Fitch Rates Telephone and Data Systems, Inc 'BBB+'

Business Wire, March 21, 2005

CHICAGO -- Fitch Ratings has assigned a 'BBB ' rating to the $150 million of 40-year senior notes issued by Telephone and Data Systems, Inc (TDS). Following the offering, TDS' operating telephone subsidiaries expect to repay some or all of the $240 million debt owed to the Rural Utilities Service, Rural Telephone Bank, Federal Financing Bank, and other lenders. The Rating Outlook for TDS is Stable.

TDS' current rating draws support from its strong liquidity position, the relatively stable cash flows associated with its wireline operations in predominantly less competitive markets, and the strengthened competitive position within U.S. Cellular's (USM) regional footprint. Offsets to these positive factors include lack of meaningful free cash flow at the consolidated level, the margin pressures associated with the ongoing competitive effects from the nationwide operators, and the continued new wireless launches within its developing markets. Accordingly, Fitch does not expect that TDS will be able to materially reduce debt levels and improve free cash flow in the next couple of years as USM will likely continue investment and footprint expansion in its regional clusters, particularly considering the results from the recently completed spectrum auction.

For 2004, consolidated debt-to-EBITDA was 3.75 times (x), assuming no equity credit for the prepaid forward contracts. As a result of faster customer growth, the costs of new market launches and the divestiture of cash flow generating properties, EBITDA growth was minimal at USM for the third consecutive year. Given a light maturity schedule, debt levels should remain relatively stable during 2005. Leverage should improve slightly in 2005 due to EBITDA growth in USM's operations, resulting from the increase in mobile subscribers, although the increase is partially offset by pricing pressure on ARPU.

At the end of 2004, TDS consolidated cash balance was approximately $1.2 billion. TDS and USM maintain $1.3 billion of undrawn revolver capacity, principally through TDS' $600 million revolving credit facility and USM's $700 million revolver. TDS' only material near-term maturity is in 2006 when $200 million of notes are due. The company also has par call options on several debt securities, including the $500 million, 7.6% notes that are callable at par beginning in 2006, providing the flexibility to repay or refinance debt as conditions warrant. TDS also has an approximate $550 million cash tax liability in 2007 and 2008 arising from the prepaid forward contracts, which mutes the benefits of its sizable cash position. Given the current market pricing for the underlying equity securities, the company retains a substantial value over the prepaid forward contract obligations. Nevertheless, due to the lengthy time frame until these obligations are settled, there are no assurances the company retains this value when the liabilities mature.

USM's designated entity partner, Carroll Wireless, was the winning bidder for 14.4 million POPs in 17 markets for $130 million, or $0.90 per MHz POP. The bidding was focused on both new and existing markets, including approximately 10 million POPs in market areas that have not been built out in Indiana, Minnesota, and North Carolina. Approximately 4.1 million new POPs were added in North Carolina, including Charlotte and Greensboro, 3.3 million new POPs in Minneapolis, and approximately 2.3 million POPs in Indiana, including Indianapolis, where USM already had spectrum but had not yet built out the markets. In addition, 10 MHz of spectrum depth was added for the Milwaukee and Oklahoma City markets.

In the past few years, USM has divested smaller noncore island markets and built out new markets that are adjacent to existing operations. Fitch agrees with USM's strategic repositioning as this strengthens the company's competitive position. However, through this strategic repositioning, a substantial portion of USM's POPs could be characterized as a developing market, which indicates that the developing market operations generate minimal cash flow at this time. Accordingly, USM has shown good financial discipline of gaiting the PCS deployments by using the cash flows associated with its mature markets to fully fund the developing operations. In 2005, USM only has plans to launch the St. Louis market (2.9 million POPs) in the third quarter, which is critical to strengthening USM's footprint. Management estimates that launch costs will affect EBITDA by $40 million to 50 million and result in net additions increasing by 50,000. Beyond 2005, Fitch believes USM may consider similarly sized footprint expansions utilizing the new spectrum in North Carolina Indiana and Minneapolis, which depending on the scale and timing of deployments, will likely continue to pressure cash generation and delay free cash flow.