Fitch Ratings Affirms TDS & USM IDRs at 'BBB+'; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) of Telephone & Data Systems, Inc. (TDS) and United States Cellular (USM) and removed TDS and USM from Rating Watch Negative. The Rating Outlook on TDS and USM is Stable. Approximately $1.6 billion of debt is affected by Fitch's action. Fitch has also assigned a 'BBB+' rating to TDS and USM's revolving credit facilities.

The following ratings have been affirmed:

TDS

--Issuer default rating (IDR) at 'BBB+';

--Senior unsecured debt at 'BBB+';

USM

--IDR at 'BBB+';

--Senior unsecured debt at 'BBB+'.

The following ratings have been assigned:

TDS

--Revolving credit facility at 'BBB+';

USM

--Revolving credit facility at 'BBB+'.

Fitch originally placed the ratings of TDS and USM on Rating Watch Negative in November 2005 following an announcement that TDS would restate several years of financial statements. Subsequent to this announcement, TDS identified further accounting errors on multiple occasions, which led to additional financial restatements, extensions from the American Stock Exchange and several waivers from their bank lenders. While the accounting issues caused material uncertainty regarding TDS internal controls and accounting systems, the financial restatements did not lead to a negative impact on TDS' revenue, cash or cash flows or trigger a liquidity issue. Consequently, Fitch believes the accounting issues at TDS have had a limited impact on its credit profile. As a result of its first quarter 2007 financial filings, USM and TDS were in compliance with its loan agreements and long-term debt indentures. As of June 30, 2007, TDS indicated that the company's disclosure controls and procedures were still not effective, resulting in three material weaknesses.

The rating affirmation reflects the progress the company has made in remediating its accounting deficiencies, the past deleveraging efforts, the growing profitability in its wireless operations and the increasing free cash flow at a consolidated TDS. USM has materially exceeded Fitch's expectations for the first half of 2007 due to higher ARPU and net postpaid subscriber additions. Fitch believes the company will continue to sustain this momentum in the wireless operations, and USM has indicated the company will not undertake any significant new market deployments through the end of 2008 in order to focus on increasing cash flow. TDS' financial profile should continue to improve over the forecast period, with leverage (total debt with equity credit to EBITDA) below 1.5 times (x) by end of 2007 with further improvements expected in 2008.

While concerned with the three existing material weaknesses, Fitch expects TDS to resolve these issues over the coming quarters. TDS has made significant progress at addressing the internal control issues. The dimensions of the remediation plan have required longer-term planning and significant internal and external resources, which has caused more uncertainty over the timing and the successful resolution regarding the control weaknesses.

TDS and USM have substantial liquidity provided by cash, committed credit lines and other assets. At the end of the second quarter 2007, TDS consolidated cash balance was approximately $1.3 billion. TDS and USM maintain $1.4 billion of undrawn revolver capacity, principally through TDS' $600 million revolving credit facility and USM's $700 million revolver that both mature in 2009. TDS also has other sizeable assets that could be monetized including USM's cellular towers and minority interests in other wireless operations.

The company has par call options on several remaining debt securities, including the $500 million, 7.6% notes that are currently callable, providing the flexibility to repay or refinance debt as conditions warrant. TDS and its subsidiaries maintain a portfolio of prepaid forward contracts with counterparties in connection with its underlying marketable equity securities. As of June 30, 2007, TDS and its subsidiaries had $1.6 billion of prepaid forward contracts outstanding. Including expected settlements during the third quarter 2007 of $517 million, TDS and USM have elected to deliver shares of the underlying stock to settle approximately $700 million in prepaid forward contracts as well as fully monetizing any remaining common shares associated with the maturing contracts. Absent a change in philosophy, Fitch expects TDS and USM will likely continue to settle the forward contracts with shares. Contract amounts maturing over the next four quarters are as follows: $41 million, $341 million, $452 million and $222 million. Since Fitch viewed the prepaid forward contracts as having 65-70% equity considerations, the settlement of the forward contracts is deleveraging for TDS.

Assuming the shares are delivered to settle the forward contracts, TDS also has a cash tax liability of approximately $230 million and $350 million in 2007 and 2008 respectively. Given the current market pricing for the underlying equity securities, the company also retains a substantial value over the forward contract obligations, which could result in an additional $500 million in before tax proceeds to offset a substantial portion of the cash tax liability. In addition, the board of directors of TDS and USM has authorized the repurchase of up to $250 million of TDS special common shares and 500,000 USM common shares. Subsequent to the announcement, USM repurchased $65 million in common shares.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.