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UScellular.
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Seasonality
Services. U.S. Cellular’s customers are able to choose fromon a postpaid or prepaid basis. A single account may include monthly wireless services for a variety of nationalhandsets and connected devices. A postpaid connection represents an individual line of service for a device for which a customer is generally billed one month in advance for a monthly access charge in return for access to and usage of network services. UScellular’s prepaid service enables individuals to obtain services without credit verification by paying for all services in advance. Approximately 90% of retail connections were postpaid connections as of December 31, 2021.
U.S. Cellular’s portfolio of smartphones, tablets and other connected devices is a key part of its strategy to deliver wireless devices that allow customers to stay productive, entertained and connected on the go; these devices are backed by U.S. Cellular’s high-speed networks, including a fourth generation (4G) Long-Term Evolution (LTE) network. U.S. Cellular’s 4G LTE network features smartphone messaging, data and internet services that allow customers to access the web and social network sites, e-mail, text, picture and video message, utilize GPS navigation, and browse and download thousands of applications to customize their wireless devices to fit their lifestyles. U.S. Cellular alsolimited time promotional offers.
Devices and
Throughout 2017, new postpaid handset salesnetworking products. UScellular allows customers to retail consumers were made under equipmentpurchase certain devices and accessories on installment plans, (EIP) only; business and governmentallowing for customers may continue to purchase equipment under alternative plans subject to a service contract. For certain installment plans, afterpay over a specified period of time or number of payments, the customer may have the right to upgrade to a new device prior to reaching the end of the installment term, thus enablingtime.
During 2017, U.S. Cellular began to offer accessories for purchase on installment plans. These plans allow new and existing postpaid customers to purchase certain accessories payable over a specified time period. These accessory installment plans are available through U.S. Cellular company-owned retail stores, telesales channels, and agent channels using direct fulfillment with U.S. Cellular’s inventory.
U.S. Cellular continues to offer device service programs that provide customers a simple process to replace a defective device via direct mail. U.S. Cellular also offers its Trade-In program where U.S. Cellular buys consumers’ used equipment, Device Protection+ program, which includes overnightprovides as soon as next-day delivery of a replacement device for damaged, lost and stolen devices, Device Protection+ Advanced, which includes 100GB of data backup, TechSupport+, and AppleCare services for Apple iOS customers.
U.S. Cellular UScellular's Device Protection+ Advanced program also includes local or on-demand repair for eligible devices. In addition, UScellular offers a full array of iconic smartphones with options for both Android and iOS customers. U.S. Cellular continues to bolster its expanding smartphone portfolio with the Samsung Galaxy S® 8/8+, the iPhone® 8 and 8 Plus and X, the LG G6, V30 and K8, and the Motorola Z Force. Along with the iconic devices, U.S. Cellular supports the larger ecosystem of Samsung and Apple devices, such as the Samsung Gear VR, the Samsung Gear S3 and the Apple Watch Series 3. For tablets, U.S. Cellular offers the full complement of iPads, the Samsung Galaxy Tab S3 and various other tablets from LG, Samsung, and ZTE. U.S. Cellular’s smartphone offerings play a significant role in attracting customers and driving data service usage and revenues. U.S. Cellular also offers additional services and products that utilize the company’s network, including feature phones, mobile hotspots, LTE wireless routers and home phones.
U.S. CellularUScellular purchases wireless devices and accessory products from a number of original equipment manufacturers including Samsung, Apple, Motorola, LG, Kyocera, ZTE, Tessco and Superior. U.S. Cellular also hasdistributors. UScellular manages relationships with its suppliers to ensure best possible pricing and identifies opportunities for promotional support. U.S. Cellularsupport from its suppliers. UScellular does not own significant product warehousing and distribution infrastructure; rather, it contracts with third party providers for the majority of its product warehousing, distribution and direct customer fulfillment activities. U.S. CellularUScellular also contracts with third party providers for services related to its device service programs.
U.S. Cellular continuously monitors
Marketing, Customer Service, and holiday season.
Marketing and Advertising. U.S. Cellular’s marketing plan is focused on acquiring, retaining and growing customer relationships by maintaining a high-quality wireless network, providing outstanding customer service, and offering a comprehensive portfolio of services and products built around customer needs at fair prices with a local focus. U.S. Cellular believes that creating positive relationships with its customers enhances their wireless experience and builds customer loyalty. U.S. Cellular currently offers several customer-centric programs and services to customers.
To attract potential new customers and retain existing customers, and increase their usage of U.S. Cellular’s services, U.S. Cellular’s advertising is directed at increasing the public awareness of the U.S. Cellular brand, knowledge of the outstanding network that works in places where other carriers do not have coverage, and understanding of the wireless services it offers. U.S. Cellular supplements its advertising with a focused public relations program that improves overall brand sentiment and awareness, encourages engagement, supports sales of services and products, and builds preference and loyalty for the U.S. Cellular brand. The approach combines national and local media relations in mainstream and social media channels with market-wide activities, events, and sponsorships.
U.S. Cellular focuses its charitable giving on initiatives relevant to consumers in its service areas. These initiatives include programs that focus on STEM (Science, Technology, Engineering and Math) activities for youth in the communities U.S. Cellular serves and often involve collaboration with organizations such as the Boys and Girls Clubs of America.
Customer Service. U.S. Cellular manages customer retention by focusing on outstanding customer service through the development of processes that are customer-friendly, extensive training of frontline sales and support associates and the implementation of retention programs.
U.S. Cellular currently operates four regional customer care centers in its operating markets with personnel who are responsible for customer service activities, and a national financial services center with personnel who perform credit and other customer payment activities. U.S. Cellular also contracts with third parties that provide additional customer care and financial services support.
Sales and Distribution Channels. U.S. Cellular
retailers.
U.S. Cellular maintains an ongoing training program to improve the effectiveness of retail sales associatesvia phone and direct sales representatives by focusing their efforts on obtaining customers by facilitating the sale of appropriate packages for the customer’s expected usage and value-added services that meet the individual needs of the customer.
U.S. Cellularonline, respectively.
U.S. Cellular services and products
Seasonality. Seasonality in operating expenses may cause operating income to vary from quarter to quarter. U.S. Cellular’s operating expenses tend to be higher in the fourth quarter due to increased marketing and promotional activities during the holiday season.
Competition
The wireless telecommunication industry is highly competitive. U.S. CellularUScellular competes directly with several wireless service providers in each of its markets. In general, there are between two and four competitors in each wireless market in which U.S. CellularUScellular provides service, excluding resellers and mobile virtual network operators (MVNO)(MVNOs). In its footprint, U.S. CellularUScellular competes to varying degrees against each of the national wireless companies: Verizon, Wireless, AT&T, Mobility, Sprint,T-Mobile USA, and T-Mobile USA,an emerging Dish as the fourth national carrier, in addition to a few smaller regional carriers, cable and other MVNOs in specific areas of its footprint. All of the national competitors have substantially greater financial and other resources than U.S. Cellular. In addition, U.S. CellularUScellular competes with other companies that use alternative communication technology and services to provide similar services and products.
The use of national advertising and promotional programs by the top four wireless service providers is a source of additional competitive and pricing pressures in all U.S. Cellular markets, even if those operators do not provide direct service in a particular market. Over the past year, competition among top carriers has continued to be aggressive, with the top four carriers offering unlimited plans as well as engaging in rich promotional initiatives including device price reductions. In addition, in the current wireless environment, U.S. Cellular’s ability to compete depends on its ability to continue to offer national voice and data plans. U.S. Cellular provides wireless services comparable to the national competitors, but the national wireless companies operate in a wider geographic area and are able to provide such services over a wider area on their own networks than U.S. Cellular can offer on its network. Although U.S. Cellular offers similar coverage area as these competitors, U.S. Cellular incurs roaming charges for data sessions and calls made in portions of the coverage area which are not part of its network, thereby increasing its cost of operations. U.S. Cellular depends on roaming agreements with other wireless carriers to provide voice and data roaming capabilities in areas not covered by U.S. Cellular’s network. Similarly, U.S. Cellular provides roaming services on its network to other wireless carriers’ customers who travel within U.S. Cellular’s coverage areas and receives revenue from other carriers for the provision of these services.
Convergence of connectivity is taking place on many levels, including wireless devices that can act as wireless or wireline replacement devices and the incorporation of wireless “hot spot” technology in wireless devices making internet access seamless regardless of location. Although less directly a substitute for other wireless services, wireless datarelated services such as Wi-Fi may be adequate for those who do not need mobile wide-area roaming or full two-way voicecontent offerings that are bundled with wireless services. Technological advances or regulatory changes in the future, such as the rollout and consumer adoption of Wi-Fi calling and Voice over Long-Term Evolution (VoLTE) capabilities, may make available other alternatives to current wireless service, thereby creating additional sources of competition that shift consumers’ perceptions and preferences of network strength, speed and reliability. If the trend toward convergence continues, U.S. Cellular is at a competitive disadvantage to larger competitors, including the national wireless carriers, traditional cable companies, MVNOs and other potential large new entrants with much greater financial and other resources in adapting to such convergence. Cable companies have begun to compete in the wireless market. Most notably, Comcast currently offers wireless services and Charter is expected to begin offering wireless services in 2018.
U.S. Cellular’s approach in 2018 and in future years will be to focus on the unique needs and attitudes of its customers towards wireless service. U.S. Cellular will deliver high-quality services and products at competitive prices and intends to continue to differentiate itself by seeking to provide an overall outstanding customer experience, founded on a high-quality network. U.S. Cellular’s ability to compete successfully in the future will depend upon its ability to anticipate and respond to changes related to new service offerings, consumer preferences, competitors’ pricing strategies and new product offerings, technology, demographic trends, economic conditions and its access to adequate spectrum resources.
Technology.
Wireless telecommunication systems transmit voiceTableUScellular continues to devote efforts to enhance its network capabilities. UScellular has completed its deployment of Contents
4G LTE technology enables more network capacity for more data per user as well as faster access to data. In addition, U.S. Cellular commercially deployed VoLTE technology for the first time in 2017 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 starting in early 2018.technology. VoLTE technology allows customers to utilize a 4G LTE network for both voice and data services and enablesoffers enhanced services such as high definition voice video calling and simultaneous voice and data sessions. In addition,
Roaming. U.S. Cellular’s main sources of revenuesagreements are its own customers and customers of other wireless operators who roam on its network. An inter-carrier roaming agreement is negotiated between the wireless operators to enable customers who are in ato use wireless service area other than the customer’sservices outside of their home service area to place or receive a call or text message, or to use data services, in that service area. U.S. CellularUScellular has entered into reciprocal roaming agreements with operators of other wireless systems covering virtually all systems with CDMA technology in the United States, Canada4G LTE and Mexico. In addition, U.S. Cellular has entered into reciprocal 4G LTEVoLTE roaming agreements with national wireless companies and, as a result, a majority of U.S. Cellular customers currently have access to these services on a nationwide 4G LTE service.
Another digital technology, Global System for Mobile Communication (GSM), hasbasis. In addition, UScellular offers a larger installed basevariety of customers worldwide. U.S. Cellular customers now have the ability to roam on GSM carriers with voice, datainternational roaming options and text messaginglaunched 5G roaming in Canada, Mexico and internationally. Both CDMA and GSM technologies are being succeeded by 4G LTE and VoLTE technology.
System Design and Construction. U.S. Cellular designs and constructs its systems in a manner it believes will permit it to provide high-quality service to substantially all types of compatible wireless devices. Designs are based on engineering studies which relate to specific markets, in support of the larger network. Network reliability is given careful consideration and extensive backup redundancy is employed in many aspects of U.S. Cellular’s network design. Route diversity, redundant equipment, ring topology and extensive use of emergency standby power also are used to enhance network reliability and minimize service disruption from any particular network element failure.
In accordance with its strategy of building and strengthening its operating market areas, U.S. Cellular has selected high-capacity, carrier-class digital wireless switching systems that are capable of serving multiple markets through a single mobile telephone switching office. Centralized equipment, used for network and data management, is located in high-availability facilities supported by multiple levels of power and network redundancy. U.S. Cellular’s systems are designed to incorporate Internet Protocol (IP) packet-based Ethernet technology, which allows for increased data capacity and a more efficient network. Interconnection between the mobile telephone switching office and the cell sites utilizes Ethernet technology for nearly all 4G LTE sites, over fiber or microwave links.
U.S. Cellular believes that currently available technologies and appropriate capital additions will allow sufficient capacity on its networks to meet anticipated demand for voice and data services over the next few years. However, increasing demand for high-speed data may require the acquisition of additional spectrum licenses to provide sufficient capacity and throughput.
Construction of wireless systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, mobile telephone switching offices, cell site equipment, transport equipment, engineering and installation. U.S. Cellular primarily uses its own personnel to engineer each wireless system it owns and operates, and engages contractors to construct the facilities.
The costs (inclusive of the costs to acquire licenses) to develop the systems which U.S. Cellular operates have historically been financed primarily through proceeds from debt offerings, with cash generated by operations, and proceeds from the sales of wireless interests and other non-strategic assets.
U.S. Cellular groups its individual markets (geographic service areas as defined by the FCC in which wireless carriers are licensed, for fixed terms, to provide service) into broader geographic market areas to offer customers large service areas that primarily utilize U.S. Cellular’s network. U.S. Cellular’s interests in wireless licenses include both direct interests whereby U.S. Cellular is the licensee and investment interests in entities which are licensees; together, these direct and investment interests involve operating and non-operating licenses covering 31 states and a total population of 51 million at December 31, 2017.
U.S. Cellular’s business development strategy is to obtain interests in or access to wireless licenses in its current operating markets and in areas that are adjacent to or in close proximity to its other wireless licenses, thereby building larger geographic operating market areas. U.S. Cellular believes that the acquisition of additional licenses within its current operating markets will enhance its network capacity and speed to meet its customers’ growing demand for data services. From time to time, U.S. Cellular has divested outright or included in exchanges for other wireless interests certain consolidated and investment interests that were considered less essential to its current and expected future operations. As part of its business development strategy, U.S. Cellular may periodically be engaged in negotiations relating to the acquisition, exchange or disposition of companies, strategic properties, investment interests or wireless spectrum. See Note 6 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for a description of recent significant acquisitions, divestitures and exchanges.
Occasionally, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. Historically, U.S. Cellular has participated in certain prior FCC auctions both directly and indirectly through its limited partnership interests. Each limited partnership that qualified as a “designated entity” was eligible for bidding credits with respect to most licenses purchased in accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits resulted in a 25% discount from the gross winning bid. In July 2016, the FCC announced U.S. Cellular as a qualified bidder in the FCC’s forward auction of 600MHz spectrum licenses, referred to as Auction 1002. Due to changes in FCC rules, U.S. Cellular did not apply to participate in Auction 1002 by investing in a “designated entity” limited partnership which would have qualified for a discount of 25% on any licenses won in the auction. Instead, U.S. Cellular applied to participate in the auction directly and did not qualify for such discount. 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 and granted the licenses to U.S. Cellular during the second quarter of 2017. See Exhibit 13 to this Form 10-K, under “Regulatory Matters – FCC Auction 1002” for a summary of U.S. Cellular’s participation in Auction 1002.
U.S. Cellular’s
U.S. Cellular provides various wireless services, including voice and data services, pursuant to licenses granted by the FCC.
Reference is made to Exhibit 13 to this Form 10-K under “Regulatory Matters” for information regarding any significant recent developments and proposals relating to the foregoing regulatory matters.
Debt Securities
The following securities trade on
U.S. Cellular
Locationsupported in a remote work environment.
U.S. Cellular executive offices are located at 8410 West Bryn Mawr Avenue, Chicago, Illinois 60631. U.S. Cellular’s telephone number is 773-399-8900. U.S. Cellular’s
If U.S. Cellular does not adapt to compete effectively in such a highly competitive environment, such competitive factors could result in product, service, pricing or cost disadvantages and could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular is a regional wireless carrier, but competes primarily against much larger national wireless carriers with much greater resources. Its business strategy in attempting to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans and pricing, all provided with a local focus has not resulted in, and in the future may not result in, performance that achieves returns in line with or above its cost of capital. U.S. Cellular’s current forecast indicates that U.S. Cellular will not achieve a return on capital that exceeds its cost of capital in the foreseeable future. U.S. Cellular also might be unable to adopt technologies, services and products as fast as its larger competitors. As a result, consumers who are eager to adopt new technologies, services and products more quickly may select U.S. Cellular’s competitors rather than U.S. Cellular as their service provider. To the extent that U.S. Cellular does not attract or retain these types of customers, U.S. Cellular could be at a competitive disadvantage and have a customer base that generates lower profit margins relative to its competition.
The successful execution of strategy and optimal capital allocation decisions depend on various internal and external factors, many of which are not in U.S. Cellular’s control. U.S. Cellular’s ability to achieve projected financial results by implementing and executing its business strategy and optimally allocating its assets and capital could be affected by such factors. Such factors include but are not limited to pricing practices by competitors, relative scale, purchasing power, roaming and other strategic agreements, wireless device availability, timing of introduction of wireless devices, access to spectrum, emerging technologies and other factors. In addition, there is no assurance that U.S. Cellular’s strategy will be successful. Even if U.S. Cellular executes its business strategy as intended, such strategy may not be successful in the long term at achieving growth in customers, revenues, net income, or generating a return on capital greater than U.S. Cellular’s cost of capital. A failure by U.S. Cellular to execute its business strategy successfully or to allocate resources or capital optimally could have an adverse effect on U.S. Cellular’s wireless business, financial condition or results of operations.
U.S. Cellular operates a capital-intensive business. Historically, U.S. Cellular has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, U.S. Cellular’s existing cash and investment balances, funds available under its revolving credit facilities, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating, certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for U.S. Cellular 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. It may be necessary from time to time to increase the size of the existing revolving credit facility, to put in place new credit facilities, or to obtain other forms of financing in order to fund potential expenditures. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain short or long-term financing on acceptable terms, U.S. Cellular makes significant spectrum license purchases, the Los Angeles SMSA Limited Partnership (LA Partnership) discontinues or reduces distributions compared to historical levels, or Federal USF and/or other regulatory support payments decline substantially. In addition, although sales of assets or businesses by U.S. Cellular have been an important source of liquidity in prior periods, U.S. Cellular does not expect a similar level of such sales in the future, which will reduce a source of liquidity for U.S. Cellular. U.S. Cellular’s credit rating currently is sub-investment grade. U.S. Cellular has incurred negative free cash flow (defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment) at times in the past and this will occur in the future if operating results do not improve or capital expenditures are not reduced. U.S. Cellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, spectrum license or system acquisitions, system development and network capacity expansion, debt service requirements, the repurchase of shares, or making additional investments. There can be no assurance that sufficient funds will continue to be available to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S. Cellular. Insufficient cash flows from operating activities, changes in its credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its acquisition, capital expenditure and business development programs, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases. U.S. Cellular 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 U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular has a significant amount of indebtedness and may need to incur additional indebtedness. U.S. Cellular’s level of indebtedness could have important consequences. For example, it (i) may limit U.S. Cellular’s ability to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to its debt securities by rating organizations are revised downward; (ii) will require U.S. Cellular to dedicate a substantial portion of its cash flow from operations to the payment of interest and principal on its debt, reducing the funds available to U.S. Cellular for other purposes including expansion through acquisitions, capital expenditures, marketing spending and expansion of its business; and (iii) may limit U.S. Cellular’s flexibility to adjust to changing business and market conditions and make U.S. Cellular more vulnerable to a downturn in general economic conditions as compared to U.S. Cellular’s competitors. U.S. Cellular’s ability to make scheduled payments on its indebtedness or to refinance it will depend on its financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and other factors beyond its control. In addition, U.S. Cellular’s leverage may put it at a competitive disadvantage to some of its competitors that are not as leveraged.
U.S. Cellular’s revolving credit facility, term loan facility and receivables securitization facility require U.S. Cellular to comply with certain affirmative and negative covenants, including certain financial covenants. Depending on actual financial performance of U.S. Cellular, there is a risk that U.S. Cellular could fail to satisfy the required financial covenants. If U.S. Cellular breaches a financial or other covenant of any of these agreements, it would result in a default under that agreement, and could involve a cross-default under other debt instruments. This could in turn cause the affected lenders to accelerate the repayment of principal and accrued interest on any outstanding debt under such agreements and, if they choose, terminate the facility. If appropriate, U.S. Cellular may request the applicable lenders for an amendment of financial covenants in the U.S. Cellular facilities, in order to provide additional financial flexibility to U.S. Cellular, and may also seek other changes to such facilities. There is no assurance that the lenders will agree to any amendments. If the lenders agree to amendments, this may result in additional payments or higher interest rates payable to the lenders and/or additional restrictions. Restrictions in such debt instruments may limit U.S. Cellular’s operating and financial flexibility.
As a result, U.S. Cellular’s level of indebtedness, restrictions contained in debt instruments and/or possible breaches of covenants, defaults, and acceleration of indebtedness could have an adverse effect on U.S. Cellular’s business, financial condition, revenues, results of operations and cash flows.
U.S. Cellular’s
UScellular.
To the extent that other carriers expand their networks in U.S. Cellular’sUScellular’s service areas, the roaming arrangements between U.S. CellularUScellular and these other carriers could become less strategic for them. That is, these other carriers will have fewer or less extensive geographic areas where roaming services are required by their customers and, as a result, the roaming arrangements could become less critical to serving their customer base. This presents a risk to U.S. CellularUScellular in that, to the extent U.S. CellularUScellular is not able to enter into economically viable roaming arrangements with these other carriers, this could impact U.S. Cellular’sUScellular’s ability to service its customers in geographic areas where U.S. CellularUScellular does not have its own network.
If U.S. Cellular’s roaming revenues decline, or its roaming expenses increase, or if U.S. Cellular is unable to obtain or maintain roaming agreements with other carriers that contain pricing and other terms that are competitive and acceptable to U.S. Cellular and that satisfy U.S. Cellular’s quality and interoperability requirements, its business, financial condition or results of operations could be adversely affected.
U.S. Cellular’s
U.S. CellularFurther, a spectrum constrained provider will generally not be able to achieve the data speeds that other competitors with more spectrum are able to provide.
In addition, newly auctioned spectrum may not be compatible with existing spectrum, and vendors may not create suitable products
From timeUScellular's business, financial condition or results of operations.
U.S. Cellular’s
U.S. Cellularresources.
U.S. Cellular’s business is highly technical and competition for skilled talent in the wireless industry is intense. Due to competition and/or limited supply for qualified management, technical, sales and other personnel, there can be no assurance that U.S. Cellular will be able to continue to attract and/or retain people of outstanding potential for the development of its business. The loss of the services of existing key personnel as well as the failure to recruit additional qualified personnel in a timely manner could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
The U.S. wireless telecommunications industry is facing
There has been a trend in the telecommunications and related industries towards consolidation of service providers through acquisitions, reorganizations and joint ventures. This trend could continue, leading to larger competitors over time. U.S. Cellular has smaller scale efficiencies compared to larger competitors. U.S. Cellular may be unable to compete successfully with larger companies that have substantially greater financial, technical, marketing, sales, purchasing and distribution resources or that offer more services than U.S. Cellular, which could adversely affect U.S. Cellular’s revenues and costs of doing business. Specifically, U.S. Cellular’s smaller scale relative to most of its competitors could have the following impacts, among others:
U.S. Cellular’s business increasingly depends on access to content for data and access to new wireless devices being developed by vendors. U.S. Cellular’s ability to obtain such access depends in part on other parties. If U.S. Cellular is unable to obtain timely access to new content or wireless devices being developed by vendors, its business, financial condition or results of operations could be adversely affected.
As a result of the foregoing, U.S. Cellular’s smaller scale relative to larger competitors could adversely affect U.S. Cellular’s business, financial condition or results of operations.
Changes in any of several factors could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations. These factors include, but are not limited to:
The telecommunications industry is experiencing significant changes in technologies and services expected by customers, as evidenced by evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new services and products, and enhancements and changes in end-user requirements and preferences. Widespread deployment of new technologies, including 5G technology, could cause the technology used on U.S. Cellular’s wireless networks to become less competitive or obsolete. Further, fixed-mobile convergence services that combine wireline broadband services with mobile services represent a competitive threat. If the trend toward convergence continues, U.S. Cellular is at a competitive disadvantage to larger competitors, including the national wireless carriers and other potential large new entrants with much greater financial and other resources in adapting to such convergence. Future technological changes or advancements may enable other wireless technologies to equal or exceed U.S. Cellular’s current levels of service and render its system infrastructure obsolete. For example, the timing, cost, and availability of CDMA enabled devices and other CDMA ecosystem support needs, including voice roaming on other carrier networks, may inhibit U.S. Cellular’s ability to maintain 3G wireless voice service until it is fully replaced by VoLTE. U.S. Cellular may not be able to respond to such changes and implement new technology on a timely or cost-effective basis, which could reduce its revenues or increase its costs of doing business. If U.S. Cellular cannot keep pace with these technological changes or other changes in the telecommunications industry over time, its financial condition, results of operations or ability to do business could be adversely affected.
U.S. Cellular has completed the transition to 4G LTE and has implemented 4G LTE as well as VoLTE roaming agreements with national carriers. U.S. Cellular began commercial deployment of VoLTE in 2017 and has begun testing 5G technology. Transition to new technologies involves significant time and cost. Furthermore, the wireless business experiences rapid technology changes and new services and products. If U.S. Cellular fails to effectively deploy new wireless technologies, services or products on a timely basis, this could have an adverse impact on U.S. Cellular’s business, financial condition and results of operations.
Furthermore, it is not certain that U.S. Cellular’s investments in various new, unproven technologies and service and product offerings will be effective. The markets for some of these services, products and solutions may still be emerging and the overall potential for these markets may be uncertain. If customer demand for these new services, products and solutions does not develop as expected, U.S. Cellular’s business, financial condition or results of operations could be adversely affected.
In 2011, the FCC released an order (USF Order) to: reform its universal service and intercarrier compensation mechanisms; establish a new, broadband-focused support mechanism; and propose further rules to advance reform. For a discussion of the USF Order and risks to such2021. There is no assurance that regulatory support see “Regulatory Matters – FCC Mobility Fund Phase II Order” in Exhibit 13 to this Form 10-K, which is incorporated by reference herein.payments will continue, and no assurance that UScellular will qualify for future regulatory support programs. If the foregoing regulatory support is discontinued or reduced from current levels, or if receipt of future regulatory support is contingent upon making certain network-related expenditures, this could have an adverse effect on U.S. Cellular’sUScellular’s business, financial condition or operating results.
The division of services between interstate services and intrastate services, including the divisions associated with Federal USF fees, is a matter of interpretation and may in the future may be contested by the FCC or state authorities. The FCC in the future also may change in the future the basis on which Federal USF fees are charged. The Federal government and many states also apply transaction-based taxes to sales of telecommunications services and products and to purchases of telecommunications services from various carriers. In addition, state regulators and local governments have imposed and may continue to impose various surcharges, taxes and fees on telecommunications services. The applicability of these surcharges and fees to U.S. Cellular’sUScellular’s services is uncertain in many cases and jurisdictions may contest whether U.S. CellularUScellular has assessed and remitted those monies correctly. Periodically, state and federal regulators may increase or change the surcharges and fees U.S. CellularUScellular currently pays. In some instances, U.S. CellularUScellular passes through these charges to its customers. However, Congress, the FCC, state regulatory agencies or state legislatures may limit the ability to pass through transaction-based tax liabilities, regulatory surcharges and regulatory fees imposed on U.S. CellularUScellular to customers. U.S. CellularUScellular may or may not be able to recover some or all of those taxes from its customers and the amount of taxes may deter demand for its services or increase its cost to provide serviceservice.
U.S. Cellular has entered into purchase commitments with certain vendors
A large portionpreventing such change in control.
As part of U.S. Cellular’s operating strategy, U.S. Cellularseries from time to time maytime. Generally, no further action or authorization by the shareholders is necessary prior to the designation or issuance of the additional Preferred Shares authorized pursuant to the UScellular Restated Certificate of Incorporation unless applicable laws or regulations would require such approval in a given instance. Such Preferred Shares could be engagedissued in circumstances that would serve to preserve TDS’ control of UScellular.
These transactions commonly involve a numberdifferent classes of risks, including:
No assurance can be given that U.S. Cellular will be successful with respect to its acquisition, divestiture or exchange strategies or initiatives. If U.S. Cellular is not successful with respect to its acquisitions, divestitures or exchanges, its business, financial condition or results of operations could be adversely affected.
U.S. Cellular’s business plan includes significant construction activities and enhancements to its network, support and other systems and infrastructure. As U.S. Cellular deploys, expands and enhances its network, it may need to acquire additional spectrum. Also, as U.S. Cellular continues to build out and enhance its network, U.S. Cellular must, among other things, continue to:
Any difficulties encountered in completing these activities, as well as problems in vendor equipment availability, technical resources, system performance or system adequacy, could delay expansion of operations and product capabilities in new or existing markets or result in increased costs. Failure to successfully build-out and enhance U.S. Cellular’s network and necessary support facilities and systems in a cost-effective manner, and in a manner that satisfies customer expectations for quality and coverage, could have an adverse effect on U.S. Cellular’s business, business prospects, financial condition or results of operations.
U.S. Cellular has relationships with independent agents and third party national retailers who market U.S. Cellular services. If such relationships are seriously harmed or if such parties experience financial difficulties, including bankruptcy, U.S. Cellular’s business, financial condition or results of operations could be adversely affected.
U.S. Cellular depends upon certain vendors to provide it with equipment (including wireless devices), services or content to continue its network construction and upgrades and to operate its business. U.S. Cellular does not have operational or financial control over such key suppliers and has limited influence with respect to the manner in which these key suppliers conduct their businesses. If these key suppliers experience financial difficulties or file for bankruptcy or experience other operational difficulties, they may be unable to provide equipment, services or content to U.S. Cellular on a timely basis, or at all, or they may otherwise fail to honor their obligations to U.S. Cellular. Furthermore, consolidation among key suppliers may result in less competition and higher prices or the discontinuation of support for equipment owned by U.S. Cellular.
Regulations regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries may affect some of U.S. Cellular’s suppliers. These regulations may limit the availability of conflict free minerals and, as a result, U.S. Cellular may not be able to obtain products in sufficient quantities or at competitive prices from its vendors who utilize such minerals in the manufacture of products. In such cases, U.S. Cellular may be unable to maintain and upgrade its network or provide services and products to its customers in a competitive manner, or could suffer other disruptions to its business. In that event, U.S. Cellular’s business, financial condition or results of operations could be adversely affected.
In addition, operation of U.S. Cellular’s supply chain and management of its inventory require accurate forecasting of customer growth and demand, which has become increasingly challenging. If overall demand for wireless devices or the mix of demand for wireless devices is significantly different than U.S. Cellular’s expectations, U.S. Cellular could face inadequate or excess supplies of particular models of wireless devices. This could result in lost sales opportunities or an excess supplythe exclusion of inventory. Either of these situations could adversely affect U.S. Cellular’s revenues, costs of doing business, results of operations or financial condition.
Also, U.S. Cellular has other arrangements with third parties, including arrangements pursuant to which U.S. Cellular now outsourcesUScellular Common Shares from certain support functions to third party vendors. Operational problems associated with such functions, including any failure by the vendor to provide the required level of service under the outsourcing arrangements, including possible cyber-attacks or other breaches of network or information technology security or privacy, could have adverse effects on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular has significant investments in entities that it does not control, including equity investments and interests in certain variable interest entities. U.S. Cellular’s interests in such entities do not provide U.S. Cellular with control over the business strategy, financial goals, network build-out plans or other operational aspects of these entities. U.S. Cellular cannot provide assurance that these entities will operate in a manner that will increase or maintain the value of U.S. Cellular’s investments, that U.S. Cellular’s proportionate share of income from these investments will continuemajor stock indices at the current levelsome point in the future, unless UScellular is grandfathered by such stock indices or that U.S. Cellular will not incur losses from the holding of such investments. Losses in the values of such investments or a reduction in income from these investments could adversely affect U.S. Cellular’s financial condition or results of operations. In addition, certain investments have historically contributed significant cash flows to U.S. Cellular and a reduction or suspension of such cash flows could adversely affect U.S. Cellular’s financial condition.
U.S. Cellular relies extensively on its telecommunication networks and information technology to operate and manage its business, process transactions and summarize and report results. These networks and technology become obsolete over time and must be upgraded, replaced and/or otherwise enhanced over time. Enhancements must be more flexible and dependable than ever before. All of this is capital intensive and challenging. A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
The increased provision of data services has introduced significant new demands on U.S. Cellular’s network and also has increased complexities related to network management. Further, the increased provision of data services, especially given the introduction of unlimited plans, on U.S. Cellular’s networks has created an increased level of risk related to quality of service. This is due to the fact that many customers increasingly rely on data communications to execute and validate transactions. As a result, redundancy and geographical diversity of U.S. Cellular’s network facilities are critical to providing uninterrupted service. Also, the speed of repair and maintenance procedures in the event of network interruptions is critical to maintaining customer satisfaction. U.S. Cellular’s ability to maintain high-quality, uninterrupted service to its customers is critical, particularly given the increasingly competitive environment and customers’ ability to choosequalifies for some other service providers.
In addition, U.S. Cellular’s networks and information technology and the networks and information technology of vendors on which U.S. Cellular relies are subject to damage or interruption due to various events, including power outages, computer, network and telecommunications failures, computer viruses, security breaches, hackers and other cyber security risks, catastrophic events, natural disasters, errors or unauthorized actions by employees and vendors, flawed conversion of systems, disruptive technologies and technology changes.
U.S. Cellular
Factors that may affect the future market price of U.S. Cellular’s Common Shares include:
Any of these or other factors could adversely affect the future market price of U.S. Cellular’s Common Shares, or could cause the future market price of U.S. Cellular’s Common Shares to fluctuate from time to time.
The preparation of financial statements requires U.S. Cellular to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. U.S. Cellular bases its estimates on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from estimates under different assumptions or conditions. Changes in facts or circumstances, including new or additional information, could require U.S. Cellular to record charges in excess of amounts accrued in the financial statements, if any, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular is regularly involved in a number
The assessment of legal and policy proceedings is a highly subjective process that requires judgments about future events. Additionally, amounts ultimately received or paid upon settlement or resolution of litigation and other contingencies may differ materially from amounts accrued in the financial statements. Depending on a range of factors, these or similar proceedings could impose restraints on U.S. Cellular’s current or future manner of doing business. Such potential outcomes could have an adverse effect on U.S. Cellular’s financial condition and results of operations or ability to do business.
Media reports and certain professional studies have suggested that certain radio frequency emissions from wireless devices may be linked to various health problems, including cancer or tumors, and may interfere with various electronic medical devices, including hearing aids and pacemakers. U.S. Cellular is a party to and may in the future be a party to lawsuits against wireless carriersemergency, actions taken by governmental authorities and other parties claiming damages for alleged health effects, including cancer or tumors, arising from wireless phones or radio frequency transmitters. Concerns over radio frequency emissions may discourage use of wireless devices or expose U.S. Cellular to potential litigation. In addition, the FCC or other regulatory authorities may adopt regulations in response to concerns about radio frequency emissions. Any resulting decrease in demand for wireless services, costs of litigationpossible direct and damage awards or regulation could have an adverse effect on U. S. Cellular’s business, financial condition or results of operations.
In addition, some studies have indicated that some aspects of using wireless devices while driving may impair drivers’ attention in certain circumstances, making accidents more likely. These concerns could lead to potential litigation relating to accidents, deaths or serious bodily injuries, anyindirect consequences, all of which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Numerous state and local legislative bodies have enacted or proposed legislation restricting or prohibiting the use of wireless devices while driving motor vehicles. These enacted or proposed laws or other similar laws, if passed, could have the effect of reducing customer usage and/or increasing costs, which could have an adverse effect on U.S. Cellular’s business, financial condition, or results of operations.
U.S. Cellular faces possible effects of industry litigation relating to patents, other intellectual property or otherwise, that may restrict U.S. Cellular’s access to devices for sale to customers. If technology that U.S. Cellular uses in products or services were determined by a court to infringe a patent or other intellectual property right held by another person, U.S. Cellular could be precluded from using that technology and could be required to pay significant monetary damages. U.S. Cellular also may be required to pay significant royalties to such person to continue to use such technology in the future. The successful enforcement of any intellectual property rights, or U.S. Cellular’s inability to negotiate a license for such rights on acceptable terms, could force U.S. Cellular to cease using the relevant technology and offering services incorporating the technology. Any litigation to determine the validity of claims that U.S. Cellular’s products or services infringe or may infringe intellectual property rights of another, regardless of their merit or resolution, could be costly and divert the effort and attention of U.S. Cellular’s management and technical personnel. Regardless of the merits of any specific claim, U.S. Cellular cannot give assurance that it would prevail in litigation because of the complex technical issues and inherent uncertainties in intellectual property litigation. Although U.S. Cellular generally seeks to obtain indemnification agreements from vendors that provide it with technology, there can be no assurance that any claim of infringement will be covered by an indemnity or that U.S. Cellular will be able to recover all or any of its losses and costs under any available indemnity agreements. Any claims of infringement of intellectual property and proprietary rights of others could prevent U.S. Cellular from using necessary technology to provide its services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
TDS owns over 80% of the combined total of both classes of common stock of U.S. Cellular, including a majority of the outstanding Common Shares and 100% of the Series A Common Shares, and controls over 96% of their combined voting power. As a result, TDS is effectively able to elect all of U.S. Cellular’s thirteen directors and otherwise control the management and operations of U.S. Cellular. Seven of the thirteen directors of U.S. Cellular are also directors of TDS and/or executive officers of TDS and/or U.S. Cellular. Directors and officers of TDS who are also directors or officers of U.S. Cellular, and TDS as U.S. Cellular’s controlling shareholder, are in positions involving the possibility of conflicts of interest with respect to certain transactions concerning U.S. Cellular. When the interests of TDS and U.S. Cellular diverge, TDS may exercise its influence in its own best interests.
U.S. Cellular and TDS have entered into contractual arrangements governing certain transactions and relationships between them. Some of these agreements were executed prior to the initial public offering of U.S. Cellular’s Common Shares and were not the result of arm’s-length negotiations. Accordingly, there is no assurance that the terms and conditions of these agreements are as favorable to U.S. Cellular as could have been obtained from unaffiliated third parties. See “Certain Relationships and Related Transactions” in this Form 10-K.
Conflicts of interest may arise between TDS and U.S. Cellular when faced with decisions that could have different implications for U.S. Cellular and TDS, including technology decisions, financial budgets, the payment of distributions by U.S. Cellular, agreements or transactions between TDS and U.S. Cellular, business activities and other matters. TDS also may take action that favors its other businesses and the interests of its shareholders over U.S. Cellular’s wireless business and the interests of U.S. Cellular shareholders and debt holders. Because TDS controls U.S. Cellular, conflicts of interest could be resolved in a manner adverse to U.S. Cellular and its other shareholders or its debt holders.
The U.S. Cellular Restated Certificate of Incorporation provides that, so long as not less than 500,000 Series A Common Shares are outstanding, U.S. Cellular, without the written consent of TDS, shall not, directly or indirectly own, invest or otherwise have an interest in, lease, operate or manage any business other than a business engaged solely in the construction of, the ownership of interests in and/or the management of wireless telephone systems. This limitation on the scope of U.S. Cellular’s potential business could hurt the growth of U.S. Cellular’s business. This restriction would preclude U.S. Cellular from pursuing attractive related or unrelated business opportunities unless TDS consents in writing. TDS has no obligation to consent to any business opportunities proposed by U.S. Cellular and may withhold its consent in its own best interests.
The control of U.S. Cellular by TDS may tend to deter non-negotiated tender offers or other efforts to obtain control of U.S. Cellular and thereby deprive shareholders of opportunities to sell shares at prices higher than those prevailing in the market.
The U.S. Cellular Restated Certificate of Incorporation also contains provisions which may serve to discourage or make more difficult a change in control of U.S. Cellular without the support of TDS or without meeting various other conditions. In particular, the authorization of multiple classes of capital stock with different voting rights could prevent shareholders from profiting from an increase in the market value of their shares as a result of a change in control of U.S. Cellular by delaying or preventing such change in control.
The U.S. Cellular Restated Certificate of Incorporation also authorizes the U.S. Cellular Board of Directors to designate and issue Preferred Shares in one or more classes or series from time to time. Generally, no further action or authorization by the shareholders is necessary prior to the designation or issuance of the additional Preferred Shares authorized pursuant to the U.S. Cellular Restated Certificate of Incorporation unless applicable laws or regulations would require such approval in a given instance. Such Preferred Shares could be issued in circumstances that would serve to preserve TDS’ control of U.S. Cellular.
From time to time, U.S. Cellular may disclose forward-looking information, including estimates of future operating revenues; various measures of income before income taxes; and/or capital expenditures. Any such forward-looking information includes consideration of known or anticipated changes to the extent disclosed, but dynamic market conditions and/or other unknown or unanticipated events, including but not limited to the risks discussed above, could cause such estimates to differ materially from the actual amounts.
2021. Item 7. 10-K. (1) Financial Statements The exhibits set forth below are filed as a part of this Report. Compensatory plans or arrangements are identified below with an asterisk. Description of Documents Registration Rights Agreement between Exchange Agreement between Intercompany Agreement between Employee Benefit Plans Agreement between Insurance Cost Sharing Agreement between 10.8(a)* Inline XBRL Taxonomy Extension Presentation Linkbase Document ** Indicates a paper filing prior to the adoption of EDGAR. Consolidated Balance Sheets - As of December 31, 2017 and 2016 (Dollars in Thousands) 2017 2016 ASSETS CURRENT ASSETS: Due from affiliate $ $ Accounts receivable, net of allowances of $26,916 and $31,093 Unbilled revenue Prepaid expenses Total current assets PROPERTY, PLANT AND EQUIPMENT - NET WIRELESS LICENSES OTHER ASSETS - NET TOTAL ASSETS $ $ LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accounts payable and accrued liabilities $ $ Advance billings and other Financing obligation Deferred rent Total current liabilities LONG TERM LIABILITIES: Financing obligation Deferred rent Other liabilities Total long term liabilities Total liabilities PARTNERS' CAPITAL General Partner's interest Limited Partners' interest Total partners' capital TOTAL LIABILITIES AND PARTNERS' CAPITAL $ $ See notes to consolidated financial statements. Consolidated Statements of Income and Comprehensive Income - For the Years Ended December 31, 2017, 2016 and 2015 (Dollars in Thousands) 2017 2016 2015 OPERATING REVENUES: Service revenues $ $ $ Equipment revenues Other Total operating revenues OPERATING EXPENSES: Cost of service (exclusive of depreciation and amortization) Cost of equipment Depreciation and amortization Selling, general and administrative Total operating expenses OPERATING INCOME OTHER INCOME (EXPENSE): Interest income (expense), net Other Total other income (expense) NET INCOME AND COMPREHENSIVE INCOME $ $ $ Allocation of Net Income: General Partner $ $ $ Limited Partners $ $ $ See notes to consolidated financial statements. Consolidated Statements of Changes in Partners' Capital - For the Years Ended December 31, 2017, 2016 and 2015 (Dollars in Thousands) General Partner Limited Partners AirTouch Cellular Inc. AirTouch Cellular Inc. Cellco Partnership United States Cellular Investment Corporation of Los Angeles Total Partners' Capital BALANCE - January 1, 2015 Net Income BALANCE - December 31, 2015 Distributions Net Income BALANCE - December 31, 2016 Distributions Net Income BALANCE - December 31, 2017 See notes to consolidated financial statements. Consolidated Statements of Cash Flows - For the Years Ended December 31, 2017, 2016 and 2015 (Dollars in Thousands) 2017 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ $ $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Imputed interest on financing obligation Provision for losses on accounts receivable Gain on device installment plan receivables sold Changes in certain assets and liabilities: Accounts receivable Unbilled revenue Prepaid expenses Other assets - net Accounts payable and accrued liabilities Advance billings and other Deferred rent Other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures Fixed asset transfers out Acquisition of wireless licenses Collections on deferred purchase price Collection on beneficial interest - net Change in due from affiliate Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Change in due to affiliate Proceeds from financing obligation Repayments of financing obligation Distributions Net cash used in financing activities CHANGE IN CASH CASH - Beginning of year CASH - End of year $ $ $ CASH PAID FOR INTEREST $ $ $ NONCASH TRANSACTIONS FROM INVESTING ACTIVITIES: Accruals for capital expenditures $ $ $ See notes to consolidated financial statements. 2017 2016 Device payment plan agreement receivables, gross $ $ Unamortized imputed interest Device payment plan agreement receivables, net of unamortized imputed interest Allowance for credit losses Device payment plan agreement receivables, net $ $ Classified on the consolidated balance sheets: Accounts receivable, net $ $ Other assets, net $ $ Device payment plan agreement receivables, net $ $ 2017 2016 Unbilled $ $ Billed: Current Past Due Device payment plan agreement receivables, gross $ $ 2017 2016 Balance at January 1 $ $ Bad debt expenses Write-offs Allowance related to receivables sold Other Balance at December 31 $ $ 2017 2016 Land $ $ Buildings and improvements (15-45 years) Wireless plant and equipment (3-50 years) Furniture, fixtures and equipment (3-10 years) Leasehold improvements (5-7 years) Less: accumulated depreciation Property, plant and equipment, net $ $ 2017 2016 Accounts payable $ $ Accrued liabilities Accounts payable and accrued liabilities $ $ 2017 2016 Advance billings $ $ Customer deposits Guarantee liability, net Advance billings and other $ $ Amount 2018 $ 2019 2020 2021 2022 2023 and thereafter Total minimum payments $ Amount 2018 $ 2019 2020 2021 2022 2023 and thereafter Total minimum payments $ Balance at Beginning of the Year Additions Charged to Expenses Write-offs Net of Recoveries Balance at End of the Year (a) Accounts Receivable Allowances: 2017 $ $ $ $ 2016 2015 a) Allowance for Uncollectible Accounts Receivable includes approximately $12,261, $16,545, and $8,661, at December 31, 2017, 2016, and 2015, respectively, related to long-term device payment plan receivables. ****** Pursuant to the requirements of Section 13 or 15(d) 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. /s/ Laurent C. Therivel /s/ Douglas W. Chambers President, Chief Financial Officer and Treasurer /s/ Anita J. Kroll /s/ Director February LeRoy T. Carlson, Jr. /s/ Director February /s/ Walter C. D. Carlson Director February Walter C. D. Carlson /s/ J. Samuel Crowley Director February J. Samuel Crowley /s/ Ronald E. Daly Director February Ronald E. Daly /s/ Deirdre C. Drake Director February Harry J. Harczak, Jr. /s/ Michael S. Irizarry Director February Gregory P. Josefowicz /s/ Peter L. Sereda Director February Peter L. Sereda /s/ Cecelia D. Stewart Director February Cecelia D. StewartUScellular has properties located throughout the United States. U.S. Cellular’s mobile telephone switchingUScellular’s corporate headquarters is located in Chicago, IL. UScellular's local business offices, cell sites, cell site equipment, connectivity centers, data centers, call centers and retail stores are located primarily in U.S. Cellular’sUScellular’s operating markets andmarkets. These properties are either owned or leased by U.S. Cellular,UScellular, one of its subsidiaries, or the partnership, limited liability company or corporation which holds the license issued by the FCC.As of December 31, 2017, U.S. Cellular’s Property,2021, UScellular’s gross investment in property, plant and equipment net of accumulated depreciation, totaled $2,320was $9,056 million.U.S. Cellular considers the properties owned or leased by it and its subsidiaries to be maintained in good operating condition and suitable and adequate for its business operations.UScellular is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If U.S. CellularUScellular believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements. See Note 1213 — Commitments and Contingencies in the Notes to Consolidated Financial Statements for further information.Item 5. MarketMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket, holder, dividend and performance graph information is incorporatedCommon Stock InformationUScellular's Common Shares are listed on the New York Stock Exchange under the symbol "USM." As of January 31, 2022, the last trading day of the month, UScellular's Common Shares were held by reference from Exhibit 13 to this Form 10-K, Annual Report sections entitled “Shareholder Information” and “Consolidated Quarterly Information (Unaudited).”U.S. Cellular230 record owners. All of the Series A Common Shares were held by TDS. No public trading market exists for the Series A Common Shares. The Series A Common Shares are convertible on a share-for-share basis into Common Shares.UScellular has not paid any cash dividends in recent periods and currently intends to retain all earnings for use in UScellular’s business.Stock Performance GraphThe following chart provides a comparison of UScellular’s cumulative total return to shareholders during the previous five years to the returns of the Standard & Poor's 500 Composite Stock Price Index and the Dow Jones U.S. Cellular’s business.Information relating to Telecommunications Index.
Note: Cumulative total return assumes reinvestment of dividends. 2016 2017 2018 2019 2020 2021 UScellular Common Shares (NYSE: USM) $ 100 $ 86.07 $ 118.87 $ 82.87 $ 70.20 $ 72.10 S&P 500 Index 100 121.83 116.49 153.17 181.35 233.41 Dow Jones U.S. Telecommunications Index 100 99.72 93.02 118.95 111.91 102.21 The comparison above assumes $100.00 invested at the close of trading on the last trading day preceding the first day of 2016, in UScellular Common Shares, S&P 500 Index and the Dow Jones U.S. Telecommunications Index.17Issuer Purchases of Equity Securities is set forth below.In November 2009, U.S. CellularUScellular announced by Form 8-K that the Board of Directors of U.S. CellularUScellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. In December 2016, the U.S. CellularUScellular Board of Directors amended this authorization to provide that, beginning on January 1, 2017, the authorized repurchase amount with respect to a particular year will be any amount from zero to 1,300,000 Common Shares, as determined by the Pricing Committee of the Board of Directors, and that if the Pricing Committee did not specify an amount for any year, such amount would be zero for such year. The Pricing Committee didhas not specifyspecified any increase as of January 1, 2018.in the authorization since that time. The Pricing Committee also was also authorized to decrease the cumulative amount of the authorization at any time, but has not taken any action to do so at this time. As a result, there was no change to the cumulative amount of the share repurchase authorization as of January 1, 2018. The authorization provides that share repurchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date. U.S. CellularUScellular did not determine to terminate the foregoing Common Share repurchase program, as amended, or cease making further purchases thereunder, during the fourth quarter of 2017.The maximum number of shares that may yet be purchased under this program was 5,900,849 as of December 31, 2017. There were nofollowing table provides certain information with respect to all purchases made by or on behalf of U.S. Cellular,UScellular, and noany open market purchases made by any “affiliated purchaser” (as defined by the SEC) of U.S. Cellular,UScellular, of U.S. CellularUScellular Common Shares during the fourth quarter ended December 31, 2017.of 2021.Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 1 - 31, 2021 258,678 $ 31.49 258,678 3,566,725 November 1 - 30, 2021 35,000 $ 31.44 35,000 3,531,725 December 1 - 31, 2021 15,000 $ 29.49 15,000 3,516,725 Total for or as of the end of the quarter ended December 31, 2021 308,678 $ 31.38 308,678 3,516,725 Item 6. Sele[Reserved]18Management’sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsIndex to Management's Discussions and Analysis of Financial Condition and Results of Operations (MD&A) Page No. 19Index to MD&AIncorporatedUnited States Cellular CorporationManagement’s Discussion and Analysis ofFinancial Condition and Results of OperationsExecutive OverviewThe following Management’s Discussion and Analysis (MD&A) should be read in conjunction with the audited consolidated financial statements and notes of United States Cellular Corporation (UScellular) for the year ended December 31, 2021, and with the description of UScellular’s business included herein. Certain numbers included herein are rounded to millions for ease of presentation; however, certain calculated amounts and percentages are determined using the unrounded numbers.This report contains statements that are not based on historical facts, including the words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions. These statements constitute and represent “forward looking statements” as this term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by reference from Exhibit 13such forward looking statements. See Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement for additional information.UScellular uses certain “non-GAAP financial measures” and each such measure is identified in the MD&A. A discussion of the reason UScellular determines these metrics to be useful and reconciliations of these measures to their most directly comparable measures determined in accordance with accounting principles generally accepted in the United States of America (GAAP) are included in the Supplemental Information Relating to Non-GAAP Financial Measures section within the MD&A of this Form 10-K Annual Report section entitled “Management’sReport.The following MD&A omits discussion of 2020 compared to 2019. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations.”Operations in UScellular's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 18, 2021, for that discussion.20GeneralUScellular owns, operates, and invests in wireless markets throughout the United States. UScellular is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). OPERATIONS ▪Serves customers with 5.0 million connections including 4.4 million postpaid, 0.5 million prepaid and 0.1 million reseller and other connections▪Operates in 21 states▪Employs approximately 4,800 associates▪4,301 owned towers▪6,898 cell sites in service21COVID-19 considerationsThe coronavirus (COVID-19) pandemic did not have a material impact on UScellular's financial results in 2021. The impact of COVID-19 on UScellular's future financial results is uncertain, but is not projected to have a material impact. However, there are many factors, including the severity and duration of the pandemic, as well as other direct and indirect impacts, that could negatively impact UScellular.UScellular Mission and StrategyUScellular’s mission is to provide exceptional wireless communication services which enhance consumers’ lives, increase the competitiveness of local businesses, and improve the efficiency of government operations in the markets UScellular serves.UScellular’s strategy is to attract and retain customers through a value proposition comprising a high-quality network, outstanding customer service and competitive devices, plans and pricing - all provided with a community focus. Strategic efforts include:▪UScellular offers economical and competitively priced service plans and devices to its customers and is focused on increasing revenues from sales of related products such as device protection plans and from new services such as fixed wireless home internet. In addition, UScellular is focused on increasing revenues from prepaid plans and expanding its solutions available to business and government customers.▪UScellular continues to devote efforts to enhance its network capabilities, including by deploying 5G technology. 5G technology helps address customers’ growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency. UScellular's 5G deployment is initially focused on mobility services using its low band spectrum. UScellular has acquired high-band and mid-band spectrum, deployed high-band spectrum on a limited basis, and will further deploy high-band and mid-band in the future to further enable the delivery of 5G services. UScellular has launched commercial 5G services in portions of substantially all of UScellular’s markets and will continue to launch in additional areas in the coming years.▪UScellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, UScellular actively seeks attractive opportunities to acquire wireless spectrum, including pursuant to FCC auctions.22Terms Used by UScellularThe following is a list of definitions of certain industry terms that are used throughout this document:▪4G LTE – fourth generation Long-Term Evolution, which is a wireless technology that enables more network capacity for more data per user as well as faster access to data compared to third generation (3G) technology.▪5G – fifth generation wireless technology that helps address customers’ growing demand for data services and creates opportunities for new services requiring high speed and reliability as well as low latency.▪Account – represents an individual or business financially responsible for one or multiple associated connections. An account may include a variety of types of connections such as handsets and connected devices.▪Auctions 105, 107 and 110 – Auction 105 was an FCC auction of 3.5 GHz wireless spectrum licenses that started in July 2020 and concluded in September 2020. Auction 107 was an FCC auction of 3.7-3.98 GHz wireless spectrum licenses that started in December 2020 and concluded in February 2021. Auction 110 was an FCC auction of 3.45-3.55 GHz wireless spectrum licenses that started in October 2021 and concluded in January 2022.▪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.▪Connections – individual lines of service associated with each device activated by a customer. Connections are associated with all types of devices that connect directly to the UScellular network.▪Connected Devices – non-handset devices that connect directly to the UScellular network. Connected devices include products such as tablets, wearables, modems, and hotspots.▪Coronavirus Aid, Relief, and Economic Security (CARES) Act – economic relief package signed into law on March 27, 2020 to address the public health and economic impacts of COVID-19, including a variety of tax provisions.▪EBITDA – refers to earnings before interest, taxes, depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted EBITDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.▪Eligible Telecommunications Carrier (ETC) – designation by states for providing specified services in “high cost” areas which enables participation in universal service support mechanisms.▪Free Cash Flow – non-GAAP metric defined as Cash flows from operating activities less Cash paid for additions to property, plant and equipment. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.▪Gross Additions – represents the total number of new connections added during the period, without regard to connections that were terminated during that period.▪Net Additions (Losses) – represents the total number of new connections added during the period, net of connections that were terminated during that period.▪OIBDA – refers to operating income before depreciation, amortization and accretion and is used in the non-GAAP metric Adjusted OIBDA throughout this document. See Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for additional information.▪Postpaid Average Revenue per Account (Postpaid ARPA) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid accounts and by the number of months in the period.▪Postpaid Average Revenue per User (Postpaid ARPU) – metric which is calculated by dividing total postpaid service revenues by the average number of postpaid connections and by the number of months in the period.▪Retail Connections – the sum of postpaid connections and prepaid connections.▪Universal Service Fund (USF) – a system of telecommunications collected fees and support payments managed by the FCC intended to promote universal access to telecommunications services in the United States.▪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.23Operational Overview
As of December 31, 2021 2020 Retail Connections – End of Period Postpaid 4,380,000 4,412,000 Prepaid 513,000 499,000 Total 4,893,000 4,911,000 Year Ended December 31, 2021 2020 2021 vs. 2020 Postpaid Activity and Churn Gross Additions Handsets 434,000 397,000 9 % Connected Devices 159,000 203,000 (22) % Total Gross Additions 593,000 600,000 (1) % Net Additions (Losses) Handsets (11,000) (13,000) 15 % Connected Devices (21,000) 39,000 N/M Total Net Additions (Losses) (32,000) 26,000 N/M Churn Handsets 0.96 % 0.89 % Connected Devices 2.72 % 2.58 % Total Churn 1.18 % 1.09 % N/M - Percentage change not meaningfulTotal postpaid handset net losses decreased in 2021 due primarily to an increase in gross additions as a result of higher consumer switching activity, partially offset by an increase in postpaid handset churn.Total postpaid connected device net additions decreased in 2021 due primarily to lower demand for internet related products as a result of a reduction in COVID-related funding vehicles, many of which are connected to government subsidies.Macroeconomic factors, including the continuing impacts of the ongoing COVID-19 pandemic, have caused some supply chain disruption and delays, including constraints on certain devices. These supply constraints are due primarily to component availability, resulting in extended lead times and additional uncertainty, which may negatively impact UScellular in future periods.Postpaid RevenueYear Ended December 31, 2021 2020 2021 vs. 2020 Average Revenue Per User (ARPU) $ 48.03 $ 47.01 2% Average Revenue Per Account (ARPA) $ 125.92 $ 122.93 2% Postpaid ARPU and Postpaid ARPA increased in 2021, due primarily to (i) favorable plan and product offering mix, (ii) an increase in regulatory recovery revenues and (iii) an increase in device protection plan revenues. These increases were partially offset by an increase in promotional discounts.2021 Postpaid ARPU and ARPA amounts exclude $9 million of postpaid revenue related to an out-of-period error recorded in the third quarter. See Note 2 — Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.24Financial OverviewYear Ended December 31, 2021 2020 2021 vs. 2020 (Dollars in millions) Retail service $ 2,765 $ 2,686 3 % Inbound roaming 110 152 (27) % Other 240 229 5 % Service revenues 3,115 3,067 2 % Equipment sales 1,007 970 4 % Total operating revenues 4,122 4,037 2 % System operations (excluding Depreciation, amortization and accretion reported below) 790 782 1 % Cost of equipment sold 1,118 1,011 11 % Selling, general and administrative 1,345 1,368 (2) % Depreciation, amortization and accretion 678 683 (1) % (Gain) loss on asset disposals, net 23 25 (9) % (Gain) loss on sale of business and other exit costs, net (2) — N/M (Gain) loss on license sales and exchanges, net — (5) N/M Total operating expenses 3,952 3,864 2 % Operating income $ 170 $ 173 (2) % Net income $ 160 $ 233 (31) % Adjusted OIBDA (Non-GAAP)1$ 869 $ 876 (1) % Adjusted EBITDA (Non-GAAP)1$ 1,054 $ 1,063 (1) % Capital expenditures2$ 780 $ 940 (17) % N/M - Percentage change not meaningful1Refer to Supplemental Information Relating to Non-GAAP Financial Measures within this MD&A for a reconciliation of this measure.2Refer to Liquidity and Capital Resources within this MD&A for additional information on Capital expenditures.25Operating Revenues(Dollars in millions)
Service revenues consist of: ▪Retail Service – Charges for voice, data and value added services and recovery of regulatory costs▪Inbound Roaming – Charges to other wireless carriers whose customers use UScellular’s wireless systems when roaming▪Other Service – Amounts received from the Federal USF, tower rental revenues, and miscellaneous other service revenuesEquipment revenues consist of:▪Sales of wireless devices and related accessories to new and existing customers, agents, and third-party distributorsKey components of changes in the statement of operations line items were as follows:Total operating revenuesRetail service revenues increased in 2021, primarily as a result of an increase in Postpaid ARPU as previously discussed in the Operational Overview section as well as an increase in the average number of postpaid subscribers.Inbound roaming revenues decreased in 2021, primarily driven by lower data revenues resulting from lower usage and lower rates. UScellular expects inbound roaming revenues to continue to decline during 2022 relative to prior year levels.Other service revenues increased in 2021, resulting from increases in tower rental revenues and miscellaneous other service revenues.Equipment sales revenues increased in 2021, due primarily to an increase in the volume of new smartphone and accessory sales, partially offset by higher promotional activity.In recent periods, wireless service providers have increased promotional aggressiveness to attract new customers and retain existing customers. Operating revenues and Operating income may be negatively impacted in future periods by the competitive need to continue to offer significant promotional discounts to new and existing customers.System operations expensesSystem operations expenses increased in 2021, due primarily to higher circuit costs and an increase in cell site rent expense, partially offset by a decrease in roaming expense driven by lower rates.Cost of equipment soldCost of equipment sold increased in 2021, due primarily to an increase in the volume of new smartphone and accessory sales.Selling, general and administrative expensesSelling, general and administrative expenses decreased in 2021, due primarily to decreases in (i) bad debts expense driven by fewer non-pay customers as a result of better credit mix and improved customer payment behavior and (ii) advertising expense due to reduced media spend.26Components of Other Income (Expense)Year Ended December 31, 2021 2020 2021 vs. 2020 (Dollars in millions) Operating income $ 170 $ 173 (2) % Equity in earnings of unconsolidated entities 179 179 – Interest and dividend income 6 8 (27) % Gain (loss) on investments — 2 N/M Interest expense (175) (112) (55) % Total investment and other income 10 77 (87) % Income before income taxes 180 250 (28) % Income tax expense 20 17 26 % Net income 160 233 (31) % Less: Net income attributable to noncontrolling interests, net of tax 5 4 14 % Net income attributable to UScellular shareholders $ 155 $ 229 (32) % N/M - Percentage change not meaningfulEquity in earnings of unconsolidated entitiesEquity in earnings of unconsolidated entities represents UScellular’s share of net income from entities in which it has a noncontrolling interest and that are accounted for using the equity method. UScellular’s investment in the Los Angeles SMSA Limited Partnership (LA Partnership) contributed pre-tax income of $82 million for both 2021 and 2020. See Note 8 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.Interest expenseInterest expense increased in 2021, primarily as a result of (i) the issuance of $500 million of 6.25% Senior Notes in August 2020 and $500 million of 5.50% Senior Notes in both December 2020 and May 2021 and (ii) the write off of $31 million of unamortized debt issuance costs related to Senior Notes that were redeemed in 2021. These increases were partially offset by a reduction in interest expense due to the redemptions of Senior Notes with higher interest rates. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information.Income tax expenseThe effective tax rate on Income before income taxes was 11.4% for 2021, compared to 6.6% in 2020. The higher effective tax rate in 2021 as compared to 2020 is due primarily to the income tax benefits of the CARES Act included in the 2020 tax rate, which do not recur as benefits in the 2021 tax rate. The 2021 tax rate includes a state tax benefit due primarily to the reductions of tax accruals from expirations of state statute of limitations for prior tax years.In January 2022, UScellular received an income tax refund of $123 million related to the 2020 net operating loss carryback enabled by the CARES Act.See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.27Liquidity and Capital ResourcesSources of LiquidityUScellular operates a capital-intensive business. In the past, UScellular’s existing cash and investment balances, funds available under its revolving credit and receivables securitization agreements, funds from other financing sources, including term loans and other long-term debt, and cash flows from operating and certain investing and financing activities, including sales of assets or businesses, provided sufficient liquidity and financial flexibility for UScellular 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, primarily of wireless spectrum licenses. 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.UScellular has incurred negative free cash flow at times in the past and this could occur in the future. However, UScellular believes that existing cash and investment balances, funds available under its revolving credit, term loan and receivables securitization agreements and expected cash flows from operating and investing activities will provide sufficient liquidity for UScellular to meet its normal day-to-day operating needs and debt service requirements for the foreseeable future. UScellular will continue to monitor the rapidly changing business and market conditions and plans to take appropriate actions, as necessary, to meet its liquidity needs.UScellular may require substantial additional capital for, among other uses, funding day-to-day operating needs including working capital, acquisitions of providers of wireless telecommunications services, wireless spectrum license acquisitions, capital expenditures, agreements to purchase goods or services, leases, debt service requirements, the repurchase of shares, or making additional investments. It may be necessary from time to time to increase the size of the existing revolving credit agreement, to put in place new credit agreements, or to obtain other forms of financing in order to fund potential expenditures.Cash and Cash EquivalentsCash and cash equivalents include cash and money market investments. The primary objective of UScellular's Cash and cash equivalents investment activities is to preserve principal.Cash and Cash Equivalents(Dollars in millions)
The majority of UScellular’s Cash and cash equivalents are held in bank deposit accounts and in money market funds that purchase only debt issued by the U.S. Treasury or U.S. government agencies. Refer to the Consolidated Cash Flow Analysis for additional information related to changes in Cash and cash equivalents.In addition to Cash and cash equivalents, UScellular had undrawn borrowing capacity from existing debt facilities of $950 million at December 31, 2021. Additional financing activity subsequent to December 31, 2021 reduced the undrawn borrowing capacity to $615 million at February 17, 2022. See the Financing section below for further details.FinancingRevolving Credit AgreementIn July 2021, UScellular entered into an amended and restated $300 million unsecured revolving credit agreement with certain lenders and other parties. Amounts under the amended and restated revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. As of December 31, 2021, there were no outstanding borrowings under the revolving credit agreement, and UScellular’s unused borrowing capacity was $300 million. In January 2022, UScellular borrowed $75 million under its revolving credit agreement and in February 2022, repaid the entire borrowing.28Term Loan AgreementsIn July 2021, UScellular amended and restated its term loan agreement to allow for additional borrowing capacity of $200 million, to allow for total borrowing capacity of $500 million. The additional borrowing capacity may be drawn in one or more advances by the one-year anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date for the existing borrowings is in July 2028 and for any additional borrowings is in July 2031. As of December 31, 2021, the outstanding borrowings under the agreement were $299 million and the unused borrowing capacity was $200 million. In January 2022, UScellular borrowed $100 million under the term loan agreement.In December 2021, UScellular entered into an additional $300 million term loan agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date for the agreement is in July 2026. As of December 31, 2021, there were no outstanding borrowings under the term loan agreement and the unused borrowing capacity was $300 million. In February 2022, UScellular borrowed $225 million under the term loan agreement.Export Credit Financing AgreementIn December 2021, UScellular entered into a $150 million term loan credit facility with Export Development Canada to finance (or refinance) equipment imported from Canada, including equipment purchased prior to entering the term loan credit facility agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement; amounts not drawn by that time will cease to be available. The maturity date of the agreement is the five-year anniversary of the first borrowing, which is in January 2027. As of December 31, 2021, there were no outstanding borrowings under the credit facility and the unused borrowing capacity was $150 million. In January 2022, UScellular borrowed $150 million under the agreement.Receivables Securitization AgreementUScellular, through its subsidiaries, has a receivables securitization agreement to permit securitized borrowings using its equipment installment plan receivables. In June 2021, UScellular increased the borrowing capacity under the receivables securitization agreement to $450 million. Amounts under the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until December 2022. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in January 2023. As of December 31, 2021, UScellular has borrowed the full amount available under the agreement of $450 million. Repurchase AgreementIn January 2022, UScellular, through a subsidiary (the repo subsidiary), entered into a repurchase agreement to borrow up to $200 million, subject to the availability of eligible equipment installment plan receivables and the agreement of the lender. The transaction is accounted for as a one-month secured borrowing. The expiration date of the repurchase agreement is in January 2023. In February 2022, the repo subsidiary borrowed $60 million under the repurchase agreement.Financial CovenantsThe revolving credit agreement, senior term loan agreement and receivables securitization and export credit financing agreements require UScellular to comply with certain affirmative and negative covenants, which include certain financial covenants. In particular, under these agreements, UScellular is required to maintain the Consolidated Interest Coverage Ratio at a level not lower than 3.00 to 1.00 as of the end of any fiscal quarter. UScellular also was required to maintain the Consolidated Leverage Ratio at a level not to exceed 3.75 to 1.00 as of the end of any fiscal quarter. UScellular believes that it was in compliance as of December 31, 2021 with all such financial covenants. Other Long-Term FinancingIn August 2020, UScellular issued $500 million of 6.25% Senior Notes due in 2069 and in December 2020, UScellular issued $500 million of 5.5% Senior Notes due in March 2070. The proceeds from both issuances were for general corporate purposes, including but not limited to, the purchase of additional wireless spectrum licenses acquired in Auction 107, funding of capital expenditures, including in connection with 5G buildout projects and retirement of existing debt.In May 2021, UScellular issued $500 million of 5.5% Senior Notes due in June 2070. The proceeds from the issuance were used for general corporate purposes, including but not limited to, the repayment of other debt, the purchase of additional spectrum and the funding of capital expenditures, including in connection with 5G buildout projects.In May 2021, UScellular redeemed its outstanding $275 million of 7.25% Senior Notes due 2063. At time of redemption, $9 million of interest expense was recorded related to unamortized debt issuance costs for these notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.In June 2021, UScellular redeemed its outstanding $300 million of 7.25% Senior Notes due 2064. At time of redemption, $10 million of interest expense was recorded related to unamortized debt issuance costs for these notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.29In September 2021, UScellular redeemed its outstanding $342 million of 6.95% Senior Notes due 2060. At time of redemption, $11 million of interest expense was recorded related to unamortized debt issuance costs related to the notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.UScellular has an effective shelf registration statement on Form S-3 to issue senior or subordinated debt securities, preferred shares and depositary shares. The proceeds from any such issuance may be used for general corporate purposes, including the possible reduction of other short-term or long-term debt; spectrum purchases; capital expenditures; acquisition, construction and development programs; working capital; additional investments in subsidiaries; or the repurchase of shares. The UScellular shelf registration statement permits UScellular to issue at any time and from time to time senior or subordinated debt securities, preferred shares and depositary shares in one or more offerings, up to the amount registered, which is currently $1 billion. The ability of UScellular to complete an offering pursuant to such shelf registration statement is subject to market conditions and other factors at the time.UScellular believes that it was in compliance as of December 31, 2021, with all covenants and other requirements set forth in the UScellular long-term debt indentures. UScellular has not failed to make nor does it expect to fail to make any scheduled payment of principal or interest under such indentures.Refer to Market Risk — Long-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to UScellular’s Long-term debt.UScellular, at its discretion, may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information regarding the revolving credit agreement, senior term loan agreement, receivables securitization and export credit financing agreements, Senior Notes and other long-term financing.Credit RatingsIn certain circumstances, UScellular’s interest cost on its revolving credit and term loan agreements may be subject to increase if its current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised. UScellular’s agreements do not cease to be available nor do the maturity dates accelerate solely as a result of a downgrade in credit rating. However, a downgrade in UScellular’s credit rating could adversely affect its ability to renew the agreements or obtain access to other credit agreements in the future.UScellular is rated as a sub-investment grade issuer. The UScellular issuer credit ratings as of December 31, 2021, and the dates such ratings were re-affirmed were as follows:Rating Agency Rating Outlook Moody's (re-affirmed August 2021) Ba1 stable outlook Standard & Poor's (re-affirmed October 2021) BB stable outlook Fitch Ratings (re-affirmed February 2021) BB+ stable outlook 30Capital RequirementsThe discussion below is intended to highlight some of the significant cash outlays expected during 2022 and beyond and to highlight the spending incurred in current and prior years for these items. This discussion does not include cash required to fund normal operations, and is not a comprehensive list of capital requirements. Significant cash requirements that are not routine or in the normal course of business could arise from time to time.Capital ExpendituresUScellular makes substantial investments to acquire, construct and upgrade wireless telecommunications networks and facilities to remain competitive and as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities (such as 5G and VoLTE technology) have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades of UScellular’s networks to remain competitive; this is expected to continue in 2022 and future years with the continued deployment of 5G technology.Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures; excludes wireless spectrum license additions), which include the effects of accruals and capitalized interest, in 2021 and 2020 were as follows:Capital Expenditures(Dollars in millions)
In 2021, UScellular's capital expenditures were used for the following purposes:▪Continue network modernization and 5G deployment;▪Enhance and maintain UScellular's network coverage, including providing additional speed and capacity to accommodate increased data usage by current customers; and▪Invest in information technology to support existing and new services and products.UScellular’s capital expenditures for 2022 are expected to be between $700 million and $800 million. These expenditures are expected to be used for similar purposes as those listed above.Macroeconomic factors, including the continuing impacts of the ongoing COVID-19 pandemic, have caused some supply chain disruption and delays. These factors may impact the acquisition of certain products and materials and contribute to internal and external labor shortages.UScellular intends to finance its capital expenditures for 2022 using primarily Cash flows from operating activities, existing cash balances and, as required, additional debt financing from its revolving credit, term loan and receivables securitization agreements and/or other forms of financing.Acquisitions, Divestitures and ExchangesUScellular may be engaged from time to time in negotiations (subject to all applicable regulations) relating to the acquisition, divestiture or exchange of companies, properties or wireless spectrum licenses (including pursuant to FCC auctions). In general, UScellular may not disclose such transactions until there is a definitive agreement.In January and February 2022, UScellular paid $560 million for wireless spectrum licenses won in Auction 110. This amount was paid using the funds available under UScellular's various financing agreements as described above.Other ObligationsUScellular will require capital for future spending on existing contractual obligations, including long-term debt obligations; lease commitments; commitments for device purchases, network facilities and transport services; agreements for software licensing; long-term marketing programs; commitments for wireless spectrum licenses acquired through FCC auctions; and other agreements to purchase goods or services.31Variable Interest EntitiesUScellular consolidates certain “variable interest entities” as defined under GAAP. See Note 14 — Variable Interest Entities in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. UScellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.Common Share Repurchase ProgramDuring 2021, UScellular repurchased 989,988 Common Shares for $31 million at an average cost per share of $31.37. At December 31, 2021, the total cumulative amount of UScellular Common Shares authorized to be repurchased is 3,517,000.Depending on its future financial performance, construction, development and acquisition programs, and available sources of financing, UScellular may not have sufficient liquidity or capital resources to make share repurchases. Therefore, there is no assurance that UScellular will make any share repurchases in the future.For additional information related to the current repurchase authorization, see Note 16 — Common Shareholders’ Equity in the Notes to Consolidated Financial Statements.32Consolidated Cash Flow AnalysisUScellular operates a capital‑intensive business. UScellular makes substantial investments to acquire wireless spectrum licenses and properties and to construct and upgrade wireless telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-saving upgrades to UScellular’s networks. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, timing and other factors. The following discussion summarizes UScellular’s cash flow activities in 2021 and 2020.2021 CommentaryUScellular’s Cash, cash equivalents and restricted cash decreased $1,092 million. Net cash provided by operating activities was $802 million due to net income of $160 million adjusted for non-cash items of $677 million and distributions received from unconsolidated entities of $176 million including $76 million in distributions from the LA Partnership. This was partially offset by changes in working capital items which decreased net cash by $211 million. The working capital changes were primarily influenced by an increase in customer and agent receivables, a decrease to accrued taxes and the timing of vendor payments.Cash flows used for investing activities were $2,036 million. Cash paid for additions to property, plant and equipment totaled $724 million. Cash payments for wireless spectrum licenses, including advance payments, were $1,322 million.Cash flows provided by financing activities were $142 million, reflecting the issuance of $500 million of 5.50% Senior Notes, $625 million borrowed under the receivables securitization agreement, and $217 million borrowed under the term loan. These were partially offset by the redemption of $917 million of UScellular Senior Notes, a $200 million repayment on the receivables securitization agreement, the repurchase of $31 million of Common Shares and payment of debt issuance costs of $22 million.2020 CommentaryUScellular’s Cash, cash equivalents and restricted cash increased $1,000 million. Net cash provided by operating activities was $1,237 million due to net income of $233 million adjusted for non-cash items of $758 million, distributions received from unconsolidated entities of $189 million including $89 million in distributions from the LA Partnership, and changes in working capital items which increased net cash by $57 million. The working capital changes were primarily influenced by the timing of vendor payments partially offset by tax impacts from the CARES Act and the timing of collections of customer and agent receivables.Cash flows used for investing activities were $1,163 million. Cash paid for additions to property, plant and equipment totaled $989 million. Cash payments for wireless spectrum licenses, including advance payments, were $201 million.Cash flows provided by financing activities were $926 million, reflecting the issuance of $500 million of 5.50% Senior Notes, $500 million of 6.25% Senior Notes, and $125 million borrowed under the receivables securitization agreement. These were partially offset by a $100 million repayment on the receivables securitization agreement, payment of debt issuance costs of $38 million and the repurchase of $23 million of Common Shares.33Consolidated Balance Sheet AnalysisThe 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 2021 were as follows:Inventory, netInventory, net increased $27 million due primarily to an increase in the volume of inventory.LicensesLicenses increased $1,459 million due primarily to wireless spectrum licenses acquired through Auction 107. See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for additional information.Customer deposits and deferred revenuesCustomer deposits and deferred revenues increased $40 million due primarily to an increase in contract liabilities resulting from higher promotional activity in the current year.Other deferred liabilities and creditsOther deferred liabilities and credits increased $197 million due primarily to relocation and acceleration fees related to wireless spectrum licenses acquired through Auction 107 and an increase in asset retirement obligations.Long-term debt, netThe following table presents the components of the $239 million increase in Long-term debt, net:Long-term debt, net (Dollars in millions) Balance at December 31, 2020 $ 2,489 Borrowings under Term Loan Agreements 217 Borrowings under Receivables Securitization Agreement 625 Issuance of Senior Notes, net of debt issuance costs 484 Repayments under Receivables Securitization Agreement (200) Repayments under Term Loan Agreements (1) Redemptions of Senior Notes (917) Debt issuance costs charged to interest expense 32 Other (1) Balance at December 31, 2021 $ 2,728 34Application of Critical Accounting Policies and EstimatesUScellular prepares its consolidated financial statements in accordance with GAAP. UScellular’s significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies, Note 2 — Revenue Recognition and Note 10 — Leases in the Notes to Consolidated Financial Statements.Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of UScellular’s consolidated financial statements.Wireless Spectrum LicensesWireless spectrum licenses represent a significant component of UScellular’s consolidated assets. Wireless spectrum licenses are considered to be indefinite-lived assets and, therefore, are not amortized but rather are tested at least annually for impairment. Significant negative events, such as changes in any of the assumptions described below as well as decreases in forecasted cash flows, could result in an impairment in future periods. Wireless spectrum licenses are tested for impairment at the level of reporting referred to as a unit of accounting.For purposes of its impairment testing, UScellular separates its FCC wireless spectrum licenses into eight units of accounting, which consist of one unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and seven geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses).A qualitative assessment of the license values was completed as of November 1, 2021 and November 1, 2020. The qualitative assessment considered several factors, including analyst estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent UScellular and other market participant transactions and other industry and market factors. Based on these assessments, UScellular concluded that it was more likely than not that the fair value of the wireless spectrum licenses in each unit of accounting exceeded their respective carrying values. Therefore, no quantitative impairment evaluation was completed.See Note 7 — Intangible Assets in the Notes to Consolidated Financial Statements for information related to wireless spectrum licenses activity in 2021 and 2020.Income TaxesUScellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and UScellular are parties to a Tax Allocation Agreement which provides that UScellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, UScellular and its subsidiaries calculate their income, income tax and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement between TDS and UScellular, UScellular remits its applicable income tax payments to TDS, and receives applicable tax refunds from TDS, consistent with when such payments would be paid or received if UScellular and its subsidiaries were a separate affiliated group.The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to UScellular’s financial condition and results of operations.The preparation of the consolidated financial statements requires UScellular to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities which are included on a net basis in UScellular’s Consolidated Balance Sheet. UScellular must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management’s judgment is required in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets.UScellular recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on management’s judgment as to the possible outcome that has a greater than 50% cumulative likelihood of being realized upon ultimate resolution. See Note 5 — Income Taxes in the Notes to Consolidated Financial Statements for additional information.35Regulatory Matters5G FundOn October 27, 2020, the FCC adopted rules creating the 5G Fund for Rural America, which will distribute up to $9 billion over ten years to bring 5G wireless broadband connectivity to rural America. The 5G Fund will be implemented through a two-phase competitive process, using multi-round auctions to award support. The winning bidders will be required to meet certain minimum speed requirements and interim and final deployment milestones. The order provides that the 5G Fund be in lieu of the previously proposed fund (the Phase II Connect America Mobility Fund) for the development of 4G LTE. The order also provides that over time a growing percentage of the legacy support a carrier receives must be used for 5G deployment.UScellular cannot predict at this time when the 5G fund auction will occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the 5G fund auction will provide opportunities to UScellular to offset any loss in existing support.Spectrum AuctionsOn March 2, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.5 GHz band (Auction 105). On September 2, 2020, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 243 wireless spectrum licenses for a purchase price of $14 million, of which up to $5 million relates to licenses which are subject to the FCC's spectrum aggregation and ownership attribution rules for Auction 105. None of the wireless spectrum licenses have been granted yet by the FCC.On August 7, 2020, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.7-3.98 GHz bands (Auction 107). On February 24, 2021, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 254 wireless spectrum licenses for $1,283 million. UScellular paid $30 million of this amount in 2020 and the remainder in March 2021. The wireless spectrum licenses from Auction 107 were granted by the FCC in July 2021. Additionally, UScellular expects to be obligated to pay approximately $181 million in total from 2021 through 2024 related to relocation costs and accelerated relocation incentive payments. Such additional costs were accrued and capitalized at the time the licenses were granted. In October 2021, UScellular paid $36 million related to the additional costs. The spectrum must be cleared by incumbent providers before UScellular can access it. UScellular does not expect to have access to this spectrum until late 2023. Combined with prior mid-band purchases in Auction 105, UScellular will have mid-band spectrum in nearly all of its operating footprint, covering approximately 95% of subscribers.On June 9, 2021, the FCC released a Public Notice establishing procedures for an auction offering wireless spectrum licenses in the 3.45-3.55 GHz band (Auction 110). On January 14, 2022, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 380 wireless spectrum licenses for $580 million. UScellular paid $20 million of this amount in 2021 and the remainder in January and February 2022. The wireless spectrum licenses from Auction 110 are expected to be granted by the FCC in 2022.36Private Securities Litigation Reform Act of 1995Safe Harbor Cautionary StatementThis Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that UScellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward‑looking statements, but are not the exclusive means of identifying them. Such forward‑looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward‑looking statements. Such risks, uncertainties and other factors include, but are not limited to, those set forth below. See “Risk Factors” in UScellular’s Annual Report on Form 10-K for the year ended December 31, 2021, for a further discussion of these risks. Each of the following risks could have a material adverse effect on UScellular’s 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. UScellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.Operational Risk Factors▪Intense competition involving products, services, pricing, promotions and network speed and technologies could adversely affect UScellular’s revenues or increase its costs to compete.▪Changes in roaming practices or other factors could cause UScellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact UScellular's ability to service its customers in geographic areas where UScellular does not have its own network, which could have an adverse effect on UScellular's business, financial condition or results of operations.▪A failure by UScellular 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 UScellular’s business, financial condition or results of operations.▪An inability to attract people of outstanding talent throughout all levels of the organization, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on UScellular's business, financial condition or results of operations.▪UScellular’s smaller scale relative to larger competitors that may have greater financial and other resources than UScellular could cause UScellular to be unable to compete successfully, which could adversely affect its business, financial condition or results of operations.▪Changes in various business factors, including changes in demand, consumer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪Advances or changes in technology could render certain technologies used by UScellular obsolete, could put UScellular at a competitive disadvantage, could reduce UScellular’s revenues or could increase its costs of doing business.▪Complexities associated with deploying new technologies present substantial risk and UScellular investments in unproven technologies may not produce the benefits that UScellular expects.▪Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or wireless spectrum licenses and/or expansion of UScellular’s business could have an adverse effect on UScellular’s business, financial condition or results of operations.▪A failure by UScellular to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations. ▪Difficulties involving third parties with which UScellular does business, including changes in UScellular's relationships with or financial or operational difficulties, including supply chain disruptions, of key suppliers or independent agents and third-party national retailers who market UScellular’s services, could adversely affect UScellular's business, financial condition or results of operations.▪A failure by UScellular to maintain flexible and capable telecommunication networks or information technologies, or a material disruption thereof, could have an adverse effect on UScellular’s business, financial condition or results of operations. 37Financial Risk Factors▪Uncertainty in UScellular’s future cash flow and liquidity or the inability to access capital, deterioration in the capital markets, changes in interest rates, other changes in UScellular’s performance or market conditions, changes in UScellular’s credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to UScellular, which could require UScellular to reduce its construction, development or acquisition programs, reduce the amount of wireless spectrum licenses acquired, and/or reduce or cease share repurchases.▪UScellular has a significant amount of indebtedness which could adversely affect its financial performance and in turn adversely affect its ability to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt.▪UScellular’s assets and revenue are concentrated in the U.S. wireless telecommunications industry. Consequently, its operating results may fluctuate based on factors related primarily to conditions in this industry.▪UScellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on UScellular’s financial condition or results of operations.Regulatory, Legal and Governance Risk Factors▪Failure by UScellular to timely or fully comply with any existing applicable legislative and/or regulatory requirements or changes thereto could adversely affect UScellular’s business, financial condition or results of operations.▪UScellular receives significant regulatory support, and is also subject to numerous surcharges and fees from federal, state and local governments – the applicability and the amount of the support and fees are subject to great uncertainty, including the ability to pass through certain fees to customers, and this uncertainty could have an adverse effect on UScellular’s business, financial condition or results of operations. ▪Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on UScellular’s business, financial condition or results of operations.▪The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices or frequencies used by other industries, could have an adverse effect on UScellular's business, financial condition or results of operations.▪Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent UScellular from using necessary technology to provide products or services or subject UScellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on UScellular’s business, financial condition or results of operations.▪There are potential conflicts of interests between TDS and UScellular. ▪Certain matters, such as control by TDS and provisions in the UScellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of UScellular or have other consequences.General Risk Factors▪UScellular 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 UScellular's business, financial condition or results of operations.▪Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede UScellular’s 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 UScellular’s business, financial condition or results of operations.▪The impact of public health emergencies, such as the COVID-19 pandemic, on UScellular's business is uncertain, but depending on duration and severity could have a material adverse effect on UScellular's business, financial condition or results of operations.38Market RiskLong-Term DebtAs of December 31, 2021, the majority of UScellular’s long-term debt was in the form of fixed-rate notes with remaining maturities ranging up to 49 years. UScellular also holds variable-rate debt. Fluctuations in market interest rates can lead to fluctuations in the fair value of fixed-rate notes and interest paid on variable-rate debt.The following table presents the scheduled principal payments on long-term debt, lease obligations and the related weighted average interest rates by maturity dates at December 31, 2021:Principal Payments Due by Period Long-Term Debt Obligations1Weighted-Avg. Interest Rates on Long-Term Debt Obligations2(Dollars in millions) 2022 $ 3 2.4 % 2023 3 2.4 % 2024 3 2.5 % 2025 3 2.4 % 2026 3 2.4 % Thereafter 2,331 5.5 % Total3$ 2,346 5.5 % 1The total long-term debt obligation differs from Long-term debt in the Consolidated Balance Sheet due to unamortized debt issuance costs on all non-revolving debt instruments and unamortized discounts related to the 6.7% Senior Notes. See Note 12 — Debt in the Notes to Consolidated Financial Statements for additional information.2Represents the weighted average stated interest rates at December 31, 2021, for debt maturing in the respective periods.3Excludes $450 million of outstanding borrowings under the receivables securitization agreement. If the maturity date of the facility is not extended, principal repayments begin in January 2023. Principal repayments are not scheduled but are instead based on actual receivable collections. UScellular intends to extend the maturity date of the facility.Fair Value of Long-Term DebtAt December 31, 2021 and 2020, the estimated fair value of long-term debt obligations, excluding lease obligations, the current portion of such long-term debt and debt financing costs, was $2,999 million and $2,775 million, respectively, and the book value was $2,781 million and $2,558 million, respectively. See Note 3 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information.Other Market Risk Sensitive InstrumentsThe substantial majority of UScellular’s other market risk sensitive instruments (as defined in Item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents. Accordingly, UScellular believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments.39Supplemental Information Relating to Non-GAAP Financial MeasuresUScellular sometimes uses information derived from consolidated financial information but not presented in its financial statements prepared in accordance with GAAP to evaluate the performance of its business. Certain of these measures are considered “non-GAAP financial measures” under U.S. Securities and Exchange Commission Rules. Specifically, UScellular has referred to the following measures in this Form 10-K Report:▪EBITDA▪Adjusted EBITDA▪Adjusted OIBDA▪Free cash flowFollowing are explanations of each of these measures:EBITDA, Adjusted EBITDA and Adjusted OIBDAEBITDA, Adjusted EBITDA and Adjusted OIBDA are defined as net income adjusted for the items set forth in the reconciliation below. EBITDA, Adjusted EBITDA and Adjusted OIBDA are not measures of financial performance under GAAP and should not be considered as alternatives to Net income or Cash flows from operating activities, as indicators of cash flows or as measures of liquidity. UScellular 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. Management uses Adjusted EBITDA and Adjusted OIBDA as measurements of profitability, and therefore, reconciliations to Net income and Operating income are deemed appropriate. Management believes Adjusted EBITDA and Adjusted OIBDA are useful measures of UScellular’s 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 UScellular’s financial data in evaluating the effectiveness of its operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. Adjusted EBITDA shows adjusted earnings before interest, taxes, depreciation, amortization and accretion, and gains and losses, while Adjusted OIBDA reduces this measure further to exclude Equity in earnings of unconsolidated entities and Interest and dividend income in order to more effectively show the performance of operating activities excluding investment activities. The following table reconciles EBITDA, Adjusted EBITDA and Adjusted OIBDA to the corresponding GAAP measures, Net income and Operating income. 2021 2020 (Dollars in millions) Net income (GAAP) $ 160 $ 233 Add back: Income tax expense 20 17 Interest expense 175 112 Depreciation, amortization and accretion 678 683 EBITDA (Non-GAAP) 1,033 1,045 Add back or deduct: (Gain) loss on asset disposals, net 23 25 (Gain) loss on sale of business and other exit costs, net (2) — (Gain) loss on license sales and exchanges, net — (5) (Gain) loss on investments — (2) Adjusted EBITDA (Non-GAAP) 1,054 1,063 Deduct: Equity in earnings of unconsolidated entities 179 179 Interest and dividend income 6 8 Adjusted OIBDA (Non-GAAP) 869 876 Deduct: Depreciation, amortization and accretion 678 683 (Gain) loss on asset disposals, net 23 25 (Gain) loss on sale of business and other exit costs, net (2) — (Gain) loss on license sales and exchanges, net — (5) Operating income (GAAP) $ 170 $ 173 40Free Cash FlowThe following table presents Free cash flow, which 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 UScellular believes may be useful to investors and other users of its financial information in evaluating liquidity, specifically, the amount of net cash generated by business operations after deducting Cash paid for additions to property, plant and equipment. 2021 2020 (Dollars in millions) Cash flows from operating activities (GAAP) $ 802 $ 1,237 Less: Cash paid for additions to property, plant and equipment 724 989 Free cash flow (Non-GAAP) $ 78 $ 248 41Item 7A. QuantitativeQuantitative and Qualitative Disclosures About Market RiskIncorporated by reference from Exhibit 13 to this Form 10-K, Annual ReportSee section entitled “Market Risk.”Risk” in Item 7 of this Form 10-K.42Index to Financial Statements and Supplementary Data Page No. 43Incorporated by reference from Exhibit 13Index to this Form 10-K, Annual Report sections entitled “ConsolidatedFinancial Statements and Supplementary DataFinancial StatementsUnited States Cellular CorporationConsolidated Statement of Operations” “ConsolidatedYear Ended December 31, 2021 2020 2019 (Dollars and shares in millions, except per share amounts) Operating revenues Service $ 3,115 $ 3,067 $ 3,035 Equipment sales 1,007 970 987 Total operating revenues 4,122 4,037 4,022 Operating expenses System operations (excluding Depreciation, amortization and accretion reported below) 790 782 756 Cost of equipment sold 1,118 1,011 1,028 Selling, general and administrative 1,345 1,368 1,406 Depreciation, amortization and accretion 678 683 702 (Gain) loss on asset disposals, net 23 25 19 (Gain) loss on sale of business and other exit costs, net (2) — (1) (Gain) loss on license sales and exchanges, net — (5) — Total operating expenses 3,952 3,864 3,910 Operating income 170 173 112 Investment and other income (expense) Equity in earnings of unconsolidated entities 179 179 166 Interest and dividend income 6 8 17 Gain (loss) on investments — 2 — Interest expense (175) (112) (110) Total investment and other income 10 77 73 Income before income taxes 180 250 185 Income tax expense 20 17 52 Net income 160 233 133 Less: Net income attributable to noncontrolling interests, net of tax 5 4 6 Net income attributable to UScellular shareholders $ 155 $ 229 $ 127 Basic weighted average shares outstanding 86 86 86 Basic earnings per share attributable to UScellular shareholders $ 1.80 $ 2.66 $ 1.47 Diluted weighted average shares outstanding 87 87 88 Diluted earnings per share attributable to UScellular shareholders $ 1.77 $ 2.62 $ 1.44 The accompanying notes are an integral part of these consolidated financial statements.44United States Cellular CorporationConsolidated Statement of Cash Flows” “ConsolidatedYear Ended December 31, 2021 2020 2019 (Dollars in millions) Cash flows from operating activities Net income $ 160 $ 233 $ 133 Add (deduct) adjustments to reconcile net income to net cash flows from operating activities Depreciation, amortization and accretion 678 683 702 Bad debts expense 56 72 107 Stock-based compensation expense 27 32 41 Deferred income taxes, net 41 130 (4) Equity in earnings of unconsolidated entities (179) (179) (166) Distributions from unconsolidated entities 176 189 161 (Gain) loss on asset disposals, net 23 25 19 (Gain) loss on sale of business and other exit costs, net (2) — (1) (Gain) loss on license sales and exchanges, net — (5) — (Gain) loss on investments — (2) — Other operating activities 33 2 4 Changes in assets and liabilities from operations Accounts receivable (27) (8) (46) Equipment installment plans receivable (116) (54) (97) Inventory (27) 16 (20) Accounts payable (57) 145 (69) Customer deposits and deferred revenues 40 2 (8) Accrued taxes (41) (57) (23) Other assets and liabilities 17 13 (9) Net cash provided by operating activities 802 1,237 724 Cash flows from investing activities Cash paid for additions to property, plant and equipment (724) (989) (650) Cash paid for licenses (1,302) (171) (266) Cash received from investments 3 1 29 Cash paid for investments — (3) (11) Cash received from divestitures and exchanges 3 26 41 Advance payments for license acquisitions (20) (30) (5) Other investing activities 4 3 (2) Net cash used in investing activities (2,036) (1,163) (864) Cash flows from financing activities Issuance of long-term debt 1,342 1,125 — Repayment of long-term debt (1,118) (108) (116) Common Shares reissued for benefit plans, net of tax payments (16) (11) (9) Repurchase of Common Shares (31) (23) (21) Payment of debt issuance costs (22) (38) (1) Distributions to noncontrolling interests (3) (6) (4) Payments to acquire additional interest in subsidiaries — (11) — Other financing activities (10) (2) (1) Net cash provided by (used in) financing activities 142 926 (152) Net increase (decrease) in cash, cash equivalents and restricted cash (1,092) 1,000 (292) Cash, cash equivalents and restricted cash Beginning of period 1,291 291 583 End of period $ 199 $ 1,291 $ 291 The accompanying notes are an integral part of these consolidated financial statements.45United States Cellular CorporationConsolidated Balance Sheet” “Consolidated — AssetsDecember 31, 2021 2020 (Dollars in millions) Current assets Cash and cash equivalents $ 156 $ 1,271 Short-term investments — 3 Accounts receivable Customers and agents, less allowances of $57 and $62, respectively 976 915 Roaming 7 13 Other, less allowances of $2 and $1, respectively 63 70 Inventory, net 173 146 Prepaid expenses 58 51 Income taxes receivable 123 125 Other current assets 49 29 Total current assets 1,605 2,623 Assets held for sale 18 2 Licenses 4,088 2,629 Investments in unconsolidated entities 439 435 Property, plant and equipment In service and under construction 9,056 8,785 Less: Accumulated depreciation and amortization 6,450 6,319 Property, plant and equipment, net 2,606 2,466 Operating lease right-of-use assets 959 924 Other assets and deferred charges 626 602 Total assets1$ 10,341 $ 9,681 The accompanying notes are an integral part of these consolidated financial statements.46United States Cellular CorporationConsolidated Balance Sheet — Liabilities and EquityDecember 31, 2021 2020 (Dollars and shares in millions, except per share amounts) Current liabilities Current portion of long-term debt $ 3 $ 2 Accounts payable Affiliated 14 10 Trade 346 377 Customer deposits and deferred revenues 191 151 Accrued taxes 33 48 Accrued compensation 83 82 Short-term operating lease liabilities 129 116 Other current liabilities 104 85 Total current liabilities 903 871 Liabilities held for sale — 1 Deferred liabilities and credits Deferred income tax liability, net 674 633 Long-term operating lease liabilities 889 875 Other deferred liabilities and credits 573 376 Long-term debt, net 2,728 2,489 Commitments and contingencies 0 0 Noncontrolling interests with redemption features 11 10 Equity UScellular shareholders’ equity Series A Common and Common Shares Authorized 190 shares (50 Series A Common and 140 Common Shares) Issued 88 shares (33 Series A Common and 55 Common Shares) Outstanding 86 shares (33 Series A Common and 53 Common Shares) Par Value ($1.00 per share) ($33 Series A Common and $55 Common Shares) 88 88 Additional paid-in capital 1,678 1,651 Treasury shares, at cost, 2 Common Shares (68) (67) Retained earnings 2,849 2,739 Total UScellular shareholders' equity 4,547 4,411 Noncontrolling interests 16 15 Total equity 4,563 4,426 Total liabilities and equity1$ 10,341 $ 9,681 The accompanying notes are an integral part of these consolidated financial statements.1The consolidated total assets as of December 31, 2021 and 2020, include assets held by consolidated variable interest entities (VIEs) of $1,482 million and $1,060 million, respectively, which are not available to be used to settle the obligations of UScellular. The consolidated total liabilities as of December 31, 2021 and 2020, include certain liabilities of consolidated VIEs of $23 million and $20 million, respectively, for which the creditors of the VIEs have no recourse to the general credit of UScellular. See Note 14 — Variable Interest Entities for additional information.47United States Cellular CorporationConsolidated Statement of Changes in Equity” “Notes UScellular Shareholders Series ACommon andCommonsharesAdditionalpaid-incapitalTreasurysharesRetainedearningsTotal
UScellular
shareholders'
equityNoncontrollinginterestsTotal equity (Dollars in millions) December 31, 2020 $ 88 $ 1,651 $ (67) $ 2,739 $ 4,411 $ 15 $ 4,426 Net income attributable to UScellular shareholders — — — 155 155 — 155 Net income attributable to noncontrolling interests classified as equity — — — — — 4 4 Repurchase of Common Shares — — (31) — (31) — (31) Incentive and compensation plans — 27 30 (45) 12 — 12 Distributions to noncontrolling interests — — — — — (3) (3) December 31, 2021 $ 88 $ 1,678 $ (68) $ 2,849 $ 4,547 $ 16 $ 4,563 The accompanying notes are an integral part of these consolidated financial statements.48United States Cellular CorporationConsolidated Statement of Changes in Equity UScellular Shareholders Series ACommon andCommonsharesAdditionalpaid-incapitalTreasurysharesRetainedearningsTotal
UScellular
shareholders'
equityNoncontrollinginterestsTotal equity (Dollars in millions) December 31, 2019 $ 88 $ 1,629 $ (70) $ 2,550 $ 4,197 $ 13 $ 4,210 Cumulative effect of accounting change — — — (2) (2) — (2) Net income attributable to UScellular shareholders — — — 229 229 — 229 Net income attributable to noncontrolling interests classified as equity — — — — — 4 4 Repurchase of Common Shares — — (23) — (23) — (23) Incentive and compensation plans — 32 26 (38) 20 — 20 Distributions to noncontrolling interests — — — — — (6) (6) Acquisitions of noncontrolling interests — (10) — — (10) 4 (6) December 31, 2020 $ 88 $ 1,651 $ (67) $ 2,739 $ 4,411 $ 15 $ 4,426 The accompanying notes are an integral part of these consolidated financial statements.49United States Cellular CorporationConsolidated Statement of Changes in Equity UScellular Shareholders Series ACommon andCommonsharesAdditionalpaid-incapitalTreasurysharesRetainedearningsTotal
UScellular
shareholders'
equityNoncontrollinginterestsTotal equity (Dollars in millions) December 31, 2018 $ 88 $ 1,590 $ (65) $ 2,444 $ 4,057 $ 10 $ 4,067 Cumulative effect of accounting change — — — 2 2 — 2 Net income attributable to UScellular shareholders — — — 127 127 — 127 Net income attributable to noncontrolling interests classified as equity — — — — — 6 6 Repurchase of Common Shares — — (21) — (21) — (21) Incentive and compensation plans — 39 16 (23) 32 — 32 Distributions to noncontrolling interests — — — — — (3) (3) December 31, 2019 $ 88 $ 1,629 $ (70) $ 2,550 $ 4,197 $ 13 $ 4,210 The accompanying notes are an integral part of these consolidated financial statements.50United States Cellular CorporationNotes to Consolidated Financial Statements” “Management’s Report on Internal Control OverNote 1 Summary of Significant Accounting PoliciesUnited States Cellular Corporation (UScellular), a Delaware Corporation, is an 82%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).Nature of OperationsUScellular owns, operates and invests in wireless systems throughout the United States. As of December 31, 2021, UScellular served customers with 5.0 million total connections. UScellular has 1 reportable segment.Principles of ConsolidationThe accounting policies of UScellular conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Reporting,” “ReportAccounting Standards Board (FASB) Accounting Standards Codification (ASC). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of Independent Registered Public Accounting Firm,”the FASB ASC. The consolidated financial statements include the accounts of UScellular, subsidiaries in which it has a controlling financial interest, general partnerships in which UScellular has a majority partnership interest and “Consolidated Quarterly Information (Unaudited).”certain entities in which UScellular has a variable interest that requires consolidation under GAAP. See Note 14 — Variable Interest Entities for additional information relating to UScellular’s VIEs. Intercompany accounts and transactions have been eliminated. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the years ended December 31, 2017, 20162021, 2020 and 20152019 equaled net income.Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (a) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (b) the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates are involved in accounting for indefinite-lived intangible assets and income taxes.Cash, Cash Equivalents and Restricted CashCash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. Cash and cash equivalents subject to contractual restrictions are classified as restricted cash. Restricted cash primarily consists of balances required under the receivables securitization agreement. See Note 12 — Debt for additional information related to the receivables securitization agreement. The following table provides a reconciliation of Cash and cash equivalents and restricted cash reported in the Consolidated Balance Sheet to the total of the amounts in the Consolidated Statement of Cash Flows.December 31, 2021 2020 (Dollars in millions) Cash and cash equivalents $ 156 $ 1,271 Restricted cash included in Other current assets 43 20 Cash, cash equivalents and restricted cash in the statement of cash flows $ 199 $ 1,291 Accounts Receivable and Allowance for Credit LossesAccounts receivable consist primarily of amounts owed by customers for wireless services and equipment sales, including sales of certain devices and accessories under installment plans, by agents and third-party distributors for sales of equipment to them and by other wireless carriers whose customers have used UScellular’s wireless systems.UScellular estimates expected credit losses related to accounts receivable balances based on a review of available and relevant information including current economic conditions, projected economic conditions, historical loss experience, account aging, and other factors that could affect collectability. Expected credit losses are determined for each pool of accounts receivable balances that share similar risk characteristics. The allowance for credit losses is the best estimate of the amount of expected credit losses related to existing accounts receivable. UScellular does not have any off-balance sheet credit exposure related to its customers.InventoryInventory consists primarily of wireless devices stated at the lower of cost, which approximates cost determined on the first-in first-out basis, or net realizable value. Net realizable value is determined by reference to the stand-alone selling price.51Cloud-Hosted ArrangementsUScellular's cloud-hosted arrangements that are service contracts consist primarily of software used to perform administrative functions. Implementation costs related to UScellular's cloud-hosted arrangements, which are recorded in Prepaid expenses and Other assets and deferred charges in the Consolidated Balance Sheet, were as follows:December 31, 2021 2020 (Dollars in millions) Implementation costs, gross $ 76 $ 67 Accumulated amortization (29) (13) Implementation costs, net $ 47 $ 54 These costs are amortized over the period of the service contract, which is generally three to five years. Amortization of implementation costs was $16 million and $11 million for the years ended December 31, 2021 and 2020, respectively, and was included in Selling, general and administrative expenses.LicensesLicenses consist of direct and incremental costs incurred in acquiring Federal Communications Commission (FCC) wireless spectrum licenses that generally provide UScellular with the exclusive right to utilize designated radio spectrum within specific geographic service areas to provide wireless service. Although wireless spectrum licenses are issued for a fixed period of time, generally ten years, or in some cases twelve or fifteen years, the FCC has granted license renewals routinely and at a nominal cost. The wireless spectrum licenses held by UScellular expire at various dates. UScellular believes that it is probable that its future wireless spectrum license renewal applications will be granted. UScellular determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of the wireless spectrum licenses. Therefore, UScellular has determined that wireless spectrum licenses are indefinite-lived intangible assets. UScellular performs its annual impairment assessment of wireless spectrum licenses as of November 1 of each year or more frequently if there are events or circumstances that cause UScellular to believe it is more likely than not that the carrying value of wireless spectrum licenses exceeds fair value. For purposes of its impairment testing, UScellular separated its FCC wireless spectrum licenses into 8 units of accounting. The 8 units of accounting consisted of 1 unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and 7 units of accounting for geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses). UScellular performed a qualitative impairment assessment to determine whether the wireless spectrum licenses were impaired. In 2021 and 2020, UScellular considered several qualitative factors, including analyst estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent UScellular and other market participant transactions and other industry and market factors. Based on these assessments, UScellular concluded that it was more likely than not that the fair value of the wireless spectrum licenses in each unit of accounting exceeded their respective carrying values. Therefore, no quantitative impairment evaluation was completed. See Note 7 — Intangible Assets for additional details related to wireless spectrum licenses.Investments in Unconsolidated EntitiesFor its equity method investments for which financial information is readily available, UScellular records its equity in the earnings of the entity in the current period. For its equity method investments for which financial information is not readily available, UScellular records its equity in the earnings of the entity on a one quarter lag basis.Property, Plant and EquipmentUScellular’s Property, plant and equipment is stated at the original cost of construction or purchase including capitalized costs of certain taxes, payroll-related expenses, interest and estimated costs to remove the assets.Expenditures that enhance the productive capacity of assets in service or extend their useful lives are capitalized and depreciated. Expenditures for maintenance and repairs of assets in service are charged to System operations expense or Selling, general and administrative expense, as applicable. Retirements and disposals of assets are recorded by removing the original cost of the asset (along with the related accumulated depreciation) from plant in service and recording it, together with proceeds, if any, and net removal costs (removal costs less an applicable accrued asset retirement obligation and salvage value realized), as a gain or loss, as appropriate.UScellular capitalizes certain costs of developing new information systems. Software licenses that qualify for capitalization as an asset are accounted for as the acquisition of a fixed asset and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition.Depreciation and AmortizationDepreciation is provided using the straight-line method over the estimated useful life of the related asset.52UScellular depreciates leasehold improvement assets over periods ranging from one year to thirty years; such periods approximate the shorter of the assets’ economic lives or the specific lease terms.Useful lives of specific assets are reviewed throughout the year to determine if changes in technology or other business changes would warrant accelerating the depreciation of those specific assets. There were no material changes to the assigned useful lives of the various categories of property, plant and equipment in 2021, 2020 or 2019. However, in 2021, 2020 and 2019, depreciation for certain specific assets was accelerated due to changes in technology. See Note 9 — Property, Plant and Equipment for additional details related to useful lives.Impairment of Long-Lived AssetsUScellular reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired.UScellular has 1 asset group for purposes of assessing property, plant and equipment for impairment based on the integrated nature of its assets and operations. The cash flows generated by this single interdependent asset group represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.LeasesA lease is generally present in a contract if the lessee controls the use of identified property, plant or equipment for a period of time in exchange for consideration. See Note 10 — Leases for additional details related to leases.UScellular adopted the provisions of ASC 842 on January 1, 2019, using a modified retrospective method. Under this method, UScellular elected to apply the new accounting standard only to the most recent period presented, recognizing the cumulative effect of the accounting change as an adjustment to the beginning balance of retained earnings. The cumulative effect of applying the provisions of ASC 842 had no material impact on retained earnings.Agent LiabilitiesUScellular has relationships with agents, which are independent businesses that obtain customers for UScellular. At December 31, 2021 and 2020, UScellular had accrued $51 million and $55 million, respectively, in agent related liabilities. These amounts are included in Other current liabilities in the Consolidated Balance Sheet.Debt Issuance CostsDebt issuance costs include underwriters’ and legal fees and other charges related to issuing and renewing various borrowing instruments and other long–term agreements and are amortized over the respective term of each instrument. Debt issuance costs related to UScellular’s revolving credit agreement and receivables securitization agreement are recorded in Other assets and deferred charges in the Consolidated Balance Sheet. All other debt issuance costs are presented as an offset to the related debt obligation in the Consolidated Balance Sheet.Asset Retirement ObligationsUScellular records asset retirement obligations for the fair value of legal obligations associated with asset retirements and a corresponding increase in the carrying amount of the related long-lived asset in the period in which the obligations are incurred. In periods subsequent to initial measurement, UScellular recognizes changes in the liability resulting from the passage of time and updates to the timing or the amount of the original estimates. The liability is accreted to its estimated settlement date value over the period to the estimated settlement date. The change in the carrying amount of the long-lived asset is depreciated over the average remaining life of the related asset. See Note 11 — Asset Retirement Obligations for additional information.Treasury SharesCommon Shares repurchased by UScellular are recorded at cost as treasury shares and result in a reduction of equity. When treasury shares are reissued, UScellular determines the cost using the first-in, first-out cost method. The difference between the cost of the treasury shares and reissuance price is included in Additional paid-in capital or Retained earnings.Revenue RecognitionRevenues from sales of equipment and products are recognized when control has transferred to the customer, agent or third-party distributor. Service revenues are recognized as the related service is provided. See Note 2 — Revenue Recognition for additional information on UScellular's policies related to Revenues.Advertising CostsUScellular expenses advertising costs as incurred. Advertising costs totaled $184 million, $196 million and $212 million in 2021, 2020 and 2019, respectively.53Income TaxesUScellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. For financial statement purposes, UScellular and its subsidiaries calculate their income, income taxes and credits as if they comprised a separate affiliated group. Under a tax allocation agreement between TDS and UScellular, UScellular remits its applicable income tax payments to and receives applicable tax refunds from TDS. UScellular had a tax receivable balance with TDS of $123 million and $125 million as of December 31, 2021, and 2020, respectively. In January 2022, UScellular received $123 million of the tax receivable balance with TDS.Deferred taxes are computed using the liability method, whereby deferred tax assets are recognized for future deductible temporary differences and operating loss carryforwards, and deferred tax liabilities are recognized for future taxable temporary differences. Both deferred tax assets and liabilities are measured using the enacted tax rates in effect when the temporary differences are expected to reverse. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. UScellular evaluates income tax uncertainties, assesses the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment. Deferred taxes are reported as a net non-current asset or liability by jurisdiction. Any corresponding valuation allowance to reduce the amount of deferred tax assets is also recorded as non-current. See Note 5 — Income Taxes for additional information.Stock-Based Compensation and Other PlansUScellular has established a long-term incentive plan and a non-employee director compensation plan. These plans are considered compensatory plans and, therefore, recognition of costs for grants made under these plans is required.UScellular recognizes stock compensation expense based upon the fair value of the specific awards granted using established valuation methodologies. The amount of stock compensation cost recognized on either a straight-line basis or graded attribution method is based on the portion of the award that is expected to vest over the requisite service period, which generally represents the vesting period. Stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. See Note 17 — Stock-Based Compensation for additional information.Defined Contribution PlansUScellular participates in a qualified noncontributory defined contribution pension plan sponsored by TDS; such plan provides pension benefits for the employees of UScellular and its subsidiaries. Under this plan, pension costs are calculated separately for each participant and are funded annually. Pension costs were $12 million, $12 million and $11 million in 2021, 2020 and 2019, respectively.UScellular also participates in a defined contribution retirement savings plan (401(k) plan) sponsored by TDS. Total costs incurred for UScellular’s contributions to the 401(k) plan were $15 million, $15 million and $14 million in 2021, 2020 and 2019, respectively.54Note 2 Revenue RecognitionNature of goods and servicesThe following is a description of principal activities from which UScellular generates its revenues.Services and products Nature, timing of satisfaction of performance obligations, and significant payment terms Wireless services Wireless service includes voice, messaging and data services. Revenue is recognized in Service revenues as wireless service is provided to the customer. Wireless services generally are billed and paid in advance on a monthly basis. Wireless devices and accessories UScellular offers a comprehensive range of wireless devices such as handsets, tablets, mobile hotspots, home phones and routers for use by its customers, as well as accessories. UScellular also sells wireless devices to agents and other third-party distributors for resale. UScellular frequently discounts wireless devices sold to new and current customers. UScellular also offers customers the option to purchase certain devices and accessories under installment contracts over a specified time period. For certain equipment installment plans, after a specified period of time, the customer may have the right to upgrade to a new device. Such upgrades require the customer to enter into an equipment installment contract for the new device, and transfer the existing device to UScellular. UScellular recognizes revenue in Equipment sales revenues when control of the device or accessory is transferred to the customer, agent or third-party distributor, which is generally upon delivery. Wireless roaming UScellular receives roaming revenues when other wireless carriers’ customers use UScellular’s wireless systems. UScellular recognizes revenue in Service revenues when the roaming service is provided. Wireless Eligible Telecommunications Carrier (ETC) Revenues Telecommunications companies may be designated by states, or in some cases by the FCC, as an ETC to receive support payments from the Universal Service Fund if they provide specified services in “high cost” areas. ETC revenues recognized in the reporting period represent the amounts which UScellular is entitled to receive for such period, as determined and approved in connection with UScellular’s designation as an ETC in various states. Wireless tower rents UScellular receives tower rental revenues when another carrier leases tower space on a UScellular owned tower. UScellular recognizes revenue in Service revenues in the period during which the services are provided. Significant JudgmentsAs a practical expedient, UScellular groups similar contracts or similar performance obligations together into portfolios of contracts or performance obligations if doing so does not result in a significant difference from accounting for the individual contracts discretely. UScellular applies this grouping method for the following types of transactions: device activation fees, contract acquisition costs, and certain customer promotions. Contract portfolios are recognized over the respective expected customer lives or terms of the contracts.Services are deemed to be highly interrelated when the method and timing of transfer and performance risk are the same. Highly interrelated services that are determined to not be distinct have been grouped into a single performance obligation. Each month of services promised is a performance obligation. The series of monthly service performance obligations promised over the course of the contract are combined into a single performance obligation for purposes of the revenue allocation.UScellular has made judgments regarding transaction price, including but not limited to issues relating to variable consideration, time value of money, returns and non-cash consideration. When determined to be significant in the context of the contract, these items are considered in the valuation of transaction price at contract inception or modification, as appropriate.Multiple Performance ObligationsUScellular sells bundled service and equipment offerings. In these instances, UScellular recognizes its revenue based on the relative standalone selling prices for each distinct service or equipment performance obligation, or bundles thereof. UScellular estimates the standalone selling price of the device or accessory to be its retail price excluding discounts. UScellular estimates the standalone selling price of wireless service to be the price offered to customers on month-to-month contracts.IncentivesDiscounts, incentives, and rebates to agents and end customers that are deemed cash are recognized as a reduction of Operating revenues concurrently with the associated revenue. From time to time, UScellular may offer certain promotions to incentivize customers to switch to, or to purchase additional services from, UScellular. Under these types of promotions, an eligible customer may receive an incentive in the form of a discount off additional services purchased shown as a credit to the customer’s monthly bill. UScellular accounts for the future discounts as material rights at the time of the initial transaction by allocating and deferring revenue based on the relative proportion of the future discounts in comparison to the aggregate initial purchase. The deferred revenue will be recognized as service revenue in future periods.55Amounts Collected from Customers and Remitted to Governmental AuthoritiesUScellular records amounts collected from customers and remitted to governmental authorities on a net basis within a liability account if the amount is assessed upon the customer and UScellular merely acts as an agent in collecting the amount on behalf of the imposing governmental authority. If the amount is assessed upon UScellular, then amounts collected from customers 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 $66 million, $56 million and $53 million for 2021, 2020 and 2019, respectively.Disaggregation of RevenueIn the following table, UScellular's revenues are disaggregated by type of service, which represents the relevant categorization of revenues for UScellular, and timing of recognition. Service revenues are recognized over time and Equipment sales are point in time.Year Ended December 31, 2021 2020 2019 (Dollars in millions) Revenues from contracts with customers: Retail service1$ 2,765 $ 2,686 $ 2,650 Inbound roaming 110 152 174 Other service 157 152 137 Service revenues from contracts with customers 3,032 2,990 2,961 Equipment sales 1,007 970 987 Total revenues from contracts with customers2$ 4,039 $ 3,960 $ 3,948 1During the third quarter of 2021, UScellular recorded a $9 million out-of-period error related to the timing of recognition of regulatory fee billings. This adjustment had the impact of increasing Service revenue by $9 million in 2021. UScellular determined that this adjustment was not material to any of the periods impacted.2Revenue line items in this table will not agree to amounts presented in the Consolidated Statement of Operations as the amounts in this table only include revenue resulting from contracts with customers.Contract BalancesFor contracts that involve multiple element service and equipment offerings, the transaction price is allocated to each performance obligation based on its relative standalone selling price. When payment is collected in advance of delivery of goods or services, a contract liability is recorded. A contract asset is recorded when revenue is recognized in advance of UScellular’s right to receive consideration. Once there is an unconditional right to receive the consideration, UScellular records such amounts as receivables, and then bills the customer under the terms of the respective contract.UScellular recognizes Equipment sales revenue when the equipment is delivered to the customer and a corresponding contract asset or liability is recorded for the difference between the amount of revenue recognized and the amount billed to the customer in cases where discounts are offered. The contract asset or liability is reduced over the contract term as service is provided and billed to the customer.The following table provides balances for contract assets from contracts with customers, which are recorded in Other current assets and Other assets and deferred charges in the Consolidated Balance Sheet, and contract liabilities from contracts with customers, which are recorded in Customer deposits and deferred revenues and Other deferred liabilities and credits in the Consolidated Balance Sheet.December 31, 2021 2020 (Dollars in millions) Contract assets $ 7 $ 10 Contract liabilities $ 243 $ 171 Revenue recognized related to contract liabilities existing at January 1, 2021 was $132 million for the year ended December 31, 2021.56Transaction price allocated to the remaining performance obligationsThe following table includes estimated service revenues expected to be recognized related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. These estimates represent service revenues to be recognized when wireless services are delivered to customers pursuant to service plan contracts and under certain roaming agreements with other carriers. These estimates are based on contracts in place as of December 31, 2021, and may vary from actual results. As practical expedients, revenue related to contracts of less than one year, generally month-to-month contracts, and contracts with a fixed per-unit price and variable quantity, are excluded from these estimates.Service Revenues (Dollars in millions) 2022 $ 252 2023 112 Thereafter 81 Total $ 445 Contract Cost AssetsUScellular expects that commission fees paid as a result of obtaining contracts are recoverable and therefore UScellular defers and amortizes these costs. As a practical expedient, costs with an amortization period of one year or less are expensed as incurred. The contract cost asset balance related to commission fees and other costs was $126 million and $124 million at December 31, 2021 and 2020, respectively and was recorded in Other assets and deferred charges in the Consolidated Balance Sheet. Deferred commission fees are amortized based on the timing of transfer of the goods or services to which the assets relate, typically the contract term. Amortization of contract cost assets was $99 million, $104 million and $109 million for the years ended December 31, 2021, 2020 and 2019, respectively, and was included in Selling, general and administrative expenses.Note 3 Fair Value MeasurementsAs of December 31, 2021 and 2020, UScellular did not have any material financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets.UScellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below. Level within the Fair Value Hierarchy December 31, 2021 December 31, 2020 Book Value Fair Value Book Value Fair Value (Dollars in millions) Long-term debt Retail 2 $ 1,500 $ 1,594 $ 1,917 $ 1,962 Institutional 2 535 659 535 707 Other 2 746 746 106 106 Long-term debt excludes lease obligations, the current portion of Long-term debt and debt financing costs. The fair value of “Retail” Long-term debt was estimated using market prices for UScellular Senior Notes, which are traded on the New York Stock Exchange. UScellular’s “Institutional” debt consists of the 6.7% Senior Notes which are traded over the counter. UScellular’s “Other” debt consists of a senior term loan credit agreement and receivables securitization agreement. UScellular estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 1.31% to 4.40% and 1.35% to 3.75% at December 31, 2021 and 2020, respectively.The fair values of Cash and cash equivalents, restricted cash and Short-term investments approximate their book values due to the short-term nature of these financial instruments.57Note 4 Equipment Installment PlansUScellular sells devices to customers under equipment installment plans over a specified 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.The following table summarizes equipment installment plan receivables.December 31, 2021 2020 (Dollars in millions) Equipment installment plan receivables, gross $ 1,085 $ 1,007 Allowance for credit losses (72) (78) Equipment installment plan receivables, net $ 1,013 $ 929 Net balance presented in the Consolidated Balance Sheet as: Accounts receivable — Customers and agents (Current portion) $ 639 $ 590 Other assets and deferred charges (Non-current portion) 374 339 Equipment installment plan receivables, net $ 1,013 $ 929 UScellular uses various inputs, including internal data, information from 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 eligible lines, the amount of credit available, and the down payment requirement, if any. These credit classes are grouped into four credit categories: lowest risk, lower risk, slight risk and higher risk. A customer's assigned credit class is reviewed periodically and a change is made, if appropriate. An equipment installment plan billed amount is considered past due if not paid within 30 days. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows: December 31, 2021 December 31, 2020 Lowest Risk Lower Risk Slight Risk Higher Risk Total Lowest Risk Lower Risk Slight Risk Higher Risk Total (Dollars in millions) Unbilled $ 896 $ 94 $ 24 $ 5 $ 1,019 $ 819 $ 98 $ 22 $ 9 $ 948 Billed — current 40 5 1 1 47 36 5 1 1 43 Billed — past due 10 6 2 1 19 8 5 2 1 16 Total $ 946 $ 105 $ 27 $ 7 $ 1,085 $ 863 $ 108 $ 25 $ 11 $ 1,007 The balance of the equipment installment plan receivables as of December 31, 2021 on a gross basis by year of origination were as follows:2019 2020 2021 Total (Dollars in millions) Lowest Risk $ 41 $ 278 $ 627 $ 946 Lower Risk 3 26 76 105 Slight Risk 1 4 22 27 Higher Risk — 1 6 7 Total $ 45 $ 309 $ 731 $ 1,085 Activity for the years ended December 31, 2021 and 2020, in the allowance for credit losses for equipment installment plan receivables was as follows: 2021 2020 (Dollars in millions) Allowance for credit losses, beginning of year $ 78 $ 84 Bad debts expense 38 50 Write-offs, net of recoveries (44) (56) Allowance for credit losses, end of year $ 72 $ 78 58Note 5 Income TaxesUScellular is included in a consolidated federal income tax return and in certain state income tax returns with other members of the TDS consolidated group. For financial statement purposes, UScellular and its subsidiaries compute their income tax expense as if they comprised a separate affiliated group and were not included in the TDS consolidated group.UScellular’s current income taxes balances at December 31, 2021 and 2020, were as follows:December 31, 2021 2020 (Dollars in millions) Federal income taxes receivable $ 123 $ 124 Net state income taxes receivable — 1 Income tax expense (benefit) is summarized as follows:Year Ended December 31, 2021 2020 2019 (Dollars in millions) Current Federal $ 2 $ (118) $ 44 State (23) 5 12 Deferred Federal 49 124 — State (8) 6 (4) Total income tax expense (benefit) $ 20 $ 17 $ 52 A reconciliation of UScellular’s income tax expense computed at the statutory rate to the reported income tax expense, and the statutory federal income tax rate to UScellular’s effective income tax rate is as follows:Year Ended December 31, 2021 2020 2019 Amount Rate Amount Rate Amount Rate (Dollars in millions) Statutory federal income tax expense and rate $ 38 21.0 % $ 52 21.0 % $ 39 21.0 % State income taxes, net of federal benefit1(25) (14.1) 8 3.4 6 3.4 Change in federal valuation allowance27 3.8 — 0.1 7 3.6 Loss carryback benefit of CARES Act3— — (49) (19.8) — — Nondeductible compensation 2 1.3 6 2.6 2 1.3 Tax credits — (0.2) — (0.1) (3) (1.5) Other differences, net (2) (0.4) — (0.6) 1 0.3 Total income tax expense (benefit) and rate $ 20 11.4 % $ 17 6.6 % $ 52 28.1 % 1State income taxes, net of federal benefit, include changes in unrecognized tax benefits as well as adjustments to state valuation allowances. State taxes in 2021 are a net benefit due primarily to the reduction of tax accruals resulting from expirations of state statute of limitations for prior tax years.2Change in federal valuation allowance is due primarily to interest expense carryforwards from partnership investments that may not be realized.3The CARES Act provides a 5-year carryback of net operating losses generated in years 2018-2020. As the statutory federal tax rate applicable to certain years within the carryback period is 35%, carryback to those years provides a tax benefit in excess of the current federal statutory rate of 21%.59Significant components of UScellular’s deferred income tax assets and liabilities at December 31, 2021 and 2020, were as follows:December 31, 2021 2020 (Dollars in millions) Deferred tax assets Net operating loss (NOL) carryforwards $ 126 $ 107 Lease liabilities 254 236 Asset retirement obligation 64 51 Other 130 83 Total deferred tax assets 574 477 Less valuation allowance (83) (94) Net deferred tax assets 491 383 Deferred tax liabilities Property, plant and equipment 446 391 Licenses/intangibles 330 256 Partnership investments 154 143 Lease assets 232 215 Other 3 11 Total deferred tax liabilities 1,165 1,016 Net deferred income tax liability $ 674 $ 633 At December 31, 2021, UScellular and certain subsidiaries had $2,058 million of state NOL carryforwards (generating a $90 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards expire between 2022 and 2041. UScellular and certain subsidiaries had $170 million of federal NOL carryforwards (generating a $36 million deferred tax asset) available to offset future taxable income. The federal NOL carryforwards generally expire between 2022 and 2037, with the exception of federal NOLs generated after 2017, which do not expire. A valuation allowance was established for certain federal and state NOL carryforwards since it is more likely than not that a portion of such carryforwards will expire before they can be utilized.A summary of UScellular’s deferred tax asset valuation allowance is as follows: 2021 2020 2019 (Dollars in millions) Balance at beginning of year $ 94 $ 90 $ 75 Charged to Income tax expense (11) 4 15 Balance at end of year $ 83 $ 94 $ 90 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2021 2020 2019 (Dollars in millions) Unrecognized tax benefits balance at beginning of year $ 51 $ 48 $ 48 Additions for tax positions of current year 8 7 7 Additions for tax positions of prior years — 2 — Reductions for tax positions of prior years (3) — (6) Reductions for settlements of tax positions (2) — (1) Reductions for lapses in statutes of limitations (19) (6) — Unrecognized tax benefits balance at end of year $ 35 $ 51 $ 48 Unrecognized tax benefits are included in Other deferred liabilities and credits in the Consolidated Balance Sheet. If these benefits were recognized at each respective year end period, they would have reduced income tax expense in 2021, 2020 and 2019 by $28 million, $41 million and $37 million, respectively, net of the federal benefit from state income taxes. UScellular recognizes accrued interest and penalties related to unrecognized tax benefits in Income tax expense (benefit). The amounts charged to income tax expense related to interest and penalties resulted in a benefit of $10 million in 2021, and expenses of $2 million and $3 million in 2020 and 2019, respectively. Net accrued liabilities for interest and penalties were $12 million and $23 million at December 31, 2021 and 2020, respectively, and are included in Other deferred liabilities and credits in the Consolidated Balance Sheet. 60UScellular is included in TDS’ consolidated federal and certain state income tax returns. UScellular also files certain state and local income tax returns separately from TDS. With limited exceptions, TDS is no longer subject to federal and state income tax audits for the years prior to 2018.Note 6 Earnings Per ShareBasic earnings per share attributable to UScellular shareholders is computed by dividing Net income attributable to UScellular shareholders by the weighted average number of Common Shares outstanding during the period. Diluted earnings per share attributable to UScellular shareholders is computed by dividing Net income attributable to UScellular 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 incremental shares issuable upon the exercise of outstanding stock options and the vesting of performance and restricted stock units.The amounts used in computing basic and diluted earnings per share attributable to UScellular shareholders were as follows:Year Ended December 31, 2021 2020 2019 (Dollars and shares in millions, except per share amounts) Net income attributable to UScellular shareholders $ 155 $ 229 $ 127 Weighted average number of shares used in basic earnings per share 86 86 86 Effects of dilutive securities 1 1 2 Weighted average number of shares used in diluted earnings per share 87 87 88 Basic earnings per share attributable to UScellular shareholders $ 1.80 $ 2.66 $ 1.47 Diluted earnings per share attributable to UScellular shareholders $ 1.77 $ 2.62 $ 1.44 Certain Common Shares issuable upon the exercise of stock options or vesting of performance and restricted stock units were not included in weighted average diluted shares outstanding for the calculation of Diluted earnings per share attributable to UScellular shareholders because their effects were antidilutive. The number of such Common Shares excluded was less than 1 million shares for 2021, 2020 and 2019, respectively. Note 7 Intangible AssetsLicensesUScellular reviews attractive opportunities to acquire additional wireless spectrum, including pursuant to FCC auctions. UScellular also may seek to divest outright or exchange wireless spectrum that is not strategic to its long-term success. Activity related to UScellular's Licenses is presented below. 2021 2020 (Dollars in millions) Balance at beginning of year $ 2,629 $ 2,471 Acquisitions 1,464 171 Transferred to Assets held for sale (18) — Divestitures — (18) Capitalized interest 13 5 Balance at end of year $ 4,088 $ 2,629 Auction 103In March 2020, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 237 wireless spectrum licenses in the 37, 39 and 47 GHz bands (Auction 103) for $146 million. UScellular paid $5 million of this amount in 2019 and the remainder in 2020. In June 2020, the wireless spectrum licenses from Auction 103 were granted by the FCC.61Auction 107In February 2021, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 254 wireless spectrum licenses in the 3.7-3.98 GHz bands (Auction 107) for $1,283 million. UScellular paid $30 million of this amount in 2020 and the remainder in March 2021. The wireless spectrum licenses from Auction 107 were granted by the FCC in July 2021. Additionally, UScellular expects to be obligated to pay approximately $181 million in total from 2021 through 2024 related to relocation costs and accelerated relocation incentive payments. Such additional costs were accrued and capitalized at the time the licenses were granted. In October 2021, UScellular paid $36 million related to the additional costs. The spectrum must be cleared by incumbent providers before UScellular can access it. UScellular does not expect to have access to this spectrum until late 2023.Auction 110In January 2022, the FCC announced by way of public notice that UScellular was the provisional winning bidder for 380 wireless spectrum licenses in the 3.45-3.55 GHz band (Auction 110) for $580 million. UScellular paid $20 million of this amount in 2021 and the remainder in January and February 2022. The advance payment is included in Other assets and deferred charges in the December 31, 2021 Consolidated Balance Sheet. The wireless spectrum licenses from Auction 110 are expected to be granted by the FCC in 2022.Note 8 Investments in Unconsolidated EntitiesInvestments in unconsolidated entities consist of amounts invested in entities in which UScellular holds a noncontrolling interest. UScellular's Investments in unconsolidated entities are accounted for using either the equity method or measurement alternative method as shown in the table below. The carrying value of measurement alternative method investments represents cost minus any impairments plus or minus any observable price changes.December 31, 2021 2020 (Dollars in millions) Equity method investments: Capital contributions, loans, advances and adjustments $ 104 $ 104 Cumulative share of income 2,417 2,238 Cumulative share of distributions (2,090) (1,914) Total equity method investments 431 428 Measurement alternative method investments 8 7 Total investments in unconsolidated entities $ 439 $ 435 The following tables, which are based on unaudited information provided in part by third parties, summarize the combined assets, liabilities and equity, and results of operations of UScellular’s equity method investments:December 31, 2021 2020 (Dollars in millions) Assets Current $ 1,223 $ 1,199 Noncurrent 6,129 5,849 Total assets $ 7,352 $ 7,048 Liabilities and Equity Current liabilities $ 707 $ 643 Noncurrent liabilities 1,249 1,112 Partners’ capital and shareholders’ equity 5,396 5,293 Total liabilities and equity $ 7,352 $ 7,048 Year Ended December 31, 2021 2020 2019 (Dollars in millions) Results of Operations Revenues $ 7,100 $ 6,677 $ 6,903 Operating expenses 5,130 4,733 5,022 Operating income 1,970 1,944 1,881 Other income (expense), net 15 16 (22) Net income $ 1,985 $ 1,960 $ 1,859 62Note 9 Property, Plant and EquipmentProperty, plant and equipment in service and under construction, and related accumulated depreciation and amortization, as of December 31, 2021 and 2020, were as follows:December 31, Useful Lives (Years) 2021 2020 (Dollars in millions) Land N/A $ 37 $ 34 Buildings 20 293 295 Leasehold and land improvements 1-30 1,442 1,369 Cell site equipment 7-25 4,150 4,018 Switching equipment 5-8 1,095 1,094 Office furniture and equipment 3-5 252 282 Other operating assets and equipment 3-5 47 49 System development 1-7 1,479 1,327 Work in process N/A 261 317 Total property, plant and equipment, gross 9,056 8,785 Accumulated depreciation and amortization (6,450) (6,319) Total property, plant and equipment, net $ 2,606 $ 2,466 Depreciation and amortization expense totaled $662 million, $669 million and $689 million in 2021, 2020 and 2019, respectively. In 2021, 2020 and 2019, (Gain) loss on asset disposals, net included charges of $23 million, $25 million and $19 million, respectively, related to disposals of assets, trade-ins of older assets for replacement assets and other retirements of assets from service in the normal course of business.Note 10 LeasesLessee AgreementsA lease is generally present in a contract if the lessee controls the use of identified property, plant or equipment for a period of time in exchange for consideration. Nearly all of UScellular’s leases are classified as operating leases, although it does have a small number of finance leases. UScellular’s most significant leases are for land and tower spaces, network facilities, retail spaces, and offices.UScellular has agreements with both lease and nonlease components, which are accounted for separately. As part of the present value calculation for the lease liabilities, UScellular uses an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on UScellular's unsecured rates, adjusted to approximate the rates at which UScellular would be required to borrow on a collateralized basis over a term similar to the recognized lease term. UScellular applies the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term. The cost of nonlease components in UScellular’s lease portfolio (e.g., utilities and common area maintenance) are not typically predetermined at lease commencement and are expensed as incurred at their relative standalone price.Variable lease expense occurs when, subsequent to the lease commencement, lease payments are made that were not originally included in the lease liability calculation. UScellular’s variable lease payments are primarily a result of leases with escalations that are tied to an index. The incremental changes due to the index changes are recorded as variable lease expense and are not included in the right-of-use assets or lease liabilities.The identified lease term determines the periods to which expense is allocated and also has a significant impact on the right-of-use asset and lease liability calculations. Many of UScellular’s leases include renewal and early termination options. At lease commencement, the lease terms include options to extend the lease when UScellular is reasonably certain that it will exercise the options. The lease terms do not include early termination options unless UScellular is reasonably certain to exercise the options. Certain asset classes have similar lease characteristics; therefore, UScellular has applied the portfolio approach for lease term recognition for its tower space, retail, and certain ground lease asset classes.The following table shows the components of lease cost included in the Consolidated Statement of Operations:Year Ended December 31, 2021 2020 2019 (Dollars in millions) Operating lease cost $ 181 $ 171 $ 163 Variable lease cost 10 10 7 Total $ 191 $ 181 $ 170 63The following table shows supplemental cash flow information related to lease activities:Year Ended December 31, 2021 2020 2019 (Dollars in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 183 $ 169 $ 156 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 182 $ 155 $ 125 The table below shows a weighted-average analysis for lease terms and discount rates for operating leases:December 31, 2021 2020 Weighted Average Remaining Lease Term 12 years 12 years Weighted Average Discount Rate 3.8 % 4.1 % The maturities of lease liabilities are as follows: Operating Leases (Dollars in millions) 2022 $ 163 2023 162 2024 143 2025 118 2026 87 Thereafter 680 Total lease payments1$ 1,353 Less: Imputed interest 335 Present value of lease liabilities $ 1,018 1 Lease payments exclude $33 million of legally binding lease payments for leases signed but not yet commenced.Lessor AgreementsUScellular's most significant lessor leases are for tower space. All of UScellular’s lessor leases are classified as operating leases. A lease is generally present in a contract if the lessee controls the use of identified property, plant, or equipment for a period of time in exchange for consideration. UScellular’s lessor agreements with lease and nonlease components are generally accounted for separately.The identified lease term determines the periods to which revenue is allocated over the term of the lease. Many of UScellular’s leases include renewal and early termination options. At lease commencement, lease terms include options to extend the lease when UScellular is reasonably certain that lessees will exercise the options. Lease terms would not include periods after the date of a termination option that lessees are reasonably certain to exercise.Variable lease income occurs when, subsequent to the lease commencement, lease payments are received that were not originally included in the lease receivable calculation. UScellular’s variable lease income is primarily a result of leases with escalations that are tied to an index. The incremental increases due to the index changes are recorded as variable lease income.The following table shows the components of lease income which are included in Service revenues in the Consolidated Statement of Operations:Year Ended December 31, 2021 2020 2019 (Dollars in millions) Operating lease income1$ 83 $ 77 $ 74 1 During the third quarter of 2019, UScellular recorded an out-of-period adjustment attributable to 2009 through the second quarter of 2019 due to errors in the timing of recognition of revenue for certain tower leases. This out-of-period adjustment had the impact of increasing operating lease income by $5 million for the year ended December 31, 2019. UScellular determined that this adjustment was not material to any of the periods impacted.64The maturities of expected lease payments to be received are as follows: Operating Leases (Dollars in millions) 2022 $ 72 2023 69 2024 54 2025 36 2026 17 Thereafter 15 Total future lease maturities $ 263 Note 11 Asset Retirement ObligationsUScellular is subject to asset retirement obligations associated with its leased cell sites, switching office sites, retail store sites and office locations. Asset retirement obligations generally include obligations to restore leased land, towers, retail store and office premises to their pre-lease conditions. These obligations are included in Other deferred liabilities and credits in the Consolidated Balance Sheet.In 2021 and 2020, UScellular performed a review of the assumptions and estimated future costs related to asset retirement obligations. The results of the review and other changes in asset retirement obligations during 2021 and 2020, were as follows: 2021 2020 (Dollars in millions) Balance at beginning of year $ 249 $ 220 Additional liabilities accrued 9 5 Revisions in estimated cash outflows 42 11 Disposition of assets (1) (1) Accretion expense 16 14 Balance at end of year $ 315 $ 249 Note 12 DebtRevolving Credit AgreementAt December 31, 2021, UScellular had a revolving credit agreement available for general corporate purposes. Amounts under the revolving credit agreement may be borrowed, repaid and reborrowed from time to time until maturity in July 2026. The following table summarizes the revolving credit agreement as of December 31, 2021:(Dollars in millions) Maximum borrowing capacity $ 300 Letters of credit outstanding $ — Amount borrowed $ — Amount available for use $ 300 Borrowings under the revolving credit agreement bear interest at a rate of Secured Overnight Financing Rate (SOFR) plus 1.60%. UScellular may select a borrowing period of either one, two, three or six months (or other period of twelve months or less if requested by UScellular and approved by the lenders). UScellular’s credit spread and commitment fees on its revolving credit agreement may be subject to increase if its current credit rating from nationally recognized credit rating agencies is lowered, and may be subject to decrease if the rating is raised. In connection with UScellular’s revolving credit agreement, TDS and UScellular entered into a subordination agreement together with the administrative agent for the lenders under UScellular’s revolving credit agreement. Pursuant to this subordination agreement, (a) any consolidated funded indebtedness from UScellular to TDS will be unsecured and (b) any (i) consolidated funded indebtedness from UScellular to TDS (other than “refinancing indebtedness” as defined in the subordination agreement) in excess of $105 million and (ii) refinancing indebtedness in excess of $250 million will be subordinated and made junior in right of payment to the prior payment in full of obligations to the lenders under UScellular’s revolving credit agreement. As of December 31, 2021, UScellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the revolving credit agreement pursuant to the subordination agreement.The continued availability of the revolving credit agreement requires UScellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. 65The revolving credit agreement includes the following financial covenants:▪Consolidated Interest Coverage Ratio may not be less than 3.00 to 1.00 as of the end of any fiscal quarter.▪Consolidated Leverage Ratio may not be greater than 3.75 to 1.00 as of the end of any fiscal quarter.Certain UScellular wholly-owned subsidiaries have jointly and severally unconditionally guaranteed the payment and performance of the obligations of UScellular under the revolving credit agreement. Other subsidiaries that meet certain criteria will be required to provide a similar guaranty in the future. UScellular believes it was in compliance with all of the financial and other covenants and requirements set forth in its revolving credit agreement as of December 31, 2021.In January 2022, UScellular borrowed $75 million under its revolving credit agreement and in February 2022, repaid the entire borrowing.Term Loan AgreementsAt December 31, 2021, UScellular had senior term loan credit agreements available for general corporate purposes.The following table summarizes the term loan credit agreements as of December 31, 2021:(Dollars in millions) Maximum borrowing capacity $ 800 Amount borrowed and outstanding $ 299 Amount borrowed and repaid $ 1 Amount available for use $ 500 In July 2021, UScellular amended and restated its term loan agreement to allow for an additional $200 million of borrowing capacity. Principal reductions on the existing borrowings are due and payable in quarterly installments of $0.75 million beginning in December 2021. Amounts borrowed under the existing term loan agreement will bear interest at a rate of SOFR plus 2.10% and are due and payable in July 2028. Borrowings under the additional $200 million borrowing capacity may be drawn in one or more advances by the one-year anniversary of the date of the agreement, which is July 30, 2022; amounts not drawn by that time will cease to be available. Borrowings bear interest at a rate of SOFR plus 2.60% and are due and payable in July 2031. Principal reductions on any new borrowings will be due and payable in quarterly installments beginning in December 2022 at a rate of 0.25% of the initial outstanding principal balance through September 2026 and at a rate of 0.625% of the initial outstanding principal balance from December 2026 through the maturity date. In January 2022, UScellular borrowed $100 million under the term loan agreement.In December 2021, UScellular entered into an additional $300 million term loan agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement which is March 9, 2022; amounts not drawn by that time will cease to be available. Borrowings bear interest at a rate of SOFR plus 1.60% and are due and payable in July 2026. Principal reductions on any borrowings will be due and payable in quarterly installments beginning in March 2023 at a rate of 0.625% of the initial outstanding principal balance through December 2023; at a rate of 1.25% of the initial outstanding principal balance from March 2024 through December 2025; and at a rate of 2.50% of the initial outstanding principal balance from March 2026 through the maturity date. In February 2022, UScellular borrowed $225 million under the term loan agreement.In connection with UScellular’s term loan credit agreements, TDS and UScellular entered into subordination agreements together with the administrative agent for the lenders under UScellular’s term loan credit agreements, which is substantially the same as the subordination agreement for UScellular as described above under the “Revolving Credit Agreement.” As of December 31, 2021, UScellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the term loan agreements pursuant to these subordination agreements.The senior term loan credit agreements contain financial covenants and subsidiary guarantees that are consistent with the revolving credit agreements described above. UScellular believes that it was in compliance with all of the financial and other covenants and requirements set forth in its term loan credit agreements as of December 31, 2021.Export Credit Financing AgreementIn December 2021, UScellular entered into a $150 million term loan credit facility with Export Development Canada to finance (or refinance) equipment imported from Canada, including equipment purchased prior to entering the term loan credit facility agreement. The agreement may be drawn in one or more advances by the three-month anniversary of the date of the agreement which is March 17, 2022; amounts not drawn by that time will cease to be available. Borrowings bear interest at a rate of SOFR plus 1.60% and are due and payable on the five-year anniversary of the first borrowing, which is in January 2027. As of December 31, 2021, there were no outstanding borrowings under the credit facility and the unused borrowing capacity was $150 million. In January 2022, UScellular borrowed $150 million under the agreement.66In connection with UScellular export credit financing agreement, TDS and UScellular entered into a subordination agreement together with the administrative agent for the lenders under UScellular’s export credit financing agreement, which is substantially the same as the subordination agreement for UScellular as described above under the “Revolving Credit Agreement.” As of December 31, 2021, UScellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the export credit financing agreement pursuant to this subordination agreement.The export credit financing agreement contains financial covenants and subsidiary guarantees that are consistent with the revolving credit agreements described above. TDS believes that UScellular was in compliance with all of the financial and other covenants and requirements set forth in their export credit financing agreement as of December 31, 2021.Receivables Securitization AgreementAt December 31, 2021, UScellular, through its subsidiaries, had a receivables securitization agreement for securitized borrowings using its equipment installment receivables for general corporate purposes. In June 2021, UScellular increased the borrowing capacity under the receivables securitization agreement to $450 million. Amounts under the receivables securitization agreement may be borrowed, repaid and reborrowed from time to time until maturity in December 2022. Unless the agreement is amended to extend the maturity date, repayments based on receivable collections commence in January 2023. UScellular intends to extend the maturity date of the facility. The outstanding borrowings bear interest at floating rates. As of December 31, 2021, UScellular has borrowed the full amount available under the agreement of $450 million. As of December 31, 2021, the USCC Master Note Trust held $638 million of assets available to be pledged as collateral for the receivables securitization agreement.In connection with entering into the receivables securitization agreement in 2017, UScellular formed a wholly-owned subsidiary, USCC Master Note Trust (Trust), which qualifies as a bankruptcy remote entity. Under the terms of the agreement, UScellular, through its subsidiaries, transfers eligible equipment installment receivables to the Trust. The Trust then utilizes the transferred assets as collateral for notes payables issued to third party financial institutions. Since UScellular retains effective control of the transferred assets in the Trust, any activity associated with this receivables securitization agreement will be treated as a secured borrowing. Therefore, UScellular will continue to report equipment installment receivables and any related balances on the Consolidated Balance Sheet. Cash received from borrowings under the receivables securitization agreement will be reported as Debt. Refer to Note 14 — Variable Interest Entities for additional information.UScellular entered into a performance guaranty whereby UScellular guarantees the performance of certain wholly-owned subsidiaries of UScellular under the receivables securitization agreement. The continued availability of the receivables securitization agreement requires UScellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and provide representations on certain matters at the time of each borrowing. The covenants include the same financial covenants for UScellular as described above under the “Revolving Credit Agreement.” UScellular believes that it was in compliance as of December 31, 2021, with all of the financial covenants and requirements set forth in its receivables securitization agreement.Repurchase AgreementIn January 2022, UScellular, through a subsidiary (the repo subsidiary), entered into a repurchase agreement to borrow up to $200 million, subject to the availability of eligible equipment installment plan receivables and the agreement of the lender. The transaction form involves the sale of receivables by the repo subsidiary and the commitment to repurchase at the end of the applicable repurchase term, which may extend up to one month. The transaction is accounted for as a one-month secured borrowing. The outstanding borrowings bear interest at a rate of SOFR plus 1.25%. Although the lender holds a security interest in the receivables, the repo subsidiary retains effective control of the receivables, and therefore, any activity associated with the repurchase agreement will be treated as a secured borrowing. UScellular will continue to report equipment installment plan receivables and any related balances on the Consolidated Balance Sheet. The expiration date of the repurchase agreement is in January 2023. As of January 31, 2022, UScellular held $455 million of assets available for inclusion in the repurchase facility; these assets are distinct from the assets held by the USCC Master Note Trust for UScellular's receivables securitization agreement. In February 2022, the repo subsidiary borrowed $60 million under the repurchase agreement.UScellular entered into a performance guaranty whereby UScellular guarantees the performance of the repo subsidiary under the repurchase agreement.67Other Long-Term DebtLong-term debt as of December 31, 2021 and 2020, was as follows: December 31, 2021 December 31, 2020 IssuancedateRedemption date MaturitydateCalldate (anytime onor after)PrincipalAmountLess
Unamortized
discount
and debt
issuance
costsTotal PrincipalAmountLessUnamortizeddiscountand debtissuancecostsTotal (Dollars in millions) Unsecured Senior Notes 6.700% Dec 2003
and
June 2004Dec 2033 Dec 2003
and
June 2004$ 544 $ 12 $ 532 $ 544 $ 13 $ 531 6.950% May 2011 Sep 2021 May 2060 May 2016 — — — 342 11 331 7.250% Dec 2014 May 2021 Dec 2063 Dec 2019 — — — 275 10 265 7.250% Nov 2015 Jun 2021 Dec 2064 Dec 2020 — — — 300 10 290 6.250% Aug 2020 Sep 2069 Sep 2025 500 17 483 500 17 483 5.500% Dec 2020 Mar 2070 Mar 2026 500 17 483 500 17 483 5.500% May 2021 Jun 2070 Jun 2026 500 16 484 — — — Term Loan 299 3 296 83 3 80 EIP Securitization 450 — 450 25 — 25 Finance lease obligations 3 — 3 3 — 3 Total long-term debt $ 2,796 $ 65 $ 2,731 $ 2,572 $ 81 $ 2,491 Long-term debt, current $ 3 $ 2 Long-term debt, noncurrent $ 2,728 $ 2,489 In May 2021, UScellular issued $500 million of 5.5% Senior Notes due in June 2070, and received cash proceeds of $484 million after payment of debt issuance costs of $16 million. These funds will be used for general corporate purposes. Interest on these notes is payable quarterly beginning in September 2021. UScellular may redeem these notes, in whole or in part, at any time after June 2026 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest.UScellular redeemed outstanding Senior Notes in 2021. At time of redemption, $31 million of interest expense was recorded related to unamortized debt issuance costs for the notes. The notes were redeemed at a price of 100% of the principal amount, including accrued and unpaid interest to the redemption date.UScellular may redeem its 6.25% Senior Notes, 5.5% March 2070 Senior Notes and 5.5% June 2070 Senior Notes, in whole or in part at any time after the respective call date, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest. UScellular may redeem the 6.7% Senior Notes, in whole or in part, at any time prior to maturity at a redemption price equal to the greater of (a) 100% of the principal amount of such notes, plus accrued and unpaid interest, or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate plus 30 basis points. Interest on the Senior Notes outstanding at December 31, 2021, is payable quarterly, with the exception of the 6.7% Senior Notes for which interest is payable semi-annually.The annual requirements for principal payments on long-term debt are approximately $3 million, $3 million, $3 million, $3 million and $3 million for the years 2022 through 2026, respectively. These amounts do not include payments on the $450 million of outstanding borrowings under the receivables securitization agreement. If the maturity date of the facility is not extended, principal repayments begin in January 2023. Principal repayments are not scheduled but are instead based on actual receivable collections. UScellular intends to extend the maturity date of the facility.The covenants associated with UScellular’s long-term debt obligations, among other things, restrict UScellular’s ability, subject to certain exclusions, to incur additional liens, enter into sale and leaseback transactions, and sell, consolidate or merge assets.UScellular’s long-term debt notes do not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in UScellular’s credit rating.68Note 13 Commitments and ContingenciesIndemnificationsUScellular enters into agreements in the normal course of business that provide for indemnification of counterparties. The terms of the indemnifications vary by agreement. The events or circumstances that would require UScellular to perform under these indemnities are transaction specific; however, these agreements may require UScellular to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. UScellular is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, UScellular has not made any significant indemnification payments under such agreements. Legal ProceedingsUScellular is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If UScellular believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements. UScellular had no accrual with respect to legal proceedings and unasserted claims as of December 31, 2021. UScellular accrued less than $1 million with respect to legal proceedings and unasserted claims as of December 31, 2020.In April 2018, the United States Department of Justice (DOJ) notified UScellular and its parent, TDS, that it was conducting inquiries of UScellular and TDS under the federal False Claims Act relating to UScellular’s participation in wireless spectrum license auctions 58, 66, 73 and 97 conducted by the FCC. UScellular is/was a limited partner in several limited partnerships which qualified for the 25% bid credit in each auction. The investigation arose from civil actions under the Federal False Claims Act brought by private parties in the U.S. District Court for the Western District of Oklahoma. In November and December 2019, following the DOJ’s investigation, the DOJ informed UScellular and TDS that it would not intervene in the above-referenced actions. Subsequently, the private party plaintiffs filed amended complaints in both actions in the U.S. District Court for the Western District of Oklahoma and are continuing the action on their own. In July 2020, these actions were transferred to the U.S. District Court for the District of Columbia. UScellular believes that its arrangements with the limited partnerships and the limited partnerships’ participation in the FCC auctions complied with applicable law and FCC rules. At this time, UScellular cannot predict the outcome of any proceeding.Note 14 Variable Interest EntitiesConsolidated VIEsUScellular consolidates VIEs in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. UScellular reviews the criteria for a controlling financial interest 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 UScellular’s Form 10-K for the year ended December 31, 2021.UScellular formed USCC EIP LLC (Seller/Sub-Servicer), USCC Receivables Funding LLC (Transferor) and the Trust, collectively the special purpose entities (SPEs), to facilitate a securitized borrowing using its equipment installment plan receivables. Under a Receivables Sale Agreement, UScellular wholly-owned, majority-owned and unconsolidated entities, collectively referred to as “affiliated entities”, transfer device equipment installment plan contracts to the Seller/Sub-Servicer. The Seller/Sub-Servicer aggregates device equipment installment plan contracts, and performs servicing, collection and all other administrative activities related to accounting for the equipment installment plan contracts. The Seller/Sub-Servicer sells the eligible equipment installment plan receivables to the Transferor, a bankruptcy remote entity, which subsequently sells the receivables to the Trust. The Trust, which is bankruptcy remote and isolated from the creditors of UScellular, will be responsible for issuing asset-backed variable funding notes (Notes), which are collateralized by the equipment installment plan receivables owned by the Trust. Given that UScellular has the power to direct the activities of these SPEs, and that these SPEs lack sufficient equity to finance their activities, UScellular is deemed to have a controlling financial interest in the SPEs and, therefore, consolidates them. All transactions with third parties (e.g., issuance of the asset-backed variable funding notes) will be accounted for as a secured borrowing due to the pledging of equipment installment plan contracts as collateral, significant continuing involvement in the transferred assets, subordinated interests of the cash flows, and continued evidence of control of the receivables. Refer to Note 12 — Debt, Receivables Securitization Agreement for additional details regarding the securitization agreement for which these entities were established.The following VIEs were formed to participate in FCC auctions of wireless spectrum licenses and to fund, establish, and provide wireless service with respect to any FCC wireless spectrum licenses won in the auctions:▪Advantage Spectrum, L.P. (Advantage Spectrum) and Sunshine Spectrum, Inc., the general partner of Advantage Spectrum; and▪King Street Wireless, L.P. (King Street Wireless) and King Street Wireless, Inc., the general partner of King Street Wireless.69These particular VIEs are collectively referred to as designated entities. The power to direct 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 carry on the business of the partnerships. The general partner of each partnership needs the consent of the limited partner, an indirect UScellular subsidiary, to sell or lease certain wireless spectrum licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of these VIEs is shared, UScellular has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that UScellular is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.UScellular 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, UScellular 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 also are 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 UScellular’s Consolidated Balance Sheet.December 31, 2021 2020 (Dollars in millions) Assets Cash and cash equivalents $ 22 $ 18 Short-term investments — 3 Accounts receivable 693 639 Inventory, net 2 3 Other current assets 44 21 Licenses 639 639 Property, plant and equipment, net 124 111 Operating lease right-of-use assets 47 39 Other assets and deferred charges 383 348 Total assets $ 1,954 $ 1,821 Liabilities Current liabilities $ 30 $ 28 Long-term operating lease liabilities 41 36 Other deferred liabilities and credits 25 20 Total liabilities1$ 96 $ 84 1Total liabilities does not include amounts borrowed under the receivables securitization agreement. See Note 12 – Debt for additional information.Unconsolidated VIEsUScellular 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.UScellular’s total investment in these unconsolidated entities was $4 million and $5 million at December 31, 2021 and 2020, respectively, and is included in Investments in unconsolidated entities in UScellular’s Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by UScellular in those entities.Other Related MattersUScellular made contributions, loans or advances to its VIEs totaling $36 million, $111 million and $255 million during 2021, 2020 and 2019, respectively; of which $83 million in 2020 and $214 million in 2019 are related to USCC EIP LLC as discussed above. UScellular 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 wireless spectrum licenses granted in various auctions. UScellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit or receivables securitization agreements and/or other long-term debt. There is no assurance that UScellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.70The limited partnership agreement of Advantage Spectrum also provides the general partner with a put option whereby the general partner may require the limited partner, a subsidiary of UScellular, to purchase its interest in the limited partnership. The general partner’s put option related to its interest in Advantage Spectrum was not exercised during the first exercise period and will be exercisable again in the third quarter of 2022. The greater of the carrying value of the general partner's investment or the value of the put option, net of any borrowings due to UScellular is recorded as Noncontrolling interests with redemption features in UScellular’s Consolidated Balance Sheet. Also in accordance with GAAP, minority share of income or changes in the redemption value of the put option, net of interest accrued on the loans, are recorded as a component of Net income attributable to noncontrolling interests, net of tax, in UScellular’s Consolidated Statement of Operations.Note 15 Noncontrolling InterestsUScellular’s consolidated financial statements include certain noncontrolling interests that meet the GAAP definition of mandatorily redeemable financial instruments. These mandatorily redeemable noncontrolling interests represent interests held by third parties in consolidated partnerships, where the terms of the underlying partnership agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the noncontrolling interest holders and UScellular in accordance with the respective partnership agreements. The termination dates of these mandatorily redeemable noncontrolling interests range from 2085 to 2092.The estimated aggregate amount that would be due and payable to settle all of these noncontrolling interests, assuming an orderly liquidation of the finite-lived consolidated partnerships on December 31, 2021, net of estimated liquidation costs, is $32 million. This amount excludes redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated Balance Sheet. The estimate of settlement value was based on certain factors and assumptions which are subjective in nature. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount. The corresponding carrying value of the mandatorily redeemable noncontrolling interests in finite-lived consolidated partnerships at December 31, 2021, was $14 million, and is included in Noncontrolling interests in the Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying value of these mandatorily redeemable noncontrolling interests is due primarily to the unrecognized appreciation of the noncontrolling interest holders’ share of the underlying net assets in the consolidated partnerships. Neither the noncontrolling interest holders’ share, nor UScellular’s share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements.Note 16 Common Shareholders’ EquitySeries A Common SharesSeries A Common Shares are convertible on a share-for-share basis into Common Shares. In matters other than the election of directors, each Series A Common Share is entitled to 10 votes per share, compared to 1 vote for each Common Share. The Series A Common Shares are entitled to elect 75% of the directors (rounded down), and the Common Shares elect 25% of the directors (rounded up). As of December 31, 2021, a majority of UScellular’s outstanding Common Shares and all of UScellular’s outstanding Series A Common Shares were held by TDS.Common Share Repurchase ProgramIn November 2009, UScellular announced by Form 8-K that the Board of Directors of UScellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. In December 2016, the UScellular Board amended this authorization to provide that, beginning on January 1, 2017, the authorized repurchase amount with respect to a particular year will be any amount from zero to 1,300,000 Common Shares, as determined by the Pricing Committee of the Board of Directors, and that if the Pricing Committee did not specify an amount for any year, such amount would be zero for such year. The Pricing Committee has not specified any increase in the authorization since that time. The Pricing Committee also was authorized to decrease the cumulative amount of the authorization at any time, but has not taken any action to do so at this time. As of December 31, 2021, the total cumulative amount of Common Shares authorized to be purchased is 3,517,000. The authorization provides that share repurchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date.Tax-Deferred Savings PlanAt December 31, 2021, UScellular has reserved 67,000 Common Shares for issuance under the TDS Tax-Deferred Savings Plan, a qualified profit‑sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in a UScellular Common Share fund, a TDS Common Share fund or certain unaffiliated funds.Note 17 Stock-Based CompensationUScellular has established the following stock‑based compensation plans: Long-Term Incentive Plans and a Non-Employee Director compensation plan.71Under the UScellular Long-Term Incentive Plans, UScellular may grant fixed and performance-based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees. At December 31, 2021, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, performance share awards and deferred compensation stock unit awards.Under the Non-Employee Director compensation plan, UScellular may grant Common Shares to members of the Board of Directors who are not employees of UScellular or TDS.At December 31, 2021, UScellular had reserved 11,370,000 Common Shares for equity awards granted and to be granted under the Long-Term Incentive Plans and 84,000 Common Shares for issuance under the Non-Employee Director compensation plan.UScellular uses treasury stock to satisfy requirements for Common Shares issued pursuant to its various stock-based compensation plans.Long-Term Incentive Plans–Stock OptionsUScellular's last stock option grant occurred in 2016.Stock options outstanding, and the related weighted average exercise price, at December 31, 2021 and 2020 were 378,000 units at $42.18 and 418,000 units at $42.23, respectively. All stock options are exercisable and expire between 2022 and 2026.The aggregate intrinsic value of UScellular stock options exercised in 2021 and 2019 was less than $1 million and $3 million, respectively. No stock options were exercised in 2020.Long-Term Incentive Plans–Restricted Stock UnitsRestricted stock unit awards granted to key employees generally vest after three years. The restricted stock unit awards currently outstanding were granted in 2019, 2020 and 2021 and will vest in 2022, 2023 and 2024, respectively.UScellular estimates the fair value of restricted stock units based on the closing market price of UScellular shares on the date of grant. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.A summary of UScellular nonvested restricted stock units and changes during 2021 is presented in the table below:Common Restricted Stock Units Number Weighted Average Grant Date Fair Value Nonvested at December 31, 2020 1,660,000 $ 36.43 Granted 672,000 $ 36.68 Vested (609,000) $ 39.10 Forfeited (122,000) $ 35.77 Nonvested at December 31, 2021 1,601,000 $ 35.57 The total fair value of restricted stock units that vested during 2021, 2020 and 2019 was $22 million, $20 million and $25 million, respectively. The weighted average grant date fair value per share of the restricted stock units granted in 2021, 2020 and 2019 was $36.68, $29.18 and $46.81, respectively.Long-Term Incentive Plans – Performance Share UnitsBeginning in 2017, UScellular granted performance share units to key employees. The performance share units generally vest after three years. Beginning with the 2021 grants, each recipient may be entitled to shares of UScellular common stock equal to 0% to 200% of a communicated target award depending on the achievement of a predetermined performance based operating target over the performance period, which is generally a three-year period beginning on January 1 in the year of grant to December 31 of the third year. The performance-based operating target for the 2021 grants is Return on Capital.Prior to the 2021 grants, each recipient was entitled to shares of UScellular common stock equal to 50% to 200% of a communicated target award depending on the achievement of predetermined performance-based operating targets over the performance period, which was generally a one-year period beginning on January 1 in the year of grant to December 31 in the year of grant. The remaining time through the end of the vesting period is considered the “time-based period”. Performance-based operating targets for grants made in 2020 included Consolidated Total Service Revenues, Consolidated Operating Cash Flow, Consolidated Capital Expenditures and Postpaid Handset Voluntary Defections; and for grants made prior to 2020 included Simple Free Cash Flow, Consolidated Total Operating Revenues and Postpaid Handset Voluntary Defections. Grants made prior to 2021 are subject to vesting during the time-based period and their performance share unit award agreements provide that in no event shall the awards be less than 50% of the target opportunity as of their grant dates. The performance share units currently outstanding were granted in 2019, 2020 and 2021 and will vest in 2022, 2023 and 2024, respectively.72Additionally, UScellular granted performance share units during 2020 to a newly appointed President and Chief Executive Officer. The recipient may be entitled to shares of UScellular common stock equal to 100% of the communicated target award depending on the achievement of predetermined performance-based operating targets over the performance period, which is any two calendar-year period commencing no earlier than January 1, 2021 and ending no later than December 31, 2026. Performance-based operating targets include Average Total Revenue Growth and Average Annual Return on Capital. If one, or both, of the performance targets are not satisfied, the award will be forfeited.UScellular estimates the fair value of performance share units using UScellular’s closing stock price on the date of grant. An estimate of the number of performance share units expected to vest based upon achieving the performance-based operating targets is made and the aggregate fair value is expensed on a straight-line basis over the requisite service period. Each reporting period, during the performance period, the estimate of the number of performance share units expected to vest is reviewed and stock compensation expense is adjusted as appropriate to reflect the revised estimate of the aggregate fair value of the performance share units expected to vest.A summary of UScellular's nonvested performance share units and changes during 2021 is presented in the table below:Common Performance Share Units Number Weighted Average Grant Date Fair Value Nonvested at December 31, 2020 1,305,000 $ 36.60 Granted 394,000 $ 37.67 Vested (601,000) $ 39.50 Change in units based on approved performance factors 42,000 $ 28.94 Forfeited (91,000) $ 35.13 Nonvested at December 31, 2021 1,049,000 $ 35.17 The total fair value of performance share units that vested during 2021, 2020 and 2019 was $22 million, $11 million and less than $1 million, respectively. The weighted average grant date fair value per share of the performance share units granted in 2021, 2020 and 2019 was $37.67, $29.71 and $46.43, respectively.Long-Term Incentive Plans–Deferred Compensation Stock UnitsCertain UScellular employees may elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution on the amount deferred. All bonus compensation that is deferred by employees electing to participate is immediately vested and is deemed to be invested in UScellular Common Share stock units. Beginning with the 2021 performance year, the amount of UScellular's matching contribution is a 33% match for the amount of their total annual bonus that is deferred into the program. Prior to the 2021 performance year, the amount of UScellular’s matching contribution was a 25% match for amounts deferred up to 50% of their total annual bonus and a 33% match for amounts that exceeded 50% of their total annual bonus. Matching contributions are also deemed to be invested in UScellular Common Share stock units and vest over three years.Compensation of Non-Employee DirectorsUScellular issued 20,000, 19,000 and 13,000 Common Shares in 2021, 2020 and 2019, respectively, under its Non-Employee Director compensation plan.Stock‑Based Compensation ExpenseThe following table summarizes stock‑based compensation expense recognized during 2021, 2020 and 2019:Year Ended December 31, 2021 2020 2019 (Dollars in millions) Restricted stock unit awards 16 21 22 Performance share unit awards 10 10 18 Awards under Non-Employee Director compensation plan 1 1 1 Total stock-based compensation expense, before income taxes 27 32 41 Income tax benefit (7) (8) (10) Total stock-based compensation expense, net of income taxes $ 20 $ 24 $ 31 73The following table provides a summary of the classification of stock-based compensation expense included in the Consolidated Statement of Operations for the years ended:December 31, 2021 2020 2019 (Dollars in millions) Selling, general and administrative expense $ 23 $ 28 $ 36 System operations expense 4 4 5 Total stock-based compensation expense $ 27 $ 32 $ 41 At December 31, 2021, unrecognized compensation cost for all UScellular stock‑based compensation awards was $41 million and is expected to be recognized over a weighted average period of 2.3 years.UScellular’s tax benefits realized from the exercise of stock options and the vesting of other awards totaled $11 million in 2021.Note 18 Supplemental Cash Flow DisclosuresFollowing are supplemental cash flow disclosures regarding interest paid and income taxes paid.Year Ended December 31, 2021 2020 2019 (Dollars in millions) Interest paid $ 143 $ 105 $ 107 Income taxes paid, net of (refunds received) 6 (38) 78 Following are supplemental cash flow disclosures regarding transactions related to stock-based compensation awards. In certain situations, UScellular withholds shares that are issuable upon the exercise of stock options or the vesting of restricted shares to cover, and with a value equivalent to, the exercise price and/or the amount of taxes required to be withheld from the stock award holder at the time of the exercise or vesting. UScellular then pays the amount of the required tax withholdings to the taxing authorities in cash.Year Ended December 31, 2021 2020 2019 (Dollars in millions) Common Shares withheld 438,000 376,000 452,000 Aggregate value of Common Shares withheld $ 16 $ 11 $ 23 Cash receipts upon exercise of stock options — — 1 Cash disbursements for payment of taxes (16) (11) (10) Net cash receipts (disbursements) from exercise of stock options and vesting of other stock awards $ (16) $ (11) $ (9) Note 19 Certain Relationships and Related TransactionsThe following persons are partners of Sidley Austin LLP, the principal law firm of UScellular and its subsidiaries: Walter C.D. Carlson, a director of UScellular, a director and non-executive Chairman of the Board of Directors of TDS and a trustee and beneficiary of a voting trust that controls TDS; and John P. Kelsh, the General Counsel and/or an Assistant Secretary of TDS and UScellular and certain other subsidiaries of TDS. Walter C.D. Carlson does not provide legal services to TDS, UScellular or their subsidiaries. UScellular and its subsidiaries incurred legal costs from Sidley Austin LLP of $7 million, $9 million and $7 million in 2021, 2020 and 2019, respectively.UScellular is billed for all services it receives from TDS, pursuant to the terms of various agreements between it and TDS. These billings are included in UScellular's Systems operations and Selling, general and administrative expenses. Some of these agreements were established at a time prior to UScellular's initial public offering when TDS owned more than 90% of UScellular's outstanding capital stock and may not reflect terms that would be obtainable from an unrelated third party through arms-length negotiations. Billings from TDS and certain of its subsidiaries to UScellular are based on expenses specifically identified to UScellular and on allocations of common expenses. Such allocations are based on the relationship of UScellular's assets, employees, investment in property, plant and equipment and expenses relative to all subsidiaries in the TDS consolidated group. Management believes the method TDS uses to allocate common expenses is reasonable and that all expenses and costs applicable to UScellular are reflected in its financial statements. Billings to UScellular from TDS totaled $89 million, $81 million and $82 million in 2021, 2020 and 2019, respectively.The Audit Committee of the Board of Directors of UScellular is responsible for the review and evaluation of all related-party transactions as such term is defined by the rules of the New York Stock Exchange.74Reports of ManagementManagement’s Responsibility for Financial StatementsManagement of United States Cellular Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and, in management’s opinion, were fairly presented. The financial statements included amounts that were based on management’s best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements.PricewaterhouseCoopers LLP (PCAOB ID 238), an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed herein its unqualified opinion on these financial statements.75Report of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of United States Cellular CorporationOpinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheet of United States Cellular Corporation and its subsidiaries (“the Company” or “UScellular”)as of December 31, 2021 and 2020, and the related consolidatedstatements of operations, of changes in equity, and of cash flowsfor each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020,and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.Change in Accounting PrincipleAs discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.76Critical Audit MattersThe critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.Intangible Asset Impairment Assessment – Wireless Spectrum Licenses (UScellular Licenses)As described in Notes 1 and 7 to the consolidated financial statements, the UScellular’s consolidated licenses balance was $4,088 million as of December 31, 2021. Management performs its annual impairment assessment of licenses as of November 1 of each year or more frequently if there are events or circumstances that cause management to believe it is more likely than not that the carrying value of licenses exceeds fair value. A qualitative impairment assessment was performed as of November 1, 2021, to determine whether the wireless spectrum licenses were impaired. As disclosed by management, the qualitative assessment considered several qualitative factors, including analyst estimates of wireless spectrum license values which contemplated recent spectrum auction results, recent UScellular and other market participant transactions and other industry and market factors. Based on this assessment, management concluded that it was not more likely than not that the carrying value of the wireless spectrum licenses in each unit of accounting exceeded their respective fair values. Therefore, no quantitative impairment evaluation was completed.The principal considerations for our determination that performing procedures relating to the intangible asset impairment assessment for the UScellular Licenses is a critical audit matter are (i) the significant judgment by management when performing the qualitative impairment assessment; and (ii) a high degree of auditor judgment and subjectivity in performing procedures and evaluating management’s qualitative impairment assessment.Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual intangible asset impairment assessment, including management’s review of qualitative factors affecting the UScellular Licenses. These procedures also included, among others, evaluating management’s qualitative assessment by (i) obtaining analyst estimates of wireless spectrum license values; and (ii) considering recent UScellular and other market participant transactions and external market and industry data./s/ PricewaterhouseCoopers LLPChicago, IllinoisFebruary 17, 2022We have served as the Company’s auditor since 2002.77Evaluation of Disclosure Controls and ProceduresU.S. CellularUScellular maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to U.S. Cellular’sUScellular’s management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.As required by SEC Rule 13a-15(b), U.S. CellularUScellular carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of U.S. Cellular’sUScellular’s disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that U.S. Cellular’sUScellular’s disclosure controls and procedures were effective as of December 31, 2017,2021, at the reasonable assurance level.Management’s Report on Internal Control overOver Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. U.S. Cellular’sUScellular’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). U.S. Cellular’sUScellular’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and, where required, the board of directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer’s assets that could have a material effect on the interim or annual consolidated financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Under the supervision and with the participation of U.S. Cellular’sUScellular’s management, including its principal executive officer and principal financial officer, U.S. CellularUScellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2017,2021, based on the criteria established in the 2013 version of Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that U.S. CellularUScellular maintained effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in the 2013 version of InternalControl — Integrated Framework issued by the COSO.The effectiveness of U.S. Cellular’sUScellular’s internal control over financial reporting as of December 31, 2017,2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the firm’s report which is incorporated by reference intoincluded in Item 8 of this Annual Report on Form 10-K from Exhibit 13 filed herewith.Changes in Internal Control overOver Financial ReportingThere were no changes in U.S. Cellular’sUScellular’s internal control over financial reporting during the fourth quarter of 20172021 that have materially affected, or are reasonably likely to materially affect, U.S. Cellular’sUScellular’s internal control over financial reporting, except as follows: U.S. Cellular implemented internal controls duringreporting.Item 9B. Other InformationOn February 15, 2022 Peter L. Sereda, a director of UScellular, informed the fourth quarter of 2017Chairman that given his pending retirement from TDS, he no longer wishes to ensure that, upon adoption of the new revenue recognition accounting standard, contracts will be properly evaluated and any impactsconsidered for re-election to the financial statements will be recognized in accordance with this new accounting standard effective January 1, 2018.Item 9B. Other InformationThe following information is being provided to update prior disclosures made pursuant to the requirementsBoard of Form 8-K, Item 2.03 – CreationDirectors of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.U.S. Cellular did not borrow or repay any cash amounts under its revolving credit facility in the fourth quarter of 2017 or through the filing date of this Form 10-K, and had no cash borrowings outstanding under its revolving credit facility as of December 31, 2017, or as of the filing date of this Form 10-K.Further, U.S. Cellular did not borrow or repay any cash amounts under its receivables securitization facility in the fourth quarter of 2017 or through the filing date of this Form 10-K, and had no cash borrowings outstanding under its receivables securitization facility as of December 31, 2017, or as of the filing date of this Form 10-K.
UScellular.Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent InspectionsNot applicable.Incorporated by reference from Proxy Statement sections entitled “Election of Directors,” “Corporate Governance,”Governance” and “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance.Officers.”Incorporated by reference from Proxy Statement section entitled “Executive and Director Compensation.”Item 12. SecuritySecurity Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersIncorporated by reference from Proxy Statement sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans.”Incorporated by reference from Proxy Statement sections entitled “Corporate Governance” and “Certain“Other Relationships and Related Transactions.”Incorporated by reference from Proxy Statement section entitled “Fees Paid to Principal Accountants.”PART IV(a) The following documents are filed as part of this report: Annual Report*Annual Report*Annual Report*Annual Report*Annual Report*Management's Report on Internal Control Over Financial ReportingAnnual Report*Annual Report*Consolidated Quarterly Information (Unaudited)Annual Report*(2) Exhibits *Incorporated by reference from Exhibit 13.(2)Financial Statement SchedulesLocationLos Angeles SMSA Limited Partnership and Subsidiary Financial StatementsS-1Report of Independent Registered Public Accounting Firm — Ernst & Young LLPS-2Consolidated Balance SheetsS-3Consolidated Statements of Income and Comprehensive IncomeS-4Consolidated Statements of Changes in Partners’ CapitalS-5Consolidated Statements of Cash FlowsS-6Notes to Consolidated Financial StatementsS-7All other schedules have been omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto.(3)ExhibitsExhibit Number 3.13.1 3.23.2 4.14.1 4.24.2 4.34.4(a)4.4(b)4.3(b) 4.4(c)4.3(c) 4.4(d)4.3(d) 4.4(e)4.4(f)4.3(e) 4.54.3(f) 4.4 4.64.74.84.5(b)*** 4.6(a) 9.14.6(b) 4.6(c) 4.7 Amended and Restated Series 2017-VFN Indenture Supplement by and among USCC Master Note Trust, as Issuer, USCC Services, LLC, as Servicer, and U.S. Bank National Association, as Indenture Trustee, dated October 23, 2020, is hereby incorporated by reference to Exhibit 4.1 to UScellular's Form 8-K dated October 23, 2020.4.8(a) 4.8(b) 4.9(a) 8110.3** *U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975).10.4** *U.S. CellularUScellular and TDS, as amended, is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975).10.5** *U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975).10.6** *U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975).10.7** *U.S. CellularUScellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’sUScellular’s Registration Statement on Form S-1 (Registration No. 33-16975).10.8(b)* 10.8(c)* 10.9*10.9* 10.10*10.11(a)10.10(a)*10.11(b)*10.10(b)* 10.12*10.10(c)* 10.10(d)* 10.10(e)* 10.11(a)* 10.13(a)*10.11(b)* 10.12(a)* 10.13(b)*8210.12(g)* 10.12(h)* 10.13* 10.17*10.14* 10.15* 10.18*10.16*** 10.19*10.17*** 10.20*10.21*10.22**10.19*** 10.23**10.24**10.25*10.2610.2710.2810.21 111210.23* 10.24*** 13Incorporated portions of 2017 Annual Report to Shareholders.218332.132.1 32.232.2 101.INS101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH101.SCH Inline XBRL Taxonomy Extension Schema Document 101.PRE 101.CAL101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.DEF101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document *104 Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the inline document. * Indicates a management contract or compensatory plan or arrangement. ** Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Exchange Act of 1934, as amended. The application for confidential treatment has been granted.84**** Portions of this Exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K promulgated under the Exchange Act. Item 16. Form 10-K SummaryLOS ANGELES SMSA LIMITED PARTNERSHIP AND SUBSIDIARYFINANCIAL STATEMENTSU.S. Cellular owns a 5.5% limited partnership interest in the Los Angeles SMSA Limited Partnership and Subsidiary, and accounts for such interest by the equity method. The partnership’s consolidated financial statements were obtained by U.S. Cellular as a limited partner.Report of Independent Registered Public Accounting FirmThe Partners of Los Angeles SMSA Limited PartnershipOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Los Angeles SMSA Limited Partnership and Subsidiary (the Partnership) as of December 31, 2017 and 2016, the related consolidated statements of income and comprehensive income, changes in partners’ capital and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity with U.S. generally accepted accounting principles.Basis for OpinionThese financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our December 31, 2017 and 2016 audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. We conducted our 2015 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLP Certified Public AccountantsWe have served as the Partnership’s auditor since 2014.Orlando, FloridaLos Angeles SMSA Limited Partnership and SubsidiaryNotes to Consolidated Financial Statements – For the Years Ended December 31, 2017, 2016 and 2015(Dollars in Thousands)1. ORGANIZATION AND MANAGEMENTThe Consolidated Financial Statements include the accounts of the Los Angeles SMSA Limited Partnership (“Los Angeles SMSA”) and Los Angeles Edge LLC, a wholly owned subsidiary of Los Angeles SMSA (collectively, the “Partnership”). The principal activity of Los Angeles SMSA, formed in 1984, is to provide cellular service in the Los Angeles metropolitan statistical area. Los Angeles Edge LLC was formed during 2015 and is a bankruptcy remote special purpose entity (SPE), created for the purpose of selling wireless device payment plan agreement receivables to third parties (see Note 3). In accordance with the partnership agreement, AirTouch Cellular Inc., an indirect wholly owned subsidiary of Cellco Partnership (“Cellco”), doing business as Verizon Wireless, and general partner of the Partnership, is responsible for managing the operations of the Partnership (see Note 8).The partners and their respective ownership percentages of the Partnership as of December 31, 2017, 2016, and 2015 are as follows:AirTouch Cellular Inc.40.0%Limited Partners:AirTouch Cellular Inc.42.3%Cellco Partnership12.2%United States Cellular Investment Corporation of Los Angeles5.5%2.SIGNIFICANT ACCOUNTING POLICIESConsolidation –The method of accounting applied to investments involves an evaluation of all significant terms of the investments that explicitly grant or suggest evidence of control or influence over the operations of the investee. The consolidated financial statements include our subsidiary which is a variable interest entity (VIE) where Los Angeles SMSA is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated (see Note 3).Use of estimates – The consolidated financial statements are prepared using U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.Examples of significant estimates include: the allowance for doubtful accounts, the recoverability of property, plant and equipment, the recoverability of wireless licenses and unbilled revenues, fair values of financial instruments, deferred purchase price, beneficial interest, accrued expenses and contingencies.Revenue recognition – The Partnership offers products and services to customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.The Partnership earns revenue primarily by providing access to and usage of its network as well as the sale of equipment. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when service is rendered. Equipment revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and accepted by the customer, as equipment sales is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which the Partnership is considered the primary obligor in the arrangements, the revenue is recorded gross at the time of sale.Under the Verizon device payment plan program, eligible wireless customers purchase wireless devices under a device payment plan agreement. The Partnership may offer certain promotions that allow a customer to trade in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the Partnership may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. The Partnership recognizes a liability for the trade-in device measured at fair value, which is approximated by considering several factors, including the weighted-average selling prices obtained in recent resales of devices eligible for trade-in. Future credits are recognized when earned by the customer. From time to time, the Partnership offers certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of their required device payment plan agreement amount and trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, the Partnership accounts for this trade-in right as a guarantee obligation. The full amount of the trade-in right’s fair value (not an allocated value) is recognized as a guarantee liability and the remaining allocable consideration is allocated to the device. The value of the guarantee liability effectively results in a reduction to the revenue recognized for the sale of the device. In multiple element arrangements that bundle devices and monthly wireless service, revenue is allocated to each unit of accounting using a relative selling price method. At the inception of the arrangement, the amount allocable to the delivered units of accounting is limited to the amount that is not contingent upon the delivery of the monthly wireless service (the noncontingent amount). The Partnership effectively recognizes revenue on the delivered device at the lesser of the amount allocated based on the relative selling price of the device or the noncontingent amount owed when the device is sold.Roaming revenue reflects service revenue earned by the Partnership when customers not associated with the Partnership operate in the service area of the Partnership and use the Partnership’s network. The roaming rates with third party carriers associated with those customers are based on agreements with such carriers. The roaming rates and methodology to determine roaming volumes charged by the Partnership to Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).Other revenues primarily consist of certain fees billed to customers for surcharges and elected services. The Partnership reports taxes imposed by governmental authorities on revenue-producing transactions between the Partnership and its customers which is passed through to the customers on a net basis. Other revenues also include switch revenue. This revenue represents revenue earned by the Partnership for switch services provided to other Cellco owned entities by the Partnership. The switch revenue rates charged by the Partnership to Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).Operating expenses – Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of selling, general and administrative, and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services on behalf of the Partnership. These employees are not employees of the Partnership, therefore operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes such allocations, principally based on the Partnership’s total subscribers, are calculated in accordance with the Partnership agreement and are a reasonable method of allocating such costs (see Note 8). In 2016, allocations were principally based on the Partnership’s percentage of certain revenue streams, total subscribers and customer gross additions or minutes-of-use; in 2017, allocations were principally based on total subscribers. The impact of the change in allocation factors was insignificant.Cost of roaming, included in cost of service, reflects costs incurred by the Partnership when customers associated with the Partnership operate in a service area not associated with the Partnership and use a network not associated with the Partnership. The roaming rates with third party carriers are based on agreements with such carriers. The roaming rates and methodology to determine roaming volumes charged to the Partnership by Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).Cost of equipment is recorded upon sale of the related equipment at Cellco’s cost basis. Inventory is wholly owned by Cellco until the moment of sale and is not recorded in the consolidated financial statements of the Partnership.Maintenance and repairs – The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged principally to Cost of service as these costs are incurred.Advertising costs –Costs for advertising products and services as well as other promotional and sponsorship costs are charged to Selling, general and administrative expense in the periods in which they are incurred (See Note 8).Comprehensive income –Comprehensive income is the same as net income as presented in the accompanying statements of income and comprehensive income.Income taxes – On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted. The TCJA significantly revised the U.S. federal corporate income tax by, among other things, lowering the corporate income tax rate to 21% and imposing limitations on the deduction of interest expense. The Partnership is treated as a pass through entity for income tax purposes and, therefore, is not subject to federal, state or local income taxes. Accordingly, no provision has been recorded for income taxes in the Partnership’s consolidated financial statements. The results of operations, including taxable income, gains, losses, deductions and credits, are allocated to and reflected on the income tax returns of the respective partners.The Partnership files partnership income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Partnership remains subject to examination by tax authorities for tax years as early as 2014. It is reasonably possible that various current tax examinations will conclude or require reevaluations of the Company’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.Due to/from affiliate – Due to/from affiliate principally represents the Partnership’s cash position with Cellco. Cellco manages, on behalf of the Partnership, all cash, investing and financing activities, including all transactions associated with the sales of wireless device payment plan agreement receivables, of the Partnership. As such, the change in due to/from affiliate is reflected as an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership.Additionally, cost of equipment, administrative and operating costs incurred by Cellco on behalf of the Partnership, as well as property, plant and equipment and wireless license transactions with affiliates, are charged to the Partnership through this account. Interest income on due from affiliate is based on the Applicable Federal Rate which was approximately 1.2%, 0.7% and 0.5% for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense on due to affiliate is calculated by applying Cellco’s average cost of borrowing from Verizon Communications Inc., which was approximately 4.7%, 4.8% and 4.8% for the years ended December 31, 2017, 2016 and 2015 respectively, to the outstanding due to/from affiliate balance. Included in Interest Income (expense), net is interest income of $5,928, $1,390 and $0 for the years ended December 31, 2017, 2016, and 2015, respectively, related to due to/from affiliate. Interest expense of $0, $2,683 and $23,878 was incurred during the years ended December 31, 2017, 2016 and 2015 respectively, of which all was capitalized.Allowance for doubtful accounts – Accounts receivable are recorded in the consolidated financial statements at cost, net of allowance for credit losses, with the exception of device payment plan agreement receivables which are initially recorded at fair value based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. The Partnership maintains allowances for uncollectible accounts receivable, including device payment plan agreement receivables, for estimated losses resulting from the failure or inability of customers to make required payments. The allowance for uncollectible accounts receivable is based on Cellco’s assessment of the collectability of each Partnership’s specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. The Partnership records an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. The Partnership also records an allowance for all other receivables based on multiple factors including historical experience with bad debts, the general economic environment and the aging of such receivables. Similar to traditional service revenue accounting treatment, the Partnership records device payment plan agreement bad debt expense based on an estimate of the percentage of equipment revenue that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. Due to the device payment plan agreement being incorporated in the standard Verizon Wireless bill, the collection and risk strategies continue to follow historical practices. The Partnership monitors the aging of accounts with device payment plan agreement receivables and writes off account balances if collection efforts are unsuccessful and future collection is unlikely.Property, plant and equipment, and Depreciation – Property, plant and equipment is recorded at cost. Property, plant and equipment are generally depreciated on a straight-line basis.Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the property, plant and equipment accounts and any gains or losses on disposition are recognized in income. Transfers of property, plant and equipment between Cellco and affiliates are recorded at net book value on the date of the transfer with an offsetting entry included in due to/from affiliate.Interest associated with the construction of network-related assets is capitalized. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.In connection with the ongoing review of estimated useful lives of property, plant and equipment during 2016, Cellco determined that the average useful lives of certain leasehold improvements would be increased from 5 to 7 years. This change was immaterial in 2016. Cellco determined that changes were also necessary to the remaining estimated useful lives of certain assets as a result of technology upgrades, enhancements, and planned retirements. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, Cellco and the Partnership believe the current estimates of useful lives are reasonable.Other assets – Other assets - net primarily include beneficial interest and long term device payment plan agreement receivables, net of allowances of $12,261 and $16,545 at December 31, 2017 and 2016, respectively (see Note 3).Impairment – All long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications were to become present, the Partnership would test for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, the next step would be to determine the fair value of the asset and record an impairment, if any. The Partnership re-evaluates the useful life determinations for these long-lived assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.Wireless licenses – Wireless licenses provide the Partnership with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services. In addition, Cellco maintains wireless licenses that provide the Partnership with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services (see Note 4). While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals, which are managed by Cellco, have historically occurred routinely and at nominal cost. Moreover, Cellco determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Partnership’s wireless licenses. As a result, wireless licenses are treated as an indefinite-lived intangible asset. The useful life determination for wireless licenses is re-evaluated each year to determine whether events and circumstances continue to support an indefinite useful life. When evaluating for impairment, Cellco aggregates wireless licenses into one single unit of accounting, as they are utilized on an integrated basis.Cellco on behalf of the Partnership tests the wireless licenses balance for potential impairment annually or more frequently if impairment indicators are present. In 2017, 2016, and 2015, Cellco performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of the Partnership’s wireless licenses was less than the carrying amount. As part of the assessment, several qualitative factors were considered including market transactions, the business enterprise value of the Partnership, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA (Earnings before interest, taxes, depreciation and amortization) margin projections), the projected financial performance, as well as other factors. In 2017 and 2016, Cellco also performed a qualitative impairment assessment similar to that described for the Partnership for its aggregate wireless licenses. In 2015, Cellco performed a quantitative impairment assessment for its aggregate wireless licenses which consisted of comparing the estimated fair value of its aggregate wireless licenses to the aggregated carrying amount as of the test date.Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses (see Note 4). The capitalization period ends when the development is discontinued or substantially complete and the license is ready for its intended use.In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for licenses included in Cellco’s national footprint. Cellco and the Partnership evaluated their wireless licenses for potential impairment as of December 15, 2017, 2016 and 2015. These evaluations resulted in no impairment of wireless licenses.Financial instruments –The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.Fair value measurements – Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:Level 1 - Quoted prices in active markets for identical assets or liabilitiesLevel 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilitiesLevel 3 - No observable pricing inputs in the marketFinancial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy. As of December 31, 2017 and 2016 the Partnership does not have any assets or liabilities measured at fair value on a recurring basis.Distributions – The Partnership is required to make distributions to its partners based upon the Partnership’s operating results, due to/from affiliate status, and financing needs as determined by the General Partner at the date of the distribution.Variable interest entities (VIEs) – VIEs are entities which lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, have equity investors which do not have the ability to make significant decisions relating to the entity’s operations through voting rights, do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. The assets and liabilities of the VIEs are consolidated when the Partnership is deemed to be the primary beneficiary. The primary beneficiary is the party which has the power to make the decisions that most significantly affect the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.Recent accounting standards – In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for these issues. Among the updates, this standard update requires cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables to be classified as cash inflows from investing activities. This standard update is effective as of the first quarter of 2018; however, early adoption is permitted. We expect the amendment relating to beneficial interests in securitization transactions will have an impact on our presentation of collections of the deferred purchase price from sales of wireless device payment plan agreement receivables in our consolidated statements of cash flows. Upon adoption of this standard update in the first quarter of 2018, we expect to retrospectively reclassify approximately $39,848 of collections of deferred purchase price related to collections from customers from Cash flows from operating activities to Cash flows from investing activities in our consolidated statement of cash flows for the year ended December 31, 2017 and $81,670 for the year ended December 31, 2016.In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. This standard update is effective as of the first quarter of 2020; however early adoption is permitted. The Partnership is currently evaluating the impact that this standard update will have on the consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This standard update intends to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, through improved disclosure requirements, the standard update will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. This standard update is effective as of the first quarter of 2019; however early adoption is permitted. The Partnership’s current operating lease portfolio is primarily comprised of spectrum, network, real estate, and equipment leases. Upon adoption of this standard, the Partnership expects the balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. At Cellco, a cross-functional coordinated implementation team has been established to implement the standard update related to leases. The Partnership is in the process of determining the scope of arrangements that will be subject to this standard as well as assessing the impact to its systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).��� This standard, along with related subsequently issued updates clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The standard provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provides more useful information to users of financial statements through improved disclosure requirements. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the standard is applied only to the most current period presented and the cumulative effect of applying the standard would be recognized at the date of initial application. In August 2015, an accounting standard update was issued that delayed the effective date of this standard until the first quarter of 2018, at which time the Partnership will adopt the standard using the modified retrospective approach to open contracts. At Cellco, a cross-functional coordinated team has been established to implement this standard. Summarized below are the key impacts and areas requiring significant judgement arising from the initial adoption of Topic 606.The ultimate impact on revenue resulting from the application of the new standard is subject to assessments that are dependent on many variables, including, but not limited to, the terms of the contractual arrangements and mix of business. The Partnership expects the allocation of revenue between equipment and service for wireless subsidy contracts will result in more revenue allocated to equipment and recognized upon delivery, and less service revenue recognized over the contract term than under current GAAP. Total revenue over the full contract term will be unchanged and there will be no change to customer billing, the timing of cash flows or the presentation of cash flows.Additionally, the new standard requires the deferral of incremental costs to obtain a customer contract, which are then amortized to expense, as part of Selling, general and administrative expense, over the respective periods of expected benefit. As a result, a significant amount of our sales commission costs, which would have historically been expensed as incurred will be deferred and amortized. In addition, for certain contractual arrangements, the device may be sold by one Cellco entity but the service contract is the performance obligation of another Cellco entity. In contractual arrangements where another Cellco entity sells the device on behalf of the Partnership, the Partnership will compensate the other Cellco entity for obtaining the service contract. This represents an incremental cost to obtain the service contract and will be deferred by the Partnership and recognized over the expected benefit period. The Partnership will recognize service revenue for the wireless service that it provides to the customer. In contractual arrangements where the Partnership sells the device on behalf of another Cellco entity, the equipment revenue associated with the transaction will be recognized by the Partnership, and the Partnership will also recognize commission revenue as compensation for obtaining the service contract on behalf of the other Cellco entity.Based on currently available information, we expect the cumulative effect of initially applying the new standard to result in an increase to the opening balance of retained earnings ranging from approximately $125,000 to $175,000. Subsequent events – Events subsequent to December 31, 2017 have been evaluated through February 26, 2018, the date the consolidated financial statements were issued.3. WIRELESS DEVICE PAYMENT PLANSUnder the Verizon device payment program, eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under fixed-term service plans, and their device payment plan charge is included on their standard wireless monthly bill. As of January 2017, we no longer offer consumers new fixed-term service plans for phones, however we continue to service existing plans and provide these plans to business customers.Wireless device payment plan agreement receivables– The following table displays device payment plan agreement receivables, net, that continue to be recognized in the accompanying consolidated balance sheets:The Partnership may offer customers certain promotions that allow a customer to trade in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, the Partnership may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. The Partnership recognizes a liability for the trade-in device measured at fair value, which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net does not reflect the trade-in device liability. At December 31, 2017 and 2016, the amount of trade-in liability was insignificant.From time to time, the Partnership offers certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, we account for this trade-in right as a guarantee obligation. At December 31, 2017 and 2016, the amount of the guarantee obligation was insignificant. The amount of the guarantee obligation was included in Advance billings and other on the accompanying consolidated balance sheets. At the time of sale, the Partnership imputes risk adjusted interest on the device payment plan agreement receivables. Imputed interest is recorded as a reduction to the related accounts receivable. Interest income, which is included within Other revenues on the consolidated statements of income and comprehensive income, is recognized over the financed device payment term.When originating device payment plan agreements, the Partnership uses internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. If a customer is either new to the Partnership or has less than 210 days of customer tenure (a new customer), the credit decision process relies more heavily on external data sources. If the customer has 210 days or more of customer tenure (an existing customer), the credit decision process relies on internal data sources. The Partnership’s experience has been that the payment attributes of longer tenured customers are highly predictive in estimating their ability to pay in the future. External data sources include obtaining a credit report from a national consumer credit reporting agency, if available. Internal data and/or credit data obtained from the credit reporting agencies is used to create a custom credit risk score. The custom credit risk score is generated automatically (except with respect to a small number of applications where the information needs manual intervention) from the applicant’s credit data using Verizon Wireless proprietary custom credit models, which are empirically derived and demonstrably and statistically sound. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment.For a small portion of new customer applications, a traditional credit report is not available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternate credit data is used for the risk assessment.Based on the custom credit risk score, each customer is assigned to a credit class, each of which has a specified required down payment percentage, which ranges from zero to 100%, and specified credit limits. Device payment plan agreement receivables originated from customers assigned to credit classes requiring no down payment represent the lowest risk. Device payment plan agreement receivables originated from customers assigned to credit classes requiring a down payment represent a higher risk.Subsequent to origination, the Partnership monitors delinquency and write-off experience as key credit quality indicators for its portfolio of device payment plan agreements and fixed-term service plans. The extent of collection efforts with respect to a particular customer are based on the results of proprietary custom empirically derived internal behavioral scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These customer scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. The Partnership continuously monitors collection performance results and the credit quality of device payment plan agreement receivables based on a variety of metrics, including aging. The Partnership considers an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date.As of December 31, 2017 and 2016, the balance and aging of the device payment plan agreement receivables on a gross basis was as follows:Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:Sales of wireless device payment plan agreement receivables –During 2015 and 2016 Cellco established programs pursuant to a Receivables Purchase Agreement (RPA) to sell from time to time, on an uncommitted basis, eligible device payment plan receivables to a group of primarily relationship banks (Purchasers) on both a revolving (Revolving Program) and non-revolving (Non-Revolving Program) basis. Additionally, during September of 2016, Cellco entered into a device payment plan agreement receivables financing facility (the “ABS Financing Facility”) with a number of financial institutions. The receivables sold under the RPA and the ABS Financing Facility were no longer considered assets of the Partnership. The proceeds received from the Purchasers were recorded within cash flows provided by operating activities on the consolidated statements of cash flows.Receivables Purchase Agreement – Under the Non-Revolving Program, Los Angeles SMSA would transfer the eligible receivables to Los Angeles Edge (Seller or SPE). The Seller would then sell the receivables to the Purchasers for upfront proceeds and additional consideration upon settlement of the receivables (the deferred purchase price). Under the Revolving Program, Los Angeles SMSA transferred the eligible device payment plan agreement receivables to the Seller. The Seller then sold the eligible receivables on a revolving basis, subject to a maximum funding limit, to the Purchasers. Sales of eligible receivables by the Sellers, once initiated, generally occurred and were settled on a monthly basis. Customer payments made towards receivables sold under the Revolving Program were available to purchase additional eligible device payment plan agreement receivables originated during the revolving period. Under the Programs, eligible device payment plan agreement receivables were transferred to the Purchasers for upfront cash proceeds and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. Throughout 2017, as permitted by the RPA agreements, Cellco exercised its clean up call options to trigger the repurchase of an immaterial amount of outstanding receivables in consideration for the rights to collect any remaining deferred purchase price assets, ending the program.There were no sales of device payment plan agreement receivables under the Programs during 2017. There were no reinvested collections in 2017.During 2016, the Partnership sold $178,981 of receivables, net of allowances and imputed interest under the Revolving Program. The Partnership received proceeds from new transfers of $132,483 and proceeds from reinvested collections of $36,855, and recorded a deferred purchase price of $23,873.During 2015, the Partnership sold $418,615 of receivables, net of allowances and imputed interest, under the Non-Revolving Program. In connection with this sale, proceeds from new transfers of $308,659 were received and a deferred purchase price of $117,587 was recorded. During 2015, the Partnership also sold $201,283 of receivables, net of allowances and imputed interest, under the Revolving Program. In connection with this sale, proceeds from new transfers of $168,854 were received and a deferred purchase price of $32,429 was recorded.During 2017, 2016, and 2015, the sales of receivables under the RPA did not have a material impact on the consolidated statements of income and comprehensive income.Deferred purchase price– During 2017, 2016 and 2015, the Partnership collected $39,848, $81,670, and an insignificant amount, respectively, which was returned as deferred purchase price and recorded within Cash flows provided by operating activities on our consolidated statement of cash flows. Collections recorded within Cash flows from investing activities on our consolidated statements of cash flows were $46,161 during 2017 and insignificant during 2016 and 2015. At December 31, 2017 and 2016, our deferred purchase price receivable was $0 and $95,827, respectively. The deferred purchase price was initially recorded at fair value, based on the remaining device payment amounts expected to be collected, adjusted, as applicable, for the time value of money and by the timing and estimated value of the device trade-in in connection with upgrades. The estimated value of the device trade-in considers prices expected to be offered to us by independent third parties. This estimate contemplates changes in value after the launch of a device. The fair value measurements were considered to be Level 3 measurements within the fair value hierarchy. The collection of the deferred purchase price was contingent on collections from customers.Variable interest entities (VIEs)– Under the RPA, the SPE’s sole business consists of the acquisition of the receivables from Los Angeles SMSA and the resale of the receivables to the Purchasers. The assets of the SPE are not available to be used to satisfy obligations of any Partnership entities other than the SPE’s. It was determined that the SPE is a VIE as it lacks sufficient equity to finance its activities. Given that Los Angeles SMSA has the power to direct the activities of the SPE that most significantly impact the SPE’s economic performance, Los Angeles SMSA is deemed to be the primary beneficiary of the SPE. As a result, Los Angeles SMSA consolidates the assets and liabilities of the SPE into the consolidated financial statements (see Note 2). As of December 31, 2017 and 2016 the VIE held DPP assets of $0 and $95,827, respectively and held no liabilities.Continuing Involvement – We no longer have continuing involvement in the RPA because the program ended in 2017. There was no loss related to the RPA. The Partnership’s maximum exposure to loss related to the sold receivables was limited tothe amount of the outstanding deferred purchase price, which was $0, $95,827 and $148,941 as of December 31, 2017, 2016, and 2015, respectively. The maximum exposure to loss represents an estimated loss that would have been incurred under severe, hypothetical circumstances whereby the Partnership would not receive the total portion of the proceeds withheld by the Purchasers. As the Partnership believed the probability of these circumstances occurring was remote, the maximum exposure to loss was not an indication of the Partnership’s expected loss.In addition, the Partnership had continuing involvement related to the sold receivables as the Partnership is responsible for absorbing additional credit losses pursuant to the agreements. Credit losses on receivables sold were $5,277 during 2017 and $11,755 during 2016.The outstanding device payment plan agreement receivables derecognized from the Partnership’s consolidated balance sheets, but which Cellco continues to service, was $0 and $259,856 at December 31, 2017 and 2016, respectively.ABS Financing Facility – Under the terms of the ABS Financing Facility, the counterparties to the facility made advances under asset-backed loans backed by device payment plan agreement receivables for proceeds. There is a two year revolving period, which may be extended, during which Cellco may transfer additional receivables to an ABS Entity. Subject to certain conditions, Cellco may also remove receivables from the ABS Entity. Cellco may prepay the outstanding amounts of the loans without penalty, but in certain cases, with breakage costs. During 2017 and 2016, the Partnership sold $706,729 and $389,800, respectively, of device payment plan agreement receivables, net of allowances and imputed interest to affiliates of Cellco and received proceeds of $581,224 and $331,454 and recorded a beneficial interest of $125,505 and $58,346 respectively, which was recorded within Other assets - net on the consolidated balance sheets.Variable interest entities (VIEs) – Under the ABS Financing Facility, there is a Trust entity (the “Trust”) whose sole business consists of holding collected receivables which are sold by the Partnership to Cellco affiliates under the terms of the ABS Financing Facility. The activity of servicing the receivables and distribution of the cash collected is the activity that has the most significant impact on the Trust. Cellco is the master and special servicer for the receivables but does not have a direct variable interest in the Trust. The Partnership holds a beneficial interest in the Trust which represents the residual interest in the Trust and as such are variable interests. Since Cellco maintains decision making rights as servicer and has an obligation to absorb losses, it is the primary beneficiary in the Trust.Beneficial interest–Under the ABS Financing Facility, the beneficial interest was initially recorded at fair value, based on the remaining device payment amounts expected to be collected, adjusted, as applicable, for the time value of money and credit risk. The initial fair value measurements are considered to be Level 3 measurements within the fair value hierarchy. The collection of the beneficial interest is contingent on collections from customers. At December 31, 2017 and 2016, the Partnership’s beneficial interest was $174,077 and $56,359 respectively, which is included within Other Assets – net on the consolidated balance sheets. During 2017 and 2016, the Partnership collected a net $16,343 and $0, respectively, which was recorded within Cash flows provided by investing activities on our consolidated statement of cash flows.Continuing involvement – Cellco has continuing involvement with the sold receivables as it services the receivables pursuant to the ABS Financing Facility on behalf of the Partnership. Cellco services their related receivables, including facilitating customer payment collection. While servicing the receivables, the same policies and procedures are applied to the sold receivables that apply to owned receivables, and the Partnership continues to maintain normal relationships with their customers. The credit quality of the customers the Partnership continues to service was consistent throughout the periods presented. The Partnership’s maximum exposure to loss related to the sold receivables was limited to the amount of the outstanding beneficial interest, which was $174,077 and $56,359 as of December 31, 2017 and 2016, respectively. The maximum exposure to loss represents an estimated loss that would have been incurred under severe, hypothetical circumstances whereby the Partnership would not receive the total portion of the proceeds withheld by the Trust. As the Partnership believes the probability of these circumstances occurring was remote, the maximum exposure to loss was not an indication of the Partnership’s expected loss.In addition, the Partnership has continuing involvement related to the sold receivables as the Partnership is responsible for absorbing additional credit losses pursuant to the agreements. Credit losses on receivables sold were $11,176 during 2017 and insignificant during 2016.The outstanding device payment plan agreement receivables derecognized from the Partnership’s consolidated balance sheets, but which Cellco continues to service, was $629,686 and $350,134 at December 31, 2017 and 2016, respectively.Changes in the carrying amount of wireless licenses are as follows:Balance at January 1, 2016$AcquisitionsCapitalized interest on wireless licensesBalance at December 31, 2016$AcquisitionsCapitalized interest on wireless licensesBalance at December 31, 2017$The average remaining renewal period of the Partnership’s wireless license portfolio was 8.6 years as of December 31, 2017.Spectrum license transaction – On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Cellco participated in that auction and was the high bidder on the licenses covering the Partnership service area. The licenses were deemed to be right to use assets and were allocated and recorded by the Partnership as wireless licenses. The cash payment made by the Partnership of $1,972,824 is classified within Acquisition of wireless licenses on the statement of cash flows for the year ended December 31, 2015.5. PROPERTY, PLANT AND EQUIPMENT, NETProperty, plant and equipment consist of the following at December 31, 2017 and 2016:Capitalized interest cost of $0 and $772, and capitalized network engineering costs of $23,414 and $24,656, were recorded during the years ended December 31, 2017 and 2016, respectively. Construction in progress included in certain classifications shown above, principally consists of wireless plant and equipment, amounted to $122,335 and $127,758, as of December 31, 2017 and 2016, respectively. Depreciation expense of $355,692, $354,329, and $353,975 was incurred during the years ended December 31, 2017, 2016 and 2015.6. TOWER MONETIZATION TRANSACTIONPrior to the acquisition of the Partnership interest by Cellco in 2000, Vodafone Group PLC (“Vodafone”), then parent company of AirTouch Cellular, entered into agreements to sublease all of its unused space on up to 430 of its communications towers (“Sublease Agreement”) to SpectraSite Holdings, Inc. (“SpectraSite”) in exchange for $155,000. At various closings in 2001 and 2000, SpectraSite leased 274 communications towers owned and operated by the Partnership for $98,465. At December 31, 2017, 2016, and 2015 the Partnership has $14,053, $18,967, and $23,932 respectively, recorded as deferred rent. The Sublease Agreement requires monthly maintenance fees for the existing physical space used by the Partnership’s cellular equipment. The Partnership paid $1,180 and $1,528 and $2,152 to SpectraSite pursuant to the Sublease Agreement for the years ended December 31, 2017, 2016, and 2015, respectively, which is included in cost of service in the accompanying statements of income and comprehensive income.During March 2015, Verizon Communications, the parent company of Cellco, entered into an agreement with American Tower Corporation (ATC) giving ATC exclusive rights to lease and operate approximately 11,300 wireless towers owned and operated by Cellco and its subsidiaries for an upfront payment of $5.0 billion (not in thousands). Verizon Communications also sold 162 towers to ATC for an upfront payment of $0.1 billion (not in thousands). Under the terms of the lease agreements, ATC has exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, ATC has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. The Partnership has subleased capacity on the towers from ATC for a minimum of 10 years at current market rates, with options to renew. The Partnership participated in this arrangement and has leased 538 towers to ATC for an upfront payment of $221,653 and has sold 1 tower to ATC for an upfront payment of $616. The upfront payment, including the towers sold was $222,269 and was accounted for as deferred rent and as a financing obligation. The $95,634 accounted for as deferred rent was included in cash flows provided by operating activities and relates to the portion of the towers for which the right-of-use has passed to ATC. The deferred rent is being recognized on a straight-line basis over the Partnership’s average lease term of 30 years. As of December 31, 2015, a financing obligation in the amount of $126,635 was included in cash flows provided by financing activities, which relates to the portion of the towers that continue to be occupied and used for the Partnership’s network operations. The Partnership makes a sublease payment to ATC for $1.9 per month per site, with annual increases of 2 percent. During 2017, 2016, and 2015, the Partnership made $13,426, $12,498, and $10,260, respectively, of sublease payments to ATC, which are recorded as Repayments of financing obligation.At December 31, 2017, 2016, and 2015, the balance of deferred rent was $85,618 and $89,605 and $93,057, respectively. At December 31, 2017, 2016 and 2015, the balance of the financing obligation was $124,244 and $125,296 and $125,510, respectively.Accounts payable and accrued liabilities consist of the following at December 31, 2017 and 2016.Advance billings and other consist of the following at December 31, 2017 and 2016:8. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIESIn addition to fixed asset purchases and right to use licenses substantially all of service revenues, equipment revenues, other revenues, cost of service, cost of equipment, and selling, general and administrative expenses represent transactions processed by affiliates (Cellco and its related parties) on behalf of the Partnership or represent transactions with affiliates. These transactions consist of (1) revenues and expenses that pertain to the Partnership which are processed by Cellco and directly attributed to or directly charged to the Partnership; (2) roaming revenue by customers of other Cellco affiliated markets within the Partnership market or Partnership customers’ cost when roaming in other Cellco affiliated markets; (3) certain revenues and expenses that are processed or incurred by Cellco which are allocated to the Partnership based on factors such as the Partnership’s percentage of revenue streams, customers, gross customer additions, or minutes of use in 2015 and 2016 and on total subscribers in 2017; (4) certain costs of operating switches which are allocated to the Partnership; and (5) lease agreements with Cellco, whereas the Partnership has the right to use certain spectrum. These transactions do not necessarily represent arm’s length transactions and may not represent all revenues and costs that would be present if the Partnership operated on a standalone basis. Cellco periodically reviews the methodology and allocation bases for allocating certain revenues, operating costs, selling, general and administrative expenses to the Partnership. Resulting changes, if any, in the allocated amounts have historically not been significant, other than the roaming revenue and cost impacts discussed below.Service revenues – Service revenues include monthly customer billings processed by Cellco on behalf of the Partnership and roaming revenues relating to customers of other affiliated markets that are specifically identified to the Partnership. For the years ended December 31, 2017, 2016, and 2015 roaming revenues were $510,521, $486,262, and $438,105, respectively. During 2017, Cellco updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller revenue, resulting in a net decrease of $145,797 to roaming revenue as compared to prior periods. Service revenues also include long distance, data, and certain revenue reductions including revenue concessions that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.Equipment revenues – Equipment revenues include equipment sales processed by Cellco and specifically identified to the Partnership, as well as certain handset and accessory revenues, contra-revenues including equipment concessions, and coupon rebates that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.Other revenues – Other revenues include switch revenue and other fees and surcharges charged to the customer that are specifically identified to the Partnership. For the years ended December 31, 2017, 2016, and 2015 switch revenues were $2,781, $8,570, and $9,234, respectively.Cost of service – Cost of service includes roaming costs relating to the Partnership’s customers roaming in other affiliated markets and switch costs that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. For the years ended December 31, 2017, 2016 and 2015, roaming costs were $637,264, $619,985, and $547,672, respectively. During 2017, Cellco updated its roaming rates and methodology for determining roaming volumes charged for postpaid, prepaid and reseller cost, resulting in a net decrease of $182,169 to roaming cost as compared to prior periods. Cost of service also includes cost of telecom, long distance and application content that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership has lease agreements for the right to use additional spectrum owned by Cellco. See Notes 2 and 9 for further information regarding these arrangements.Cost of equipment – Cost of equipment is recorded at Cellco’s cost basis (see Note 2). Cost of equipment also includes certain costs related to handsets, accessories and other costs incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.Selling, general and administrative – Selling, general and administrative expenses include commissions, customer billing, office telecom, customer care, salaries, sales and marketing and advertising expenses that are specifically identified to the Partnership as well as incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership was allocated $100,183, $113,300 and $117,409 in advertising costs for the years ended December 31, 2017, 2016 and 2015, respectively.Property, plant and equipment – Property, plant and equipment includes assets purchased by Cellco and directly charged to the Partnership as well as assets transferred between Cellco and the Partnership (see Note 2).Wireless licenses – Wireless licenses include the right to use assets that were allocated by Cellco and recorded by the Partnership in exchange for a $1,972,824 payment (see Note 4).Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities and equipment used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured of occurring. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended December 31, 2017, 2016 and 2015 the Partnership incurred a total of $134,337, $125,754, and $110,380, respectively, as rent expense related to these operating leases, which is included in Cost of service and Selling, general and administrative expenses in the accompanying statements of income and comprehensive income depending on the nature of the facility. Aggregate future minimum rental commitments under noncancellable operating leases, excluding renewal options that are not reasonably assured of occurring and remaining tower maintenance fees of $7,862 (see Note 6), for the years shown are as follows:The Partnership has also entered into certain agreements with Cellco, whereas the Partnership leases certain spectrum from Cellco that overlaps the Los Angeles metropolitan statistical area. Total rent expense under these spectrum leases amounted to $125,608 in 2017, $124,943 in 2016, and $124,722 in 2015, which is included in Cost of service in the accompanying consolidated statements of income and comprehensive income.Based on the terms of these leases as of December 31, 2017, future spectrum lease obligations are as follows:The General Partner currently expects that any renewal option in the leases will be exercised.Cellco and the Partnership are subject to lawsuits and other claims including class actions, product liability, patent infringement, intellectual property, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also currently defending lawsuits filed against it and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco violated certain state consumer protection laws and other statutes and defrauded customers through misleading billing practices or statements. These matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and the outcomes are not currently predictable.The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. The Partnership has no accrual for any pending matters. An estimate of the reasonably possible loss or range of loss with respect to these matters as of December 31, 2017 cannot be made at this time due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. Cellco and the Partnership continuously monitors these proceedings as they develop and will adjust any accrual or disclosure as needed. It is not expected that the ultimate resolution of any pending regulatory or legal matter in future periods will have a material effect on the financial condition of the Partnership, but it could have a material effect on the results of operations for a given reporting period.11. RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTSUNITED STATES CELLULAR CORPORATION By: By:Kenneth R. MeyersKenneth R. Meyers
President and Chief Executive Officer
(principal executive officer)By: By:Steven T. CampbellSteven T. Campbell
Executive Vice President-Finance,
(principal financial officer)By: By:Douglas D. ShumaDouglas D. Shuma
Chief Accounting Officer
(principal accounting officer)By: By:Douglas W. ChambersDouglas W. ChambersJeffrey S. HoerschVice President and ControllerDated: February 26, 201817, 2022Each person whose signature appears below constitutes and appoints LeRoy T. Carlson, Jr. as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do so and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all the said attorney-in fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.TitleDateSignature Title Date /s/ LeRoy T. Carlson, Jr. 26, 2018Kenneth R. Meyers26, 2018Kenneth R. Meyers/s/ James Barr IIIDirectorFebruary 26, 2018James Barr III/s/ Steven T. CampbellDirectorFebruary 26, 2018Steven T. Campbell26, 201826, 201826, 2018Director February 17, 2022 Deirdre C. Drake /s/ Harry J. Harczak, Jr. 26, 2018Director February 17, 2022 Michael S. Irizarry /s/ Gregory P. Josefowicz 26, 201826, 2018/s/ Douglas D. ShumaDirectorFebruary 26, 2018Douglas D. Shuma26, 2018/s/ Kurt B. ThausDirectorFebruary 26, 2018Kurt B. Thaus
