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TDS Telephone and Data Systems Inc

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Quarterly Report (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, 2017

[ ]

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

For the transition period from to

Commission file number 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2669023

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

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

(Address of principal executive offices) (Zip code)

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

Yes

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subj ect 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 comp any” 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 June 30, 2017

Common Shares, $0.01 par value

103,371,620 Shares

Series A Common Shares, $0.01 par value

7,244,282 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Period Ended June 30, 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 B alance Sheet Analysis	27
Supplemental Information Relating to Non-GAAP Financial Measures	28
Application of Critical Accounting Policies and Estimates	33
Recent Accounting Pronouncements	33
Regulatory Matters	34
Private Securit ies Litigation Reform Act of 199 5 Safe Harbor Cautionary Statement	35

Risk Factors	37

Quantitative and Qualitative Disclosures About Market Risk	37

Financial Statements (Unaudited)	38
Consolidated Statement of Operations	38
Consolidated Statement of Comprehensive Income	39
Consolidated Statement of Cash Flows	40
Consolidated Balance Sheet	41
Consolidated Statement of Changes in Equity	43
Notes to Consolidated Financial Statements	45

Controls and Procedures	57

Legal Proceedings	57

Unregistered Sales of Equity Securities and Use of Proceeds	57

Other Information	58

Exhibits	59

Form 10-Q Cross Reference Index	60

Signatures	61

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 and six months ended June 30, 2017 , to the three and six months ended June 30, 2016 . It should be read in conjunction with TDS’ interim consolidated financial statements an d notes included herein , and with the description of TDS’ busines s, 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 . Certain numbers included herein are rounded to millions for ease of presentation; however, calculated amounts and percentages are determined using the unrounded numbers .

This report contains statements that are not based on his torical 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 Sec urities 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 i s 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 Unit ed States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section w ithin the MD&A of this Form 10-Q Report.

General

TDS is a diversified telecommunications company that provides high-quality commu nications services to approximately 6 million connections nationwide. TDS provides wireless services through its 83% -owned subsidiary, United States Cellular Corporation (U.S. Cellular). TDS also provide s wireline services, cable services and hosted and managed services (HMS), through its wholly-owned subsidiary, TDS T elecommunications Corporation ( TDS Telecom ). TDS’ segments operate almost entirely in the United States. See Note 10 — Business 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 outstand ing 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 v alue 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, compet itive businesses providing high-quality, data-focused services and products. Strategic efforts include:

U.S. Cellular continues to devote efforts to enhance its network capabilities. During the second quarter of 2017, U.S. Cellular commercially deployed VoLTE technology for the first time in one key market and will continue to build out VoLTE services over the next few years. The next commercial launch is expected to occur in several additional operating markets in early 2018. VoLTE technology allows c ustomers to utilize a 4G LTE network for both voice and data services, and offers enhanced services such as high definition voice, video calling and simultaneous voice and data session s. In addition, the deployment of VoLTE technology expands U.S. Cellula r’s ability to offer roaming services to other carriers.
U.S. Cellular continues to enhance its spectrum position and monetize non-strategic assets by participating in auctions and entering into agreements with third parties. 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 in the forward auction of 600 MHz spectrum licenses, referred to as Auction 1002. U.S. Cellular made an upfront pa yment of $143 million to the FCC in June 2016 and paid the remaining balance of $186 million and was granted these licenses during the second quarter of 2017. In addition, U.S. Cellular closed on certain license exchange agreement s in the six months ended June 30, 2017 , and received $15 million of cash and recognized gains of $19 million. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Stateme nts for additio nal information related to these transactions .
U.S. Cellular is focused on expanding its solutions available to business and government custo mers, including a growing suite of connected machine-to-machine solutions and software applications across various categories. U.S. Cellular will continue to enhance its advanced wireless services and connected solutions for consumer, business and government customers.

TDS Telecom’s Wireline business continues to focus on driving growth in its IPTV, broadband, and managedIP services by leveraging its network investments in fiber and copper bonding. With support from the FCC’s A-CAM program, Wireline will deploy higher speed broadband services to more rural areas over the next ten years.
TDS Telecom’s Cable business has continued to make network capacity investments and offer more advanced services in its markets in line with its strategy to i ncrease connections and grow broadband penetration.
TDS Telecom’s HMS business is focused on growing recurring service revenues through increased sales of IT solutions including hosted and managed services, colocation services, and cloud computing services .

Terms Used by TDS

The following is a list of definitions of certain industry terms that are used throughout this document:

4G LTE – fourth generation Long-Term Evolution which is a wireless broadband technology.
Account – represents an individual or bu siness financially responsible for one or multiple associated connections. A n 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 mechan ism for rate-o f-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 a uction 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 (ref erred 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 in to 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.
EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document.
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-Machin e 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 solutio ns 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.
OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document.
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 a verage 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 n umber 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 telecommunic ations services in the United States.
U.S. Cellular Connections - individual line s 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 — T DS Consolidated

			Three Months Ended					Six Months Ended
			June 30,					June 30,
			2017		2016		2017 vs. 2016	2017		2016		2017 vs. 2016
(Dollars in millions)
Operating revenues
	U.S. Cellular 1		$	963	$	992	(3)%	$	1,899	$	1,962	(3)%
	TDS Telecom			281		300	(6)%		580		581	-
	All other 2			3		3	-		6		7	(4)%
		Total operating revenues 1		1,247		1,295	(4)%		2,485		2,550	(3)%
Operating expenses
	U.S. Cellular			958		962	(1)%		1,840		1,921	(4)%
	TDS Telecom			257		275	(7)%		527		540	(2)%
	All other 2			4		5	19%		8		8	(3)%
		Total operating expenses		1,219		1,242	(2)%		2,375		2,469	(4)%
Operating income
	U.S. Cellular 1			5		30	(82)%		59		41	45%
	TDS Telecom			25		24	1%		53		41	29%
	All other 2			(2)		(1)	>(100)%		(2)		(1)	(1)%
		Total operating income 1		28		53	(47)%		110		81	38%
Investment and other income (expense)
	Equity in earnings of unconsolidated entities			33		36	(9)%		65		72	(9)%
	Interest and dividend income 1			4		3	15%		8		5	36%
	Interest expense			(43)		(43)	-		(85)		(85)	(1)%
	Other, net			–		1	>100%		1		–	>100%
		Total investment and other income (expense) 1		(6)		(3)	(78)%		(11)		(8)	(53)%

Income before income taxes				22		50	(55)%		99		73	36%
	Income tax expense			10		18	(45)%		44		31	43%

Net income				12		32	(62)%		55		42	31%
	Less: Net income attributable to noncontrolling interests, net of tax			2		4	(49)%		8		6	24%
Net income attributable to TDS shareholders			$	10	$	28	(63)%	$	47	$	36	32%

Adjusted OIBDA (Non-GAAP) 1,3			$	243	$	260	(6)%	$	523	$	506	4%
Adjusted E BITDA (Non-GAAP) 3			$	280	$	300	(6)%	$	597	$	583	3%
Capital ex penditures			$	134	$	142	(5)%	$	230	$	267	(14)%

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.

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



TDS’ 4% decrease in operating revenues for the three months ended June 30, 2017 was due primarily to decreases in retail service revenues at U.S. Cellular and equipment and product sales revenues at HMS. TDS’ 3% decrease in operating revenues for the six months ended June 30, 2017 , was due primarily to a decrease in retail service revenues at U.S. Cellular. Retail service revenues continue to be im pacted by industry-wide price competition.	TDS’ 2% and 4% decrease in operating expenses for the three and six months ended June 30, 2017 , respectively, was due pri marily to a decrease in Cost of equipment sold, advertising and commission expenses.

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 Ang eles SMSA Limited Partnershi p ( LA Partnership) contributed $ 17 million and $ 20 million in the three months ended June 30, 2017 and 2016 , respectively, and $ 33 million and $ 40 million for the six months ended June 30, 2017 and 2016 , respectively, to Equit y in earnings of unconsolidated entities. See Note 7 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

Income tax exp ense

TDS’ effective tax rate on Income before income taxes for the three and six months ended June 30, 2017 , was 45.0% and 44.4%, respectively, and for the three and six months ended June 30, 2016 , was 36.3% and 42.3%, respectively. Due to difficulty in reliably projecting an annual tax rate, TDS calculated income taxes for the six months ended June 30, 2017 , based on an estim ated year-to-date tax rate.

The lower effective tax rate for the three months and six months ended June 30, 2016 , resulted from a decrease in unrecognized tax benefits due to the expiration of statutes of limitat ion in certain states in the prior year.

Net income attributable to noncontrolling interests, net of tax

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
(Dollars in millions)
U.S. Cellular noncontrolling public shareholders’	$	2	$	5	$	6	$	6
Noncontrolling shareholders’ or partners’		–		(1)		2		–
Net income attributable to noncontrolling interests, net of tax	$	2	$	4	$	8	$	6

Net income attributable to noncontrolling interests, net of tax includes the noncontrolling public sh areholders’ 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 decreased due primarily to declines in operating income levels at U.S. Cellular, which is driven by lower retail service revenues, partially offset by cost saving initiatives and improved loss on equipment.

Six Months Ended

Net income and Adjusted EBITDA increased due primarily to cost savings initiatives and improved loss on equipment outpacing overall declines in retail service revenues at U.S. Cellular.

*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 compr ised 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 a pproximately 6,100 employees
Headquartered in Chicago, Illinois
6,421 cell sites including 4,044 owned towers in service

Operational Overview


				YTD 2017	YTD 2016
	Postpaid Connections
		Gross Additions :		320,000	412,000
			Handsets	218,000	249,000
			Connected Devices	102,000	163,000
		Net Additions (Losses):		(4,000)	81,000
			Handsets	(9,000)	(17,000)
			Connected Devices	5,000	98,000
		Churn:		1.21%	1.24%
			Handsets	0.99%	1.14%
			Connected Devices	2.45%	1.92%
		Connections – end of period		4,478,000	4,490,000
	Prepaid connections – end of period			484,000	413,000
	Retail connections – end of period			4,962,000	4,903,000
The decrease in postpaid net additions for the six months ended June 30, 2017, when compared to the same period last year, was a result of lower handset s and tablet gross additions, partially offset by a decline in postpaid handsets churn due to improvements in both v oluntary and involuntary churn.

Postpaid Revenue

		Three Months Ended					Six Months Ended
		June 30,					June 30,
		2017		2016		2017		2016
Average Revenue Per User (ARPU)		$	44.60	$	47.37	$	45.00	$	47.76
Average Billings Per User (ABPU) 1		$	55.19	$	56.09	$	55.49	$	56.08

Average Revenue Per Account (ARPA)		$	119.73	$	124.91	$	120.46	$	125.13
Average Billings Per Account (ABPA) 1		$	148.15	$	147.90	$	148.54	$	146.95

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 for the three and six months ended June 30, 2017, due primarily to industry-wide price competition resulting in overall price reductions on plan offerings.

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 al ternative plans that are subject to a service contract. Equipment installment plans also have the impact of reducing service revenues as certain 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 for the three and six months ended June 30, 2017, due to increased adoption of equipment installment plans by postpaid customers. Postpaid ABPU decreased for the three and six months ended June 30, 2017, as t he increase in equipment installment plan billings was more than offset by the decline in Postpaid ARPU discussed above. Postpaid ABPA, however, increased slightly for the three months ended June 30, 2017, and to a greater extent for the six months ended June 30, 2017, as the increase in equipment installment plan billings more than offset the decline in Postpaid ARPA discussed above. U.S. Cellular expects the penetration of equipment installment plans to continue to increase over time due to the fact tha t, effective in September 2016, all equipment sales to retail customers are made under installment plans.

Financial Overview — U.S. Cellular

		Three Months Ended					Six Months Ended
		June 30,					June 30,
						2017 vs.					2017 vs.
		2017		2016		2016	2017		2016			2016
(Dollars in millions)
Retail service		$	647	$	680	(5)%	$	1,304	$	1,361		(4)%
Inbound roaming			31		38	(18)%		58		74		(22)%
Other 1			62		56	9%		124		110		13%
	Service revenues 1		740		774	(4)%		1,486		1,545		(4)%
Equipment sales			223		218	2%		413		417		(1)%
	Total operating revenues 1		963		992	(3)%		1,899		1,962		(3)%

System operations (excluding Depreciation, amortization and accretion reported below)			189		193	(2)%		364		376		(3)%
Cost of equ ipment sold			260		262	(1)%		488		518		(6)%
Selling, general and administrative			351		357	(2)%		691		719		(4)%
Depreciation, amortization and accretion			155		154	-		307		307		-
(Gain) loss on asset disposals, net			5		5	6%		9		10		(12)%
(Gain) loss on license sales and exchanges, net			(2)		(9)	81%		(19)		(9)		>(100)%
	Total operating expenses		958		962	(1)%		1,840		1,921		(4)%

Operating income¹		$	5	$	30	(82)%	$	59	$	41		45%

Net income		$	12	$	27	(57)%	$	40	$	37		8%
Adjusted OIBDA (Non-GAAP) 1,2		$	163	$	180	(9)%	$	356	$	349		2%
Adjusted EBI TDA (Non-GAAP) 2		$	198	$	218	(9)%	$	426	$	424		1%
Capital expenditures		$	84	$	93	(9)%	$	145	$	172		(16)%

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

S ervice 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 reven ues

Equipment revenues consist of:

Sales of wireless devices and related accessories to new and existing customers, agent s, 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 pri or 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 for the three and six months ended June 30, 2017, as a result of (i) a decrease in retail service revenues primarily driven by industry-wide price competition resulting in overall price reductions on plan offerings ; and (ii) a decrease in inbound roaming reve nues primarily driven by lower roaming rates. Such reductions were partially offset by an increase in imputed interest income due to an increase in the total number of active equipment installment plans.

Federal USF revenue remained flat at $23 million and $46 million for the three and six months ended June 30, 2017, respectively, when compared to the same periods last year. See the Regulatory Matters section in this MD&A for a description of the FCC’s Reform Order (Reform Order) and its expected impact s on U.S. Cellular’s current Federal USF support.

Equipment sales revenues increased for the three months ended June 30, 2017, when compared to the same period last year, due to a mix shift from connected devices to smartphones and an increase in the proportion of new device sales made under equipment installment plans versus subsidy plans. These impacts were partially offset by a reduction in guarantee liability amortization for equipment installment contracts as a result of changes in plan o fferings and a reduction in device activation fees.

Equipment sales revenues decreased for the six months ended June 30, 2017, when compared to the same period last year, as a result of an overall reduction in the number of devices sold, along with the re lated impact on accessories revenues, as well as reductions in device activation fees and guarantee liability amortization for equipment installment contracts as a result of changes in plan offerings. These impacts were partially offset by an increase in the proportion of new device sales made under equipment installment plans and, to a lesser extent, a mix shift from connected devices to smartphones.

System operations expenses

System operations expenses decreased for the six months ended June 30, 2017 , when compared to the same period last year, as a result of (i) a decrease in roaming expenses driven primarily by lower rates for both data and voice traffic, partially offset by increased data roaming usage; and (ii) a decrease in customer usage expense s primarily driven by decreased circuit costs.

Cost of equipment sold

The decrease in Cost of equipment sold for the six months ended June 30, 2017, when compared to the same period last year, was mainly due to a reduction in the number of devices sold, partially offset by a shift in sales from connected devices to higher cost smartphones. Cost of equipment sold included $200 million and $174 million related to equipment installment plan sales for the three months ended June 30, 2017 and 2 016, respectively, and $368 million and $334 million for the six months ended June 30, 2017 and 2016, respectively. Loss on equipment, defined as Equipment sales revenues less Cost of equipment sold, was $37 million and $44 million for the three months en ded June 30, 2017 and 2016, respectively, and $75 million and $101 million for the six months ended June 30, 2017 and 2016, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased for the six months ended June 30, 2017, due to lower advertising expenses, lower agent commission expenses driven by fewer activations and renewals, lower phone program expenses and the aggregate impact of modest reductions in numerous other general and administrative categ ories.

(Gain) loss on license sales and exchanges , net

Net gains in 2017 and 2016 were due to gains recognized on license exchange transactions with third parties. 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 W ireline and C able 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, appl ications 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 serv ic e s 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 p rimarily 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					Six Months Ended
			June 30,					June 30,
							2017 vs.					2017 vs.
			2017		2016		2016	2017		2016		2016
(Dollars in millions)
Operating revenues
	Wireline		$	181	$	175	3%	$	360	$	348	3%
	Cable			51		45	12%		100		90	11%
	HMS			51		80	(37)%		122		144	(15)%
	Intra-company elimination			(1)		(1)	12%		(2)		(2)	5%
		TDS Telecom operating revenues		281		300	(6)%		580		581	-

Operating expenses
	Wireline			152		151	1%		302		304	-
	Cable			48		46	5%		95		90	6%
	HMS			58		80	(28)%		131		148	(12)%
	Intra-company elimination			(1)		(1)	12%		(2)		(2)	5%
		TDS Telecom operating expenses		257		275	(7)%		527		540	(2)%

TDS Telecom operating income			$	25	$	24	1%	$	53	$	41	29%

Net income			$	15	$	15	5%	$	33	$	25	32%
Adjusted OIBDA (Non-GAAP) 1			$	80	$	79	2%	$	166	$	155	7%
Adjusted E BITDA (Non-GAAP) 1			$	82	$	80	3%	$	168	$	156	8%
Capital ex penditures			$	49	$	46	6%	$	81	$	88	(8)%

Numbers may not foot due to rounding.

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

Three and Six Months Ended

Operating revenues decreased for the three and six months ended June 30, 2017, due to lower HMS equipment and product sales revenues offset by higher Wireline support revenue provided through the A-CAM program, IPTV and Cable broadband connection growth, and price increases for video and broadband services.

To tal operating expenses

Operating expenses de creased for the three and six months ended June 30, 2017, due primarily to lower HMS equipment cost of goods sold offset by higher Wireline and Cable video programming costs.

Capital expenditures

C apital spending will increase throughout the year to support A-CAM build-outs and is expected to be approximately $225 million for 2017.

WIRELINE OPERATIONS

Business Overview

TDS Telecom’s W ireline 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 it s customers in the Uppe r Midwest and the Southeast. TDS Telecom’s strategy is to offer its residential customers broadband, video, and voice services throu gh value-added bundling. In its commercial business, TDS Telecom’s focus is on small - to medium - siz ed business es and its sales efforts emphasize advanced IP-based data and voice services.

Operational Overview


Residential broadband customers are increasingly choosing higher speeds in ILEC markets with 55% choosing speeds of 10 Mbps or greater and 22% choosing speeds of 50 Mbps or greater.		Wireline residential revenue per connection increased for the three and six months ended June 30, 2017, due primarily to higher broadband speeds, IPTV connection growth, and price increases.

Total residential connections decreased by 2% as decline s in voice and broadband connections outpaced the growth in IPTV connections.

Total commercial connections decreased by 4% due primarily to an 8% decrease in voice connections.

Financial Overview — Wireline

			Three Months Ended					Six Months Ended
			June 30,					June 30,
			2017		2016		2017 vs. 2016	2017		2016		2017 vs. 2016
(Dollars in millions)
Residential			$	81	$	77	5%	$	160	$	153	4%
Commercial				50		53	(6)%		101		107	(6)%
Wholesale				49		44	10%		98		87	12%
	Service r evenues			180		175	3%		359		347	3%
Equipment and product sales				–		–	(36)%		1		1	(37)%
	Total ope rating revenues			181		175	3%		360		348	3%

Cost of services (excluding Depreciation, amortization and accretion reported below)				65		64	3%		129		126	2%
Cost of equipment and products				1		–	22%		1		1	13%
Selling, general and administrative				48		49	(2)%		96		98	(2)%
Depreciation, amortization and accretion				37		37	1%		76		78	(3)%
(Gain) loss on asset disposals, net				–		1	(46)%		1		1	(40)%
	Total operating expenses			152		151	1%		302		304	-

Operating income			$	29	$	25	17%	$	57	$	45	28%

Income before income taxes			$	30	$	25	18%	$	60	$	46	29%
Adjusted O IBDA (Non-GAAP) 1			$	66	$	62	7%	$	134	$	124	8%
Adjusted EBITDA (Non-GAAP) 1			$	67	$	63	8%	$	137	$	125	9%
Capital ex penditures			$	33	$	27	18%	$	50	$	55	(9)%

Numbers may not foot due to rounding.

1		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, pre mium 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 supp ort

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

Total operating revenues

Residential revenues increased for the three and six months ended June 30, 201 7, as growth in broadband speeds and IPTV connections, price incre ases for broadband and video services and the effects on revenue from the discontinuation of a customer loyalty program more than offse t the decline in voice services. Average I PTV connections grew 14 %, offset by a 4 % decline in average voice connections.

Commercial revenues decreased for the three and six months ended June 30, 201 7, due to declining voice and data connections mostly in CLEC markets.

Wholesale revenues in creased for the three and six months ended June 30, 201 7, due primarily to increased s upport received from the A-CAM program.

Cost of services

Cost of services increased modestly for the three and six months ended June 30, 201 7, due to increased charges related to growth in IPTV , offset by reduced costs of provisioning circuits, purchasin g unbundled network elements and providing long-distance services.

Depreciation, amortization and accretion

Depreciation, amortization and accretion decreas ed for the three and six months ended June 30, 201 7, as certain assets became fully depreciated. A $4 million reduction recorded in the three months ended June 30, 2016, for excess depreciation from prior periods partially offset this decrease.

CABLE O PERATIONS

Business Overview

TDS Telecom’s Cable strategy is to expand its broadba nd services and leverage that growth by bundling with video and voice services. TDS Telecom seek s to be the leading provider of bro adband services in its targeted markets by leveraging its core competencies in network m anagement and customer focus.

Operational Overview

Cable connections grew 3% over 201 6 due to a 12% increase in broadband connections .

Financial Overview — Cable

			Three Months Ended					Six Months Ended
			June 30,					June 30,
			2017		2016		2017 vs. 2016	2017		2016		2017 vs. 2016
(Dollars in millions)
Residential			$	41	$	36	15%	$	82	$	72	15%
Commercial				9		9	1%		18		19	(4)%
	Total operating revenues			51		45	12%		100		90	11%

Cost of services (excluding Depreciation, amortization and accretion reported below)				24		24	1%		48		46	4%
Selling, general and administrative				13		12	4%		25		24	3%
Depreciation, amortization and accretion				11		9	18%		21		18	14%
(Gain) loss on asset disposals, net				–		–	(5)%		1		1	(15)%
	Total ope rating expenses			48		46	5%		95		90	6%

Operating income (loss)			$	3	$	–	>100%	$	5	$	1	>100%

Income (loss) before income taxes			$	3	$	–	>100%	$	5	$	1	>100%
Adjusted OIBDA (Non-GAAP) 1			$	14	$	10	49%	$	27	$	20	35%
Adjusted EBITDA (Non-GAAP) 1			$	14	$	10	49%	$	27	$	20	36%
Capital ex penditures			$	12	$	17	(28)%	$	21	$	30	(29)%

Numbers may not foot due to rounding.

1		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:

B roadband 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 for the three and six months ended June 30, 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 $1 million and $3 million for the thr ee and six months ended June 30, 2017, respectively. Cost of services increased for the three and six months ended June 30, 2017, due primarily to increases in programming fees . Selling, general and administrative expenses in creased for the three and six months 2017 due to increased employee and IT-related expenses, offset by lower property taxes .

HMS OPERATIONS

Business Overview

Under TDS Telecom’s OneNeck IT Solutions brand, TDS Telecom offer s a full s uite of IT solutions ranging from equipment resal e 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					Six Months Ended
			June 30,					June 30,
			2017		2016		2017 vs. 2016	2017		2016		2017 vs. 2016
(Dollars in millions)
Service revenues			$	27	$	33	(16)%	$	56	$	62	(9)%
Equipment and product sales				23		47	(51)%		66		82	(20)%
	Total operating re venues			51		80	(37)%		122		144	(15)%

Cost of services (excluding Depreciation, amortization and accretion reported below)				21		19	11%		42		40	4%
Cost of equipment and products				19		39	(51)%		55		68	(20)%
Selling, general and administrative				10		15	(29)%		21		25	(16)%
Depreciation, amortization and accretion				7		7	(7)%		14		15	(7)%
	Total operating expenses			58		80	(28)%		131		148	(12)%

Operating loss			$	(7)	$	–	>(100)%	$	(9)	$	(4)	>(100)%

Loss before income taxes			$	(8)	$	(1)	>(100)%	$	(11)	$	(6)	(80)%
Adjusted O IBDA (Non-GAAP) 1			$	–	$	7	>(100)%	$	4	$	10	(59)%
Adjusted EBITDA (Non-GAAP) 1			$	–	$	7	>(100)%	$	4	$	11	(57)%
Capital expenditures			$	4	$	2	>100%	$	10	$	3	>100%

Numbers may not foot due to rounding.

1		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
Co location 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

Declines in hardware maintenance services resulted in a de crease in Service revenues for the three and six months ended June 30, 201 7. Equipment and product sales revenues from sales of IT infrastructure hardware solutions decreased for the three and six months ended June 30, 2017, due primarily to lower spending by existing customers in the second qu arter. There was a corresponding decrease in Cost of equipment and products. Cost of services increased for the three and six months ended June 30, 2017, due to increased employee expenses and maintenance and support costs. Selling, general and administ rative expenses de creased due primarily to lower commissions associated with decreased sales for the three and six month periods.

Liquidity and Capital Resources

Sources of Liquidity

TDS and its subsidiaries operate capital-intensive businesses. Historica lly, 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, fund s from other financing sources, including a term loan and other long-term debt, and cash flows from operating, certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for TDS to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisitions. There is no assurance that this will be the case in the future. See Market Risk for additional information regarding maturities of long-term debt.

Although TDS currently has a significant cash balance, in certain recent periods, TDS has incurred negative free cash flow (non-GAAP metric 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 ex isting 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 requirement s 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 o r 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, or to obtain other forms of financing in order to fund potential expenditures. TDS is exploring a potential securitized borrowing using its eq uipment installment plan receivables, which may occur later in 2017. 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 purcha ses, 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.

TDS’ credit rating has been sub-investment grade since 2014. There can be no assurance that sufficient funds will con tinue 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 capita l, 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 pay ment 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 o r 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 pa y a dividend to its shareholders.

At June 30, 2017 , TDS’ consolidated cash and cash equivalents totaled $ 791 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 acquisitions, 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, a s of June 30, 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.

L ong-term debt payments due for the remain der of 2017 and the next four years represent less than 3% of TDS’ total long-term debt obligation as of June 30, 2017 .

Capital Expenditures

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures), which in clude 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 genera l purposes:

Expand and enhance network coverage, including providing additional capacity to accommodate increased network usage, principally data usage, by current customers;
D eploy ment 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 negotia tions (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 ag reement. 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 addi tional 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-t erm 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. U.S. Cellular paid the remaining $ 186 million to the FCC and was granted the licenses during the second quarter of 2017.

In February 2016, U.S. Cellular entered into an agreement with a third par ty 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 “variable interest entities” as defined under GAAP. See Note 8 — 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.

During the first quarter of 2017, U.S. Cellular formed USCC EIP LLC, a special purpose entity (SPE), to facilitate a potential securitized borrowing using its equipment i nstallment plan receivables in the future. During the six months ended June 30, 2017, net equipment installment plan receivables totaling $ 883 m illion were transferred to the newly formed SPE from affiliated entities. On a cons olidated basis, the transfer of receivables into this SPE did not have a material impact to the financial condition 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
Six Months Ended June 30,		Shares	Per Share		(in millions)
2017
	TDS Common Shares	–	$	–	$	–
	U.S. Cellular Common Shares	–	$	–	$	–

2016
	TDS Common Shares	111,700	$	22.56	$	3
	U.S. Cellular Common Shares	46,861	$	34.77	$	2

For additional information related to the current TDS repurchase authorization, see Unregistered Sales of Equity Securities and Use of Proceeds.

U.S. Cellular also has a share repurchase authorization. A s of June 30, 2017 , the total cumulative amount of U.S. Cellular Common Shares authorized to be purchased is 5,900,849 .

All outstanding TDS Preferred Shares were redeemed in April 2017 for $1 million.

Contractual and Other Obligations

There were no material changes outside the ordinary course of business between December 31, 2016 and June 30, 2017 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, 2016 .

Off-Balance Sheet Arrangements

TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resour ces.

Consolidated Cash Flow Analysis

TDS operates a capital- and marketing-intensive business. TDS makes substantial investments to acquire wireless lice nses and properties and to construct and upgrade communications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in p otentially revenue ‑ enhancing and cost-reducing upgrades to TDS’ networks. 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 spectrum licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions and divestitures, capit al expenditures and other factors. The following discussion summarizes TDS' cash flow activities for the six months ended June 30, 2017 and 2016 .

2017 Commentary

TDS’ Cash and cash equivalents de creased $ 109 million in 2017 . Net cash provided by operating activities was $ 358 million in 201 7 due to net income of $ 55 million plus non-cash items of $ 398 million and distributions received from unconsolidated entities of $ 65 million, including $ 30 millio n in distributions from the LA Partnership. This was partially offset by c hanges in working capital items which decreased net cash by $ 160 million. The decrease resulting from changes in working capital items was due in part to a $ 107 million increase in equipment installment plan receivables, which are expected to continue to increase and further require the use of working capital in the near term. The decrease was also a result of a $ 59 million decrease in accounts payable.

The net cash provided by operating activities was offset by Cash flows used for investing activities of $ 424 million. Cash paid in 201 7 fo r additions to property, plant and equipment totaled $ 242 million. Cash paid for acquisitions and licenses was $ 200 million which included the remaining $ 186 million due to the FCC for lice nses U.S. Cellular won in Auction 1002. This was partially offset by Cash received from divestitures and exchanges of $ 17 million. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statemen ts for additional information related to these transactions.

Cash flows used for financing activities were $ 43 million for the six months ended June 30, 2017, reflecting ordinary activity such as the payment of dividends and the scheduled repayments of debt.

2016 Commentary

T DS’ Cash and cash equivalents de creased $ 86 million in 2016. Net cash provided by operating activities was $ 400 million in 2016 due to net income of $ 42 million plus non-cash items of $ 424 million and distributions received from unconsolidated entities of $ 30 million . This wa s partially offset by changes in working capital items which decreased net cash by $ 96 million. TDS received a federal tax refund of $ 63 million related to an overpayment of the 2015 expected tax liability , which resulted from the enactment of federal bonus depreciation in December 2015 . This was offset by a use of cash of $ 94 million due to an increase in equipment installment plan receivables .

The net cash provided by operating act ivities was offset by Cash flows used for investing activities of $ 452 million. Cash paid in 2016 for additions to property, plant and equipment totaled $ 281 million. In June 2016, U.S. Cel lular made a deposit of $ 143 million to the FCC for its participation in Auction 1002. Cash paid for acquisitions and licenses in 2016 was $ 46 million partially offset by Cash received from divestitures and exch anges of $ 17 million.

Consolidated Balance Sheet Analysis

The following discussion addresses certain captions in the consolidated balance sheet and changes therein. This discussion is intended to highlight the significant changes and is not intended to fully reconcile the changes. Changes in financial condition during 2017 are as follows:

Licenses

Licenses increased $ 340 million due primarily to an aggregate winning bid of $ 329 million in FCC Auction 1002. These lice nses were granted by the FCC in the second quarter of 2017. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for more information about this transaction.

Other assets and deferred charges

Other assets and deferred charges decreased $ 86 million due primarily to the $ 143 million deposit paid to the FCC in June 2016 for participation in Auction 1002, being applied to total amounts due for the licenses won in said auction in the second quarter of 2017. This was partially offset by a $ 59 million increase in the long-term portion of unbilled equipment installment plan receivables, net, due to the offering of longer term equipmen t installment plan contracts and the overall increase in the number of such contracts outstanding . See Note 3 — Equipment Installment Plans and Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these balances.

Accounts p ayable

Accounts payable decreased $ 70 million due primarily to reduction of expenses in 2017 as well as payment timing differe nces .

Accrued taxes

Accrued taxes increased $ 41 million due primarily to the excess of current income tax expense over federal estimated payments made during the six months ended June 30, 2017 .

Accrued c ompensation

Accrued compensation decreased $ 49 million due primarily to employee bonus payments in March 2017 .

Supplemental Information Relating to Non-GAAP Financial Measures

TDS sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with U.S. GAAP to evaluate the performance of its business. Certain of these measures are considered “non-GAAP financial measures” under U.S. Secu rities and Exchange Commission Rules. Specifically, TDS has referred to the following measures in this Form 10-Q Report:

EBITDA
Adjusted EBITDA
Adjusted OIBDA
Free cash flow
Postpaid ABPU

Postpaid ABPA

Following are explanations of each of these measures.

Adjusted EBITDA and Adjusted OIBDA

Adjusted EBITDA is defined as net income adjusted for the items set forth in the reconciliation below. Adjusted OIBDA is defined as net income adjusted for the items set forth in the reconciliation below. Adjusted EBIT DA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. TDS does not intend to imply that any such items set forth in the reconciliation below are non-recurring, infrequent or unusual; such items may occur in the future.

Adjusted EBITDA is a segment measure reported to the chief operating decision maker for purposes of making decisio ns about allocating resources to the segments and assessing their performance. See Note 10 — Business Segment Information in the Notes to Consolidated Financial Statements for additional information.

Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability and, therefore, reconciliations to applicable GAAP income measures are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful m easures of TDS’ operating results before significant recurring non-cash charges, gains and losses, and other items as presented below as they provide additional relevant and useful information to investors and other users of TDS’ financial data in evaluati ng the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accre tion, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding inve stment activities. The following table reconciles Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measure, Net income or Income (loss) before income taxes. Income tax expense is not provided at the individual segment level for Wireline, Cabl e and HMS. TDS calculates income tax expense for TDS Telecom in total.

		Three Months Ended				Six Months Ended
		June 30,				June 30,
TDS ̶ CONSOLIDATED		2017		2016		2017		2016
(Dollars in millions)
Net inco me (GAAP)		$	12	$	32	$	55	$	42
Add back:
	Income tax expense		10		18		44		31
	Interest expense		43		43		85		85
	Deprecia tion, amortization and accretion		211		210		422		422
EBITDA (Non-GAAP)			276		303		606		580
Add back or deduct:
	(Gain) loss on license sales and exchanges, net		(2)		(9)		(19)		(9)
	(Gain) l oss on asset disposals, net		6		6		10		12
Adjusted EBITDA (Non-GAAP)			280		300		597		583
Deduct:
	Equity in earnings of unconsolidated entities		33		36		65		72
	Interest and dividend income 1		4		3		8		5
	Other, n et		–		1		1		–
Adjusted OIBDA (Non-GAAP) 1			243		260		523		506
Deduct:
	Depreciation, amortization and accretion		211		210		422		422
	(Gain) loss on license sales and exchanges, net		(2)		(9)		(19)		(9)
	(Gain) l oss on asset disposals, net		6		6		10		12
Operating income (GAAP)¹		$	28	$	53	$	110	$	81

		Three Months Ended				Six Months Ended
		June 30,				June 30,
U.S. CELLULAR		2017		2016		2017		2016
(Dollars in millions)
Net inco me (GAAP)		$	12	$	27	$	40	$	37
Add back:
	Income tax expense		–		13		33		23
	Interest expense		28		28		56		56
	Deprecia tion, amortization and accretion		155		154		307		307
EBITDA (Non-GAAP)			195		222		436		423
Add back or deduct:
	(Gain) loss on license sales and exchanges, net		(2)		(9)		(19)		(9)
	(Gain) l oss on asset disposals, net		5		5		9		10
Adjusted EBITDA (Non-GAAP)			198		218		426		424
Deduct:
	Equity in earnings of unconsolidated entities		33		37		66		72
	Interest and dividend income 1		2		2		5		3
	Other, n et		–		(1)		(1)		–
Adjusted OIBDA (Non-GAAP) 1			163		180		356		349
Deduct:
	Depreciation, amortization and accretion		155		154		307		307
	(Gain) l oss on license sales and exchanges, net		(2)		(9)		(19)		(9)
	(Gain) l oss on asset disposals, net		5		5		9		10
Operating income (GAAP)¹		$	5	$	30	$	59	$	41

		Three Months Ended				Six Months Ended
		June 30,				June 30,
TDS TELECOM		2017		2016		2017		2016
(Dollars in millions)
Net inco me (GAAP)		$	15	$	15	$	33	$	25
Add back:
	Income tax expense		10		10		21		16
	Interest expense		1		1		2		1
	Deprecia tion, amortization and accretion		55		54		111		112
EBITDA (Non-GAAP)			81		79		167		154
Add back or deduct:
	(Gain) loss on asset disposals, net		1		1		1		2
Adjusted EBITDA (Non-GAAP)			82		80		168		156
Deduct:
	Interest and dividend income		1		1		2		2
Adjusted OIBDA (Non-GAAP)			80		79		166		155
Deduct:
	Depreciation, amortization and accretion		55		54		111		112
	(Gain) l oss on asset disposals, net		1		1		1		2
Operating income (GAAP)		$	25	$	24	$	53	$	41

Numbers may not foot due to rounding.

		Three Months Ended				Six Months Ended
		June 30,				June 30,
WIRELINE		2017		2016		2017		2016
(Dollars in millions)
Income b efore income taxes (GAAP)		$	30	$	25	$	60	$	46
Add back:
	Interest expense		–		–		–		(1)
	Deprecia tion, amortization and accretion		37		37		76		78
EBITDA (Non-GAAP)			67		62		136		124
Add back or deduct:
	(Gain) loss on asset disposals, net		–		1		1		1
Adjusted EBITDA (Non-GAAP)			67		63		137		125
Deduct:
	Interest and dividend income		1		1		2		1
Adjusted OIBDA (Non-GAAP)			66		62		134		124
Deduct:
	Depreciation, amortization and accretion		37		37		76		78
	(Gain) l oss on asset disposals, net		–		1		1		1
Operating income (GAAP)		$	29	$	25	$	57	$	45

Numbers may not foot due to rounding.

		Three Months Ended				Six Months Ended
		June 30,				June 30,
CABLE		2017		2016		2017		2016
(Dollars in millions)
Income ( loss) before income taxes (GAAP)		$	3	$	–	$	5	$	1
Add back:
	Depreciation, amortization and accretion		11		9		21		18
EBITDA (Non-GAAP)			14		9		26		19
Add back or deduct:
	(Gain) loss on asset disposals, net		–		–		1		1
Adjusted EBITDA (Non-GAAP)			14		10		27		20
Deduct:
	Interest and dividend income		–		–		–		–
Adjusted OIBDA (Non-GAAP)			14		10		27		20
Deduct:
	Depreciation, amortization and accretion		11		9		21		18
	(Gain) loss on asset disposals, net		–		–		1		1
Operating income (loss) (GAAP)		$	3	$	–	$	5	$	1

Numbers may not foot due to rounding.

			Three Months Ended				Six Months Ended
			June 30,				June 30,
HMS			2017		2016		2017		2016
(Dollars in millions)
Loss bef ore income taxes (GAAP)			$	(8)	$	(1)	$	(11)	$	(6)
Add back:
	Interest expense			1		1		2		2
	Deprecia tion, amortization and accretion			7		7		14		15
EBITDA (Non-GAAP)				–		7		4		11
Add back or deduct:
	(Gain) loss on asset disposals, net			–		–		–		–
Adjusted EBITDA (Non-GAAP)				–		7		4		11
Deduct:
	Interest and dividend income			–		–		–		–
Adjusted OIBDA (Non-GAAP)				–		7		4		10
Deduct:
	Depreciation, amortization and accretion			7		7		14		15
	(Gain) loss on asset disposals, net			–		–		–		–
Operating loss (GAAP)			$	(7)	$	–	$	(9)	$	(4)

Numbers may not foot due to rounding.

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 addit ional details.

Free Cash Flow

The following table presents Free cash flow. Management uses Free cash flow as a liquidity measure and it is defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash pa id for additions to property, plant and equipment.

		Six Months Ended June 30,
		2017		2016
(Dollars in millions)
Cash flows from operating activities (GAAP)		$	358	$	400
Less: Cash paid for additions to property, plant and equipment			242		281
	Free cash flow (Non-GAAP)	$	116	$	119

Postpaid ABPU and Postpaid ABPA

U.S. Cellular presents Postpaid ABPU and Postpaid ABPA to reflect the revenue shift from Service revenues to Equipment and product sales resulting from the increased adoption of equipment installment plans. Postpaid ABPU and Postpaid ABPA, as previously defined, are non-GAAP financial measures which U.S. Cellular believes are useful to investors and other users of its financial information in showing trends in both service and eq uipment and product sales revenues received from customers.

		Three Months Ended June 30,				Six Months Ended June 30,
		2017		2016		2017		2016
(Dollars and connection counts in millions)
C alculation of Postpaid ARPU
Postpaid service revenues		$	597	$	636	$	1,205	$	1,275
Average number of postpaid connections			4.47		4.48		4.46		4.45
Number of months in period			3		3		6		6
	Postpaid ARPU (GAAP metric)	$	44.60	$	47.37	$	45.00	$	47.76

Calculation of Postpaid ABPU
Postpaid service revenues		$	597	$	636	$	1,205	$	1,275
Equipment installment plan billings			142		118		281		223
	Total billings to postpaid connections	$	739	$	754	$	1,486	$	1,498
Av erage number of postpaid connections			4.47		4.48		4.46		4.45
Number of months in period			3		3		6		6
	Postpaid ABPU (Non-GAAP metric)	$	55.19	$	56.09	$	55.49	$	56.08

Calculation of Postpaid ARPA
Postpaid service revenues		$	597	$	636	$	1,205	$	1,275
Average number of postpaid accounts			1.66		1.70		1.67		1.70
Number of months in period			3		3		6		6
	Postpaid ARPA (GAAP metric)	$	119.73	$	124.91	$	120.46	$	125.13

Calculation of Postpaid ABPA
Postpaid service revenues		$	597	$	636	$	1,205	$	1,275
Equipment installment plan billings			142		118		281		223
	Total billings to postpaid accounts	$	739	$	754	$	1,486	$	1,498
Av erage number of postpaid accounts			1.66		1.70		1.67		1.70
Number of months in period			3		3		6		6
	Postpaid ABPA (Non-GAAP metric)	$	148.15	$	147.90	$	148.54	$	146.95

Application of Critical Accounting P olicies 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 Ac counting 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 Conditio n and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2016 .

Effective January 1, 2017, TDS 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 the current year presentation. See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for additional information regarding this accounting change. There were no other material changes to TDS’ application of crit ical accounting policies and estimates during the six months ended June 30, 2017 .

With respect to TDS’ critical accounting policy governing intangible asset impairment, man agement continues to monitor industry market conditions and changes in interest rates for significant negative trends. Given limited excess of estimated fair value over carrying value of certain of its reporting units as determined in the 2016 annual impa irment tests, such trends, if identified, could adversely influence future forecasted cash flows and discounted cash flow calculations which could result in possible impairment in future periods.

Recent Accounting Pronouncements

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

Regulatory Matters

FCC Auction 1002

U.S. Cellular w as a bidder in the FCC’s forward auction of 600 MHz spectrum licenses, referred to as Auction 1002 , which concluded in March 2017 . 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 pu rchase 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. U.S. Ce llular paid the remaining $186 million to the FCC and was granted the licenses during the second quarter of 2017.

FCC Reform Order

Pursuant to the 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 Reform Order contemplated the establishment of a new program and provided for a pause in the phase down if that program was not timely implemented by July 2014. The Phase II Connect America Mobility Fund (MF2) was not operati onal 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. The Order establishes a MF2 support fund of $453 million annually for ten years to be distributed through a market-based, multi-round reverse auction. The Order further states that the phase down of legacy support for ar eas that do not receive support under MF2 will commence on the first day of the month following the completion of the auction and will conclude two years later. U.S. Cellular cannot predict at this time when the MF2 auction will occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the MF2 auction will provide opportunities to U.S. Cellular to offset any loss in existing support. However, U.S. Cellular currently expects that its legacy support wil l continue at the current level for 2017.

FCC Notice of Proposed Rulemaking

In May 2017, the FCC adopted a Notice of Proposed Rulemaking (NPRM) proposing to revise decisions made in the FCC’s 2015 Open Internet and Title II Order . If adopted as proposed , the item would reverse the FCC’s decision to reclassify Broadband Internet Access Services as telecommunications services subject to regulation under Title II of the Telecommunications Act. The NPRM would also seek comment on blocking, throttling, paid prioritization, and transparency rules adopted as part of the FCC’s previous rulemaking.

T he NPRM is subject to public comment and further action by the FCC, and any final rules adopted may differ from those proposed in the NPRM. Also, there may be legal proceedings challenging any rule changes that are ultimately adopted. TDS cannot predict the outcome of these proceedings or the impact on its business.

Other Regulatory Matters

In March 2017, both the U.S. Senate and U.S. House of Representatives approved a joint resolution under the Congressional Review Act to repeal regulations approved by the FCC in October 2016 governing consumer privacy by broadband Internet service providers. The President approved the resolution in April 2017. The repeal removed the pending FCC rules, which would have gone into effect later in 2017. The rules would have prohibited broadband internet service providers from sharing certain sensitive customer information unless customers opted in and expressly agreed to share such information. TDS will continue to protect customer information in accordance with Section 222 of the Telecommunications Act and its publicly available Pri vacy Statement until such time as regulators adopt other privacy requirements.

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 an d 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, uncer tainties 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, 2016 . Each of the following risks could have a material adve rse effect on TDS’ business, financial condition or results of operations. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. TDS undertakes no obligation to update publicly any fo rward-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, 2016 , the following fac tors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business , financial condition or results of operations .

Intense competition in the markets in which TDS operates co uld adversely affect TDS’ revenues or increase its costs to compete.
A failure by TDS to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, divestitures and exchanges) or allocate resources or capital could h ave an adverse effect on TDS’ business, financial condition or results of operations.
Uncertainty in TDS’ future cash flow and liquidity or in the ability to access capital, deterioration in the capital markets, other changes in TDS’ performance or market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development or acquisition programs, reduce the acq uisition of spectrum licenses, and/or reduce or cease share repurchases and/or the payment of dividends.
TDS has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make pa yments on its indebtedness, comply with terms of debt covenants and incur additional debt.
Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline from current levels, roaming expenses to increase from current levels and/ or impact TDS’ ability to service its customers in geographic areas where TDS does not have its own network, which could have an adverse effect on TDS’ business, financial condition or results of operations.
A failure by TDS to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on TDS’ business, financial condition or results of operations.
To the extent conducted by the FCC, TDS may participate in FCC auctions of additional spectrum in the future directly or indirectly and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on TDS.
Failure by TDS to timely or fully comply wit h any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect TDS’ business, financial condition or results of operations.
An inability to attract people of outstanding 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. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.
TDS’ smaller scale relative to larger competitors that may have greater financial and other resources than TD S could cause TDS to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.
Changes in various business factors, including changes in demand, customer preferences and perceptions, price c ompetition, churn from customer switching activity and other 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, cou ld put TDS at a competitive disadvantage, could reduce TDS’ revenues or could increase its costs of doing business.
Complexities associated with deploying new technologies present substantial risk and TDS’ investments in unproven technologies may not produ ce the benefits that TDS expects.
TDS receives regulatory support and is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of the support and fees are subject to great uncertainty, which could have an adverse effect on TDS’ business, financial condition or results of operations.
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 r ecognize 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 o f TDS’ businesses 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, compared to fixed-term service contracts, includes risks that TDS may possibly incur greater churn, lower cash flows, increased costs and/or increased bad debts expense due to differences in contract terms, which could have an adverse impact on TDS' financial condition or results of operations.
A failure by TDS to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse ef fect 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 m arket 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’ fin ancial 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 resul ts of operations.
TDS has experienced and, in the future, expects to experience cyber-attacks or other breaches of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on TDS' business, financ ial 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 ot her 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’ bu siness, financial condition or results of operations.
Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on TDS’ business, financ ial 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 consequence s, 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 propert y 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 diff icult 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.

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, 2016 , which could materially affe ct 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, 2016 , may not be the onl y risks that could affect TDS. Additional u nidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condi tion 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, 2016 .

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, 2016 , for additional information , including information regarding required principal payments and the weighted average int erest rates related to TDS’ L ong-term debt. There have been no material changes to such information since December 31, 2016 .

See Note 2 — Fair Va lue Measurements in the Notes to Consolidated Financial Statements for additional information related to the fa ir value of TDS’ L ong-term debt as of June 30, 2017 .

Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations

(Unaudited)

			Three Months Ended				Six Months Ended
			June 30,				June 30,
			2017		2016		2017		2016
(Dollars and shares in millions, except per share amounts)
Operating revenues
	Service		$	992	$	1,019	$	1,989	$	2,032
	Equipment and product sales			255		276		496		518
		Total operating revenues		1,247		1,295		2,485		2,550

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			298		297		580		585
	Cost of equipment and products			287		309		557		600
	Selling, general and administrative			419		429		825		859
	Depreciation, amortization and accretion			211		210		422		422
	(Gain) loss on asset disposals, net			6		6		10		12
	(Gain) loss on license sales and exchanges, net			(2)		(9)		(19)		(9)
		Total operating expenses		1,219		1,242		2,375		2,469

Operating income				28		53		110		81

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			33		36		65		72
	Interest and dividend income			4		3		8		5
	Interest expense			(43)		(43)		(85)		(85)
	Other, net			–		1		1		–
		Total investment and other income (expense)		(6)		(3)		(11)		(8)

Income before income taxes				22		50		99		73
	Income tax expense			10		18		44		31
Net income				12		32		55		42
Less: Net income attributable to noncontrolling
interests, net of tax				2		4		8		6
Net income attributable to TDS shareholders				10		28		47		36
TDS Preferred dividend requirement				–		–		–		–
Net income available to TD S common shareholders			$	10	$	28	$	47	$	36

Basic weighted average shares outstanding				111		109		110		109
Basic earnings per share available to TDS common shareholders			$	0.09	$	0.25	$	0.43	$	0.33

Diluted weighted average shares outstanding				112		111		112		111
Diluted earnings per share available to TDS common shareholders			$	0.09	$	0.25	$	0.42	$	0.32

Dividends per share to TDS shareholders			$	0.155	$	0.148	$	0.310	$	0.296

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,
					2017		2016		2017		2016
(Dollars in millions)
Net income					$	12	$	32	$	55	$	42
	Net change in accumulated other comprehensive income
		Change in net unrealized gain on equity investments				–		1		–		1
		Change related to retirement plan
			Amounts included in net periodic benefit cost
				for th e period
				A mortization of prior service cost		–		(1)		(1)		(1)
Compr ehensive income						12		32		54		42
	Less: Net income attributable to noncontrolling
		interests, net of tax				2		4		8		6
Comprehensive income attributable to TDS shareholders					$	10	$	28	$	46	$	36

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,
				2017		2016
(Dollars in millions)
Cash flows from operating activities
	Net income			$	55	$	42
	Add (deduct) adjustments to reconcile net income to net cash flows
	from operating activities
		Depreciation, amortization and accretion			422		422
		Bad debts expense			49		46
		Stock-based compensation expense			22		18
		Deferred income taxes, net			(22)		8
		Equity in earnings of unconsolidated entities			(65)		(72)
		Distributions from unconsolidated entities			65		30
		(Gain) loss on asset disposals, net			10		12
		(Gain) loss on license sales and exchanges, net			(19)		(9)
		Noncash interest expense			1		2
		Other operating activities			–		(3)
	Changes in assets and liabilities from operations
		Accounts receivable			5		(6)
		Equipment installment plans receivable			(107)		(94)
		Inventory			2		(26)
		Accounts payable			(59)		32
		Customer deposits and deferred revenues			(10)		(18)
		Accrued taxes			53		76
		Accrued interest			–		(1)
		Other assets and liabilities			(44)		(59)
			Net cash provided by operating activities		358		400

Cash fl ows from investing activities
	Cash paid for additions to property, plant and equipment				(242)		(281)
	Cash paid for acquisitions and licenses				(200)		(46)
	Cash received from divestitures and exchanges				17		17
	Federal Communications Commission deposit				–		(143)
	Other investing activities				1		1
			Net cash used in investing activities		(424)		(452)

Cash fl ows from financing activities
	Repayment of long-term debt				(6)		(6)
	Issuance of long-term debt				–		2
	TDS Common Shares reissued for benefit plans, net of tax payments				(1)		–
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments				–		3
	Repurchase of TDS Common Shares				–		(3)
	Repurchase of U.S. Cellular Common Shares				–		(2)
	Repurchase of TDS Preferred Shares				(1)		–
	Dividends paid to TDS shareholders				(34)		(32)
	Payment of debt issuance costs				–		(4)
	Distributions to noncontrolling interests				(2)		(1)
	Other financing activities				1		9
			Net cash used in financing activities		(43)		(34)

Net dec rease in cash and cash equivalents					(109)		(86)

Cash and cash equivalents
	Beginning of period				900		985
	End of period			$	791	$	899

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,
				2017		2016
(Dollars in millions)
Current assets
	Cash and cash equivalents			$	791	$	900
	Accounts receivable
		Customers and agents, less allowances of $55 and $55, respectively			749		753
		Other, less allowances of $1 and $2, respectively			96		98
	Inventory, net				149		151
	Prepaid expenses				111		115
	Income taxes receivable				2		10
	Other current assets				26		32
			Total current assets		1,924		2,059

Assets held for sale					4		8

Licenses					2,235		1,895
Goodwill					770		766
Franchise rights					244		244
Other intangible assets, net of accumulated amortization of $137 and $153, respectively					28		33
Investments in unconsolidated entities					452		451
Other investments					–		1

Property, plant and equipment
	In service and under construction				11,726		11,679
	Less: Accumulated depreciation and amortization				8,353		8,124
			Property, plant and equipment, net		3,373		3,555

Other assets and deferred charges					348		434

Total assets 1				$	9,378	$	9,446

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,
				2017		2016
(Dollars and shares in millions, except per share amounts)
Current liabilities
	Current portion of long-term debt			$	12	$	12
	Accounts payable				295		365
	Customer deposits and deferred revenues				218		229
	Accrued interest				11		11
	Accrued taxes				85		44
	Accrued compensation				78		127
	Other current liabilities				87		99
			Total current liabilities		786		887

Deferred liabilities and credits
	Deferred income tax liability, net				899		922
	Other deferred liabilities and credits				472		453

Long-term debt, net					2,428		2,433

Commitments and contingencies

Noncontrolling interests with redemption features					1		1

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares
			Authorized 290 shares (25 Series A Common and 265 Common Shares)
			Issued 133 shares (7 Series A Common and 126 Common Shares)
			Outstanding 111 shares (7 Series A Common and 104 Common Shares) and 110 shares (7 Series A Common and 103 Common Shares), respectively
			Par Value ($.01 per share)		1		1
		Capital in excess of par value			2,393		2,386
		Treasury shares, at cost, 22 and 23 Common Shares, respectively			(684)		(698)
		Accumulated other comprehensive income			–		1
		Retained earnings			2,457		2,454
			Total TDS shareholders' equity		4,167		4,144

	Preferred shares				–		1
	Noncontrolling interests				625		605

		Total equity			4,792		4,750

Total liabilities and equity 1				$	9,378	$	9,446

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


1		The consolidated total assets as of June 30, 2017 and December 31, 2016 include assets held by consolidated VIEs of $759 million and $804 million, respectively, which are not available to be used to settle the obligations of TDS. The consolidated total liabilities as of June 30, 2017 and December 31, 2016 include certain liabilities of consolidated VIEs of $17 million for which th e creditors of the VIEs have no recourse to the general credit of TDS. See Note 8 — Variable Interest Entities for additional information.

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

	TDS Shareholders
	Series A Common and Common shares		Capital in excess of par value		Treasury shares		Accumulated other comprehensive income (loss)		Retained earnings		Total TDS shareholders' equity		Preferred shares		Noncontrolling interests		Total equity
(Dollars in millions)
December 31, 2016	$	1	$	2,386	$	(698)	$	1	$	2,454	$	4,144	$	1	$	605	$	4,750
Net income attributable to TDS shareholders		–		–		–		–		47		47		–		–		47
Net income attributable to noncontrolling interests classified as equity		–		–		–		–		–		–		–		8		8
Other comprehensive income		–		–		–		(1)		–		(1)		–		–		(1)
TDS Common and Series A Common share dividends		–		–		–		–		(34)		(34)		–		–		(34)
Redemption of Preferred shares		–		–		–		–		–		–		(1)		–		(1)
Dividend reinvestment plan		–		–		5		–		–		5		–		–		5
Incentive and compensation plans		–		–		9		–		(10)		(1)		–		–		(1)
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		–		–		–		–		–		–		–		14		14
Stock-based compensation awards		–		7		–		–		–		7		–		–		7
Distributions to noncontrolling interests		–		–		–		–		–		–		–		(2)		(2)
June 30, 2017	$	1	$	2,393	$	(684)	$	–	$	2,457	$	4,167	$	–	$	625	$	4,792

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

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

	TDS Shareholders
	Series A Common and Common shares		Capital in excess of par value		Treasury shares		Accumulated other comprehensive income (loss)		Retained earnings		Total TDS shareholders' equity		Preferred shares		Noncontrolling interests		Total equity
(Dollars in millions)
December 31, 2015	$	1	$	2,365	$	(727)	$	–	$	2,487	$	4,126	$	1	$	577	$	4,704
Net income attributable to TDS shareholders		–		–		–		–		36		36		–		–		36
Net income attributable to noncontrolling interests classified as equity		–		–		–		–		–		–		–		6		6
TDS Common and Series A Common share dividends		–		–		–		–		(32)		(32)		–		–		(32)
Repurchase of Common shares		–		–		(3)		–		–		(3)		–		–		(3)
Dividend reinvestment plan		–		1		4		–		–		5		–		–		5
Incentive and compensation plans		–		(4)		9		–		(4)		1		–		–		1
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		–		(5)		–		–		–		(5)		–		19		14
Stock-based compensation awards		–		6		–		–		–		6		–		–		6
Distributions to noncontrolling interests		–		–		–		–		–		–		–		(1)		(1)
June 30, 2016	$	1	$	2,363	$	(717)	$	–	$	2,487	$	4,134	$	1	$	601	$	4,736

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

Telephone and Data Systems, Inc.

Notes to Consolidated Financial Statements

Note 1 Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (TDS) conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board (FASB) Accounting Stan dards Codification (ASC). The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 83% -owned wireless telephone subsidiary, United States Ce llular 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 consolidat ion under GAAP. All material intercompany accounts and transactions have been eliminated.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the period ended June 30, 2017 , are U.S. Cellu lar, Wireline, Cable, and Hosted and Managed Services (HMS) operations. TDS’ non-reportable other business activities are presented as “Corporate, Eliminations and Other”, which includes the operations of TDS’ wholly-owned subsidiary Suttle-Straus, Inc. ( Suttle-Straus). Suttle-Straus’ financial results were not significant to TDS’ operations. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 10 — Business Segment Information for summary financial information on each business segment.

The unaudited consolidated financial statements included herein have been prepared by TDS pursuant to the rul es 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. Howe ver, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. Certain numbers included herein are rounded to millions for ease of presentation; however, calculated amounts and percentages are determi ned using the unrounded numbers. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2016 .

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of TDS’ fina ncial position as of June 30, 2017 and December 31, 2016 , its results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and its cash flows and changes in equity for the six months ended June 30, 2017 and 2016 . These results are not necessarily indicative of the results to be expected for the full year. TDS has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31, 2016 , except as described below.

Equipment Installment Plans

TDS equipment revenue under equipment installment plan contracts is recognized at the time the device is delivered to the end-user customer for the selling price of the device, net of any deferred imputed int erest or trade-in right, if applicable. Imputed interest is reflected as a reduction to the receivable balance and recognized over the duration of the plan as Service revenues. See Note 3 — Equipment Installment Plans . Effective January 1, 2017, TDS 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 Operati ons. TDS believes this classification is preferable because financing of devices as part of enrolling customers for service is an activity that is central to TDS’ operations, and it is consistent with the presentation by others in the industry. Comparati ve financial statements of prior years have been adjusted to apply the new classification retrospectively. As a result of this change in classification, Service revenues for the three and six months ended June 30, 2016, increased by $ 12 million and $ 24 million, respectively, from previously reported amounts, with a corresponding decrease in Interest and dividend income. In comparison, Service revenues for the three and six months ended June 30, 2017 , include $ 17 million and $ 33 million, respectively, of equipment installment plan interest income. This change did not have an impact on Income before income tax es, Net income, or Earnings per share for the three or six months ended June 30, 2016, nor did it have a cumulative impact to Retained earnings as of any date presented.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) and has since amended the standard with Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effect ive Date , Accounting Standards Update 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , Accounting Standards Update 2016-10, Revenue from Contracts with Customers: Identifying Perfor mance Obligations and Licensing , Accounting Standards Update 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients , and Accounting Standards Update 2016-20, Technical Corrections and Improvements to Topic 606, R evenue from Contracts with Customers . These standards replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. TDS is required to adopt ASU 2014-09, as amended, o n January 1, 2018. Early adoption as of January 1, 2017, is permitted; however, TDS did not adopt early. ASU 2014-09, as amended, impacts TDS’ revenue recognition related to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. In addition, ASU 2014-09 requires deferral of incremental contract acquisition and fulfillment costs and subsequent expense recognition over the contract period or expected customer life. TDS has identifi ed that new systems, processes and controls are required to adopt ASU 2014-09, as amended. TDS has substantially completed the design and development of new systems to perform revenue recognition accounting under the provisions of ASU 2014-09, as amended, and is currently engaged in the process of testing these new systems. TDS expects to transition to the new standard under the modified retrospective transition method whereby a cumulative effect adjustment to retained earnings is recognized upon adoption and the guidance is applied prospectively. Upon adoption, the cumulative effect adjustment is expected to include the establishment of contract asset and contract liability accounts with a corresponding adjustment to retained earnings to reflect the real location of revenues between service and equipment performance obligations for which control is transferred to customers in different periods. Reallocation impacts generally arise when bundle discounts are provided in a contract arrangement that includes equipment and service performance obligations. In these cases, the revenue will be reallocated according to the relative stand-alone selling prices of the performance obligations included in the bundle and this may be different than how the revenue is bil led to the customer and recognized under current guidance. In addition, contract cost assets will be established to reflect costs that will be deferred as incremental contract acquisition and fulfillment costs. Incremental contract acquisition costs gene rally relate to commissions paid to sales associates while fulfillment costs are generally related to service installation costs on the wireline and cable businesses. TDS is evaluating the effects that adoption of ASU 2014-09, as amended, will have on its financial position and results of operations.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU do es not substantially impact the lessor accounting model. However, some changes to the lessor accounting guidance were made to align with lessee accounting changes within Accounting Standards Codification (ASC) 842, Leases and certain key aspects of ASC 60 6, Revenue from Contracts with Customers. TDS is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, TDS expects a substantial increase to assets and liabilities on its balance sheet. TDS is eval uating the effects that adoption of ASU 2016-02 will have on its results of operations.

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 201 6-13). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosure relating to the credit quality of trade and other receivables, including information relating to mana gement’s estimate of credit allowances. TDS is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted. TDS is evaluating the effects that adoption of ASU 2016-13 will have on its financial position, results o f operations and disclosures.

In December 2016, the FASB issued Accounting Standards Update 2016-19 Technical Corrections and Improvements (ASU 2016-19). ASU 2016-19 includes an amendment to Accounting Standards Codification Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software, which clarifies that a software license within the scope of the Subtopic will be accounted for as the acquisition of an intangible asset and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition. TDS adopted this standard prospectively for all arrangements entered into or materially modified after January 1, 2017.

In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the current goodwill impairment test. Goodwill impairment loss will be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. TDS is required to adopt ASU 2017-04 on January 1, 2020. Early adoption is permitted. TDS is assessing whether it will early adopt ASU 2017-04.

In February 2017, the FASB issued Accounting Standards Update 2017-05, Other Income – Gains and Losses fro m the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASU 2017-05). ASU 2017-05 clarifies how entities account for the derecognition of a nonfinancial asse t and adds guidance for partial sales of nonfinancial assets. TDS is required to adopt ASU 2017-05 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2017-05 is not expected to have a significant impact on TDS’ financial position or re sults of operations.

In March 2017, the FASB issued Accounting Standards Update 2017-07, Compensation – Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 re quires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost must be pre sented separately from the service cost component and outside of Operating income in the Consolidated Statement of Operations. The guidance also specifies that only the service cost component of net benefit cost is eligible for capitalization. TDS is req uired to adopt ASU 2017-07 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2017-07 is not expected to have a significant impact on TDS’ results of operations.

In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensa tion – Stock Compensation (ASU 2017-09). ASU 2017-09 clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as modifications. TDS is required to adopt ASU 2017-09 on January 1, 2018. Early adoption is permi tted. The adoption of ASU 2017-09 is not expected to have a significant impact on TDS’ financial position or results of operations.

Amounts Collected from Customers and Remitted to Governmental Authorities

TDS records amounts collected from customers and remitted to governmental authorities on a net basis within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in co llecting 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 $ 20 million and $ 38 million for the three and six months ended June 30, 2017 , respectively, and $ 22 million and $ 45 million for the three and six months ended June 30, 2016 , respectively.

Note 2 Fair Value Measurements

As of June 30, 2017 and December 31, 2016 , TDS did not have any material financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidate d 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 acti ve 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 leve l 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 assets 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 pur poses as displayed below.

		Level within the Fair Value Hierarchy	June 30, 2017				December 31, 2016
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in millions)
Cash and cash equivalents		1	$	791	$	791	$	900	$	900
Long-term debt
	Retail	2		1,753		1,815		1,753		1,741
	Institutional	2		533		552		533		532
	Other	2		202		201		208		207

The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular’s 6.95% Senior Notes, 7.25% 2063 Senior Notes and 7.25% 2064 Senior Notes. TDS’ “Institutional” debt consists of U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS’ “Other” debt consists of a senior term loan credit facility and other borrowings with financial institutions. TDS estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each bo rrowing, which ranged from 0.00% to 6.55% and 0.00% to 6.93% at June 30, 2017 and December 31, 2016 , respectively.

Note 3 Equipment Installment Plans

TDS sells devices to customers under equipment installment contracts over a specifie d time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. TDS values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair va lue 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. When a customer exercises the trade-in option, the differen ce between the outstanding receivable balance forgiven and the fair value of the used device is offset against the guarantee liability. If the customer does not exercise the trade-in option at the time of eligibility, TDS begins amortizing the liability a nd records this amortization as additional equipment revenue. As of June 30, 2017 and December 31, 2016 , the guarantee liability related to these plans was $ 24 million and $ 33 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. Because equipment installment plans have a duration of greater than twelve months, TDS imputes interest. TDS records imputed interest as a reduction to the related accounts receivable and recognizes it over the term of the ins tallment agreement. Equipment installment plan receivables had a weighted average effective imputed interest rate of 12.1% and 11.2% as of June 30, 2017 and December 31, 2016 , respectively.

The following table summarizes equipment installment plan receivables as of June 30, 2017 and December 31, 2016 .

	June 30, 2017		December 31, 2016
(Dollars in millions)
Equipment installment plan receivables, gross	$	722	$	628
Deferred interest		(63)		(53)
Equipment installment plan receivables, net of deferred interest		659		575
Allowance for credit losses		(57)		(50)
Equipment installment plan receivables, net	$	602	$	525

Net balance presented in the Consolidated Balance Sheet as:
Accounts receivable — Customers and agents (Current portion)	$	363	$	345
Other assets and deferred charges (Non-current portion)		239		180
Equipment installment plan receivables, net	$	602	$	525

TDS uses various inputs, including internal data, information from the credit bureaus and other sources, to evaluate the credit profiles of its customers. From this evaluation, a credit class is assigned to the customer that determines the number of eligi ble lines, the amount of credit available, and the down payment requirement, if any. Customers assigned to credit classes requiring no down payment represent a lower risk category, whereas those assigned to credit classes requiring a down payment represen t a higher risk category. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:

	June 30, 2017						December 31, 2016
	Lower Risk		Higher Risk		Total		Lower Risk		Higher Risk		Total
(Dollars in millions)
Unbilled	$	636	$	48	$	684	$	553	$	38	$	591
Billed — current		25		2		27		23		2		25
Billed — past due		9		2		11		10		2		12
Equipment installment plan receivables, gross	$	670	$	52	$	722	$	586	$	42	$	628

Activity for the six months ended June 30, 2017 and 2016, in the allowance for credit losses balance for the equipment installment plan receivables was as f ollows:

	June 30, 2017		June 30, 2016
(Dollars in millions)
Allowance for credit losses, beginning of period	$	50	$	26
Bad debts expense		31		28
Write-offs, net of recoveries		(24)		(17)
Allowance for credit losses, end of period	$	57	$	37

N ote 4 Earnings Per Share

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

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

				Three Months Ended				Six Months Ended
				June 30,				June 30,
				2017		2016		2017		2016
(Dollars and shares in millions, except per share amounts)
Basic earnings per share available to TDS common
		shareholders:
	Net income available to TDS common shareholders used in basic earnings per share			$	10	$	28	$	47	$	36
Adjustments to compute diluted earnings:
	Noncontrolling interest adjustment				–		–		–		–
	Net income available to TDS common shareholders
		used in diluted earnings per share		$	10	$	28	$	47	$	36

Weighted average number of shares used in basic
	earnings per share:
		Common Shares			104		102		103		102
		Series A Common Shares			7		7		7		7
			Total		111		109		110		109

Effects of dilutive securities					1		2		2		2
Weighted average number of shares used in diluted
	earnings per share				112		111		112		111

Basic earnings per share available to TDS common
	shareholders			$	0.09	$	0.25	$	0.43	$	0.33

Diluted earnings per share available to TDS common
	shareholders			$	0.09	$	0.25	$	0.42	$	0.32

Certain Common Shares issuable upon the exercise of stock options, vesting of performance and restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings per share availab le to TDS common shareholders because their effects were antidilutive. The number of such Common Shares excluded was 5 million shares and 4 million shares for the three and six months ended June 30, 2017 , respectively, and 4 million shares for both the three and six months ended June 30, 2016 .

Note 5 Acquisitions, Divestitures and Exchanges

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 t ime U.S. Cellular received $ 15 million of cash and recorded a gain of $ 17 million.

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. Prior to commencement of the forward auction, U.S. Cellular made an upfront payment to the FCC of $ 143 million in June 2016 to establish its initial bidding eligibility. 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. U.S. Cellular paid the remaining $ 186 million to the FCC and was granted the licenses during the second quarter of 2017.

Note 6 Intangible Assets

Licenses


(Dollars in millions)
Balance December 31, 2016		$	1,895
	Acquisitions		331
	Transferred to Assets held for sale		(4)
	Exchanges - Licenses received		14
	Exchanges - Licenses surrendered		(1)
Balance June 30, 2017		$	2,235

Note 7 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 in part on information provided by third parties, summarizes the combined results of operations of TDS’ equity method investments.

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
(Dollars in millions)
Revenues	$	1,636	$	1,641	$	3,251	$	3,329
Operating expenses		1,229		1,173		2,446		2,408
Operating income		407		468		805		921
Other expense, net		(2)		(3)		(2)		(8)
Net income	$	405	$	465	$	803	$	913

Note 8 Variable Interest Entities

Consolidated VIEs

TDS consolidates variable interest entities (VIEs) in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the fo llowing characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. TDS reviews these criter ia initially at the time it enters into agreements and subsequently when events warranting reconsideration occur. These VIEs have risks similar to those described in the “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2016 .

During the first quarter of 2017, U.S. Cellular formed USCC EIP LLC, a special purpose entity (SPE), to facilitate a potential securitized borrowing using its equipment installment plan receivables in the future. Under a Recei vables Sale Agreement, U.S. Cellular wholly-owned, majority-owned and unconsolidated entities, collectively referred to as “affiliated entities”, transfer device equipment installment contracts to USCC EIP LLC. This SPE will aggregate device equipment ins tallment plan contracts for further transfer into a separate bankruptcy remote securitization trust structure, perform servicing, collection and all other administrative activities related to accounting for equipment installment plan contracts.

USCC EIP LLC’s sole business consists of the acquisition of the receivables from U.S. Cellular affiliated entities for the future transfer of receivables into a trust. Given that U.S. Cellular has the power to direct the activities of this SPE, and that this SPE l acks sufficient equity to finance its activities, U.S. Cellular is deemed to have a controlling financial interest in the SPE and, therefore, consolidates it.

During the six months ended June 30, 2017 , net equipment installment plan receivables totaling $ 883 million were transferred to the newly formed SPE from affiliated entities. There were no receivables transferred as of December 31, 2016. B ecause TDS fully consolidates USCC EIP LLC, the transfer of receivables into this SPE did not have a material impact to the consolidated financial statements of TDS. As of June 30, 2017 , TDS had not executed a sec uritized borrowing from a third party specific to its equipment installment plan receivables.

The following VIEs 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:

Advantage Spectrum, L.P. (Advantage Spectrum) and Sunshine Spectrum, Inc. (Sunshine Spectrum), the general partner of Advantage Spectrum (former general partner was Frequency Advantage, L.P. (Frequency Advantage));
Aquinas Wir eless, 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.

These particular VIEs are collectively referred to as designated entities. The power to dir ect the activities that most significantly impact the economic performance of these VIEs 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 c arry on the business of the partnerships. The general partner of each partnership needs the consent of the limited partner, an indirect TDS subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidat e the limited partnerships. Although the power to direct the activities of these VIEs is shared, TDS has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that TDS is the primary ben eficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.

In January 2017, Sunshine Spectrum and the other owner of Frequency Advantage (the previous general partner of Advantage Spectrum) completed a series of transactions wh ereby Frequency Advantage was dissolved and Sunshine Spectrum became the new general partner of Advantage Spectrum. Consistent with its previous treatment of Frequency Advantage and in accordance with GAAP, TDS consolidates Sunshine Spectrum in its financ ial statements.

TDS also consolidates other VIEs that are limited partnerships that provide wireless service. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partner. For certain limited partnerships, U.S. Cellular is the general partner and manages the operations. In these partnerships, the limited partners do not have substantive kick-out or participating rights and, further, such limited partners do not have the authority to remove the general partner. Therefore, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model.

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

			June 30,		December 31,
			2017		2016
(Dollars in millions)
Assets
	Cash and cash equivalents		$	2	$	2
	Accounts receivable			402		39
	Other current assets			6		6
	Licenses			649		649
	Property, plant and equipment, net			87		93
	Other assets and deferred charges			241		15
		Total assets	$	1,387	$	804

Liabilities
	Current liabilities		$	40	$	18
	Deferred liabilities and credits			12		12
		Total liabilities	$	52	$	30

Unconsolidated VIEs

TDS manages the operations of and holds a variable interest in certain other limited partnerships, but is not the primary beneficiary of these entities and, therefore, does not consolidate them under the variable interest model.

TDS’ total investment in these unconsolidated entities was $ 4 million and $ 6 million at June 30, 2017 and December 31, 2016 , respectively, and is included in Investments in unconsolidated entities in TDS’ Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by TDS in those entitie s.

Other Related Matters

TDS made contributions, loans and/or advances to its VIEs totaling $ 676 million, of which $ 659 million is related to USCC EIP LLC as discussed above, and $ 26 million during the six months ended June 30, 2017 and June 30, 2016 , respectively. TDS may agree to make additional capital contributions and/or advances to these or other VIEs and/or to their general partners to provide additional funding for operations or the development of lice nses 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.

Note 9 Noncontrolling Interests

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

Six Months Ended June 30,	2017		2016
(Dollars in millions)
Net income attributable to TDS shareholders	$	47	$	36
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		(11)		(15)
Change in TDS' Capital in excess of par value from U.S. Cellular's repurchases of U.S. Cellular shares		–		–
Purchase of ownership in subsidiaries from noncontrolling interests		–		–
Net transfers (to) from noncontrolling interests		(11)		(15)
Change from net income attributable to TDS and transfers (to) from noncontrolling interests	$	36	$	21

Note 10 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 com mon 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 repre sentative 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, 2017 and 2016 , is as follows. See Note 1 — Basis of Presentation for additional information.

					TDS Telecom
Three Months Ended or as of June 30, 2017			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in millions)
Operating revenues
	Service 1		$	740	$	180	$	51	$	27	$	(1)	$	258	$	(6)	$	992
	Equipment and product sales			223		–		–		23		–		24		8		255
		Total operating revenues 1		963		181		51		51		(1)		281		3		1,247
Cost of services (excluding Depre ciation, amortization
	and accretion reported below)			189		65		24		21		(1)		110		(1)		298
Cost of equipment and products				260		1		–		19		–		20		7		287
Selling, general and administrative				351		48		13		10		–		72		(4)		419
Depreciation, amortization a nd accretion				155		37		11		7		–		55		1		211
(Gain) loss on asset disposals, net				5		–		–		–		–		1		–		6
(Gain) loss on license sales and exchanges, net				(2)		–		–		–		–		–		–		(2)
Operating income (loss) 1				5		29		3		(7)		–		25		(2)		28
Equi ty in earnings of unconsolidated entities				33		–		–		–		–		–		–		33
Interest and dividend income 1				2		1		–		–		–		1		1		4
Interest expense				(28)		–		–		(1)		–		(1)		(14)		(43)
Other, net				–		–		–		–		–		–		–		–
Income (loss) before income taxes				12		30		3		(8)		–		25		(15)		22
Income tax expense (benefit) 2				–										10		–		10
Net income (loss)				12										15		(15)		12
Add back:
Depreciation, amortization and accretion				155		37		11		7		–		55		1		211
(Gain) loss on asset disposals, net				5		–		–		–		–		1		–		6
(Gain) loss on license sales and excha nges, net				(2)		–		–		–		–		–		–		(2)
Interest expense				28		–		–		1		–		1		14		43
Income tax expense (benefit) 2				–										10		–		10
Adjusted EBITDA 3			$	198	$	67	$	14	$	–	$	–	$	82	$	–	$	280

Investments in unconsolidated ent ities			$	414	$	4	$	–	$	–	$	–	$	4	$	34	$	452
Total assets			$	7,077	$	1,200	$	611	$	247	$	–	$	2,059	$	242	$	9,378
Capital expenditures			$	84	$	33	$	12	$	4	$	–	$	49	$	1	$	134

Numbers may not foot due to rounding.

					TDS Telecom
Three Months Ended or as of June 30, 2016			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in millions)
Operating revenues
	Service 1		$	774	$	175	$	45	$	33	$	(1)	$	252	$	(7)	$	1,019
	Equipment and product sales			218		–		–		47		–		48		10		276
		T otal operating revenues 1		992		175		45		80		(1)		300		3		1,295
Cost of services (excluding Depreciation, amortization
	and accretion reported below)			193		64		24		19		(1)		105		(1)		297
Cost of equipment and products				262		–		–		39		–		39		8		309
Selling, general and administrative				357		49		12		15		–		76		(4)		429
Depreciation, amortization and accretion 4				154		37		9		7		–		54		2		210
(Gain) loss on asset disposals, net				5		1		–		–		–		1		–		6
(Gain) loss on license sales and exchanges, net				(9)		–		–		–		–		–		–		(9)
Operating incom e (loss) 1				30		25		–		–		–		24		(1)		53
Equity in earnings of unconsolidated entities				37		–		–		–		–		–		(1)		36
Interest and dividend income 1				2		1		–		–		–		1		–		3
Interest expense				(28)		–		–		(1)		–		(1)		(14)		(43)
Other, net				(1)		–		–		–		–		–		2		1
Income (loss) before income taxes				40		25		–		(1)		–		24		(14)		50
Income tax expense (benefit) 2				13										10		(5)		18
Net income (loss)				27										15		(10)		32
Add back:
Depreciation, amortization and accretion 4				154		37		9		7		–		54		2		210
(Gain) loss on asset disposals, net				5		1		–		–		–		1		–		6
(Gain) loss on license sales and exchanges, net				(9)		–		–		–		–		–		–		(9)
Interest expense				28		–		–		1		–		1		14		43
Income tax expense (benefit) 2				13		–		–		–		–		10		(5)		18
Adjusted EBITDA 3			$	218	$	63	$	10	$	7	$	–	$	80	$	2	$	300

Investments in unconsolidated entities			$	407	$	4	$	–	$	–	$	–	$	4	$	35	$	446
Total assets			$	7,091	$	1,268	$	589	$	285	$	–	$	2,142	$	193	$	9,426
Capital expenditures			$	93	$	27	$	17	$	2	$	–	$	46	$	3	$	142

Numbers may not foot due to rounding.

					TDS Telecom
Six Months Ended or as of June 30, 2017			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in millions)
Operating revenues
	Service 1		$	1,486	$	359	$	100	$	56	$	(2)	$	513	$	(10)	$	1,989
	Equipment and pr oduct sales			413		1		–		66		–		67		16		496
		Total operating revenues 1		1,899		360		100		122		(2)		580		6		2,485
Cost of services (excluding Depreciation, amortization
	and accretion reported below)			364		129		48		42		(2)		216		–		580
Cost of equipment and products				488		1		–		55		–		56		13		557
Selling, general and administrative				691		96		25		21		–		142		(8)		825
Depreciation, amortization and accretion				307		76		21		14		–		111		4		422
(Gain) loss on asset disposals, net				9		1		1		–		–		1		–		10
(Gain) loss on license sales and exchanges, net				(19)		–		–		–		–		–		–		(19)
Operating income (loss) 1				59		57		5		(9)		–		53		(2)		110
Equity in earnings of unconsolidated entities				66		–		–		–		–		–		(1)		65
Interest and dividend income 1				5		2		–		–		–		2		1		8
Interest expense				(56)		–		–		(2)		–		(2)		(27)		(85)
Other, net				(1)		–		–		–		–		–		2		1
Income (loss) before income taxes				73		60		5		(11)		–		54		(28)		99
Income tax expense (benefit) 2				33										21		(10)		44
Net income (loss)				40										33		(18)		55
Add back:
Depreciation, amortization and accretion				307		76		21		14		–		111		4		422
(Gain) loss on asset disposals, net				9		1		1		–		–		1		–		10
(Gain) loss on license sales and exchanges, net				(19)		–		–		–		–		–		–		(19)
Interest expense				56		–		–		2		–		2		27		85
Income tax expense (benefit) 2				33										21		(10)		44
Adjusted EBITDA 3			$	426	$	137	$	27	$	4	$	–	$	168	$	3	$	597

Investments in unconsolidated entities			$	414	$	4	$	–	$	–	$	–	$	4	$	34	$	452
Total assets			$	7,077	$	1,200	$	611	$	247	$	–	$	2,059	$	242	$	9,378
Capital expenditures			$	145	$	50	$	21	$	10	$	–	$	81	$	4	$	230

Numbers may not foot due to rounding.

					TDS Telecom
Six Months Ended or as of June 30, 2016			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Corporate, Eliminations and Other		Total
(Dollars in millions)
Operating revenues
	Service 1		$	1,545	$	347	$	90	$	62	$	(2)	$	497	$	(10)	$	2,032
	Equipment and product sales			417		1		–		82		–		84		17		518
		Total operating revenues 1		1,962		348		90		144		(2)		581		7		2,550
Cost of services (excluding Depreciation, amortization
	and accretion reported below)			376		126		46		40		(2)		210		(1)		585
Cost of equipment and products				518		1		–		68		–		69		13		600
Selling, general and administrative				719		98		24		25		–		147		(7)		859
Depreciation, amortization and accretion 4				307		78		18		15		–		112		3		422
(Gain) loss on asset disposals, net				10		1		1		–		–		2		–		12
(Gain) loss on license sales and exchanges, net				(9)		–		–		–		–		–		–		(9)
Operating incom e (loss) 1				41		45		1		(4)		–		41		(1)		81
Equity in earnings of unconsolidated entities				72		–		–		–		–		–		–		72
Interest and dividend income 1				3		1		–		–		–		2		–		5
Interest expense				(56)		1		–		(2)		–		(1)		(28)		(85)
Other, net				–		–		–		–		–		–		–		–
Income (loss) before income taxes				60		46		1		(6)		–		41		(28)		73
Income tax expense (benefit) 2				23										16		(8)		31
Net income (loss)				37										25		(20)		42
Add back:
Depreciation, amortization and accretion 4				307		78		18		15		–		112		3		422
(Gain) loss on asset disposals, net				10		1		1		–		–		2		–		12
(Gain) loss on license sales and exchanges, net				(9)		–		–		–		–		–		–		(9)
Interest expense				56		(1)		–		2		–		1		28		85
Income tax expense (benefit) 2				23										16		(8)		31
Adjusted EBITDA 3			$	424	$	125	$	20	$	11	$	–	$	156	$	3	$	583

Investments in unconsolidated entities			$	407	$	4	$	–	$	–	$	–	$	4	$	35	$	446
Total assets			$	7,091	$	1,268	$	589	$	285	$	–	$	2,142	$	193	$	9,426
Capital expenditures			$	172	$	55	$	30	$	3	$	–	$	88	$	7	$	267

Numbers may not foot due to rounding.

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 for additional details.

2		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”.

3		Adjusted earnings before interest, taxes, depreciation, amortization and accretion (Adjusted EBITDA) is a segment measure reporte d 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. T DS believes Adjusted EBITDA is a useful measure of TDS’ operating results before significant recurring non-cash charges, gains and losses, and other items as presented above as they provide additional relevant and useful information to investors and other users of TDS' financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management's evaluation of business performance.

4		During the three and six months ended June 30, 2016, TDS recorded an out-of-period adjustment attributable to the third q uarter of 2014 through the first quarter of 2016 related to the over-depreciation of certain assets in the Wireline segment. TDS determined that this adjustment was not material to the quarterly periods or the annual results for 2016. As a result of this out-of-period adjustment, Depreciation, amortization and accretion expense decreased by $4 million for the three and six months ended June 30, 2016.

Telephone and Data Systems, Inc.

Additional Required Information

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 Ex chang e 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 specif ied in the SEC’s rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal e xecutive o fficer and principal f inancial o fficer, as appropriate, to allow for timely decisions regarding required disc losure. 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 s 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal e xecutive o fficer and principal f inancial o fficer, 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 e xecutive o fficer and principal f inancial o fficer concluded that TDS' disclosure controls and procedures wer e effective as of June 30, 2017 , at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal controls over financial reporting that have occurred during the quarter ended June 30, 2017 , that have materially affected, or are reasonably likely to ma terially affect, TDS ’ internal control over financial reporting.

Legal Proceedings

Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2016 . There have been no material changes to such information since December 31, 2016 .

Unregistered Sales of Equity Securities and Use of Proceeds

On August 2, 2013, the Board of Directors of TDS authorized , and TDS announced by Form 8-K, 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 Exchange Act, purs uant 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. TDS did not determine t o terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the second quarter of 2017 .

The following table provides cer tain information with respect to all purchases made by or on behalf of TDS, and any 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.

					Total Number of	Maximum Dollar
			Average		Shares Purchased	Value of Shares that
		Total Number	Price		as Part of Publicly	May Yet Be
		of Shares	Paid per		Announced Plans or	Purchased Under the
Period		Purchased	Share		Programs	Plans or Programs
April 1 – 30, 2017		–	$	–	–	$	198,691,355
May 1 – 31, 2017		–		–	–		198,691,355
June 1 – 30, 2017		–		–	–		198,691,355
	Total for or as of the end of the
	quarter ended June 30, 2017	–	$	–	–	$	198,691,355

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 cash amounts under their revolving credit facilities in the second quarter of 2017 or through the filing date of this Form 10-Q, and had no cash borrowings outstanding under their revo lving credit facilities as of June 30, 2017 , or as of the filing date of this Form 10-Q.

Exhibits

Exhibit Number	Description of Documents
Exhibit 10.1	Form of U.S. Cellular 2013 Long-Term Incentive Plan 2017 Performance Award Agreement for the President and CEO of U.S. Cellular is hereby incorporated by reference t o Exhibit 10.1 to U.S. Cellular’s Current Report on Form 8-K dated April 3, 2017.
Exhibit 10.2	Form of U.S. Cellular 2013 Long-Term Incentive Plan 2017 Restricted Stock Unit Award Agreement for the President and CEO of U.S. Cellular is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellular’s Current Report on Form 8-K dated April 3, 201 7.
Exhibit 10.3	TDS 2017 Officer Bonus Program is hereby incorporated by reference to Exhibit 10.1 to TDS’ Current Report on Form 8-K dated May 24, 2017.
Exhibit 10.4	Form of 2017 Performance Share Award Agreement, is hereby incorporated by reference to Exhibit 10.2 to TDS' Current Report on Form 8-K dated Ma y 24, 2017.
Exhibit 10.5	TDS Incentive Plan is hereby incorporated by reference to Exhibit A to TDS’ proxy statement for its 2017 Annual Meeting of shareholders as filed on Schedule 14A on April 12, 2017.
Exhibit 11	Statement regarding computation of per share earn ings is included herein as Note 4 — Earnings Per Share in the Notes to Consolidated Financial Statements.
Exhibit 12	Statement regarding computation of ratio of earnings to fixed charges.
Exhibit 18	Preferability letter from Independent Re gistered Public Accounting Firm is hereby incorporated by reference to Exhibit 18 to TDS’ Quarterly Report on Form 10-Q for the period ended March 31, 2017 .
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 Sta tes 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, 2016 . Reference is made to TDS’ Form 10-K for the year ended December 31, 2016 , for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.

Form 1 0-Q Cross Reference Index

Item Number			Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)	38 - 44
		Notes to Consolidated Financial Statements	45 - 56

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1 - 37

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	Item 4.	Controls and Procedures	57

Part II.	Other Information

	Item 1.	Legal Proceedings	57

	Item1A.	Risk Factors	37

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

	Item 5.	Other Information	58

	Item 6.	Exhibits	59

Signatures			61

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:	August 4, 2017		/s/ LeRoy T. Carlson, Jr.
			LeRoy T. Carlson, Jr. President and Chief Executive Officer (principal executive officer)

Date:	August 4, 2017		/s/ Douglas D. Shuma
			Douglas D. Shuma Senior Vice President - Finance and Chief Accounting Officer (principal financial officer and principal accounting officer)

Date:	August 4, 2017		/s/ Anita J. Kroll
			Anita J. Kroll Vice President and Controller