred income taxes
(1
)
 
3

 
1

Change related to retirement plan, net of tax
1

 
(8
)
 
(2
)
Net change in accumulated other comprehensive income
1

 
(8
)
 
(2
)
Comprehensive income
148

 
167

 
155

Less: Net income attributable to noncontrolling interests, net of tax
26

 
40

 
4

Comprehensive income attributable to TDS shareholders
$
122

 
$
127

 
$
151

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

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Telephone and Data Systems, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31,
2019
 
2018
 
2017
(Dollars in millions)
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
Net income
$
147

 
$
175

 
$
157

Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
 
 
 
 
 
Depreciation, amortization and accretion
932

 
883

 
844

Bad debts expense