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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for United States Cellular Corporation (U.S. Cellular), an 81%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). The company provides wireless telecommunications services to approximately 6.2 million customers across 26 states. The filing includes unaudited consolidated financial statements and management's discussion and analysis.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 1% year-over-year, driven by a 2% increase in service revenues ($981.9 million vs. $962.1 million). This growth was achieved despite a 17% decline in inbound roaming revenues, offset by customer base growth and higher average monthly service revenue per customer ($52.54 vs. $52.24).
• Profitability: Net income attributable to U.S. Cellular increased 20% to $84.6 million. This increase was primarily due to a lower effective tax rate (25.6% in 2009 vs. 38.9% in 2008), driven by a discrete state tax benefit of $14.6 million.
• Operating Expenses: Total operating expenses rose 2% to $938.0 million. System operations expenses increased 5% due to higher network usage and cell site maintenance costs. Depreciation, amortization, and accretion decreased 3% due to the full depreciation of legacy TDMA and analog equipment.
• Cash Flow: Operating cash flows decreased $44.2 million to $185.6 million, largely due to changes in operating assets and liabilities, including a $34.0 million deposit paid to the IRS via the parent company.

Guidance, Outlook, and Risks

2009 Full-Year Estimates

• Net Retail Customer Additions: 75,000 - 150,000
• Service Revenues: $3,900 - $4,000 million
• Operating Income: $275 - $350 million
• Capital Expenditures: Approximately $575 million

Management Commentary

Management anticipates continued growth in data product revenues and customer base, though they face headwinds from industry consolidation reducing inbound roaming revenues. The company is investing in 3G network expansion and new billing systems. U.S. Cellular maintains a strong balance sheet with $191.8 million in cash and a $700 million revolving credit facility with no outstanding borrowings.

Risks and Contingencies

• Legal Proceedings: The Department of Justice (DOJ) is investigating U.S. Cellular's participation in FCC spectrum auctions (Auctions 58, 66, and 73) regarding the eligibility for 25% bid credits. A civil action seeks the return of approximately $165 million in bid credits plus treble damages. The outcome is uncertain.
• Roaming Revenue Decline: The acquisition of Alltel by Verizon has reduced inbound roaming revenues, a trend expected to continue.
• Capital Markets: Deteriorating credit market conditions may impact the renewal of the revolving credit facility expiring in December 2009, potentially leading to reduced availability or higher costs.

Investor Verification Checklist

• DOJ Investigation Status: Monitor updates on the False Claims Act investigation regarding FCC auction bid credits and potential financial exposure.
• Roaming Revenue Trends: Verify the extent of revenue erosion from the Verizon/Alltel consolidation and the effectiveness of offsetting strategies.
• Credit Facility Renewal: Assess the terms and availability of the $700 million revolving credit facility upon its December 2009 expiration given current market conditions.
• Customer Churn and ARPU: Track postpay churn rates (1.5% in Q1) and average revenue per user to ensure growth targets are met amidst competitive pricing pressures.
• Capital Expenditure Execution: Confirm that the planned $575 million in 2009 capital expenditures aligns with network expansion goals and cash flow generation.