Attached files

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EX-32.2 - EX-32.2 - TELEPHONE & DATA SYSTEMS INC /DE/exhibit32_2.htm
EX-32.1 - EX-32.1 - TELEPHONE & DATA SYSTEMS INC /DE/exhibit32_1.htm
EX-31.2 - EX-31.2 - TELEPHONE & DATA SYSTEMS INC /DE/exhibit31_2.htm
EX-31.1 - EX-31.1 - TELEPHONE & DATA SYSTEMS INC /DE/exhibit31_1.htm
EX-18 - EX-18 - TELEPHONE & DATA SYSTEMS INC /DE/exhibit18.htm
EX-12 - EX-12 - TELEPHONE & DATA SYSTEMS INC /DE/exhibit12.htm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

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

For the quarterly period ended March 31, 2017

 

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

 

[ ]

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

For the transition period from                                    to                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission file number 001-14157

 

 

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

 

36-2669023

(State or other jurisdiction of incorporation or organization)

 

 

(IRS Employer Identification No.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

(Address of principal executive offices) (Zip code)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yes

No

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

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

[x]

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Large accelerated filer

[x]

 

 

 

 

 

 

 

Accelerated filer

[ ]

Non-accelerated filer

[ ]

(Do not check if a smaller reporting company)

 

Smaller reporting company

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

[ ]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

[ ]

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

[ ]

[x]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

 

Outstanding at March 31, 2017

Common Shares, $0.01 par value

 

 

103,076,101 Shares

Series A Common Shares, $0.01 par value

 

 

7,236,725 Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Telephone and Data Systems, Inc.

 

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2017

 

 

Index

Page No.

 

 

Management Discussion and Analysis of Financial Condition and Results of Operations

1

Executive Overview

1

Terms used by TDS

3

Results of Operations – TDS Consolidated

4

U.S. Cellular Operations

7

TDS Telecom Operations

13

Wireline Operations

15

Cable Operations

18

HMS Operations

20

Liquidity and Capital Resources

22

Consolidated Cash Flow Analysis

26

Consolidated Balance Sheet Analysis

26

Supplemental Information Relating to Non-GAAP Financial Measures

27

Application of Critical Accounting Policies and Estimates

32

Recent Accounting Pronouncements

32

Regulatory Matters

32

Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement

33

 

 

Risk Factors

36

 

 

Quantitative and Qualitative Disclosures About Market Risk

36

 

 

Financial Statements (Unaudited)

37

Consolidated Statement of Operations

37

Consolidated Statement of Comprehensive Income

38

Consolidated Statement of Cash Flows

39

Consolidated Balance Sheet

40

Consolidated Statement of Changes in Equity

42

Notes to Consolidated Financial Statements

44

 

 

Controls and Procedures

54

 

 

Legal Proceedings

54

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

Other Information

55

 

 

Exhibits

56

 

 

Form 10-Q Cross Reference Index

57

 

 

Signatures

58


Telephone and Data Systems, Inc.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Executive Overview

The following discussion and analysis compares Telephone and Data Systems, Inc.’s (“TDS”) financial results for the three months ended March 31, 2017 to the three months ended March 31, 2016.  It should be read in conjunction with TDS’ interim consolidated financial statements and notes included herein, and with the description of TDS’ business, its audited consolidated financial statements and Management's Discussion and Analysis (“MD&A”) 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, 2016.  Calculated amounts and percentages are based on the underlying actual numbers rather than the numbers rounded to millions as presented.

This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects, “plans,” “intends,” “projects” and similar expressions.  These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.

TDS uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A.  A discussion of the reason TDS determines these metrics to be useful and a reconciliation of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-Q Report.

General

TDS is a diversified telecommunications company that provides high-quality communications services to approximately 6 million customers nationwide.  TDS provides wireless services through its 83%-owned subsidiary, United States Cellular Corporation (“U.S. Cellular”).  TDS also provides wireline services, cable services and hosted and managed services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).  TDS’ segments operate almost entirely in the United States.  See Note 10Business Segment Information in the Notes to Consolidated Financial Statements for summary financial information on each business segment.

 

 


TDS Mission and Strategy

TDS’ mission is to provide outstanding communications services to its customers and meet the needs of its shareholders, its people, and its communities.  In pursuing this mission, TDS seeks to profitably grow its businesses, create opportunities for its associates and employees, and build value over the long-term for its shareholders.  Across all of its businesses, TDS is focused on providing exceptional customer experiences through best-in-class services and products and superior customer service.

TDS’ long-term strategy calls for the majority of its capital to be reinvested in its operating businesses to strengthen their competitive positions and financial performance, while also returning value to TDS shareholders through the payment of a regular quarterly cash dividend and share repurchases. 

In 2017, TDS is working to build shareholder value by continuing to execute on its strategies to build strong, competitive businesses providing high-quality, data-focused services and products.  Strategic efforts include:


Terms Used by TDS

All defined terms in this MD&A are used as defined in the Notes to Consolidated Financial Statements, and additional terms are defined below:

  • 4G LTE – fourth generation Long-Term Evolution which is a wireless broadband technology.
  • Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.
  • Alternative Connect America Cost Model (“A-CAM”) a USF support mechanism for rate-of-return carriers, which provides revenue support annually for ten years beginning in 2017.  This support comes with an obligation to build defined broadband speeds to a certain number of locations.
  • Auctions 1000, 1001, and 1002 –  Auction 1000 is an FCC auction of 600 MHz spectrum licenses that started in 2016 and continued into 2017 involving: (1) a “reverse auction” in which broadcast television licensees submit bids to voluntarily relinquish spectrum usage rights in exchange for payments (referred to as Auction 1001); (2) a “repacking” of the broadcast television bands in order to free up certain broadcast spectrum for other uses; and (3) a “forward auction” of licenses for spectrum cleared through this process to be used for wireless communications (referred to as Auction 1002).
  • Broadband Connections – refers to the number of Wireline customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies or the Cable billable number of lines into a building for high-speed data services.
  • Churn Rate – represents the percentage of the connections that disconnect service each month.  These rates represent the average monthly churn rate for each respective period.
  • DOCSIS – Data Over Cable Service Interface Specification is an international telecommunications standard that permits the addition of high-bandwidth data transfer to an existing cable TV system. DOCSIS 3.1 is a system specification that increases data transmission rates.
  • Eligible Telecommunications Carrier (“ETC”) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms.
  • FCC – Federal Communications Commission.
  • Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.
  • IPTV Connections – represents the number of Wireline customers provided video services using IP networking technology.
  • Machine-to-Machine or M2M – technology that involves the transmission of data between networked devices, as well as the performance of actions by devices without human intervention.  U.S. Cellular sells and supports M2M solutions to customers, provides connectivity for M2M solutions via the U.S. Cellular network, and has agreements with device manufacturers and software developers which offer M2M solutions.
  • ManagedIP Connections – refers to the number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.
  • Net Additions – represents the total number of new connections added during the period, net of connections that were terminated during that period.
  • Postpaid Average Billings per Account (“Postpaid ABPA”) – non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid accounts and by the number of months in the period.
  • Postpaid Average Billings per User (“Postpaid ABPU”) – non-GAAP metric is calculated by dividing total postpaid service revenues plus equipment installment plan billings by the average number of postpaid connections and by the number of months in the period.
  • Postpaid Average Revenue per Account (“Postpaid ARPA”) – metric is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.
  • Postpaid Average Revenue per User (“Postpaid ARPU”) – metric is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.
  • Retail Connections – the sum of U.S. Cellular postpaid connections and U.S. Cellular prepaid connections.
  • Universal Service Fund (“USF”) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.
  • U.S. Cellular Connections - individual lines of service associated with each device activated by a customer.  This includes smartphones, feature phones, tablets, modems, and machine-to-machine devices.
  • Video Connections – generally, a home or business receiving video programming counts as one video connection.  In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.
  • Voice Connections – refers to the individual circuits connecting a customer to Wireline’s central office facilities or the Cable billable number of lines into a building for voice services.
  • VoLTE – Voice over Long-Term Evolution is a technology specification that defines the standards and procedures for delivering voice communications and related services over 4G LTE networks.
  • Wireline Residential Revenue per Connection – is calculated by dividing total Wireline residential revenue by the average number of Wireline residential connections and by the number of months in the period.

Results of Operations TDS Consolidated

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

2017

 

2016

 

2017 vs. 2016

(Dollars in millions)

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

U.S. Cellular1

 

$

936 

 

$

969 

 

(3)%

 

TDS Telecom

 

 

299 

 

 

281 

 

6%

 

All other2

 

 

3 

 

 

4 

 

(8)%

 

 

Total operating revenues1

 

 

1,238 

 

 

1,254 

 

(1)%

Operating expenses

 

 

 

 

 

 

 

 

 

U.S. Cellular

 

 

882 

 

 

959 

 

(8)%

 

TDS Telecom

 

 

270 

 

 

264 

 

2%

 

All other2

 

 

4 

 

 

5 

 

(27)%

 

 

Total operating expenses

 

 

1,156 

 

 

1,228 

 

(6)%

Operating income

 

 

 

 

 

 

 

 

 

U.S. Cellular1

 

 

54 

 

 

10 

 

>100%

 

TDS Telecom

 

 

29 

 

 

17 

 

70%

 

All other2

 

 

(1)

 

 

(1)

 

97%

 

 

Total operating income1

 

 

82 

 

 

26 

 

>100%

Investment and other income (expense)

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

 

32 

 

 

35 

 

(8)%

 

Interest and dividend income1

 

 

4 

 

 

3 

 

63%

 

Interest expense

 

 

(42)

 

 

(41)

 

(1)%

 

Other, net

 

 

1 

 

 

 

 

>100%

 

 

Total investment and other income1

 

 

(5)

 

 

(3)

 

(33)%

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

77 

 

 

23 

 

>100%

 

Income tax expense

 

 

34 

 

 

13 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

43 

 

 

10 

 

>100%

 

Less: Net income attributable to

  noncontrolling interests, net of tax

 

 

6 

 

 

2 

 

>100%

Net income attributable to TDS shareholders

 

$

37 

 

$

8 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

96 

 

$

125 

 

(23)%

 

 

 

 

 

 

 

 

 

 

 

 

1

Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017.  All prior period numbers have been recast to conform to this accounting change.  See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details.

 

 

 

 

 

 

 

 

 

 

 

 

2

Consists of corporate and other operations and intercompany eliminations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS’ 1% decrease in operating revenues was due primarily to a decrease in retail service revenues at U.S. Cellular.  Retail service revenues continue to be impacted by industry-wide price competition. 

TDS’ 6% decrease in operating expenses was due primarily to a decrease in Cost of equipment sold, lower advertising and commission expenses, and a gain recognized as a result of a license exchange transaction.

 

Refer to individual segment discussions in this MD&A for additional details on operating revenues and expenses at the segment level.

Equity in earnings of unconsolidated entities

Equity in earnings of unconsolidated entities represents TDS’ share of net income from entities in which it has a noncontrolling interest and that are accounted for by the equity method.  TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $16 million and $19 million to Equity in earnings of unconsolidated entities in 2017 and 2016, respectively.  See Note 7 Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Income tax expense

The effective tax rate on Income before income taxes in 2017 and 2016 was 44.3% and 55.7%, respectively.  The higher rate in 2016 is due primarily to discrete tax adjustments that had a disproportionate impact on the tax rate because of the relatively low pretax income in that quarter. 


Net income attributable to noncontrolling interests, net of tax

 

Three Months Ended

 

March 31,

 

2017

 

2016

(Dollars in millions)

 

 

 

 

 

U.S. Cellular noncontrolling public shareholders’

$

4 

 

$

1 

Noncontrolling shareholders’ or partners’

 

2 

 

 

1 

Net income attributable to noncontrolling interests, net of tax

$

6 

 

$

2 

 

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 U.S. Cellular subsidiaries’ net income (loss). 

 

Three Months Ended

 

Net income and Adjusted EBITDA increased due primarily to improved Operating income levels within each business segment. 

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


 

U.S. CELLULAR OPERATIONS

 

Business Overview

U.S. Cellular owns, operates, and invests in wireless markets throughout the United States.  U.S. Cellular is an 83%-owned subsidiary of TDS.  U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans, and pricing, all provided with a local focus. 

 

OPERATIONS

 

  • Serves customers with approximately 5.0 million connections including 4.5 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections
  • Operates in 23 states
  • Employs approximately 6,200 employees
  • Headquartered in Chicago, Illinois
  • 6,417 cell sites including 4,041 owned towers in service

 

 


Operational Overview

 

 

 

YTD 2017

YTD 2016

 

 

Postpaid Connections

 

 

 

 

 

Gross Additions

146,000

215,000

 

 

 

Net Additions (Losses)

(27,000)

45,000

 

 

 

Churn:

1.29%

1.28%

 

 

 

Handsets

1.08%

1.18%

 

 

 

Connected Devices

2.55%

2.01%

 

 

  

Connections –

end of period

4,455,000

4,454,000

 

 

Prepaid Connections –

end of period

480,000

399,000

 

 

Retail Connections –

end of period

4,935,000

4,853,000

 

 

U.S. Cellular believes the decrease in postpaid net additions is a result of lower gross additions, which were impacted by competitive pressures.  Total postpaid churn remained relatively flat in the first quarter of 2017 when compared to the same period last year.

 

 

Postpaid Revenue

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

Average Revenue Per User (ARPU)

$

45.42 

 

$

48.13 

Average Billings Per User (ABPU)1

$

55.82 

 

$

56.06 

 

 

 

 

 

 

Average Revenue Per Account (ARPA)

$

121.88 

 

$

125.36 

Average Billings Per Account (ABPA)1

$

149.78 

 

$

145.99 

 

 

 

 

 

 

 

1

Postpaid ABPU and Postpaid ABPA are non-GAAP financial measures.  Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of these measures.

 

Postpaid ARPU and Postpaid ARPA decreased in 2017 due primarily to industry-wide price competition and discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal.  These factors were partially offset by the impacts of continued adoption of smartphones and the related increase in service revenues from data usage.

Equipment installment plans increase equipment sales revenue as customers pay for their wireless devices in installments at a total device price that is generally higher than the device price offered to customers in conjunction with alternative plans that are subject to a service contract.  Equipment installment plans also have the impact of reducing service revenues as many equipment installment plans provide for reduced monthly access charges.  In order to show the trends in total service and equipment revenues received, U.S. Cellular has presented Postpaid ABPU and Postpaid ABPA, which are calculated as Postpaid ARPU and Postpaid ARPA plus average monthly equipment installment plan billings per connection and account, respectively.

Equipment installment plan billings increased in 2017 due to increased adoption of equipment installment plans by postpaid customers.  Postpaid ABPU decreased in 2017 as the increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU discussed above.  Postpaid ABPA, however, increased in 2017 as the increase in equipment installment plan billings more than offset the decline in Postpaid ARPA discussed above.  U.S. Cellular expects the adoption and penetration of equipment installment plans to continue to increase given a recent change in its equipment offerings.  Effective in September 2016, all equipment sales to retail customers are made under installment plans.


Financial Overview — U.S. Cellular

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

2017 vs.

 

 

 

 

 

2017

 

2016

 

2016

(Dollars in millions)

 

  

  

  

  

  

  

  

Retail service

 

$

657 

 

$

682 

 

(4)%

Inbound roaming

 

 

27 

 

 

36 

 

(26)%

Other1

 

 

62 

 

 

53 

 

17%

  

Service revenues1

 

 

746 

 

 

771 

 

(3)%

Equipment sales

 

 

190 

 

 

198 

 

(4)%

  

Total operating revenues1

 

 

936 

 

 

969 

 

(3)%

  

  

 

 

 

 

 

 

 

 

 

 

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

 

  

175 

  

  

184 

  

(4)%

Cost of equipment sold

 

 

228 

 

 

256 

 

(11)%

Selling, general and administrative

 

 

339 

 

 

361 

 

(6)%

 

 

 

 

 

 

742 

 

 

801 

 

(7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow1,2

 

 

194 

 

 

168 

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

153 

 

 

153 

 

1%

(Gain) loss on asset disposals, net

 

 

4 

 

 

5 

 

(28)%

(Gain) loss on license sales and exchanges, net

 

 

(17)

 

 

 

 

N/M

  

Total operating expenses

 

 

882 

 

 

959 

 

(8)%

Operating income¹

 

$

54 

 

$

10 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

28 

 

$

9 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA2

 

$

229 

 

$

206 

 

11%

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

61 

 

$

79 

 

(23)%

  

  

  

  

 

  

  

  

  

  

  

  

N/M - Percentage change not meaningful

 

 

 

 

 

 

 

 

 

 

 

 

1

Equipment installment plan interest income is reflected as a component of Service revenues consistent with an accounting policy change effective January 1, 2017.  All prior period numbers have been recast to conform to this accounting change.  See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details.

 

 

 

 

 

 

 

 

 

 

 

 

2

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

 

 

 

Service revenues consist of:

  • Retail Service - Charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data services and products
  • Inbound Roaming - Charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming
  • Other Service – Primarily amounts received from the Federal USF, imputed interest recognized on equipment installment plan contracts and tower rental revenues

 

Equipment revenues consist of:

  • Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributors

 

 

 

Key components of changes in the statement of operations line items were as follows:

Total operating revenues

On January 1, 2017, U.S. Cellular elected to change the classification of interest income on equipment installment plan contracts from Interest and dividend income to Service revenues in the Consolidated Statement of Operations.  All prior period numbers have been recast to conform to this accounting change.  See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional details. 

Service revenues decreased as a result of (i) a decrease in retail service revenues primarily driven by industry-wide price competition and discounts on shared data plans provided to customers on equipment installment plans and those providing their own device at the time of activation or renewal; and (ii) a decrease in inbound roaming revenues driven by lower roaming rates.  Such reductions were partially offset by an increase in the average connections base, continued adoption of smartphones, and an increase in imputed interest income on equipment installment plans.

 

Federal USF revenue remained flat year over year at $23 millionPursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s current Federal USF support was to be phased down at the rate of 20% per year beginning July 1, 2012.  The Phase II Mobility Fund (“MF2”) was not operational as of July 2014 and, therefore, as provided by the Reform Order, the phase down was suspended at 60% of the baseline amount until such time as the FCC had taken steps to establish the MF2.  In February 2017, the FCC adopted an Order concerning MF2 and the resumption of the phase down. See the Regulatory Matters section in this MD&A for a description of the Reform Order and its expected impacts. 

Equipment sales revenues decreased due to an overall reduction in the number of devices sold, along with the related impact on accessories revenues, as well as reductions in device activation fees and post-sale installment revenues reflecting changes in plan offerings.  These impacts were partially offset by an increase in the proportion of new device sales made under equipment installment plans versus subsidy plans and, to a lesser extent, a mix shift from connected devices to smartphones.

 

System operations expenses

System operations expenses decreased in 2017 when compared to 2016 as a result of the following drivers:

Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming decreased $3 million or 8% largely due to lower rates for both data and voice traffic, partially offset by increased data roaming usage.

Customer usage expenses decreased $3 million or 7% driven primarily by decreased circuit costs.

Maintenance, utility and cell site expenses decreased $2 million or 2% mainly driven by decreased tower maintenance and repair costs, partially offset by increased cell site rent and higher support costs for the 4G LTE network.

Cost of equipment sold

The decrease in Cost of equipment sold is mainly due to an overall reduction in devices sold, partially offset by a shift in sales from connected devices to higher cost smartphones.  Cost of equipment sold in 2017 included $168 million related to equipment installment plan sales compared to $160 million in 2016.  Loss on equipment, defined as Equipment sales revenues less Cost of equipment sold, was $38 million and $58 million in 2017 and 2016, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased due primarily to lower advertising expenses as well as lower agent and retail commission expenses driven by fewer activations and renewals.

(Gain) loss on license sales and exchanges, net

A gain of $17 million was recognized in 2017 as a result of a license exchange transaction with a third party.  See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.  


TDS TELECOM OPERATIONS

 

Business Overview

TDS Telecom operates in three reportable segments: Wireline, Cable and HMS. The overall strategy for the Wireline and Cable businesses is to provide the best broadband connection in the market in order to capitalize on data growth and customers’ need for higher speeds and leverage that growth by bundling services with video and voice.  In addition, through its HMS business, TDS Telecom provides a wide range of Information Technology (“IT”) services including colocation, cloud and hosting solutions, managed services, applications management, and sales of IT hardware and related maintenance and professional services.

 

OPERATIONS

  • TDS Telecom operates in 34 states, and through its Wireline and Cable operations provides broadband, video and voice services to approximately 1.2 million connections.
  • Employs approximately 3,300 employees.
  • Wireline operates incumbent local exchange carriers (“ILEC”) and competitive local exchange carriers (“CLEC”) in 27 states.
  • Cable operates primarily in Oregon, Utah, Colorado, New Mexico and Texas.
  • HMS operates a total of eight data centers.  It owns two data centers in Iowa, one each in Minnesota, Wisconsin, Colorado and Oregon and it leases two data centers in Arizona.

 

Financial Overview — TDS Telecom

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2017 vs.

 

 

2017

 

2016

 

2016

(Dollars in millions)

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

Wireline

 

$

179 

 

$

173 

 

3%

 

Cable

 

 

49 

 

 

45 

 

10%

 

HMS

 

 

71 

 

 

64 

 

11%

 

Intra-company elimination

 

 

(1)

 

 

(1)

 

(2)%

 

 

TDS Telecom operating revenues

 

 

299 

 

 

281 

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Wireline

 

 

150 

 

 

153 

 

(2)%

 

Cable

 

 

47 

 

 

44 

 

6%

 

HMS

 

 

74 

 

 

68 

 

8%

 

Intra-company elimination

 

 

(1)

 

 

(1)

 

(2)%

 

 

TDS Telecom operating expenses

 

 

270 

 

 

264 

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom operating income

 

$

29 

 

$

17 

 

70%

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

18 

 

$

10 

 

70%

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA1

 

$

86 

 

$

76 

 

13%

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

33 

 

$

42 

 

(22)%

 

 

 

 

 

 

 

 

 

 

 

 

Numbers may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

1

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

 

 

Three Months Ended

Operating revenues grew 6% in 2017 due to increased support revenue provided through the A-CAM program, IPTV and Cable broadband connection growth, price increases for video and broadband services and increases in HMS equipment revenues. 

 

Total operating expenses

Operating expenses increased in 2017 due primarily to increased HMS equipment cost of goods sold and higher video programming costs.


WIRELINE OPERATIONS

 

Business Overview

TDS Telecom’s Wireline business provides broadband, video and voice services.  These services are provided to residential, commercial, and wholesale customers in a mix of rural, small town and suburban markets, with the largest concentration of its customers in the Upper Midwest and the Southeast.  TDS Telecom’s strategy is to offer its residential customers broadband, video, and voice services through value-added bundling.  In its commercial business, TDS Telecom’s focus is on small- to medium-sized businesses and its sales efforts emphasize advanced IP-based voice and data services.

Operational Overview

Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 54% choosing speeds of 10 Mbps or greater and 20% choosing speeds of 50 Mbps or greater. 

Increases in broadband speeds, IPTV connection growth, and price increases drove a 4% increase in average revenue per connection.

 

 

Total residential connections were relatively flat as growth in IPTV connections was offset by declines in voice and broadband connections.

 

Total commercial connections decreased by 4% as declines in voice and broadband connections outpaced the growth in managedIP connections.

 

Financial Overview Wireline

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31,

 

 

2017

 

2016

 

2017 vs. 2016

(Dollars in millions)

 

 

 

 

 

 

 

 

Residential

 

$

79 

 

$

76 

 

4%

Commercial

 

 

51 

 

 

54 

 

(6)%

Wholesale

 

 

49 

 

 

43 

 

15%

 

Service revenues

 

 

179 

 

 

173 

 

4%

Equipment and product sales

 

 

 

 

 

 

 

(37)%

 

Total operating revenues

 

 

179 

 

 

173 

 

3%

 

 

 

 

 

 

 

 

 

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

 

 

63 

 

 

62 

 

2%

Cost of equipment and products

 

 

1 

 

 

1 

 

6%

Selling, general and administrative

 

 

48 

 

 

48 

 

(2)%

 

 

 

 

 

 

 

111 

 

 

111 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow1

 

 

68 

 

 

62 

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

39 

 

 

42 

 

(6)%

 

Total operating expenses

 

 

150 

 

 

153 

 

(2)%

Operating income

 

$

29 

 

$

20 

 

41%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

30 

 

$

22 

 

41%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA1

 

$

69 

 

$

63 

 

10%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

17 

 

$

27 

 

(37)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Numbers may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

 


 

Residential revenues consist of:

 

  • Broadband services, including fiber-based and other digital, premium and enhanced data services
  • IPTV and satellite video
  • Voice services

Commercial revenues consist of:

 

  • TDS managedIP voice and data services
  • High-speed and dedicated business internet services
  • Voice services

Wholesale revenues consist of:

 

  • Network access services to interexchange carriers for the origination and termination of interstate and intrastate long distance phone calls on TDS Telecom’s network and special access services to carriers and others
  • State and Federal USF support

 

Key components of changes in the statement of operations items were as follows:

 

Total operating revenues

Residential revenues increased in 2017 as growth in broadband speeds and IPTV connections and price increases for broadband and video services more than offset the decline in legacy voice services. IPTV average connections grew 20%, offset by a 3% decline in average voice connections.

Commercial revenues decreased in 2017 due to declining legacy voice and data connections.

Wholesale revenues increased in 2017 due primarily to increased support received from the A-CAM program.

Cost of services

Cost of services increased in 2017 due to increased charges related to growth in IPTV, offset by reduced costs of provisioning circuits, purchasing unbundled network elements and providing long-distance services.

Selling, general and administrative expenses

Selling, general and administrative expenses were relatively flat in 2017 compared to 2016.

Depreciation, amortization and accretion

Depreciation, amortization and accretion decreased in 2017 as certain assets became fully depreciated.


CABLE OPERATIONS

 

Business Overview

TDS Telecom’s cable strategy is to expand its broadband services and leverage that growth by bundling with video and voice services.  TDS Telecom seeks to be the leading provider of broadband services in its targeted markets by leveraging its core competencies in network management and customer focus.

Operational Overview

Cable connections grew 4% over 2016 with increases in broadband and voice exceeding declines in video.

 

Financial Overview Cable

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31,

 

 

2017

 

2016

 

2017 vs. 2016

(Dollars in millions)

 

 

 

 

 

 

 

 

Residential

 

$

41 

 

$

35 

 

15%

Commercial

 

 

9 

 

 

10 

 

(8)%

 

Total operating revenues

 

 

49 

 

 

45 

 

10%

 

 

 

 

 

 

 

 

 

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

 

 

24 

 

 

22 

 

8%

Selling, general and administrative

 

 

13 

 

 

12 

 

3%

 

 

 

 

 

 

 

36 

 

 

34 

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow1

 

 

13 

 

 

11 

 

23%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

10 

 

 

9 

 

10%

(Gain) loss on asset disposals, net

 

 

 

 

 

1 

 

(23)%

 

Total operating expenses

 

 

47 

 

 

44 

 

6%

Operating income

 

$

2 

 

$

1 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

2 

 

$

 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA1

 

$

13 

 

$

10 

 

23%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

9 

 

$

13 

 

(30)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Numbers may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

 

 

Residential and Commercial revenues consist of:

 

  • Broadband services, including high-speed internet, security and support services
  • Video services, including premium programming in HD, multi-room, and TV Everywhere offerings
  • Voice services

 

 

Key components of changes in the statement of operations items were as follows:

Commentary

Residential revenues increased in 2017 due primarily to growth in broadband connections and price increases.  A change in classification of certain bulk broadband and video connections increased residential revenues and reduced commercial revenues by $2 million in 2017.  Cost of services increased in 2017 due primarily to increases in programming fees, employee and maintenance costs.  Selling, general and administrative expenses increased in 2017 due to increased IT-related expense offset by lower property taxes.


HMS OPERATIONS

Business Overview

Under TDS Telecom’s OneNeck IT Solutions brand, TDS Telecom offers a full suite of IT solutions ranging from equipment resale to full management and hosting of a customer’s IT infrastructure and applications.  The goal of HMS operations is to create, deliver, and support a platform of IT products and services tailored for mid-market business customers.

Financial Overview HMS

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31,

 

 

2017

 

2016

 

2017 vs. 2016

(Dollars in millions)

 

 

 

 

 

 

 

 

Service revenues

 

$

29 

 

$

29 

 

(1)%

Equipment and product sales

 

 

43 

 

 

35 

 

21%

 

Total operating revenues

 

 

71 

 

 

64 

 

11%

 

 

 

 

 

 

 

 

 

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

 

 

20 

 

 

21 

 

(3)%

Cost of equipment and products

 

 

36 

 

 

29 

 

21%

Selling, general and administrative

 

 

11 

 

 

11 

 

1%

 

 

 

 

 

 

 

67 

 

 

61 

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow1

 

 

4 

 

 

3 

 

42%

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

7 

 

 

7 

 

(6)%

 

Total operating expenses

 

 

74 

 

 

68 

 

8%

Operating loss

 

$

(2)

 

$

(4)

 

43%

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(3)

 

$

(5)

 

37%

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA1

 

$

5 

 

$

3 

 

41%

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

6 

 

$

2 

 

>100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Numbers may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

1

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

 

 

Service revenues consist of:

 

  • Cloud and hosting solutions
  • Managed services
  • Enterprise Resource Planning (“ERP”) application management
  • Professional services
  • Colocation services
  • IT hardware maintenance services

Equipment revenues consist of:

  • IT hardware sales

 

 

Key components of changes in the statement of operations items were as follows:

Commentary

Service revenues were unchanged in 2017 due to the increase in professional service and installation revenues offset by a 3% decline in recurring hosting revenues.  Equipment and product sales revenues from sales of IT infrastructure hardware solutions increased in 2017. There was a corresponding increase in Cost of equipment and products.  Cost of services decreased in 2017 due to reduced employee expenses and maintenance and support costs.  Selling, general and administrative expenses were relatively flat in 2017 compared to 2016.


Liquidity and Capital Resources

Sources of Liquidity

TDS and its subsidiaries operate capital-intensive businesses.  Historically, TDS has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes.  In the past, TDS’ existing cash and investment balances, funds available under its revolving credit facilities, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating, investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions.  There is no assurance that this will be the case in the future.  See Market Risk for additional information regarding maturities of long-term debt.

Although TDS currently has a significant cash balance, in certain recent periods, TDS has incurred negative free cash flow (defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment) and this will continue in the future if operating results do not improve or capital expenditures are not reduced.  TDS currently expects to have negative free cash flow in 2017.  However, TDS believes that existing cash and investment balances, funds available under its revolving credit facilities, and expected cash flows from operating and investing activities provide liquidity for TDS to meet its normal day-to-day operating needs and debt service requirements for the coming year. 

TDS may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of cable, wireless or wireline telecommunications services, IT services or other businesses, spectrum license or system acquisitions, system development and network capacity expansion, debt service requirements, the repurchase of shares, the payment of dividends, or making additional investments.  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, to explore additional sources of liquidity through the securitization of equipment installment plan receivables, or to obtain other forms of financing in order to fund potential expenditures.  TDS’ liquidity would be adversely affected if, among other things, TDS is unable to obtain short or long-term financing on acceptable terms, TDS makes significant spectrum license purchases, TDS makes significant business acquisitions, the LA Partnership discontinues or reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments decline.  In addition, although sales of assets or businesses by TDS have been an important source of liquidity in prior periods, TDS does not expect a similar level of such sales in the future, which will reduce a source of liquidity.    

TDS’ credit rating has been sub-investment grade since 2014.  There can be no assurance that sufficient funds will continue to be available to TDS or its subsidiaries on terms or at prices acceptable to TDS.  Insufficient cash flows from operating activities, changes in its credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of TDS or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends.  TDS cannot provide assurance that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur.  Any of the foregoing would have an adverse impact on TDS’ businesses, financial condition or results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash and money market investments.  The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal.  Cash held by U.S. Cellular is for its operational needs and acquisition, capital expenditure and business development programs.  TDS does not have direct access to U.S. Cellular cash unless U.S. Cellular pays a dividend on its common stock.  U.S. Cellular has no current intention to pay a dividend to its shareholders.

At March 31, 2017, TDS’ consolidated cash and cash equivalents totaled $896 million compared to $900 million at December 31, 2016.  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

TDS and U.S. Cellular have revolving credit facilities available for general corporate purposes, including spectrum purchases and capital expenditures.  These credit facilities mature in June 2021. 

TDS and U.S. Cellular’s unused capacity under their revolving credit facilities was $399 million and $298 million, respectively, as of March 31, 2017.  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 as of that date.

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

Long-term debt payments due for the remainder of 2017 and the next four years represent less than 3% of TDS’ total long-term debt obligation as of March 31, 2017.

Capital Expenditures

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which include the effects of accruals and capitalized interest, in 2017 and 2016 were as follows:

U.S. Cellular’s capital expenditures for 2017 are expected to be approximately $500 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;
  • Deployment of VoLTE technology in certain markets;
  • Expand and enhance the retail store network; and
  • Develop and enhance office systems.

TDS Telecom’s capital expenditures for 2017 are expected to be approximately $225 million.  These expenditures are expected to be for the following general purposes:

  • Maintain and enhance existing infrastructure at Wireline, Cable and HMS;
  • Upgrade broadband capacity and speeds; and
  • Support success-based spending to sustain IPTV, Cable and HMS growth.

 

TDS plans to finance its capital expenditures program for 2017 using primarily Cash flows from operating activities, existing cash balances, borrowings under its revolving credit agreements and/or other long-term debt.

Acquisitions, Divestitures and Exchanges

TDS may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum and other possible businesses.  In general, TDS may not disclose such transactions until there is a definitive agreement.  TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital.  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.  TDS also may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success. 

In July 2016, the FCC announced U.S. Cellular as a qualified bidder in the FCC’s forward auction of 600 MHz spectrum licenses, referred to as Auction 1002.  In April 2017, the FCC announced by way of public notice that U.S. Cellular was the winning bidder for 188 licenses for an aggregate purchase price of $329 million.   Prior to commencement of the forward auction, U.S. Cellular made an upfront payment to the FCC of $143 million in June 2016 and is now required to pay $186 million, the remaining amount due for the purchase of the licenses, to the FCC in May 2017.  U.S. Cellular expects to make such payment using cash on hand and expects to receive the licenses at the conclusion of the FCC’s standard post-auction licensing process.

In February 2016, U.S. Cellular entered into an agreement with a third party to exchange certain 700 MHz licenses for certain AWS and PCS licenses and $28 million of cash.  This license exchange was accomplished in two closings.  The first closing occurred in the second quarter of 2016, at which time U.S. Cellular received $13 million of cash and recorded a gain of $9 million.  The second closing occurred in the first quarter of 2017, at which time U.S. Cellular received $15 million of cash and recorded a gain of $17 million.


Variable Interest Entities

TDS consolidates certain entities because they are “variable interest entities” under GAAP.  See Note 8Variable 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.

In the first quarter of 2017, U.S. Cellular formed USCC EIP LLC, a special purpose entity (“SPE”), to facilitate the potential financing of its equipment installment plan receivable balances in the future.  During 2017, net equipment installment plan receivables totaling $679 million were transferred to the newly formed servicing SPE from affiliated entities.  On a consolidated basis, the transfer of receivables into this SPE did not have a material impact to the consolidated financial statements of TDS. 

Common Share Repurchase Programs

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.  Share repurchases made under these programs in 2017 and 2016 were as follows:

 

Number of

 

Average Cost

 

Dollar Amount