TELEPHONE & DATA SYSTEMS INC /DE/ - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

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

For the quarterly period ended June 30, 2015

[ ]

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

For the transition period from to

Commission file number 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2669023

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

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

(Address of principal executive offices) (Zip code)

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

Indicate by check mark

Yes

• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[x]

[ ]

• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[x]

[ ]

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

Large accelerated filer

[x]

Accelerated filer

[ ]

Non-accelerated filer

[ ]

Smaller reporting company

[ ]

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

[ ]

[x]

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

Class

Outstanding at June 30, 2015

Common Shares, $0.01 par value

101,363,899 Shares

Series A Common Shares, $0.01 par value

7,196,018 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2015

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		4

		Consolidated Statement of Operations		4
			Three and Six Months Ended June 30, 2015 and 2014

		Consolidated Statement of Comprehensive Income		5
			Three and Six Months Ended June 30, 2015 and 2014

		Consolidated Statement of Cash Flows		6
			Six Months Ended June 30, 2015 and 2014

		Consolidated Balance Sheet		7
			June 30, 2015 and December 31, 2014

		Consolidated Statement of Changes in Equity		9
			Six Months Ended June 30, 2015 and 2014

		Notes to Consolidated Financial Statements		11

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		26

		Overview		26

		Regulatory Matters		30

		Six Months Ended June 30, 2015 and 2014
			Results of Operations — Consolidated	31
			Results of Operations — U.S. Cellular	33
			Results of Operations — TDS Telecom	37

		Three Months Ended June 30, 2015 and 2014
			Results of Operations — Consolidated	42
			Results of Operations — U.S. Cellular	44
			Results of Operations — TDS Telecom	46

		Recent Accounting Pronouncements		48

		Liquidity and Capital Resources		49

		Application of Critical Accounting Policies and Estimates		53

		Safe Harbor Cautionary Statement		54

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		56

	Item 4.	Controls and Procedures		56

Part II.	Other Information

	Item 1.	Legal Proceedings	57

	Item1A.	Risk Factors	57

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

	Item 5.	Other Information	58

	Item 6.	Exhibits	59

Signatures

Part I. Financial Information

Item 1. Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations

(Unaudited)

			Three months ended				Six Months Ended
			June 30,				June 30,
(Dollars and shares in thousands, except per share amounts)			2015		2014		2015		2014
Operating revenues
	Service		$	1,070,650	$	1,072,179	$	2,143,741	$	2,152,421
	Equipment and product sales			205,745		164,213		384,247		279,933
		Total operating revenues		1,276,395		1,236,392		2,527,988		2,432,354

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			300,152		286,488		593,799		562,446
	Cost of equipment and products			298,450		313,011		570,431		619,658
	Selling, general and administrative			435,430		470,902		873,470		934,571
	Depreciation, amortization and accretion			211,104		204,567		417,679		429,486
	(Gain) loss on asset disposals, net			4,752		7,903		10,129		10,333
	(Gain) loss on sale of business and other exit costs, net			(5,589)		2,611		(129,372)		(4,289)
	(Gain) loss on license sales and exchanges, net			(25)		–		(122,898)		(91,446)
		Total operating expenses		1,244,274		1,285,482		2,213,238		2,460,759

Operating income (loss)				32,121		(49,090)		314,750		(28,405)

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35,412		34,790		70,053		72,117
	Interest and dividend income			10,117		2,751		18,502		5,237
	Interest expense			(33,919)		(27,898)		(67,749)		(56,605)
	Other, net			202		50		198		210
		Total investment and other income		11,812		9,693		21,004		20,959

Income (loss) before income taxes				43,933		(39,397)		335,754		(7,446)
	Income tax expense (benefit)			17,433		(13,671)		133,453		(2,014)
Net income (loss)				26,500		(25,726)		202,301		(5,432)
Less: Net income (loss) attributable to noncontrolling interests, net of tax				3,454		(3,688)		33,515		(1,648)
Net income (loss) attributable to TDS shareholders				23,046		(22,038)		168,786		(3,784)
TDS Preferred dividend requirement				(12)		(12)		(25)		(25)
Net income (loss) available to common shareholders			$	23,034	$	(22,050)	$	168,761	$	(3,809)

Basic weighted average shares outstanding				108,484		108,719		108,327		108,853
Basic earnings (loss) per share attributable to TDS shareholders			$	0.21	$	(0.20)	$	1.56	$	(0.04)

Diluted weighted average shares outstanding				109,785		108,719		109,380		108,853
Diluted earnings (loss) per share attributable to TDS shareholders			$	0.21	$	(0.20)	$	1.53	$	(0.04)

Dividends per share to TDS shareholders			$	0.141	$	0.134	$	0.282	$	0.268

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

Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

					Three months ended				Six Months Ended
					June 30,				June 30,
(Dollars in thousands)					2015		2014		2015		2014
Net income (loss)					$	26,500	$	(25,726)	$	202,301	$	(5,432)
Net change in accumulated other
	comprehensive income (loss)
		Change in net unrealized gain (loss) on equity
			investments			(353)		341		(353)		341
		Change in foreign currency translation adjustment				(39)		(17)		(3)		(21)
		Change related to retirement plan
			Amounts included in net periodic benefit cost for
				the period
				Amortization of prior service cost		(852)		(911)		(1,704)		(1,822)
				Amortization of unrecognized net loss		64		322		129		644
						(788)		(589)		(1,575)		(1,178)
			Changes in deferred income taxes			298		224		609		447
		Change related to retirement plan, net of tax				(490)		(365)		(966)		(731)
		Net change in accumulated other comprehensive				(882)		(41)		(1,322)		(411)
			income (loss)			(882)		(41)		(1,322)		(411)
Comprehensive income (loss)						25,618		(25,767)		200,979		(5,843)
		Less: Comprehensive income (loss) attributable to				3,454		(3,688)		33,515		(1,648)
			noncontrolling interest			3,454		(3,688)		33,515		(1,648)
Comprehensive income (loss) attributable to					$	22,164	$	(22,079)	$	167,464	$	(4,195)
	TDS shareholders				$	22,164	$	(22,079)	$	167,464	$	(4,195)

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

Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

			Six Months Ended
			June 30,
(Dollars in thousands)			2015		2014
Cash flows from operating activities
	Net income (loss)		$	202,301	$	(5,432)
	Add (deduct) adjustments to reconcile net income (loss) to cash flows
	from operating activities
		Depreciation, amortization and accretion		417,679		429,486
		Bad debts expense		54,599		52,098
		Stock-based compensation expense		17,949		15,488
		Deferred income taxes, net		(40,640)		(33,346)
		Equity in earnings of unconsolidated entities		(70,053)		(72,117)
		Distributions from unconsolidated entities		27,226		65,569
		(Gain) loss on asset disposals, net		10,129		10,333
		(Gain) loss on sale of business and other exit costs, net		(129,372)		(4,289)
		(Gain) loss on license sales and exchanges, net		(122,898)		(91,446)
		Noncash interest expense		1,363		1,014
		Other operating activities		(387)		3
	Changes in assets and liabilities from operations
		Accounts receivable		(17,935)		67,136
		Equipment installment plans receivable		(65,124)		(47,971)
		Inventory		127,021		38,674
		Accounts payable		29,589		(43,132)
		Customer deposits and deferred revenues		(7,005)		13,139
		Accrued taxes		191,508		1,049
		Accrued interest		361		22
		Other assets and liabilities		(87,880)		(80,636)
				538,431		315,642

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(359,513)		(339,907)
	Cash paid for acquisitions and licenses			(280,710)		(18,681)
	Cash received from divestitures and exchanges			291,888		125,905
	Cash received for investments			–		10,000
	Other investing activities			2,328		3,720
				(346,007)		(218,963)

Cash flows from financing activities
	Repayment of long-term debt			(434)		(589)
	TDS Common Shares reissued for benefit plans, net of tax payments			9,831		401
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			(1,570)		830
	Repurchase of TDS Common Shares			–		(20,090)
	Repurchase of U.S. Cellular Common Shares			(2,302)		(8,298)
	Dividends paid to TDS shareholders			(30,530)		(29,107)
	Payment of debt issuance costs			(3,080)		–
	Distributions to noncontrolling interests			(5,872)		(482)
	Other financing activities			1,181		5,502
				(32,776)		(51,833)

Net increase in cash and cash equivalents				159,648		44,846

Cash and cash equivalents
	Beginning of period			471,901		830,014
	End of period		$	631,549	$	874,860

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

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

(Unaudited)

			June 30,		December 31,
(Dollars in thousands)			2015		2014
Current assets
	Cash and cash equivalents		$	631,549	$	471,901
	Accounts receivable
		Due from customers and agents, less allowances of $43,485 and $41,431, respectively		588,085		548,537
		Other, less allowances of $1,153 and $1,141, respectively		115,807		135,144
	Inventory, net			146,686		273,707
	Net deferred income tax asset			92,881		107,686
	Prepaid expenses			102,975		86,506
	Income taxes receivable			426		113,708
	Other current assets			30,480		29,766
				1,708,889		1,766,955

Assets held for sale				22,203		103,343

Investments
	Licenses			1,837,792		1,453,574
	Goodwill			771,119		771,352
	Franchise rights			244,300		244,300
	Other intangible assets, net of accumulated amortization of $139,086 and $133,823,
		respectively		55,123		64,499
	Investments in unconsolidated entities			364,205		321,729
	Other investments			465		508
				3,273,004		2,855,962
Property, plant and equipment
	In service and under construction			11,203,446		11,194,044
	Less: Accumulated depreciation			7,476,991		7,347,919
				3,726,455		3,846,125

Other assets and deferred charges				255,761		334,554

Total assets			$	8,986,312	$	8,906,939

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

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

				June 30,		December 31,
(Dollars and shares in thousands)				2015		2014
Current liabilities
	Current portion of long-term debt			$	747	$	808
	Accounts payable				345,747		387,125
	Customer deposits and deferred revenues				317,759		324,318
	Accrued interest				8,276		7,919
	Accrued taxes				121,144		46,734
	Accrued compensation				92,994		114,549
	Other current liabilities				134,516		181,803
					1,021,183		1,063,256

Liabilities held for sale					–		21,643

Deferred liabilities and credits
	Net deferred income tax liability				885,462		941,519
	Other deferred liabilities and credits				436,810		430,774

Long-term debt					1,993,429		1,993,586

Commitments and contingencies					–		–

Noncontrolling interests with redemption features					1,178		1,150

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares
			Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares)
			Issued 132,766 shares (7,196 Series A Common and 125,570 Common Shares) and 132,749 shares (7,179 Series A Common and 125,570 Common Shares), respectively
			Outstanding 108,559 shares (7,196 Series A Common and 101,363 Common Shares) and 107,899 shares (7,179 Series A Common and 100,720 Common Shares), respectively
			Par Value ($.01 per share) $1,327 ($72 Series A Common and $1,255 Common Shares)		1,327		1,327
		Capital in excess of par value			2,342,587		2,336,511
		Treasury shares at cost:
			24,207 and 24,850 Common Shares, respectively		(735,218)		(748,199)
		Accumulated other comprehensive income			5,130		6,452
		Retained earnings			2,468,070		2,330,187
			Total TDS shareholders' equity		4,081,896		3,926,278

	Preferred shares				824		824
	Noncontrolling interests				565,530		527,909

		Total equity			4,648,250		4,455,011

Total liabilities and equity				$	8,986,312	$	8,906,939

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

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

TDS Shareholders

Series A

Accumulated

Common and

Capital in

Treasury

Other

Total TDS

Non

Common

Excess of

Common

Comprehensive

Retained

Shareholders'

Preferred

controlling

Total

(Dollars in thousands)

Par Value

Income (Loss)

Earnings

Equity

Interests

Equity

December 31, 2014

1,327

2,336,511

(748,199)

6,452

2,330,187

3,926,278

824

527,909

4,455,011

Add (Deduct)

Net income attributable to

TDS shareholders

–

168,786

–

168,786

Net income attributable

to noncontrolling interests

classified as equity

–

27,847

Net unrealized gain

(loss) on equity investments

–

(353)

–

(353)

–

(353)

Change in foreign currency

translation adjustment

–

(3)

–

(3)

–

(3)

Change related to retirement

plan

–

(966)

–

(966)

–

(966)

TDS Common and Series A

Common Share dividends

–

(30,505)

–

(30,505)

TDS Preferred dividend

requirement

–

(25)

–

(25)

Dividend reinvestment plan

–

1,612

3,755

–

5,367

–

5,367

Incentive and compensation

plans

–

1,166

9,226

–

(373)

10,019

–

10,019

Adjust investment in

subsidiaries for repurchases,

issuances and other compensation

plans

–

(2,830)

–

(2,830)

–

10,007

7,177

Stock-based compensation

awards

–

6,262

–

6,262

–

6,262

Tax windfall (shortfall) from

stock awards

–

(134)

–

(134)

–

(134)

Distributions to

noncontrolling interests

–

(233)

June 30, 2015

1,327

2,342,587

(735,218)

5,130

2,468,070

4,081,896

824

565,530

4,648,250

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

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

TDS Shareholders

Series A

Accumulated

Common and

Capital in

Treasury

Other

Total TDS

Non

Common

Excess of

Common

Comprehensive

Retained

Shareholders'

Preferred

controlling

Total

(Dollars in thousands)

Par Value

Income (Loss)

Earnings

Equity

Interests

Equity

December 31, 2013

1,327

2,308,807

(721,354)

(569)

2,529,626

4,117,837

824

551,436

4,670,097

Add (Deduct)

Net loss attributable to

TDS shareholders

–

(3,784)

–

(3,784)

Net loss attributable

to noncontrolling interests

classified as equity

–

(2,045)

Net unrealized gain

on equity investments

–

341

–

341

–

341

Change in foreign currency

translation adjustment

–

(21)

–

(21)

–

(21)

Change related to retirement

plan

–

(731)

–

(731)

–

(731)

TDS Common and Series A

Common Share dividends

–

(29,082)

–

(29,082)

TDS Preferred dividend

requirement

–

(25)

–

(25)

Repurchase of Common Shares

–

(21,096)

–

(21,096)

–

(21,096)

Dividend reinvestment plan

–

1,470

3,468

–

4,938

–

4,938

Incentive and compensation

plans

–

(314)

1,147

–

833

–

833

Adjust investment in

subsidiaries for repurchases,

issuances and other compensation

plans

–

(2,224)

–

(2,224)

–

3,662

1,438

Stock-based compensation

awards

–

5,354

–

5,354

–

5,354

Tax windfall (shortfall) from

stock awards

–

(578)

–

(578)

–

(578)

Distributions to

noncontrolling interests

–

(459)

June 30, 2014

1,327

2,312,515

(737,835)

(980)

2,496,735

4,071,762

824

552,594

4,625,180

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

Telephone and Data Systems, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 84%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2015 presentation.

The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 are U.S. Cellular, TDS Telecom’s Wireline, Cable, and Hosted and Managed Services (“HMS”) operations. TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned subsidiaries Suttle-Straus, Inc. (“Suttle-Straus”) and Airadigm Communications, Inc. (“Airadigm”). Suttle-Straus and Airadigm’s financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 12 — Business Segment Information for summary financial information on each business segment.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of June 30, 2015 and December 31, 2014, and the results of operations and changes in comprehensive income for the three and six months ended June 30, 2015 and 2014 and cash flows and changes in equity for the six months ended June 30, 2015 and 2014. These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

On May 28, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. ASU 2014-09 has an effective date of January 1, 2017. However, on July 9, 2015, the FASB affirmed a proposal to defer the effective date for one year to January 1, 2018. Under this proposal, early adoption as of January 1, 2017 also would be permissible; however, TDS does not intend to adopt early. TDS is evaluating the effects that adoption of ASU 2014-09 will have on its financial position, results of operations, and disclosures.

On August 27, 2014, the FASB issued Accounting Standards Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires TDS to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. TDS is required to adopt the provisions of ASU 2014-15 for the annual period ending December 31, 2016, but early adoption is permitted. The adoption of ASU 2014-15 will not impact TDS’ financial position or results of operations but may impact future disclosures.

On February 18, 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 simplifies consolidation accounting by reducing the number of consolidation models. Additionally, ASU 2015-02 changes certain criteria for identifying variable interest entities. TDS is required to adopt the provisions of ASU 2015-02 effective January 1, 2016. Early adoption is permitted. TDS expects that certain consolidated subsidiaries that are not defined as variable interest entities under current accounting guidance will be defined as variable interest entities under the provisions of ASU 2015-02. However, TDS does not expect the adoption of ASU 2015-02 to change the group of entities which TDS is required to consolidate in its financial statements. Accordingly, TDS does not expect the adoption of ASU 2015-02 to impact its financial position or results of operations. However, additional disclosures are expected.

On April 7, 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires certain debt issuance costs to be presented in the balance sheet as an offset to the related debt obligation. TDS is required to apply the provisions of this update effective January 1, 2016 on a retrospective basis. Early adoption is permitted. As of June 30, 2015, TDS had $54.8 million in debt issuance costs classified as Other assets and deferred charges that, upon adoption of the new standard, would be reclassified as an offset to Long-term debt.

On July 22, 2015, the FASB issued Accounting Standards Update 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11”), which requires inventory to be measured at the lower of cost or net realizable value. TDS is required to adopt ASU 2015-11 on January 1, 2017. Early adoption is permitted. TDS is evaluating the effects that adoption of ASU 2015-11 will have on its financial position and results of operations.

Amounts Collected from Customers and Remitted to Governmental Authorities

TDS records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $25.2 million and $51.5 million for the three and six months ended June 30, 2015, respectively, and $29.1 million and $60.1 million for the three and six months ended June 30, 2014, respectively.

2. Fair Value Measurements

As of June 30, 2015 and December 31, 2014, TDS did not have any financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.

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

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

		Level within the Fair Value Hierarchy	June 30, 2015				December 31, 2014
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in thousands)
Cash and cash equivalents		1	$	631,549	$	631,549	$	471,901	$	471,901
Long-term debt
	Retail	2		1,453,250		1,435,862		1,453,250		1,414,105
	Institutional and other	2		537,315		508,127		537,471		518,322

The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes and 7.25% Senior Notes. TDS’ “Institutional” debt consists of U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS estimated the fair value of its Institutional and other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.00% to 7.44% and 0.00% to 7.25% at June 30, 2015 and December 31, 2014, respectively.

3. Equipment Installment Plans

TDS offers customers the option to purchase certain devices under an equipment installment contract over a period of up to 24 months. Under certain equipment installment plans, the customer has the right to upgrade to a new device after a specified period of time and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. TDS values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. As of June 30, 2015 and December 31, 2014, the guarantee liability related to these plans was $80.2 million and $57.5 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.

TDS equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, TDS imputes interest.

The following table summarizes unbilled equipment installment plan receivables as of June 30, 2015 and December 31, 2014. Such amounts are presented on the Consolidated Balance Sheet as Accounts receivable – customers and agents (short-term portion) and Other assets and deferred charges (long-term portion).

(Dollars in thousands)	June 30, 2015		December 31, 2014
Short-term portion of unbilled equipment installment plan receivables, gross	$	208,955	$	127,400
Short-term portion of unbilled deferred interest		(19,488)		(16,365)
Short-term portion of unbilled allowance for credit losses		(7,404)		(3,686)
Short-term portion of unbilled equipment installment plan receivables, net	$	182,063	$	107,349

Long-term portion of unbilled equipment installment plan receivables, gross	$	73,548	$	89,435
Long-term portion of unbilled deferred interest		(1,136)		(2,791)
Long-term portion of unbilled allowance for credit losses		(5,176)		(6,065)
Long-term portion of unbilled equipment installment plan receivables, net	$	67,236	$	80,579

TDS assesses the collectability of equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors. To mitigate credit risk, TDS requires certain customers who desire to purchase equipment under an installment plan to make a down payment.

TDS recorded out-of-period adjustments during the six months ended June 30, 2015 due to errors related to equipment installment plan transactions that were attributable to 2014. TDS has determined that these adjustments were not material to the prior quarterly or annual periods, and also were not material to the current period or anticipated full year 2015 results. These equipment installment plan adjustments had the impact of reducing Equipment and product sales revenues by $5.7 million and $6.2 million, and Income before income taxes by $5.3 million and $5.8 million, for the three and six months ended June 30, 2015, respectively.

4. Income Taxes

TDS’ overall effective tax rate on Income (loss) before income taxes for the three and six months ended June 30, 2015 was 39.7%, and for the three and six months ended June 30, 2014 was 34.7% and 27.0%, respectively.

The lower effective tax rate for the six months ended June 30, 2014 resulted from the relatively low amount of Income (loss) before income taxes in that period, which magnified the effective rate impact of discrete tax expense items.

5. Earnings Per Share

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

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

				Three Months Ended				Six Months Ended
				June 30,				June 30,
				2015		2014		2015		2014
(Dollars and shares in thousands, except per share amounts)
Basic earnings (loss) per share attributable to TDS shareholders:
	Net income (loss) available to common shareholders of TDS used in basic earnings (loss) per share			$	23,034	$	(22,050)	$	168,761	$	(3,809)
Adjustments to compute diluted earnings (loss):
	Noncontrolling interest adjustment				(116)		–		(1,214)		(5)
	Preferred dividend adjustment				–		–		25		–
	Net income (loss) attributable to common shareholders of
		TDS used in diluted earnings (loss) per share		$	22,918	$	(22,050)	$	167,572	$	(3,814)

Weighted average number of shares used in basic
	earnings (loss) per share:
		Common Shares			101,296		101,543		101,144		101,682
		Series A Common Shares			7,188		7,176		7,183		7,171
			Total		108,484		108,719		108,327		108,853

Effects of dilutive securities:
	Stock options				896		–		623		–
	Restricted stock units				405		–		384		–
	Preferred shares				–		–		46		–
Weighted average number of shares used in diluted
	earnings (loss) per share				109,785		108,719		109,380		108,853

Basic earnings (loss) per share attributable to TDS
	shareholders			$	0.21	$	(0.20)	$	1.56	$	(0.04)

Diluted earnings (loss) per share attributable to TDS
	shareholders			$	0.21	$	(0.20)	$	1.53	$	(0.04)

Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings (loss) per share attributable to TDS shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
(Shares in thousands)
Stock options	4,523	8,883	5,304	8,777
Restricted stock units	204	824	104	737
Preferred shares	46	56	–	56

6. Acquisitions, Divestitures and Exchanges

Divestiture Transaction

On May 16, 2013, pursuant to a Purchase and Sale Agreement, U.S. Cellular sold customers and certain PCS license spectrum to subsidiaries of Sprint Corp. fka Sprint Nextel Corporation (“Sprint”) in U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.”

These agreements require Sprint to reimburse U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees. As of June 30, 2015, U.S. Cellular had received a cumulative total of $104.8 million pursuant to the Sprint Cost Reimbursement. For the six months ended June 30, 2015 and 2014, $23.2 million and $34.1 million, respectively, of the Sprint Cost Reimbursement had been received and recorded in Cash received from divestitures and exchanges in the Consolidated Statement of Cash Flows.

For the six months ended June 30, 2015 and 2014, as a result of the Divestiture Transaction, U.S. Cellular recognized gains of $5.9 million and $17.7 million, respectively, in (Gain) loss on sale of business and other exit costs, net. For the three months ended June 30, 2015 and 2014, U.S. Cellular recognized gains of $1.5 million and $10.6 million, respectively.

Other Acquisitions, Divestitures and Exchanges

In March 2015, U.S. Cellular exchanged certain of its unbuilt PCS licenses for certain other PCS licenses located in U.S. Cellular’s existing operating markets and $117.0 million of cash. As of the transaction date, the licenses received in the transaction had an estimated fair value, per a market approach, of $43.5 million. A gain of $125.2 million was recorded in (Gain) loss on license sales and exchanges, net in the Consolidated Statement of Operations in the first quarter of 2015.
An FCC auction of AWS-3 spectrum licenses, referred to as Auction 97, ended in January 2015. U.S. Cellular participated in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum L.P. (“Advantage Spectrum”). Advantage Spectrum was the provisional winning bidder for 124 licenses for an aggregate winning bid of $338.3 million, after its designated entity discount of 25%. Advantage Spectrum’s bid amount, less the initial deposit amount of $60.0 million paid in 2014, was paid to the FCC in March 2015. These licenses are expected to be granted by the FCC during the latter half of 2015. See Note 9 — Variable Interest Entities for additional information.
In December 2014, U.S. Cellular entered into an agreement with a third party to sell 595 towers and certain related contracts, assets, and liabilities for $159.0 million. This transaction was accomplished in two closings. The first closing occurred in December 2014 and included the sale of 236 towers, without tenants, for $10.0 million. On this same date, U.S. Cellular received $7.5 million in earnest money. At the time of the first closing, a $4.7 million gain was recorded. The second closing for the remaining 359 towers, primarily with tenants, took place in January 2015, at which time U.S. Cellular received $141.5 million in additional cash proceeds and recorded a gain of $119.6 million in (Gain) loss on sale of business and other exit costs, net.
In September 2014, U.S. Cellular entered into an agreement with a third party to exchange certain PCS and AWS licenses for certain other PCS and AWS licenses and $28.0 million of cash. This license exchange was accomplished in two closings. The first closing occurred in December 2014 at which time U.S. Cellular received licenses with an estimated fair value, per a market approach, of $51.5 million, recorded a $21.7 million gain and recorded an $18.3 million deferred credit in Other current liabilities. The license that was transferred to the counterparty in the second closing had a net book value of $22.2 million and was classified as “Assets held for sale” in the Consolidated Balance Sheet as of June 30, 2015. The second closing occurred in July 2015. At the time of the second closing, U.S. Cellular received $28.0 million in cash, recognized the deferred credit from the first closing and recorded a $24.1 million gain on this part of the license exchange.

7. Intangible Assets

Changes in Licenses at TDS for the six months ended June 30, 2015 are presented below. There were no significant changes to Franchise rights, Goodwill or other intangible assets during the six months ended June 30, 2015.

Licenses

(Dollars in thousands)
Balance December 31, 2014			$	1,453,574
	Acquisitions (1)			339,656
	Exchanges (2)			43,485
	Other			1,077
Balance June 30, 2015			$	1,837,792

(1)		Amount includes payments totaling $338.3 million made by Advantage Spectrum to the FCC for licenses in which it was the provisional winning bidder in Auction 97. See Note 6 — Acquisitions, Divestitures and Exchanges, and Note 9 — Variable Interest Entities for further information.
(2)		Amount represents licenses received in the March 2015 PCS license exchange. See Note 6 — Acquisitions, Divestitures and Exchanges for further information. Licenses disposed of in the exchange were previously removed from the Licenses balance and reflected in Assets held for sale in the Consolidated Balance Sheet as of December 31, 2014.

8. Investments in Unconsolidated Entities

Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.

The following table, which is based on information provided in part by third parties, summarizes the combined results of operations of TDS’ equity method investments.

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
(Dollars in thousands)
Revenues	$	1,726,558	$	1,635,216	$	3,460,818	$	3,259,900
Operating expenses		1,281,625		1,209,412		2,572,643		2,343,092
Operating income		444,933		425,804		888,175		916,808
Other income, net		(10,873)		378		(6,508)		2,403
Net income	$	434,060	$	426,182	$	881,667	$	919,211

9. Variable Interest Entities

TDS consolidates variable interest entities (VIEs) in which it has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb VIE losses and the right to receive benefits that are significant to the VIE. TDS reviews these criteria initially at the time it enters into agreements and subsequently when reconsideration events occur.

Consolidated VIEs

As of June 30, 2015, TDS holds a variable interest in and consolidates the following VIEs under GAAP:

Advantage Spectrum and Frequency Advantage L.P., the general partner of Advantage Spectrum;
Aquinas Wireless L.P. (“Aquinas Wireless”); and
King Street Wireless L.P. (“King Street Wireless”) and King Street Wireless, Inc., the general partner of King Street Wireless.

The power to direct the activities that most significantly impact the economic performance of Advantage Spectrum, Aquinas Wireless and King Street Wireless (collectively, the “limited partnerships”) is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships; however, the general partner of each partnership needs the consent of the limited partner, a TDS subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of the VIEs is shared, TDS has a disproportionate level of exposure to the variability associated with the economic performance of the VIEs, indicating that TDS is the primary beneficiary of the VIEs in accordance with GAAP. Accordingly, these VIEs are consolidated.

The following table presents the classification of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.

			June 30,		December 31,
			2015		2014
(Dollars in thousands)
Assets
	Cash and cash equivalents		$	2,069	$	2,588
	Other current assets			211		278
	Licenses (1)			651,281		312,977
	Property, plant and equipment, net			9,636		10,671
	Other assets and deferred charges			150		60,059
		Total assets	$	663,347	$	386,573

Liabilities
	Current liabilities		$	83	$	110
	Deferred liabilities and credits			567		622
		Total liabilities	$	650	$	732

(1)		Includes payments totaling $338.3 million made by Advantage Spectrum to the FCC as described below.

Other Related Matters

In March 2015, King Street Wireless made a $60.0 million distribution to its investors. Of this distribution, $6.0 million was provided to King Street Wireless, Inc. and $54.0 million was provided to U.S. Cellular.

An FCC auction of AWS-3 spectrum licenses, referred to as Auction 97, ended in January 2015. TDS participated in Auction 97 indirectly through its interest in Advantage Spectrum. A subsidiary of U.S. Cellular is a limited partner in Advantage Spectrum. Advantage Spectrum qualified as a “designated entity,” and thereby was eligible for bid credits with respect to spectrum purchased in Auction 97. Advantage Spectrum was the winning bidder for 124 licenses for an aggregate bid of $338.3 million, after its designated entity discount of 25%. This amount is classified as Licenses in TDS’ Consolidated Balance Sheet. Advantage Spectrum’s bid amount, less the initial deposit of $60.0 million paid in 2014, plus certain other charges totaling $2.3 million, were paid to the FCC in March 2015. To help fund this payment, U.S. Cellular made loans and capital contributions to Advantage Spectrum and Frequency Advantage totaling $280.6 million for the six months ended June 30, 2015. There were no capital contributions, loans or advances made to TDS’ VIEs during the six months ended June 30, 2014.

Advantage Spectrum, Aquinas Wireless and King Street Wireless were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions. As such, these entities have risks similar to those described in the “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2014.

TDS may agree to make additional capital contributions and/or advances to Advantage Spectrum, Aquinas Wireless or King Street Wireless and/or to their general partners to provide additional funding for the development of licenses granted in various auctions. TDS may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or other long-term debt. There is no assurance that TDS will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.

10. Noncontrolling Interests

The following schedule discloses the effects of Net income (loss) attributable to TDS shareholders and changes in TDS’ ownership interest in U.S. Cellular on TDS’ equity:

			Six Months Ended
			June 30,
			2015		2014
(Dollars in thousands)
Net income (loss) attributable to TDS shareholders			$	168,786	$	(3,784)
	Transfer (to) from the noncontrolling interests
		Change in TDS' Capital in excess of par value from U.S. Cellular's issuance of U.S. Cellular shares		(13,096)		(10,292)
		Change in TDS' Capital in excess of par value from U.S. Cellular's repurchases of U.S. Cellular shares		372		242
		Purchase of ownership in subsidiaries from noncontrolling interests		240		–
		Net transfers (to) from noncontrolling interests		(12,484)		(10,050)
	Change from net income (loss) attributable to TDS and transfers (to) from noncontrolling interests		$	156,302	$	(13,834)

11. Common Share Repurchases

On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program for the purchase of TDS Common Shares from time to time pursuant to open market purchases, block transactions, private purchases or otherwise, depending on market conditions. This authorization does not have an expiration date.

On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. These purchases will be made pursuant to open market purchases, block purchases, private purchases or otherwise, depending on market conditions. This authorization does not have an expiration date.

Share repurchases made under these authorizations were as follows:

		Number of	Average Cost
Six Months Ended June 30,		Shares	Per Share		Amount
(Dollar amounts and shares in thousands, except per share data)
2015
	TDS Common Shares	–	$	–	$	–
	U.S. Cellular Common Shares	66	$	34.77	$	2,302

2014
	TDS Common Shares	809	$	26.09	$	21,096
	U.S. Cellular Common Shares	212	$	40.49	$	8,598

12. Business Segment Information

U.S. Cellular and TDS Telecom are billed for all services they receive from TDS, consisting primarily of information processing, accounting and finance, and general management services. Such billings are based on expenses specifically identified to U.S. Cellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in the accompanying business segment information on a basis that is representative of what they would have been if U.S. Cellular and TDS Telecom operated on a stand-alone basis.

Financial data for TDS’ reportable segments for the three and six month periods ended, or as of June 30, 2015 and 2014, is as follows. See Note 1 — Basis of Presentation for additional information.

					TDS Telecom
Three Months Ended or as of June 30, 2015			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in thousands)
Operating revenues
	Services		$	824,373	$	175,413	$	44,545	$	29,467	$	(1,358)	$	248,067	$	(1,790)	$	1,070,650
	Equipment and product sales			151,294		557		70		46,119		–		46,746		7,705		205,745
		Total operating revenues		975,667		175,970		44,615		75,586		(1,358)		294,813		5,915		1,276,395
Cost of services (excluding Depreciation, amortization
	and accretion expense reported below)			196,276		62,604		19,849		21,954		(1,293)		103,114		762		300,152
Cost of equipment and products				253,671		597		15		38,566		–		39,178		5,601		298,450
Selling, general and administrative				362,971		49,200		13,764		10,969		(65)		73,868		(1,409)		435,430
Depreciation, amortization and accretion				150,581		41,203		8,860		6,573		–		56,636		3,887		211,104
(Gain) loss on asset disposals, net				5,399		1,010		(1,668)		27		–		(631)		(16)		4,752
(Gain) loss on sale of business and other exit costs, net				(1,705)		(3,054)		–		–		–		(3,054)		(830)		(5,589)
(Gain) loss on license sales and exchanges, net				(25)		–		–		–		–		–		–		(25)
Operating income (loss)				8,499		24,410		3,795		(2,503)		–		25,702		(2,080)		32,121
Equity in earnings of unconsolidated entities				35,584		9		–		–		–		9		(181)		35,412
Interest and dividend income				8,969		647		8		9		–		664		484		10,117
Interest expense				(20,154)		290		143		(485)		–		(52)		(13,713)		(33,919)
Other, net				91		(15)		2		107		–		94		17		202
Income (loss) before income taxes				32,989		25,341		3,948		(2,872)		–		26,417		(15,473)		43,933
Income tax expense (benefit) (1)				13,079										10,625		(6,271)		17,433
Net income (loss)				19,910										15,792		(9,202)		26,500
Add back:
Depreciation, amortization and accretion				150,581		41,203		8,860		6,573		–		56,636		3,887		211,104
(Gain) loss on asset disposals, net				5,399		1,010		(1,668)		27		–		(631)		(16)		4,752
(Gain) loss on sale of business and other exit costs, net				(1,705)		(3,054)		–		–		–		(3,054)		(830)		(5,589)
(Gain) loss on license sales and exchanges, net				(25)		–		–		–		–		–		–		(25)
Interest expense				20,154		(290)		(143)		485		–		52		13,713		33,919
Income tax expense (benefit) (1)				13,079										10,625		(6,271)		17,433
Adjusted EBITDA (2)			$	207,393	$	64,210	$	10,997	$	4,213	$	–	$	79,420	$	1,281	$	288,094

Investments in unconsolidated entities			$	325,857	$	3,804	$	–	$	–	$	–	$	3,804	$	34,544	$	364,205
Total assets			$	6,596,619	$	1,351,221	$	568,494	$	284,067	$	–	$	2,203,782	$	185,911	$	8,986,312
Capital expenditures			$	133,666	$	31,722	$	11,926	$	9,422	$	–	$	53,070	$	1,864	$	188,600

					TDS Telecom
Three Months Ended or as of June 30, 2014			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in thousands)
Operating revenues
	Services		$	843,473	$	180,297	$	22,484	$	27,575	$	(298)	$	230,058	$	(1,352)	$	1,072,179
	Equipment and product sales			114,300		431		–		40,361		–		40,792		9,121		164,213
		Total operating revenues		957,773		180,728		22,484		67,936		(298)		270,850		7,769		1,236,392
Cost of services (excluding Depreciation, amortization
	and accretion expense reported below)			187,131		64,305		11,394		21,301		(249)		96,751		2,606		286,488
Cost of equipment and products				271,978		481		–		33,875		–		34,356		6,677		313,011
Selling, general and administrative				404,252		47,708		6,285		12,376		(49)		66,320		330		470,902
Depreciation, amortization and accretion				148,337		41,827		4,557		6,791		–		53,175		3,055		204,567
(Gain) loss on asset disposals, net				6,893		514		425		44		–		983		27		7,903
(Gain) loss on sale of business and other exit costs, net				(10,511)		–		–		–		–		–		13,122		2,611
Operating income (loss)				(50,307)		25,893		(177)		(6,451)		–		19,265		(18,048)		(49,090)
Equity in earnings of unconsolidated entities				33,120		4		–		–		–		4		1,666		34,790
Interest and dividend income				1,573		490		1		22		–		513		665		2,751
Interest expense				(14,336)		677		30		(439)		–		268		(13,830)		(27,898)
Other, net				100		(95)		–		45		–		(50)		–		50
Income (loss) before income taxes				(29,850)		26,969		(146)		(6,823)		–		20,000		(29,547)		(39,397)
Income tax expense (benefit) (1)				(10,399)										7,962		(11,234)		(13,671)
Net income (loss)				(19,451)										12,038		(18,313)		(25,726)
Add back:
Depreciation, amortization and accretion				148,337		41,827		4,557		6,791		–		53,175		3,055		204,567
(Gain) loss on asset disposals, net				6,893		514		425		44		–		983		27		7,903
(Gain) loss on sale of business and other exit costs, net				(10,511)		–		–		–		–		–		13,122		2,611
Interest expense				14,336		(677)		(30)		439		–		(268)		13,830		27,898
Income tax expense (benefit) (1)				(10,399)		–		–		–		–		7,962		(11,234)		(13,671)
Adjusted EBITDA (2)			$	129,205	$	68,633	$	4,806	$	451	$	–	$	73,890	$	487	$	203,582

Investments in unconsolidated entities			$	270,215	$	3,810	$	–	$	–	$	–	$	3,810	$	34,636	$	308,661
Total assets			$	6,298,967	$	1,408,809	$	287,809	$	335,680	$	–	$	2,032,298	$	376,404	$	8,707,669
Capital expenditures			$	143,927	$	27,370	$	7,181	$	10,628	$	–	$	45,179	$	1,575	$	190,681

					TDS Telecom
Six Months Ended or as of June 30, 2015			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in thousands)
Operating revenues
	Services		$	1,652,584	$	351,104	$	88,026	$	57,883	$	(2,038)	$	494,975	$	(3,818)	$	2,143,741
	Equipment and product sales			288,328		1,001		158		78,664		–		79,823		16,096		384,247
		Total operating revenues		1,940,912		352,105		88,184		136,547		(2,038)		574,798		12,278		2,527,988
Cost of services (excluding Depreciation, amortization
	and accretion expense reported below)			386,953		125,031		39,797		41,982		(1,886)		204,924		1,922		593,799
Cost of equipment and products				491,972		1,160		75		65,696		–		66,931		11,528		570,431
Selling, general and administrative				731,939		94,869		26,389		23,659		(152)		144,765		(3,234)		873,470
Depreciation, amortization and accretion				297,666		83,212		17,579		13,008		–		113,799		6,214		417,679
(Gain) loss on asset disposals, net				9,650		1,528		(986)		(43)		–		499		(20)		10,129
(Gain) loss on sale of business and other exit costs, net				(113,182)		(3,054)		–		–		–		(3,054)		(13,136)		(129,372)
(Gain) loss on license sales and exchanges, net				(122,898)		–		–		–		–		–		–		(122,898)
Operating income (loss)				258,812		49,359		5,330		(7,755)		–		46,934		9,004		314,750
Equity in earnings of unconsolidated entities				70,055		13		–		–		–		13		(15)		70,053
Interest and dividend income				16,535		1,102		13		23		–		1,138		829		18,502
Interest expense				(40,118)		591		243		(985)		–		(151)		(27,480)		(67,749)
Other, net				196		(33)		3		14		–		(16)		18		198
Income (loss) before income taxes				305,480		51,032		5,589		(8,703)		–		47,918		(17,644)		335,754
Income tax expense (benefit) (1)				120,580										18,805		(5,932)		133,453
Net income (loss)				184,900										29,113		(11,712)		202,301
Add back:
Depreciation, amortization and accretion				297,666		83,212		17,579		13,008		–		113,799		6,214		417,679
(Gain) loss on asset disposals, net				9,650		1,528		(986)		(43)		–		499		(20)		10,129
(Gain) loss on sale of business and other exit costs, net				(113,182)		(3,054)		–		–		–		(3,054)		(13,136)		(129,372)
(Gain) loss on license sales and exchanges, net				(122,898)		–		–		–		–		–		–		(122,898)
Interest expense				40,118		(591)		(243)		985		–		151		27,480		67,749
Income tax expense (benefit) (1)				120,580										18,805		(5,932)		133,453
Adjusted EBITDA (2)			$	416,834	$	132,127	$	21,939	$	5,247	$	–	$	159,313	$	2,894	$	579,041

Investments in unconsolidated entities			$	325,857	$	3,804	$	–	$	–	$	–	$	3,804	$	34,544	$	364,205
Total assets			$	6,596,619	$	1,351,221	$	568,494	$	284,067	$	–	$	2,203,782	$	185,911	$	8,986,312
Capital expenditures			$	200,126	$	52,163	$	23,552	$	14,251	$	–	$	89,966	$	3,145	$	293,237

					TDS Telecom
Six Months Ended or as of June 30, 2014			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in thousands)
Operating revenues
	Services		$	1,697,086	$	357,230	$	44,987	$	54,951	$	(979)	$	456,189	$	(854)	$	2,152,421
	Equipment and product sales			186,498		984		–		76,093		–		77,077		16,358		279,933
		Total operating revenues		1,883,584		358,214		44,987		131,044		(979)		533,266		15,504		2,432,354
Cost of services (excluding Depreciation, amortization
	and accretion expense reported below)			367,738		128,705		22,349		38,247		(894)		188,407		6,301		562,446
Cost of equipment and products				542,452		964		–		64,342		–		65,306		11,900		619,658
Selling, general and administrative				799,816		94,228		12,663		27,211		(85)		134,017		738		934,571
Depreciation, amortization and accretion				316,090		84,563		8,918		13,469		–		106,950		6,446		429,486
(Gain) loss on asset disposals, net				8,827		759		490		78		–		1,327		179		10,333
(Gain) loss on sale of business and other exit costs, net				(17,411)		–		–		–		–		–		13,122		(4,289)
(Gain) loss on license sales and exchanges, net				(91,446)		–		–		–		–		–		–		(91,446)
Operating income (loss)				(42,482)		48,995		567		(12,303)		–		37,259		(23,182)		(28,405)
Equity in earnings of unconsolidated entities				70,195		4		–		–		–		4		1,918		72,117
Interest and dividend income				2,457		1,175		2		42		–		1,219		1,561		5,237
Interest expense				(29,198)		1,341		35		(860)		–		516		(27,923)		(56,605)
Other, net				186		(149)		–		179		–		30		(6)		210
Income (loss) before income taxes				1,158		51,366		604		(12,942)		–		39,028		(47,632)		(7,446)
Income tax expense (benefit) (1)				2,205										15,508		(19,727)		(2,014)
Net income (loss)				(1,047)										23,520		(27,905)		(5,432)
Add back:
Depreciation, amortization and accretion				316,090		84,563		8,918		13,469		–		106,950		6,446		429,486
(Gain) loss on asset disposals, net				8,827		759		490		78		–		1,327		179		10,333
(Gain) loss on sale of business and other exit costs, net				(17,411)		–		–		–		–		–		13,122		(4,289)
(Gain) loss on license sales and exchanges, net				(91,446)		–		–		–		–		–		–		(91,446)
Interest expense				29,198		(1,341)		(35)		860		–		(516)		27,923		56,605
Income tax expense (benefit) (1)				2,205		–		–		–		–		15,508		(19,727)		(2,014)
Adjusted EBITDA (2)			$	246,416	$	135,347	$	9,977	$	1,465	$	–	$	146,789	$	38	$	393,243

Investments in unconsolidated entities			$	270,215	$	3,810	$	–	$	–	$	–	$	3,810	$	34,636	$	308,661
Total assets			$	6,298,967	$	1,408,809	$	287,809	$	335,680	$	–	$	2,032,298	$	376,404	$	8,707,669
Capital expenditures			$	233,508	$	50,268	$	13,400	$	13,379	$	–	$	77,047	$	2,724	$	313,279

(1)		Income tax expense (benefit) is not provided at the individual segment level for Wireline, Cable and HMS. TDS calculates income tax expense for “TDS Telecom Total”.

(2)

Adjusted earnings before interest, taxes, depreciation, amortization and accretion (“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. Adjusted EBITDA is defined as net income, adjusted for the items set forth in the reconciliation above. Adjusted EBITDA excludes these items in order to show operating results on a more comparable basis from period to period. From time to time, TDS may also exclude other items from Adjusted EBITDA if such items help reflect operating results on a more comparable basis. TDS does not intend to imply that any of such items that are excluded are non-recurring, infrequent or unusual; such items may occur in the future. TDS believes Adjusted EBITDA is a useful measure of TDS’ operating results before significant recurring non-cash charges, discrete gains and losses, and other items as indicated above.

13. Subsequent Events

In January 2015, U.S. Cellular entered into a senior term loan credit facility. In July 2015, U.S. Cellular borrowed the full amount of $225 million available under this facility. These funds will be used for general corporate purposes, including working capital, spectrum purchases and capital expenditures. Amounts borrowed will be due and payable in quarterly installments of $2.8 million beginning in March 2016 through December 2021, and the remaining unpaid balance will be due and payable in January 2022.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Telephone and Data Systems, Inc. (“TDS”) is a diversified telecommunications company providing high-quality telecommunications services to approximately 4.8 million wireless customers and 1.2 million wireline and cable connections at June 30, 2015. TDS conducts its wireless operations through its 84%‑owned subsidiary, United States Cellular Corporation (“U.S. Cellular”). TDS provides wireline services, cable services and hosted and managed services through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).

The following discussion and analysis should be read in conjunction with TDS’ interim consolidated financial statements and notes included in Item 1 above, and with the description of TDS’ business, its audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014.

OVERVIEW

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

The following provides historical and forward-looking information and analysis about TDS’ existing business segments. TDS’ business segments reflected in this Form 10-Q for the quarter ended June 30, 2015 are U.S. Cellular, TDS Telecom’s Wireline, Cable, and Hosted and Managed Services (“HMS”) operations. TDS operations also include the wholly-owned subsidiaries Suttle-Straus, Inc. (“Suttle-Straus”) and Airadigm Communications, Inc. (“Airadigm”). Suttle-Straus and Airadigm’s financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 12 — Business Segment Information for summary financial information on each business segment.

U.S. Cellular

In its consolidated operating markets, U.S. Cellular serves approximately 4.8 million customers in 23 states. As of June 30, 2015, U.S. Cellular’s average penetration rate in its consolidated operating markets was 15.0%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular’s business development strategy is to obtain interests in and access to wireless licenses in its current operating markets and in areas that are adjacent to or in close proximity to its other wireless licenses, thereby building contiguous operating market areas with strong spectrum positions. U.S. Cellular believes that the acquisition of additional licenses within its current operating markets will enhance its network capacity to meet customers’ network performance expectations. In addition, U.S. Cellular anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs.

Financial and operating highlights for the six months ended June 30, 2015 included the following:

Total customers were 4,779,000 at June 30, 2015, including 4,692,000 retail customers (98% of total).

In March 2015, U.S. Cellular completed a license exchange of certain unbuilt PCS licenses for certain other PCS licenses and $117.0 million in cash. As a result of this transaction, a gain of $125.2 million was recorded in (Gain) loss on license sales and exchanges, net in the Consolidated Statement of Operations.
In January 2015, the FCC released the results of Auction 97. U.S. Cellular participated in Auction 97 indirectly through its limited partnership in Advantage Spectrum, L.P. (“Advantage Spectrum”). Advantage Spectrum was the provisional winning bidder for 124 licenses for an aggregate winning bid of $338.3 million, after its designated entity discount of 25%. Advantage Spectrum’s bid amount, less the initial deposit amount of $60.0 million paid in 2014, was paid to the FCC in March 2015. See Note 6 — Acquisitions, Divestitures and Exchanges and Note 9 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.
In December 2014, U.S. Cellular entered into an agreement to sell 595 towers outside of its operating markets for $159.0 million in cash. Concurrently, U.S. Cellular closed on the sale of 236 towers, without tenants, for $10.0 million in cash and received $7.5 million in earnest money. In January 2015, U.S. Cellular closed on the sale of the remaining 359 towers, primarily with tenants, and received $141.5 million in additional cash proceeds. TDS recorded a gain of $119.6 million on this transaction for the six months ended June 30, 2015. An additional gain of $4.7 million had been recognized at the time of the first closing in December 2014.

Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings for equipment installment plans. In the six months ended June 30, 2015, 41% of total devices sold to postpaid customers were made under equipment installment plans.
Retail customer net additions were 46,000 in 2015 compared to net losses of 110,000 in 2014. In the postpaid category, there were net additions of 26,000 in 2015, compared to net losses of 119,000 in 2014. Postpaid results improved significantly due to effective pricing, promotions and retention programs as well as enhanced device offerings and the resolution of billing system conversion issues. In the prepaid category, net additions were 20,000 in 2015 compared to 9,000 in 2014.
Postpaid customers comprised approximately 92% of U.S. Cellular’s retail customers as of June 30, 2015. The postpaid churn rate was 1.4% in 2015 compared to 2.0% in 2014. The prepaid churn rate was 5.5% in 2015 compared to 6.7% in 2014.
Billed average revenue per user (“ARPU”) decreased to $51.80 in 2015 from $53.62 in 2014 reflecting a decrease in postpaid ARPU due to discounts offered on shared data plans for customers on equipment installment plans and those providing their own device at the time of activation or renewal. Service revenue ARPU decreased to $57.79 in 2015 from $60.23 in 2014 due primarily to a decrease in postpaid ARPU.
Postpaid billed average revenue per account (“ARPA”) increased to $134.39 in 2015 from $131.92 in 2014 due to increased adoption of shared data plans and an increase in the number of devices per account.
Postpaid handset customers on smartphone service plans increased to 69% as of June 30, 2015 compared to 58% as of June 30, 2014. In addition, smartphones represented 86% of all handsets sold in 2015 compared to 79% in 2014.
Retail service revenues of $1,481.2 million decreased $29.7 million, or 2%, in 2015 due to a decrease in postpaid ARPU.
Equipment sales revenues increased by $101.8 million, or 55%, to $288.3 million in 2015 due to additional sales of smartphones under equipment installment plans and higher sales of accessories.
Total operating revenues increased $57.3 million, or 3%, to $1,940.9 million in 2015 due to higher equipment sales revenues, partially offset by lower retail service revenues and inbound roaming revenues.

Operating income increased $301.3 million, to $258.8 million in 2015. Gain (loss) on license sales and exchanges, net and Gain (loss) on sale of business and other exit costs, net contributed $236.1 million and $108.9 million to operating income in 2015 and 2014, respectively. Excluding these gains, operating income increased $174.0 million due to lower loss on equipment sold, selling, general and administrative expenses, and depreciation, amortization and accretion expense, which were partially offset by lower service revenues and higher system operations expense.

In July 2015, U.S. Cellular borrowed $225 million under a senior term loan credit facility (“Term Loan”).

Total additions to Property, plant and equipment were $200.1 million, including expenditures to deploy fourth generation Long-term Evolution (“4G LTE”) equipment, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, and enhance billing and other customer management related systems and platforms. Total cell sites in service increased 0.6% year-over-year to 6,223.

U.S. Cellular anticipates that its future results may be affected by the following factors:

Effects of industry competition on service and equipment pricing;
Impacts of selling devices under equipment installment plans, including potential variability in the number of customers choosing to sign an equipment installment contract as well as uncertainties related to the number, timing and realizable value of device trade-ins under equipment installment plans;
Relative ability to attract and retain customers in a competitive marketplace in a cost effective manner;
The nature and rate of growth in the wireless industry, requiring U.S. Cellular to grow revenues primarily from selling additional products and services to its existing customers, increasing the number of multi-device users among its existing customers, increasing data products and services and attracting wireless customers switching from other wireless carriers;
Rapid growth in the demand for new data devices and services which may result in increased operating expenses and the need for additional investment in spectrum, network capacity and enhancements;
Further consolidation among carriers in the wireless industry, which could result in increased competition for customers and/or cause roaming revenues to decline;

Uncertainty related to various Federal Communications Commission (“FCC”) rules and proceedings, and litigation relating thereto;
The ability to negotiate satisfactory 4G LTE data roaming agreements with additional wireless operators; and
The effects of the following:

U.S. Cellular completed the migration of its customers to a new Billing and Operational Support System (“B/OSS”) in the third quarter of 2013. In the fourth quarter of 2014, U.S. Cellular entered into certain arrangements pursuant to which U.S. Cellular now outsources certain support functions for its B/OSS to a third-party vendor. B/OSS is a complex system and any future operational problems with the system, including any failure by the vendor to provide the required level of service under the outsourcing arrangements, could have adverse effects on U.S. Cellular’s results of operations or cash flows;
In September 2014, U.S. Cellular entered into a definitive agreement to sell certain non-operating licenses (“unbuilt licenses”) in exchange for receiving licenses in its operating markets and cash. The license exchange was accomplished in two closings. The first closing occurred in December 2014. The second closing occurred in July 2015. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to the Consolidated Financial Statements for additional information related to this transaction.
In March 2015, U.S. Cellular announced that it would discontinue its loyalty rewards program on September 1, 2015. At that time, any unredeemed rewards points will expire and any deferred revenue balance related to the program will be recognized as operating revenues. At this time, U.S. Cellular is unable to predict the impact that termination of the program will have on future redemptions or operating revenues. Redemptions during the six months ended June 30, 2015 totaled $30.1 million, and the deferred revenue balance at June 30, 2015 was $81.1 million.
U.S. Cellular holds a 5.5% ownership interest in the Los Angeles SMSA Limited Partnership (“LA Partnership”). U.S. Cellular has been informed by the general partner of the LA Partnership that the LA Partnership will not make a cash distribution in 2015. U.S. Cellular currently expects that it might receive a cash distribution in the latter half of 2016, although the amount of any such distribution is uncertain.

See “Results of Operations—U.S. Cellular.”

TDS Telecom

TDS Telecom provides wireline and cable broadband, video and voice services to approximately 1.2 million connections in 35 states. The overall strategy for the wireline and cable businesses is to own the best pipe in the market in order to capitalize on data growth and the need for higher broadband speeds. In addition, TDS Telecom provides a wide range of Information Technology (“IT”) services including colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of IT infrastructure hardware solutions. TDS Telecom operates in three reportable segments: Wireline, Cable and HMS.

TDS Telecom’s wireline strategy is to focus on broadband offerings and be the preferred communications solutions provider in its markets for both residential and commercial customers by developing and delivering high-quality broadband, video and voice products and services that meet or exceed customers’ needs, and to outperform the competition by delivering superior customer service.

TDS Telecom’s cable strategy is to expand broadband offerings while leveraging the company’s existing processes, procedures, shared support teams, commercial expertise, and customer service focus.

Through its hosted and managed services business, OneNeck IT Solutions, TDS Telecom aims to grow recurring revenues from mid-market businesses by leveraging core competencies in network management, IT, customer service and reliability to take advantage of the growing IT outsourcing marketplace.

On September 1, 2014, TDS acquired substantially all of the assets of a group of companies operating as BendBroadband. This acquisition impacts the comparability of TDS Telecom’s operating results.

TDS Telecom’s financial results for the six months ended June 30, 2015 included the following:

Operating revenues increased $41.5 million or 8% to $574.8 million in 2015 due to $42.6 million from acquisitions.
Operating expenses increased $31.9 million or 6% to $527.9 million in 2015 due to $33.6 million from acquisitions.

TDS anticipates that TDS Telecom’s future results will be affected by the following factors:

Continued increases in competition from wireless and other wireline providers, cable providers, satellite video providers, fiber overbuilders and technologies such as Voice over Internet Protocol (“VoIP”), DOCSIS 3.0 and further upgrades, and fourth-generation (“4G”) mobile technology;
Continued increases in consumer data usage and demand for high-speed data services;
Continued declines in Wireline voice connections and wholesale minutes of use;
Continued focus on customer retention programs, including discounting for “triple-play” bundles including broadband, video or satellite video and voice;
The expansion of Internet Protocol television (“IPTV”) into additional market areas;
Continued increases in content costs related to video products;
Continued growth in hosted and managed services which may result in the need for additional investment in data centers;
The National Broadband Plan and other rulemaking by the FCC, including uncertainty related to future funding from the Universal Service Fund (“USF”), broadband requirements, intercarrier compensation, changes in access reform and net neutrality; and
Potential acquisitions or divestitures by TDS and/or TDS Telecom of wireline, cable, HMS or other businesses.

See “Results of Operations—TDS Telecom.”

REGULATORY MATTERS

The discussion below includes updates related to recent regulatory developments. These updates should be read in conjunction with the disclosures previously provided under “Regulatory Matters” in TDS’ Form 10-K for the year ended December 31, 2014.

FCC Net Neutrality Order

In February 2015, the FCC adopted an Open Internet Order relating to new net neutrality rules. The rules became effective in June 2015. The order reclassified high-speed, or broadband, internet access service as a "telecommunication service," making it subject to common carrier regulation under Title II of the Communications Act of 1934. The order applies equally to fixed and wireless broadband internet service providers and thus applies to internet broadband services provided by telephone, cable and wireless providers.

The rules prohibit (i) blocking (broadband providers may not block access to legal content, applications, services, or non-harmful devices); (ii) throttling (broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices); and (iii) paid prioritization (broadband providers may not favor some lawful internet traffic over other lawful traffic in exchange for consideration, i.e., internet “fast lanes” are prohibited). Also, internet service providers may not prioritize content and services of their affiliates. In addition, the FCC has now asserted jurisdiction over internet traffic exchange, so interconnection arrangements will now be subject to a statutory requirement that all charges, practices, classifications, and regulations for and in connection with interconnection must be just and reasonable. The rules also include a general conduct standard that will be applied on a case-by-case basis to address questionable practices as they occur that unreasonably interfere with or unreasonably disadvantage lawful content, applications, services, or devices to be used by end users (individuals or entities that use a broadband internet access service), or made available by edge providers (individuals or entities that provide any content, application, or service over the internet, and any individual or entity that provides a device used for accessing any content, application, or service over the internet). Although broadband internet access providers will be allowed to engage in reasonable network management practices, it is uncertain what practices will be permitted by the FCC. The order also expands the FCC’s current internet transparency rules.

All of these requirements will be subject to FCC enforcement and potential third-party claims for damages or equitable relief. Under Title II, the FCC will have broad regulatory authority over internet services and internet service providers. Although the FCC indicated that it will forbear from a number of utility-style regulations, such as rate regulation, tariffs, and unbundling requirements, the FCC could determine to apply such regulations and requirements in the future. Also, it is uncertain if internet services may be subject to the Federal Universal Service Fund (“USF”) contributions or taxation in the future as a result of the reclassification under Title II. Lawsuits have been filed challenging the net neutrality rules and the FCC’s decision to reclassify broadband internet access service under Title II. TDS cannot predict the outcome of these proceedings or the impact on its business.

Changes to FCC’s Designated Entity Rules

TDS participated in prior FCC spectrum auctions through limited partnerships that qualified as “designated entities” under FCC rules and, as such were eligible for bid credit discounts of 25% with respect to licenses won in the auctions. In July 2015, the FCC adopted a Report and Order that amended the FCC’s designated entity rules. The amended rules include caps on bid credits that designated entities may receive in future auctions and modify the attribution rules. The amended rules also restrict certain joint bidding agreements but permit certain other arrangements involving more than one party. Additionally, the amended rules make certain other changes to the FCC’s competitive bidding rules. TDS will be evaluating how these amended rules may impact future FCC spectrum auctions and its potential participation through a designated entity.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

RESULTS OF OPERATIONS — CONSOLIDATED

									Percentage
Six Months Ended June 30,			2015		2014		Change		Change
(Dollars in thousands, except per share amounts)
Operating revenues
	U.S. Cellular		$	1,940,912	$	1,883,584	$	57,328	3%
	TDS Telecom			574,798		533,266		41,532	8%
	All other (1)			12,278		15,504		(3,226)	(21)%
		Total operating revenues		2,527,988		2,432,354		95,634	4%
Operating expenses
	U.S. Cellular			1,682,100		1,926,066		(243,966)	(13)%
	TDS Telecom			527,864		496,007		31,857	6%
	All other (1) (2)			3,274		38,686		(35,412)	(92)%
		Total operating expenses		2,213,238		2,460,759		(247,521)	(10)%
Operating income (loss)
	U.S. Cellular			258,812		(42,482)		301,294	>100%
	TDS Telecom			46,934		37,259		9,675	26%
	All other (1) (2)			9,004		(23,182)		32,186	>100%
		Total operating income (loss)		314,750		(28,405)		343,155	>100%
Investment and other income (expense)
	Equity in earnings of unconsolidated entities			70,053		72,117		(2,064)	(3)%
	Interest and dividend income			18,502		5,237		13,265	>100%
	Interest expense			(67,749)		(56,605)		(11,144)	(20)%
	Other, net			198		210		(12)	(6)%
		Total investment and other income (expense)		21,004		20,959		45	-

Income (loss) before income taxes				335,754		(7,446)		343,200	>100%
	Income tax expense (benefit)			133,453		(2,014)		135,467	>100%

Net income (loss)				202,301		(5,432)		207,733	>100%
	Less: Net income (loss) attributable to noncontrolling interests, net of tax			33,515		(1,648)		35,163	>100%
Net income (loss) attributable to TDS shareholders				168,786		(3,784)		172,570	>100%
	Preferred dividend requirement			(25)		(25)		–	-
Net income (loss) available to common shareholders			$	168,761	$	(3,809)	$	172,570	>100%

(1)	Consists of corporate and other operations and intercompany eliminations.

(2)	Compared to U.S. Cellular, TDS recognized an incremental gain of $11.9 million on the tower sale in the six months ended June 30, 2015 as a result of a lower basis in the assets disposed. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information. In 2014, TDS recognized expenses of $13.1 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm.

Operating revenues and expenses

See “Results of Operations — U.S. Cellular” and “Results of Operations — TDS Telecom” below for factors that affected consolidated Operating revenues and expenses.

Equity in earnings of unconsolidated entities

TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $39.3 million and $39.6 million to Equity in earnings of unconsolidated entities in 2015 and 2014, respectively.

Interest and dividend income

Interest and dividend income increased $13.3 million in 2015 to $18.5 million for the six months ended June 30, 2015. This increase is due to imputed interest income recognized on equipment installment plans. See Note 3 — Equipment Installment Plans in the Notes to the Consolidated Financial Statements for additional information.

Interest expense

The increase in interest expense was due primarily to U.S. Cellular’s issuance of $275 million of 7.25% Senior Notes in December 2014.

Income tax expense (benefit)

See Note 4 — Income Taxes in the Notes to Consolidated Financial Statements for additional discussion of the overall effective tax rate on Income (loss) before income taxes.

Net income attributable to noncontrolling interests, net of tax

Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income and the noncontrolling shareholders’ or partners’ share of certain TDS or U.S. Cellular subsidiaries’ net income.

		Six Months Ended
		June 30,
		2015		2014
(Dollars in thousands)
Net income (loss) attributable to noncontrolling interests, net of tax
	U.S. Cellular noncontrolling public shareholders’	$	28,315	$	70
	Noncontrolling shareholders’ or partners’		5,200		(1,718)
		$	33,515	$	(1,648)

RESULTS OF OPERATIONS — U.S. CELLULAR

TDS provides wireless telephone service through U.S. Cellular, an 84%-owned subsidiary. U.S. Cellular owns, manages and invests in wireless markets throughout the United States.

Summary Operating Data for U.S. Cellular Consolidated Markets

As of or for Six Months Ended June 30,			2015		2014
Retail Customers
	Postpaid
		Total at end of period		4,324,000		4,148,000
		Gross additions		391,000		387,000
		Net additions (losses)		26,000		(119,000)
		ARPU(1)	$	54.24	$	57.18
		ARPA(2)	$	134.39	$	131.92
		Churn rate(3)		1.4%		2.0%
		Smartphone penetration(4)		69.1%		58.4%
	Prepaid
		Total at end of period		368,000		352,000
		Gross additions		138,000		150,000
		Net additions		20,000		9,000
		ARPU(1)	$	35.90	$	33.18
		Churn rate(3)		5.5%		6.7%
Total customers at end of period				4,779,000		4,653,000
Billed ARPU(1)			$	51.80	$	53.62
Service revenue ARPU(1)			$	57.79	$	60.23
Smartphones sold as a percent of total handsets sold				86.2%		78.6%
Total Population
	Consolidated markets(5)			45,737,000		54,817,000
	Consolidated operating markets(5)			31,814,000		31,729,000
Market penetration at end of period
	Consolidated markets(6)			10.4%		8.5%
	Consolidated operating markets(6)			15.0%		14.7%
Capital expenditures (000s)			$	200,126	$	233,508
Total cell sites in service				6,223		6,183
Owned towers in service				3,940		4,457

Average Revenue per User (“ARPU”) metrics are calculated by dividing a revenue base by an average number of customers by the number of months in the period. These revenue bases and customer populations are shown below:
1. Postpaid ARPU consists of total postpaid service revenues and postpaid customers.
2. Prepaid ARPU consists of total prepaid service revenues and prepaid customers.
3. Billed ARPU consists of total postpaid, prepaid and reseller service revenues and postpaid, prepaid and reseller customers.
4. Service revenue ARPU consists of total postpaid, prepaid and reseller service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller customers.

Average Revenue per Account (“ARPA”) metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts by the number of months in the period.

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

Smartphones represent wireless devices which run on an Android, Apple, BlackBerry or Windows Mobile operating system, excluding connected devices. Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid handset customers.

The decrease in the population of Consolidated markets is due primarily to the license exchange transactions of certain non-operating licenses in North Carolina in December 2014 and Illinois and Indiana in March 2015. Total Population is used only to calculate market penetration of consolidated markets and consolidated operating markets, respectively. See footnote (6) below.

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

Components of Operating Income (Loss)

								Percentage
Six Months Ended June 30,		2015		2014		Change		Change
(Dollars in thousands)
Retail service		$	1,481,228	$	1,510,918	$	(29,690)	(2)%
Inbound roaming			89,373		107,706		(18,333)	(17)%
Other			81,983		78,462		3,521	4%
	Service revenues		1,652,584		1,697,086		(44,502)	(3)%
Equipment sales			288,328		186,498		101,830	55%
	Total operating revenues		1,940,912		1,883,584		57,328	3%

System operations (excluding Depreciation, amortization and accretion reported below)			386,953		367,738		19,215	5%
Cost of equipment sold			491,972		542,452		(50,480)	(9)%
Selling, general and administrative			731,939		799,816		(67,877)	(8)%
Depreciation, amortization and accretion			297,666		316,090		(18,424)	(6)%
(Gain) loss on asset disposals, net			9,650		8,827		823	9%
(Gain) loss on sale of business and other exit costs, net			(113,182)		(17,411)		(95,771)	>(100)%
(Gain) loss on license sales and exchanges, net			(122,898)		(91,446)		(31,452)	(34)%
	Total operating expenses		1,682,100		1,926,066		(243,966)	(13)%
	Operating income (loss)	$	258,812	$	(42,482)	$	301,294	>100%

Operating Revenues

Service revenues

Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services, provided to U.S. Cellular’s retail customers and to end users through third party resellers (“retail service”); (ii) charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming; and (iii) amounts received from the Federal Universal Service Fund (“USF”), tower rental revenue, and revenue from spectrum leases.

Retail service revenues

Retail service revenues decreased by $29.7 million, or 2%, in 2015 to $1,481.2 million due to a decrease in billed ARPU, partially offset by an increase in U.S. Cellular’s average customer base.

Billed ARPU decreased to $51.80 in 2015 from $53.62 in 2014. This overall decrease is due primarily to a decrease in postpaid ARPU to $54.24 in 2015 from $57.18 in 2014, due to discounts offered on shared data plans for customers on equipment installment plans and those providing their own device at the time of activation or renewal.

U.S. Cellular expects continued pressure on retail service revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage. Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans. To the extent that customers adopt these plans, U.S. Cellular expects an increase in equipment sales revenues. However, certain of the equipment installment plans provide the customer with a reduction in the monthly access charge for the device; thus, to the extent that existing customers adopt such plans, U.S. Cellular expects a reduction in retail service revenues and ARPU.

Inbound roaming revenues

Inbound roaming revenues decreased by $18.3 million, or 17%, in 2015 to $89.4 million. The decrease was due to lower rates for both voice and data and a decline in voice volume.

Other revenues

Other revenues increased by $3.5 million, or 4%, in 2015 compared to 2014 primarily due to increases in revenue from spectrum leases and revenue share from mobile applications.

Pursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s current Federal USF support is being phased down at the rate of 20% per year beginning July 1, 2012. The Phase II Mobility Fund was not operational as of September 2014. Therefore, as provided by the Reform Order, the phase down is currently suspended and U.S. Cellular will continue to receive 60% of its baseline support until the Phase II Mobility Fund is operational. Revenues representing amounts received from the Federal USF for the three and six months ended June 30, 2015 were $23.0 million and $46.1 million, respectively. At this time, U.S. Cellular cannot predict the net effect of the FCC’s changes to the USF high cost support program in the Reform Order. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations.

Equipment sales revenues

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

U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers.

Equipment sales revenues increased $101.8 million, or 55%, to $288.3 million in 2015. The increase is due primarily to an increase in average revenue per device sold (including the impact of sales under equipment installment plans and a mix shift to smartphones and connected devices) and an increase in sales of accessories, partially offset by a decrease in total unit sales of 12%. Equipment sales revenues in 2015 include $136.9 million related to equipment installment plan sales compared to $33.6 million in 2014. See Note 3 — Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Operating Expenses

System operations expenses (excluding Depreciation, amortization and accretion)

System operations expenses (excluding Depreciation, amortization, and accretion) include charges from telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular’s network, long-distance charges, outbound roaming expenses and payments to third‑party data product and platform developers.

System operations expenses increased $19.2 million, or 5%, to $387.0 million. The primary factor in the overall increase was expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming; these expenses increased $19.5 million, or 24%, due primarily to an increase in data roaming usage. Changes in other key components of System operations expenses were largely offsetting.

U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network.

Cost of equipment sold

Cost of equipment sold decreased by $50.5 million, or 9%, to $492.0 million in 2015. The decrease was driven primarily by a 12% reduction in the total number of devices sold, partially offset by a slight increase in the average cost per device sold (reflecting the mix shift to smartphones and connected devices) and higher sales of accessories. Cost of equipment sold in 2015 includes $191.4 million related to equipment installment plan sales compared to $47.4 million in 2014.

U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $203.6 million and $356.0 million for 2015 and 2014, respectively. The $152.3 million decrease in loss on equipment was driven by higher equipment installment plan sales which have a lower loss per device. In addition, lower handset sales contributed to the decline in loss on equipment. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as iconic data-centric wireless devices continue to increase in cost and wireless carriers continue to use pricing as a means of competitive differentiation. However, U.S. Cellular expects sales of devices under equipment installment plans, and certain devices such as tablets under non-subsidized plans, will offset loss on equipment to some degree.

Selling, general and administrative expenses

Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses. Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.

Key components of the $67.9 million, or 8%, decrease to $731.9 million were as follows:

Selling and marketing expense decreased by $16.6 million, or 5%, due primarily to decreases in labor and commissions expenses, partially offset by increases in advertising expenses.
General and administrative expense decreased by $51.3 million, or 12%, due primarily to lower consulting expenses related to the billing system updates and customer service operations and lower rates for roaming administration.

Depreciation, amortization and accretion expenses

Depreciation, amortization and accretion decreased $18.4 million, or 6%, in 2015 to $297.7 million due primarily to the cessation of accelerated depreciation, amortization and accretion in the Divestiture Markets, which was completed in the first quarter of 2014.

(Gain) loss on asset disposals, net

(Gain) loss on asset disposals, net was a loss in both 2015 and 2014 due primarily to write-offs and disposals of certain network assets.

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

The net gain of $113.2 million in 2015 was due primarily to a $107.7 million gain recognized from the sale of towers to a third party which closed in January 2015. The net gain of $17.4 million in 2014 resulted from the continuing impact of the Divestiture Transaction. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges, net

The net gain of $122.9 million in 2015 was due primarily to the license exchange of certain of U.S. Cellular’s PCS licenses for certain other PCS licenses and cash. The net gain of $91.4 million in 2014 resulted from the sale of the St. Louis area non-operating market license and the license exchange in Milwaukee. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

RESULTS OF OPERATIONS — TDS TELECOM

TDS Telecom provides broadband, video and voice telecommunications services and hosted and managed services in three reportable segments: Wireline, Cable and HMS.

On September 1, 2014, TDS acquired substantially all of the assets of BendBroadband, a full-service cable communications company. As part of the agreement, TDS also acquired a cable advertising and broadcast business and a Tier III data center providing colocation and managed services. The operations of the cable and cable advertising and broadcast businesses are included in the Cable segment. The operations of the data center are included in the HMS segment. This acquisition impacts the comparability of TDS Telecom’s operating results.

The following table summarizes customer connections for TDS Telecom’s Wireline and Cable operations:

As of or for the Six Months Ended June 30,				2015		2014		Change
Wireline
	Residential connections
		Voice (1)			329,000		346,100		(17,100)
		Broadband (2)			231,200		232,700		(1,500)
		IPTV (3)			27,900		18,200		9,700
			Wireline residential connections		588,100		597,000		(8,900)

	Total residential revenue per connection (4)			$	42.21	$	40.92	$	1.29

	Commercial connections
		Voice (1)			181,800		206,200		(24,400)
		Broadband (2)			23,700		26,000		(2,300)
		managedIP (5)			145,100		133,300		11,800
			Wireline commercial connections		350,600		365,500		(14,900)

	Total Wireline connections				938,700		962,500		(23,800)

Cable
	Cable connections
		Video (6)			109,100		69,700		39,400
		Broadband (7)			112,300		63,200		49,100
		Voice (7)			51,500		17,800		33,700
			Cable connections		272,900		150,700		122,200


(1)	The individual circuit connecting customers to TDS Telecom’s central office facilities. The divestiture of certain Wireline companies resulted in a reduction of 4,300 residential connections and 1,300 commercial connections.

(2)	The number of customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies. The divestiture of certain Wireline companies resulted in a reduction of 2,600 residential connections and 200 commercial connections.

(3)	The number of customers provided video services using IP networking technology.

(4)	Total residential revenue per connection is calculated by dividing the average residential revenue for the period by the average number of residential connections for the period.

(5)	The number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.

(6)	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.

(7)	Broadband and voice connections reflect billable number of lines into a building for high speed data and voice services, respectively.

TDS Telecom

Components of Operating Income

									Percentage
Six Months Ended June 30,			2015		2014		Change		Change
(Dollars in thousands)
Operating revenues
	Wireline		$	352,105	$	358,214	$	(6,109)	(2)%
	Cable			88,184		44,987		43,197	96%
	HMS			136,547		131,044		5,503	4%
	Intra-company elimination			(2,038)		(979)		(1,059)	>(100)%
		TDS Telecom operating revenues		574,798		533,266		41,532	8%

Operating expenses
	Wireline			302,746		309,219		(6,473)	(2)%
	Cable			82,854		44,420		38,434	87%
	HMS			144,302		143,347		955	1%
	Intra-company elimination			(2,038)		(979)		(1,059)	>(100)%
		TDS Telecom operating expenses		527,864		496,007		31,857	6%

	TDS Telecom operating income		$	46,934	$	37,259	$	9,675	26%

The Wireline business has continued to experience expected secular declines in revenues. Cable and HMS revenues have increased due to acquisitions and organic growth, and have offset the decline in Wireline revenues. Excluding the impacts of acquisitions and divestitures, revenues, operating expenses and operating income have remained relatively flat.

Wireline Operations

Components of Operating Income

											Percentage
Six Months Ended June 30,						2015		2014		Change	Change
(Dollars in thousands)
Service revenues
	Residential				$	148,962	$	145,865	$	3,097	2%
	Commercial					111,158		115,452		(4,294)	(4)%
	Wholesale					90,984		95,913		(4,929)	(5)%
		Total service revenues				351,104		357,230		(6,126)	(2)%
Equipment and product sales						1,001		984		17	2%
			Total operating revenues			352,105		358,214		(6,109)	(2)%

Cost of services (excluding Depreciation, amortization and accretion reported below)						125,031		128,705		(3,674)	(3)%
Cost of equipment and products						1,160		964		196	20%
Selling, general and administrative						94,869		94,228		641	1%
Depreciation, amortization and accretion						83,212		84,563		(1,351)	(2)%
(Gain) loss on asset disposals, net						1,528		759		769	>100%
(Gain) loss on sale of business and other exit costs, net						(3,054)		–		(3,054)	N/M
			Total operating expenses			302,746		309,219		(6,473)	(2)%
				Total operating income	$	49,359	$	48,995	$	364	1%

N/M - Not Meaningful

Residential revenues, which consist of broadband, video, and voice services to TDS Telecom’s Wireline residential customer base, increased in 2015 as growth in data and IPTV more than offset the decline in legacy voice services. A 3% increase in average revenue per residential connection driven by price increases for broadband and video services, growth in customers opting for faster broadband speeds and growth in customers selecting higher tier IPTV packages increased revenues $2.2 million. IPTV average connections grew 60% increasing revenues $4.6 million, while legacy voice connections declined by 4% decreasing revenues by $2.7 million.

Commercial revenues, which consist of broadband and voice services and sales and installation of IP-based telecommunication systems to TDS Telecom’s Wireline commercial customer base, decreased in 2015. Declining legacy voice and data connections reduced revenues $7.3 million, while 9% growth in average managedIP connections increased commercial revenue $3.3 million.

Wholesale revenues, which represent compensation from other carriers for utilizing TDS Telecom’s network infrastructure and regulatory recoveries, decreased in 2015 due primarily to a $2.7 million reduction in revenues received through inter-state and intra-state regulatory mechanisms and $0.8 million due to a 10% reduction in intra-state minutes-of-use.

Cost of services decreased in 2015 due primarily to $6.5 million in reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by $3.7 million in increased charges related to the growth in IPTV.

In May 2015, the divestiture of certain wireline companies resulted in a $3.1 million Gain on sale of business and other exit costs, net.

Cable Operations

Components of Operating Income

											Percentage
Six Months Ended June 30,						2015		2014		Change	Change
(Dollars in thousands)
Service revenues
	Residential				$	69,959	$	36,475	$	33,484	92%
	Commercial					18,067		8,512		9,555	>100%
		Total service revenues				88,026		44,987		43,039	96%
Equipment and product sales						158		–		158	N/M
			Total operating revenues			88,184		44,987		43,197	96%

Cost of services (excluding Depreciation, amortization and accretion reported below)						39,797		22,349		17,448	78%
Cost of equipment and products						75		–		75	N/M
Selling, general and administrative						26,389		12,663		13,726	>100%
Depreciation, amortization and accretion						17,579		8,918		8,661	97%
(Gain) loss on asset disposals, net						(986)		490		(1,476)	>(100)%
			Total operating expenses			82,854		44,420		38,434	87%
				Total operating income	$	5,330	$	567	$	4,763	>100%

N/M - Not Meaningful

Changes in operating revenues and operating expenses in 2015 are due primarily to acquisitions.

HMS Operations

Components of Operating Income (Loss)

									Percentage
Six Months Ended June 30,				2015		2014		Change	Change
(Dollars in thousands)
Service revenues			$	57,883	$	54,951	$	2,932	5%
Equipment and product sales				78,664		76,093		2,571	3%
	Total operating revenues			136,547		131,044		5,503	4%

Cost of services (excluding Depreciation, amortization and accretion reported below)				41,982		38,247		3,735	10%
Cost of equipment and products				65,696		64,342		1,354	2%
Selling, general and administrative				23,659		27,211		(3,552)	(13)%
Depreciation, amortization and accretion				13,008		13,469		(461)	(3)%
(Gain) loss on asset disposals, net				(43)		78		(121)	>(100)%
	Total operating expenses			144,302		143,347		955	1%
		Total operating income (loss)	$	(7,755)	$	(12,303)	$	4,548	37%

Excluding the impact of acquisitions, growth of 3% in recurring services including colocation, dedicated hosting, hosted application management and cloud computing services resulted in an increase in Service revenues in 2015. Equipment and product sales revenues from sales of IT infrastructure hardware solutions increased in 2015 due to higher spending by existing customers. There was a corresponding increase in Cost of equipment and products.

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

RESULTS OF OPERATIONS — CONSOLIDATED

									Percentage
Three Months Ended June 30,			2015		2014		Change		Change
(Dollars in thousands, except per share amounts)
Operating revenues
	U.S. Cellular		$	975,667	$	957,773	$	17,894	2%
	TDS Telecom			294,813		270,850		23,963	9%
	All other (1)			5,915		7,769		(1,854)	(24)%
		Total operating revenues		1,276,395		1,236,392		40,003	3%
Operating expenses
	U.S. Cellular			967,168		1,008,080		(40,912)	(4)%
	TDS Telecom			269,111		251,585		17,526	7%
	All other (1) (2)			7,995		25,817		(17,822)	(69)%
		Total operating expenses		1,244,274		1,285,482		(41,208)	(3)%
Operating income (loss)
	U.S. Cellular			8,499		(50,307)		58,806	>100%
	TDS Telecom			25,702		19,265		6,437	33%
	All other (1) (2)			(2,080)		(18,048)		15,968	88%
		Total operating income (loss)		32,121		(49,090)		81,211	>100%
Investment and other income (expense)
	Equity in earnings of unconsolidated entities			35,412		34,790		622	2%
	Interest and dividend income			10,117		2,751		7,366	>100%
	Interest expense			(33,919)		(27,898)		(6,021)	(22)%
	Other, net			202		50		152	>100%
		Total investment and other income (expense)		11,812		9,693		2,119	22%

Income (loss) before income taxes				43,933		(39,397)		83,330	>100%
	Income tax expense (benefit)			17,433		(13,671)		31,104	>100%

Net income (loss)				26,500		(25,726)		52,226	>100%
	Less: Net income (loss) attributable to noncontrolling interests, net of tax			3,454		(3,688)		7,142	>100%
Net income (loss) attributable to TDS shareholders				23,046		(22,038)		45,084	>100%
	Preferred dividend requirement			(12)		(12)		–	-
Net income (loss) available to common shareholders			$	23,034	$	(22,050)	$	45,084	>100%

(1)	Consists of corporate and other operations and intercompany eliminations.

(2)	In 2014, TDS recognized expenses of $13.1 million related to exit and disposal activities due to a License Purchase and Customer Recommendation Agreement between U.S. Cellular and Airadigm.

Operating Revenues and Expenses

See “Results of Operations — U.S. Cellular” and “Results of Operations — TDS Telecom” below for factors that affected consolidated Operating Revenues and Expenses.

Equity in earnings of unconsolidated entities

TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $19.4 million and $18.4 million to Equity in earnings of unconsolidated entities in 2015 and 2014, respectively.

Interest and dividend income

Interest and dividend income increased $7.4 million in 2015 to $10.1 million for the three months ended June 30, 2015. This increase is due to imputed interest income recognized on equipment installment plans. See Note 3 — Equipment Installment Plans in the Notes to the Consolidated Financial Statements for additional information.

Interest expense

The increase in interest expense was due primarily to U.S. Cellular’s issuance of $275 million of 7.25% Senior Notes in December 2014.

Income tax expense (benefit)

See Note 4 — Income Taxes in the Notes to Consolidated Financial Statements for additional discussion of the overall effective tax rate on Income (loss) before income taxes.

Net income attributable to noncontrolling interests, net of tax

		Three Months Ended
		June 30,
		2015		2014
(Dollars in thousands)
Net income (loss) attributable to noncontrolling interests, net of tax
	U.S. Cellular noncontrolling public shareholders’	$	3,106	$	(3,014)
	Noncontrolling shareholders’ or partners’		348		(674)
		$	3,454	$	(3,688)

RESULTS OF OPERATIONS — U.S. CELLULAR

Components of Operating Income (Loss)

								Percentage
Three Months Ended June 30,		2015		2014		Change		Change
(Dollars in thousands)
Retail service		$	734,740	$	746,117	$	(11,377)	(2)%
Inbound roaming			49,044		57,580		(8,536)	(15)%
Other			40,589		39,776		813	2%
	Service revenues		824,373		843,473		(19,100)	(2)%
Equipment sales			151,294		114,300		36,994	32%
	Total operating revenues		975,667		957,773		17,894	2%

System operations (excluding Depreciation, amortization and accretion reported below)			196,276		187,131		9,145	5%
Cost of equipment sold			253,671		271,978		(18,307)	(7)%
Selling, general and administrative			362,971		404,252		(41,281)	(10)%
Depreciation, amortization and accretion			150,581		148,337		2,244	2%
(Gain) loss on asset disposals, net			5,399		6,893		(1,494)	(22)%
(Gain) loss on sale of business and other exit costs, net			(1,705)		(10,511)		8,806	84%
(Gain) loss on license sales and exchanges, net			(25)		–		(25)	N/M
	Total operating expenses		967,168		1,008,080		(40,912)	(4)%
	Operating income (loss)	$	8,499	$	(50,307)	$	58,806	>100%

N/M - Not meaningful

Operating Revenues

Retail service revenues

Retail service revenues decreased by $11.4 million, or 2%, in 2015 to $734.7 million due to a decrease in billed ARPU, partially offset by an increase in U.S. Cellular’s average customer base.

Billed ARPU decreased to $51.29 in 2015 from $53.36 in 2014 due primarily to a decrease in postpaid ARPU to $53.62 in 2015 from $56.82 in 2014, due to discounts offered on shared data plans for customers on equipment installment plans and those providing their own device at the time of activation or renewal.

Inbound roaming revenues

Inbound roaming revenues decreased by $8.5 million, or 15%, in 2015 to $49.0 million. The decrease was due to lower rates for both voice and data and a decline in voice volume.

Other revenues

Other revenues increased by $0.8 million, or 2%, in 2015 compared to 2014 due to increases in revenue from spectrum leases and revenue share from mobile applications.

Equipment sales revenues

Equipment sales revenues increased $37.0 million, or 32%, to $151.3 million in 2015. The increase is due primarily to an increase in average revenue per device sold (including the impact of sales under equipment installment plans and a mix shift to smartphones and connected devices) and an increase in sales of accessories, partially offset by a decrease in total unit sales of 10%. Equipment sales revenues in 2015 include $68.9 million related to equipment installment plan sales compared to $30.5 million in 2014. See Note 3 — Equipment Installment Plans in the Notes to Consolidated Financial Statements for additional information.

Operating Expenses

System operations expenses (excluding Depreciation, amortization and accretion)

System operations expenses increased $9.1 million, or 5%, to $196.3 million. The primary factor in the overall increase was expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming; these expenses increased $10.8 million, or 25%,

due primarily to an increase in data roaming usage. Changes in other key components of System operations expenses were largely offsetting.

Cost of equipment sold

Cost of equipment sold decreased by $18.3 million, or 7%, to $253.7 million in 2015. The decrease was driven primarily by a 10% decrease in the total number of devices sold, partially offset by a slight increase in the average cost per device sold (reflecting the mix shift to smartphones and connected devices) and higher sales of accessories. Cost of equipment sold in 2015 includes $104.7 million related to equipment installment plan sales compared to $44.1 million in 2014.

U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $102.4 million and $157.7 million for 2015 and 2014, respectively. The $55.3 million decrease in loss on equipment was driven by higher equipment installment plan sales which have a lower loss per device. In addition, lower handset sales contributed to the decline in loss on equipment.

Selling, general and administrative expenses

Key components of the $41.3 million, or 10%, decrease to $363.0 million were as follows:

Selling and marketing expense decreased by $6.9 million, or 4%, due primarily to decreases in labor and commissions, partially offset by increases in advertising expenses.

General and administrative expense decreased by $34.4 million, or 15%, due primarily to lower consulting expenses related to the billing system updates and customer service operations, lower rates for roaming administration and a decrease in bad debts expense.

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

The net gains of $1.7 million in 2015 and $10.5 million in 2014 were due primarily to the continuing impact of the Divestiture Transaction. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

RESULTS OF OPERATIONS – TDS TELECOM

TDS Telecom

Components of Operating Income

									Percentage
Three Months Ended June 30,			2015		2014		Change		Change
(Dollars in thousands)
Operating revenues
	Wireline		$	175,970	$	180,728	$	(4,758)	(3)%
	Cable			44,615		22,484		22,131	98%
	HMS			75,586		67,936		7,650	11%
	Intra-company elimination			(1,358)		(298)		(1,060)	>(100)%
		TDS Telecom operating revenues		294,813		270,850		23,963	9%

Operating expenses
	Wireline			151,560		154,835		(3,275)	(2)%
	Cable			40,820		22,661		18,159	80%
	HMS			78,089		74,387		3,702	5%
	Intra-company elimination			(1,358)		(298)		(1,060)	>(100)%
		TDS Telecom operating expenses		269,111		251,585		17,526	7%

	TDS Telecom operating income		$	25,702	$	19,265	$	6,437	33%

Wireline Operations

Components of Operating Income

											Percentage
Three Months Ended June 30,						2015		2014		Change	Change
(Dollars in thousands)
Service revenues
	Residential				$	74,277	$	73,360	$	917	1%
	Commercial					55,395		57,472		(2,077)	(4)%
	Wholesale					45,741		49,465		(3,724)	(8)%
		Total service revenues				175,413		180,297		(4,884)	(3)%
Equipment and product sales						557		431		126	29%
			Total operating revenues			175,970		180,728		(4,758)	(3)%

Cost of services (excluding Depreciation, amortization and accretion reported below)						62,604		64,305		(1,701)	(3)%
Cost of equipment and products						597		481		116	24%
Selling, general and administrative						49,200		47,708		1,492	3%
Depreciation, amortization and accretion						41,203		41,827		(624)	(1)%
(Gain) loss on asset disposals, net						1,010		514		496	96%
(Gain) loss on sale of business and other exit costs, net						(3,054)		–		(3,054)	N/M
			Total operating expenses			151,560		154,835		(3,275)	(2)%
				Total operating income	$	24,410	$	25,893	$	(1,483)	(6)%

N/M - Not Meaningful

Residential revenues increased in 2015 as growth in data and IPTV more than offset the decline in legacy voice services. IPTV average connections grew 56% increasing revenues $2.3 million, while legacy voice connections declined by 4% decreasing revenues by $1.3 million.

Commercial revenues decreased in 2015 as declining legacy voice and data connections reduced revenues $3.6 million, while 9% growth in average managedIP connections increased commercial revenues $1.6 million.

Wholesale revenues decreased $2.0 million due to a reduction in revenues received through inter-state and intra-state regulatory recovery mechanisms and $0.6 million due to a reduction in intra-state minutes-of-use.

Cost of services decreased in 2015 due primarily to $3.3 million in reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services, offset by $1.8 million in increased charges related to the growth in IPTV.

In May 2015, the divestiture of certain wireline companies resulted in a $3.1 million Gain on sale of business and other exit costs, net.

Cable Operations

Components of Operating Income

											Percentage
Three Months Ended June 30,						2015		2014		Change	Change
(Dollars in thousands)
Service revenues
	Residential				$	34,913	$	18,222	$	16,691	92%
	Commercial					9,632		4,262		5,370	>100%
		Total service revenues				44,545		22,484		22,061	98%
Equipment and product sales						70		–		70	N/M
			Total operating revenues			44,615		22,484		22,131	98%

Cost of services (excluding Depreciation, amortization and accretion reported below)						19,849		11,394		8,455	74%
Cost of equipment and products						15		–		15	N/M
Selling, general and administrative						13,764		6,285		7,479	>100%
Depreciation, amortization and accretion						8,860		4,557		4,303	94%
(Gain) loss on asset disposals, net						(1,668)		425		(2,093)	>(100)%
			Total operating expenses			40,820		22,661		18,159	80%
				Total operating income (loss)	$	3,795	$	(177)	$	3,972	>100%

N/M - Not Meaningful

Changes in operating revenues and operating expenses in 2015 are due primarily to acquisitions.

HMS Operations

Components of Operating Income

									Percentage
Three Months Ended June 30,				2015		2014		Change	Change
(Dollars in thousands)
Service revenues			$	29,467	$	27,575	$	1,892	7%
Equipment and product sales				46,119		40,361		5,758	14%
	Total operating revenues			75,586		67,936		7,650	11%

Cost of services (excluding Depreciation, amortization and accretion reported below)				21,954		21,301		653	3%
Cost of equipment and products				38,566		33,875		4,691	14%
Selling, general and administrative				10,969		12,376		(1,407)	(11)%
Depreciation, amortization and accretion				6,573		6,791		(218)	(3)%
(Gain) loss on asset disposals, net				27		44		(17)	(39)%
	Total operating expenses			78,089		74,387		3,702	5%
		Total operating income (loss)	$	(2,503)	$	(6,451)	$	3,948	61%

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

TDS operates a capital- and marketing-intensive business. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and dispositions of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions and divestitures, capital expenditures and other factors. The table below and the following discussion summarize TDS' cash flow activities for the six months ended June 30, 2015 and 2014.

		2015		2014
(Dollars in thousands)
Cash flows from (used in):
	Operating activities	$	538,431	$	315,642
	Investing activities		(346,007)		(218,963)
	Financing activities		(32,776)		(51,833)
	Net increase in cash and cash equivalents	$	159,648	$	44,846

Cash Flows from Operating Activities

An increase in cash flows from operating activities was due primarily to working capital factors. These factors included a $190.5 million change in accrued taxes attributable to changes in income tax payments and refunds, as well as changes in current tax expense. With regard to payments and refunds, TDS received income tax refunds, net of payments, of $24.9 million in 2015 whereas TDS paid income taxes, net of refunds, of $27.7 million in 2014. TDS recorded current income tax expense of $170.1 million and $31.3 million in 2015 and 2014, respectively. The $138.8 million increase is largely attributable to current tax accrued on the sale and exchange of certain PCS licenses, as well as the sale of towers in 2015. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information. The working capital factors also included a significant reduction of inventory, which resulted in a cash flow increase of $88.3 million.

U.S. Cellular holds a 5.5% interest in the LA Partnership. U.S. Cellular has been informed by the general partner of the LA Partnership that, in connection with the acquisition of a spectrum license covering the LA Partnership’s market in FCC Auction 97, the LA Partnership will not make a cash distribution in 2015. Notwithstanding the lack of a cash distribution, U.S. Cellular will be obligated to make tax payments on its share of any taxable income reported by the LA Partnership in 2015 and beyond. U.S. Cellular currently expects that it might receive a cash distribution in the latter half of 2016, although the amount of any such distribution is uncertain. During the six months ended June 30, 2014 and the twelve months ended December 31, 2014, U.S. Cellular received cash distributions of $35.8 million and $60.5 million, respectively, from the LA Partnership.

TDS’ future federal income tax liabilities associated with the benefits realized in prior periods from bonus depreciation are accrued as a component of Net deferred income tax liability (noncurrent) in the Consolidated Balance Sheet. Currently, there is no federal bonus depreciation deduction allowed for 2015 and future periods. Therefore, depending on TDS’ future pretax income levels, TDS’ federal income tax payments could increase in 2015 and remain at a higher level for several years as the amount of TDS’ federal tax depreciation deductions decrease. This expectation of potentially higher federal income tax payments in 2015 and subsequent years assumes that federal bonus depreciation provisions are not enacted in 2015 or future periods. To the extent further federal bonus depreciation provisions are enacted, this expectation would change.

Cash Flows from Investing Activities

TDS makes substantial investments to acquire wireless licenses and properties and to construct and upgrade telecommunications 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-reducing upgrades to TDS’ networks.

Cash used for additions to property, plant and equipment totaled $359.5 million in 2015 and $339.9 million in 2014, and is reported in the Consolidated Statement of Cash Flows.

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, in the six months ended June 30, 2015 and 2014 were as follows:

Capital expenditures			2015		2014
(Dollars in thousands)
U.S. Cellular			$	200,126	$	233,508
TDS Telecom
	Wireline			52,163		50,268
	Cable			23,552		13,400
	HMS			14,251		13,379
		TDS Telecom Total		89,966		77,047
Corporate and Other				3,145		2,724
Total			$	293,237	$	313,279

See “Capital Expenditures” below for additional information on Capital expenditures.

During 2015, a $278.3 million payment was made by Advantage Spectrum L.P. to the FCC for licenses for which it was the provisional winning bidder. See Note 6 — Acquisitions, Divestitures and Exchanges and Note 9 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information.

Cash received from Divestitures and Exchanges, which is a component of cash flows from investing activities in the Consolidated Statement of Cash Flows, is shown below.

		2015		2014
(Dollars in thousands)
U.S. Cellular licenses		$	117,000	$	91,789
U.S. Cellular businesses (1)			164,573		34,116
TDS Telecom wireline businesses			10,295		–
Other			20		–
Total		$	291,888	$	125,905

(1)	Amount includes cash proceeds received from the sale of 359 towers and reimbursements related to the Divestiture Transaction.

See Note 6— Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these divestitures.

In 2014, TDS realized proceeds of $10.0 million related to the maturities of certain of its investments in U.S. Treasury Notes.

Cash Flows from Financing Activities

Cash flows from financing activities include proceeds from and repayments of long-term debt, dividends to shareholders, distributions to noncontrolling interests, cash used to repurchase Common Shares and cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plans. In July 2015, U.S. Cellular borrowed $225 million on its Term Loan. See “Financing” section below for additional discussion.

Adjusted Free Cash Flow

The following table presents Adjusted free cash flow. Adjusted free cash flow is defined as Cash flows from operating activities (which includes cash outflows related to the Sprint decommissioning), as adjusted for cash proceeds from the Sprint Cost Reimbursement (which are included in Cash flows from investing activities in the Consolidated Statement of Cash Flows), less Cash used for additions to property, plant and equipment. Adjusted 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 the amount of cash generated by business operations (including cash proceeds from the Sprint Cost Reimbursement), after Cash used for additions to property, plant and equipment.

Six Months Ended June 30,			2015		2014
(Dollars in thousands)
Cash flows from operating activities		$	538,431	$	315,642
Add: Sprint Cost Reimbursement (1)			23,174		34,116
Less: Cash used for additions to property, plant and equipment			359,513		339,907
	Adjusted free cash flow	$	202,092	$	9,851

(1)	See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to the Sprint Cost Reimbursement.

See Cash Flows from Operating Activities and Cash Flows from Investing Activities for additional information related to the components of Adjusted free cash flow.

LIQUIDITY

TDS believes that existing cash and investment balances, funds available under its revolving credit facilities and Term Loan, and expected cash flows from operating and investing activities provide substantial liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs. However, these resources may not be adequate to fund all future expenditures that the companies could potentially elect to make such as acquisitions of spectrum licenses in FCC auctions and other acquisition, construction and development programs. It may be necessary from time to time to increase the size of the existing revolving credit facilities, to put in place new credit facilities, or to obtain other forms of financing in order to fund these potential expenditures. To the extent that sufficient funds are not available to TDS or its subsidiaries on terms or at prices acceptable to TDS, it could require TDS to reduce its acquisition, capital expenditure, business development and share repurchase programs.

TDS cannot provide assurances that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Economic conditions, changes in financial markets, TDS financial performance and/or prospects or other factors could restrict TDS’ liquidity and availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure, business development and share repurchase programs. Such reductions could have a material adverse effect on TDS’ business, financial condition or results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less. The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal. At June 30, 2015, the majority of TDS’ Cash and cash equivalents was held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such obligations. TDS monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.

Financing

As of June 30, 2015, TDS and U.S. Cellular’s unused capacity under their revolving credit facilities was $399.4 million and $282.5 million, respectively. These agreements mature in December 2017. Additionally, U.S. Cellular had $225 million in unused capacity under its Term Loan as of June 30, 2015. In July 2015, U.S. Cellular borrowed $225 million on the Term Loan. Amounts borrowed under the Term Loan will be due and payable in quarterly installments of $2.8 million beginning in March 2016 through December 2021, and the remaining unpaid balance will be due and payable in January 2022. TDS and U.S. Cellular believe they were in compliance with all of the financial covenants and requirements set forth in their revolving credit facilities and Term Loan.

TDS and U.S. Cellular have in place effective shelf registration statements on Form S-3 to issue senior or subordinated debt securities.

The proceeds from any of the aforementioned financing facilities are available for general corporate purposes, including spectrum purchases and capital expenditures.

The long-term debt payments due for the remainder of 2015 and the next four years represent less than 1% of TDS’ total long-term debt obligation measured as of June 30, 2015. Including the $225 million Term Loan drawn in July 2015, the long-term debt payments due for the remainder of 2015 and the next four years represent less than 3% of TDS’ total long-term debt obligation.

Capital Expenditures

U.S. Cellular’s capital expenditures for 2015 are expected to be approximately $600 million. These expenditures are expected to be for the following general purposes:

Expand and enhance network coverage, including providing additional capacity to accommodate increased network usage, principally data usage, by current customers;
Continue to deploy 4G LTE technology in certain markets;
Expand and enhance the retail store network; and

Develop and enhance office systems.

TDS Telecom’s capital expenditures for 2015 are expected to be $220 million. These expenditures are expected to be for the following general purposes:

Maintain and enhance existing infrastructure at Wireline, HMS and Cable;
Network upgrades and fiber expansion in Wireline and Cable markets;
Success-based spending to sustain managedIP, IPTV, HMS and Cable growth; and

Expansion of HMS data center facilities.

TDS plans to finance its capital expenditures program for 2015 using primarily Cash flows from operating activities and, as necessary, existing cash balances and borrowings under its revolving credit agreements and/or other long-term debt.

Acquisitions, Divestitures and Exchanges

TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications, cable, HMS or other possible businesses. In addition, TDS may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success. As a result, TDS may be engaged from time to time in negotiations relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to significant transactions, including expected pre-tax cash proceeds from such transactions in 2015.

Variable Interest Entities

TDS consolidates certain entities because they are “variable interest entities” under accounting principles generally accepted in the United States of America (“GAAP”). See Note 9 — Variable 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.

U.S. Cellular currently provides 4G LTE service in conjunction with King Street Wireless L.P. Aquinas Wireless L.P. has not yet developed long-term business plans. Advantage Spectrum L.P. will develop its long-term business plans after it is granted licenses by the FCC. The licenses are expected to be granted by the FCC during the latter half of 2015.

Common Share Repurchase Programs

In the past year, TDS and U.S. Cellular have repurchased and expect to continue to repurchase their Common Shares, in each case subject to any available repurchase program. For additional information related to the current TDS and U.S. Cellular repurchase authorizations and repurchases made during 2015 and 2014, see Note 11 — Common Share Repurchases in the Notes to Consolidated Financial Statements and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Contractual and Other Obligations

There were no material changes outside the ordinary course of business between December 31, 2014 and June 30, 2015 to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Form 10-K for the year ended December 31, 2014. U.S. Cellular borrowed $225 million under the Term Loan in July 2015. See Note 13 — Subsequent Events in the Notes to Consolidated Financial Statements for additional information.

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, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements and TDS’ Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2014. There were no material changes to TDS’ application of critical accounting policies and estimates during the six months ended June 30, 2015.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

SAFE HARBOR CAUTIONARY STATEMENT

This Form 10-Q, including exhibits, contains 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 those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2014. 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. You should carefully consider the Risk Factors in TDS’ Form 10-K for the year ended December 31, 2014, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business.

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, divestitures and exchanges) or allocate resources or capital could have an adverse effect on TDS’ business, financial condition or results of operations.
TDS offers customers the option to purchase certain devices under installment contracts, which creates certain risks and uncertainties which could have an adverse impact on TDS' financial condition or results of operations.
Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline 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 Federal Communications Commission (“FCC”), TDS is likely to participate in FCC auctions of additional spectrum in the future as an applicant or as a noncontrolling partner in another auction applicant and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on TDS.
Changes in the regulatory environment or a failure by TDS to timely or fully comply with any applicable regulatory requirements could adversely affect TDS’ business, financial condition or results of operations.
An inability to attract people of outstanding potential, 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 are concentrated primarily in the U.S. telecommunications industry. As a result, its results of operations may fluctuate based on factors related primarily to conditions in this industry.
TDS’ lower scale relative to larger competitors could adversely affect its business, financial condition or results of operations.
Changes in various business factors could have an adverse effect on TDS’ business, financial condition or results of operations.
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.
TDS is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of these fees are subject to great uncertainty.

Performance under device purchase agreements could have a material adverse impact on TDS' business, financial condition or results of operations.
Changes in TDS’ enterprise value, changes in the market supply or demand for wireless 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 licenses, goodwill, franchise rights and/or physical assets.
Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’ business, financial condition or results of operations.
TDS’ investments in unproven technologies may not produce the benefits that TDS expects.
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 networks and support systems 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.
Cyber-attacks or other breaches of network or information technology security could have an adverse effect on TDS' business, financial condition or results of operations.
The market price of TDS’ Common Shares is subject to fluctuations due to a variety of factors.
Changes in facts or circumstances, including new or additional information, could require TDS to record charges in excess of amounts accrued 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.
Uncertainty of TDS’ ability to access capital, deterioration in the capital markets, other changes in 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.
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.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

Refer to the disclosure under Market Risk in TDS’ Form 10-K for the year ended December 31, 2014 for additional information, including information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt. There have been no material changes to such information since December 31, 2014. U.S. Cellular borrowed $225 million under the Term Loan in July 2015.

See Note 2 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of TDS’ Long-term debt as of June 30, 2015.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, TDS’ principal executive officer and principal financial officer concluded that TDS' disclosure controls and procedures were effective as of June 30, 2015, at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

Internal controls over financial reporting continue to be updated as necessary to accommodate modifications to our business processes and accounting procedures. As previously disclosed in TDS’ Form 10-K for the year ended December 31, 2014, U.S. Cellular entered into certain arrangements in the latter part of the fourth quarter of 2014 pursuant to which U.S. Cellular now outsources certain support functions for its Billing and Operational Support System (“B/OSS”) to a third-party vendor. In accordance with this change and effective January 1, 2015, U.S. Cellular is placing reliance on certain third-party controls with respect to the B/OSS environment. There have been no other changes in internal controls over financial reporting that have occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, TDS’ internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings.

Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2014. There have been no material changes to such information since December 31, 2014.

Item 1A. Risk Factors.

In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2014, may not be the only risks that could affect TDS. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condition and/or operating results. Subject to the foregoing, TDS has not identified for disclosure any material changes to the risk factors as previously disclosed in TDS’ Annual Report on Form 10-K for the year ended December 31, 2014.

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

On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program for TDS Common Shares. Depending on market conditions, such shares may be repurchased in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share repurchases, private transactions or as otherwise authorized. This authorization does not have an expiration date.

The maximum dollar value of shares that may yet be purchased under the program was $201.2 million as of June 30, 2015. There were no purchases made by or on behalf of TDS, and no open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.

The following is additional information with respect to the Common Share authorization:

The date the program was announced was August 2, 2013 by Form 8-K.
The amount approved was up to $250 million in aggregate purchase price of TDS Common Shares.
The program does not have an expiration date.
The authorization did not expire during the second quarter of 2015.
TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the second quarter of 2015.

Item 5. Other Information.

The following information is being provided to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.

Neither TDS nor U.S. Cellular borrowed or repaid any amounts under their revolving credit facilities in the second quarter of 2015 or through the filing date of this Form 10-Q, and had no borrowings outstanding under their revolving credit facilities as of June 30, 2015 or as of the filing date of this Form 10-Q.

A description of TDS’ revolving credit facility is included in TDS’ Current Report on Form 8-K dated December 17, 2010, as such description is amended by Item 1.01 in TDS’ Current Report on Form 8-K dated July 24, 2014, and is incorporated by reference herein.

A description of U.S. Cellular’s revolving credit facility is included in U.S. Cellular’s Current Report on Form 8-K dated December 17, 2010, as such description is amended by Item 1.01 in U.S. Cellular’s Current Report on Form 8-K dated July 24, 2014, and is incorporated by reference herein.

U.S. Cellular did not borrow any amounts under its term loan facility and did not have any amounts outstanding under this facility in the second quarter of 2015. However, during July 2015, U.S. Cellular borrowed $225 million under this facility.

A description of U.S. Cellular’s term loan facility is included in U.S. Cellular’s Current Report on Form 8-K dated January 21, 2015, as amended July 20, 2015, and is incorporated by reference herein.

Item 6. Exhibits.

Exhibit 3.1— Restated Bylaws of TDS effective March 19, 2015, are hereby incorporated by reference to Exhibit 3.1 to TDS’ Current Report on Form 8-K dated March 19, 2015.

Exhibit 4.1 — Restated Bylaws of TDS are hereby incorporated by reference to Exhibit 3.1 above.

Exhibit 4.2 — Term Loan Credit Agreement dated as of January 21, 2015 between U.S. Cellular and CoBank ACB, including exhibits, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular’s Current Report on Form 8-K dated January 21, 2015.

Exhibit 10.1 — Form of TDS 2011 Long-Term Incentive Plan Stock Option Award Agreement, is hereby incorporated by reference to Exhibit 10.1 to TDS’ Current Report on Form 8-K dated May 1, 2015.

Exhibit 10.2 — Form of TDS 2011 Long-Term Incentive Plan Stock Restricted Stock Unit Award Agreement, is hereby incorporated by reference to Exhibit 10.2 to TDS’ Current Report on Form 8-K dated May 1, 2015.

Exhibit 10.3 — Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Option Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated February 26, 2015.

Exhibit 10.4 — Form of U.S. Cellular 2013 Long-Term Incentive Plan Stock Restricted Stock Unit Award Agreement for the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated February 26, 2015.

Exhibit 11 — Statement regarding computation of per share earnings is included herein as Note 5 — Earnings Per Share in the Notes to Consolidated Financial Statements.

Exhibit 12 — Statement regarding computation of ratio of earnings to fixed charges.

Exhibit 31.1 — Principal executive officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.

Exhibit 31.2 — Principal financial officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.

Exhibit 32.1 — Principal executive officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 32.2 — Principal financial officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 101.INS — XBRL Instance Document

Exhibit 101.SCH — XBRL Taxonomy Extension Schema Document

Exhibit 101.PRE — XBRL Taxonomy Presentation Linkbase Document

Exhibit 101.CAL — XBRL Taxonomy Calculation Linkbase Document

Exhibit 101.LAB — XBRL Taxonomy Label Linkbase Document

Exhibit 101.DEF — XBRL Taxonomy Extension Definition Linkbase Document

The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in TDS’ Form 10-K for the year ended December 31, 2014. Reference is made to TDS’ Form 10-K for the year ended December 31, 2014 for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TELEPHONE AND DATA SYSTEMS, INC.
		(Registrant)

Date:	July 31, 2015		/s/ LeRoy T. Carlson, Jr.
			LeRoy T. Carlson, Jr., President and Chief Executive Officer (principal executive officer)

Date:	July 31, 2015		/s/ Douglas D. Shuma
			Douglas D. Shuma, Senior Vice President - Finance and Chief Accounting Officer (principal financial officer and principal accounting officer)

Date:	July 31, 2015		/s/ Douglas W. Chambers
			Douglas W. Chambers, Vice President and Controller