UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
______________
|
| | |
| (Mark One) |
| x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
| | | |
| | | For the fiscal year ended December 31, 20142017 |
| or |
| | | |
| ¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number: 001-33664
Charter Communications, Inc.
(Exact name of registrant as specified in its charter)
|
| | |
| Delaware | | 43-185721384-1496755 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | | |
400 Atlantic Street Stamford, Connecticut 06901 | | (203) 905-7801905-7800 |
| (Address of principal executive offices including zip code) | | (Registrant’s telephone number, including area code) |
Securities registered pursuant to section 12(b) of the Act:
|
| | |
| Title of each class | | Name of Exchange which registered |
| Class A Common Stock, $.001 Par Value | | NASDAQ Global Select Market |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated“large accelerated filer,” “large accelerated“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the registrant of outstanding Class A common stock held by non-affiliates of the registrant at June 30, 20142017 was approximately $12.368.0 billion, computed based on the closing sale price as quoted on the NASDAQ Global Select Market on that date. For purposes of this calculation only, directors, executive officers and the principal controlling shareholders or entities controlled by such controlling shareholders of the registrant are deemed to be affiliates of the registrant.
There were 111,999,687238,506,059 shares of Class A common stock outstanding as of December 31, 20142017. There were no shareswas 1 share of Class B common stock outstanding as of the same date.
Documents Incorporated By Reference
Information required by Part III is incorporated by reference from Registrant’s proxy statement or an amendment to this Annual Report on Form 10-K to be filed by April 30, 2015.2018.
CHARTER COMMUNICATIONS, INC.
FORM 10-K — FOR THE YEAR ENDED DECEMBER 31, 20142017
TABLE OF CONTENTS
This annual report on Form 10-K is for the year ended December 31, 20142017. The United States Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference” information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this annual report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this annual report. In this annual report, “Charter,” “we,” “us” and “our” refer to Charter Communications, Inc. and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This annual report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in Part I. Item 1. under the heading "Business"“Business” and in Part II. Item 7. under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions, including, without limitation, the factors described in Part I. Item 1A. under “Risk Factors” and in Part II. Item 7. under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report. Many of the forward-looking statements contained in this annual report may be identified by the use of forward‑looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” “intend,” “estimated,” “aim,” “on track,” “target,” “opportunity,” “tentative,” “positioning,” “designed,” “create,” “predict,” “project,” “initiatives,” “seek,” “would,” “could,” “continue,” “ongoing,” “upside,” “increases” and “potential,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this annual report are set forth in this annual report and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
Risks Related to Comcast Corporation ("Comcast") Transactions•
the ultimate outcome of the proposed transactions between us and Comcast including the possibility that such transactions may not occur if closing conditions are not satisfied;
if any such transactions were to occur, the ultimate outcome and results of integrating operations and application of our operating strategies to the acquired assets and the ultimate ability to realize synergies at the levels currently expected as well as potential programming dis-synergies;
the impact of the proposed transactions on our stock priceefficiently and future operating results, including due to transaction and integration costs, increased interest expense, business disruption, and diversion of management time and attention;
the reduction in our current stockholders’ percentage ownership and voting interest as a result of the proposed transactions;
the increase in indebtedness as a result of the proposed transactions, which will increase interest expense and may decrease our operating flexibility;
Risks Related to Our Businesseffectively integrate acquired operations;
our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, mobile, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;
the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, fiber to the home providers, video provided over the Internet by (i) market participants that have not historically competed in the multichannel video business, (ii) traditional multichannel video distributors, and (iii) content providers that have historically licensed cable networks to multichannel video distributors, and providers of advertising over the Internet;
general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;
our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents);
| |
| • | the developmentour ability to develop and deployment ofdeploy new products and technologies including mobile products, our cloud basedcloud-based user interface, Spectrum Guide®, and downloadable security for set-top boxes;boxes, and any other cloud-based consumer services and service platforms;
|
the effects of governmental regulation on our business including costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply with, regulatory conditions applicable to us as a result of the Time Warner Cable Inc. and Bright House Networks, LLC Transactions;
any events that disrupt our networks, information systems or potential business combination transactions;properties and impair our operating activities or our reputation;
the ability to retain and hire key personnel;
the availability and access, in general, of funds to meet our debt obligations prior to or when they become due and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; and
our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions.
All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this annual report.
PART I
Item 1. Business.
Introduction
We are among the second largest providers of cable servicesoperator in the United States offeringand a variety of entertainment, information andleading broadband communications solutions to residential and commercial customers. Our infrastructure consists of a hybrid of fiber and coaxial cable plant with approximately 12.9 million estimated passings, with 97% at 550 megahertz (“MHz”) or greater, 98% of plant miles two-way active and 99% of plant all-digital. A national Internet Protocol ("IP") infrastructure interconnects Charter Communications, Inc. (“Charter”) markets. See "Item 1. Business — Products and Services" for further description of these terms and services including "customers."
As of December 31, 2014, we served approximately 6.2 million residential and commercial customers. We sell ourcompany providing video, Internet and voice services primarily on a subscription basis, often in a bundle of two or more services, providing savings and convenience to our customers. Bundled services are available to approximately 98% of our passings,27.2 million residential and approximately 62% of ourbusiness customers subscribe to a bundle of services.
We served approximately 4.2 million residential video customers as of at December 31, 2014. We completed our all-digital rollout in 20142017. In addition, we sell video and substantially all of our markets now offer over 200 HD channels and faster Internet speeds. We have launched the Charter Spectrum® brand in our all-digital markets. Digital video enables our customersonline advertising inventory to access advanced video services such as high definition ("HD") television, video on demand programming, an interactive program guide and digital video recorder (“DVR”) service.
We also served approximately 4.8 million residential Internet customers as of December 31, 2014. Our Internet service is available in a variety of download speeds of up to 100 megabits per second (“Mbps”), and up to 120 Mbps in certain markets, and upload speeds of up to 5 Mbps. Approximately 80% of our Internet customers have at least 60 Mbps download speed.
We provided voice service to approximately 2.4 million residential customers as of December 31, 2014. Our voice services typically include unlimited local and long distance calling to the United States, Canada and Puerto Rico, plus other features, including voicemail, call waiting and caller ID.
Through Charter Business®, we provide scalable, tailored broadband communications solutions to business and carrier organizations, such as video entertainment services, Internet access, business telephone services, data networking and fiber connectivity to cellular towers and office buildings. As of December 31, 2014, we served approximately 619,000 commercial primary service units, primarily small- and medium-sized commercial customers. Our advertising sales division, Charter Media®, provides local, regional and national businessesadvertising customers and fiber-delivered communications and managed information technology (“IT”) solutions to large enterprise customers. We also own and operate regional sports networks and local sports, news and community channels and sell security and home management services in the residential marketplace.
Our core strategy is to deliver high quality products at competitive prices, combined with outstanding service. This strategy, combined with simple, easy to understand pricing and packaging, is central to our goal of growing our customer base while also selling more services to each customer. We expect to execute this strategy by managing our operations in a consumer-friendly, efficient and cost-effective manner. Our operating strategy includes insourcing much of our customer care and field operations workforces, which results in higher quality service transactions. While an insourced operating model can increase field operations and customer care costs associated with each service transaction, the higher quality nature of insourced labor service transactions significantly reduces the volume of service transactions per customer, more than offsetting the higher investment made in each service transaction. As we reduce the number of service transactions and recurring costs per customer relationship, we effectively pass those savings on to our customers in the form of products and prices that we believe provide more value than what our competitors offer. The combination of offering competitively priced products and high quality service, allows us to increase the number of customers we serve over our fixed network and increase the number of products we sell to each customer, while at the same time reducing the number of service transactions per relationship, improving customer satisfaction and reducing churn, which results in lower costs to acquire and serve customers. We are also reducing our operating costs per customer relationship by providing customers with the opportunityability to advertise in individual markets on cable television networks.
For the year ended December 31, 2014, we generated approximately $9.1 billion in revenue,communicate with us through a variety of which approximately 83% was generated from our residential video, Internet and voice services. We also generated revenue from providing video, Internet, voice and fiber connectivity services to commercial businesses and from the sale of advertising. Sales from residential triple play customers (customers receiving all three service offerings, video, Internet and voice) and from commercial services have contributed to the majority of our recent revenue growth.
We have a history of net losses. Our net losses are principally attributable to insufficient revenue to cover the combination of operating expenses, interest expensesnew forums that we incur on our debt, depreciation expenses resulting from the capital investments we have made, and continue to make, in our cable properties, amortization expenses related tothey may favor over telephonic communications. These forums include our customer relationship intangibleswebsite, mobile device applications, online chat and non-cash taxes resulting from increasessocial media, which are less costly for us to provide than direct telephonic communications. Ultimately, our operating strategy enables us to offer high quality, competitively priced services profitably, while continuing to invest in our deferred tax liabilities.new products and services.
Our principal executive offices are located at 400 Atlantic Street, Stamford, Connecticut 06901. Our telephone number is (203) 905-7801,905-7800, and we have a website accessible at www.charter.com. Our annual reports, quarterly reportsAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q and current reportsCurrent Reports on Form 8-K, and all amendments thereto, are available on our website free of charge as soon as reasonably practicable after they have been filed. The information posted on our website is not incorporated into this annual report.
The Transactions with Comcast
On April 25, 2014, we entered intoMay 18, 2016, the transactions contemplated by the Agreement and Plan of Mergers dated as of May 23, 2015 (the “Merger Agreement”), by and among Time Warner Cable Inc. ("Legacy TWC"), Charter Communications, Inc. prior to the closing of the Merger Agreement (“Legacy Charter”), CCH I, LLC, previously a bindingwholly owned subsidiary of Legacy Charter and certain other subsidiaries of CCH I, LLC were completed (the “TWC Transaction,” and together with the Bright House Transaction described below, the “Transactions”). As a result of the TWC Transaction, CCH I, LLC became the new public parent company that holds the operations of the combined companies and was renamed Charter Communications, Inc.
Also, on May 18, 2016, Legacy Charter and Advance/Newhouse Partnership (“A/N”), the former parent of Bright House Networks, LLC (“Legacy Bright House”), completed their previously announced transaction, pursuant to a definitive agreementContribution Agreement (the “Transactions“Contribution Agreement”) with Comcast Corporation (“Comcast”), under which contemplatesCharter acquired Legacy Bright House (the “Bright House Transaction”). Pursuant to the following transactions: (1) an asset purchase, (2) an asset exchangeBright House Transaction, Charter became the owner of the membership interests in Legacy Bright House and (3) a contributionthe other assets primarily related to Legacy Bright House (other than certain excluded assets and liabilities and non-operating cash).
In connection with the TWC Transaction, Legacy Charter and Liberty Broadband completed their previously announced transactions pursuant to their investment agreement, in which Liberty Broadband purchased shares of Charter Class A common stock to partially finance the cash portion of the TWC Transaction consideration, and in connection with the Bright House Transaction, Liberty Broadband purchased shares of Charter Class A common stock (the "Liberty Transaction"). See Note 3 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data,” for more information on the Transactions.
and spin-off transaction (collectively, the “Transactions”) as described in more detail below. The Transactions Agreement calls for the Transactions to be consummated substantially contemporaneously with each other as promptly as practicable following the merger of a subsidiary of Comcast with Time Warner Cable Inc. (“TWC”) as previously announced by Comcast and TWC. The completion of the Transactions will result in Charter acquiring approximately a net 1.3 million existing TWC residential and commercial video customers.
Asset Purchase
At closing, the Transactions Agreement calls for Charter to acquire from Comcast certain cable systems currently owned by TWC serving approximately 1.4 million video customers and all other assets and liabilities primarily related to such cable systems for cash consideration (the "Asset Purchase"). The Transactions Agreement calls for Charter to pay to Comcast the tax benefit of the step-up Charter receives in the tax basis of the assets. The Transactions Agreement calls for such tax benefit to Charter to be paid as realized by us over an eight-year period, with an additional payment to be made at the end of such eight-year period in the amount of any remaining tax benefit (on a present value basis) not previously realized by Charter.
Asset Exchange
At closing, we and Comcast will exchange certain cable systems currently serving approximately 1.5 million TWC video customers and approximately 1.6 million Charter video customers and all other assets and liabilities primarily related to such cable systems (the "Asset Exchange"). Most tax gains associated with the Asset Exchange are expected to be offset by Charter’s existing net operating losses.
Financing
Charter has received commitments from a number of leading Wall Street investment banks to provide incremental senior secured term loan facilities totaling up to $8.4 billion and a senior secured incremental revolving facility equal to $500 million under the Charter Communications Operating, LLC ("Charter Operating") credit facility. Pursuant to that commitment, Charter has fully drawn on $3.5 billion term loan G commitments. The amount of the commitments for incremental term loan facilities was further reduced by $3.5 billion at the closing of the offering of $1.5 billion aggregate principal amount of 5.50% senior notes due 2022 and $2.0 billion aggregate principal amount of 5.75% senior notes due 2024 (collectively, the "CCOH Safari Notes") by CCOH Safari, LLC ("CCOH Safari"). Charter has $1.4 billion remaining in committed Charter Operating term loans. The proceeds from the term loan G and the CCOH Safari Notes are being held in escrow subject to the closing of the Transactions and are recorded on our consolidated balance sheet as noncurrent restricted cash and cash equivalents. The escrow for the CCOH Safari Notes continues until November 5, 2015. The escrow for term loan G continues so long as we pre-fund interest and the release conditions can be satisfied. The consideration for the assets acquired and transaction expenses is currently estimated at approximately $7.2 billion. The proceeds of the incremental facilities and the CCOH Safari Notes will be used by Charter for the purpose of financing the Asset Purchase, paying fees and expenses incurred in connection with the Asset Purchase and the other Transactions, for providing ongoing working capital and for other general corporate purposes of Charter Operating and its subsidiaries.
Contribution and Spin-Off Transaction
CCH I, LLC (“CCH I”), a current indirect subsidiary of Charter, will be reorganized to be a direct subsidiary of Charter. CCH I will then form a new subsidiary that will merge with Charter, through a tax-free reorganization and become the new holding company (“New Charter”) that will own 100% of Charter and indirectly Charter Communications Holding Company, LLC (“Charter Holdco”) ("Charter Merger"). New Charter will then acquire an approximate 33% stake in a new publicly-traded cable provider to be spun-off by Comcast serving approximately 2.5 million existing Comcast video customers (the "Spin-Off"). The cable systems will be contributed to Midwest Cable, Inc., which upon consummation of the Transactions, is expected to change its name to GreatLand Connections Inc. (“GreatLand Connections”). New Charter will acquire its interest in GreatLand Connections by issuing New Charter stock to Comcast shareholders (including former TWC shareholders) as a result of a merger of a wholly owned subsidiary of New Charter with and into GreatLand Connections. Comcast shareholders, including the former TWC shareholders, are expected to own approximately 67% of GreatLand Connections, while New Charter is expected to directly own approximately 33% of GreatLand Connections. GreatLand Connections expects to incur leverage of approximately 5 times its estimated pro forma EBITDA (as such term is defined by GreatLand Connections’ financing sources for purposes of the financing) to fund a distribution to Comcast and issue notes to Comcast prior to the spin-off. Additionally, we will provide services to GreatLand Connections, and we will be reimbursed the actual economic costs of such services, in addition to a fee of 4.25% of GreatLand Connections' gross revenues.
The Asset Purchase, Asset Exchange and the acquisition of interests in GreatLand Connections will be valued at a 7.125 multiple of 2014 EBITDA (as defined by the parties), subject to certain post-closing adjustments.
Corporate Entity Structure
The chart below sets forth our entity structure and that of our direct and indirect subsidiaries. ThisThe chart does not include all of our affiliates and subsidiaries and, in some cases, we have combined separate entities for presentation purposes. The equity ownership percentages shown below are approximations. Indebtedness amounts shown below are principal amounts as of December 31, 2014.2017. See Note 89 to the accompanying consolidated financial statements contained in “Item“Part II. Item 8. Financial Statements and Supplementary Data,” which also includes the accreted values of the indebtedness described below.
Charter Communications, Inc. Charter owns 100% of Charter Holdco . Charter Holdco, through its subsidiaries, owns cable systems. As sole manager under applicable operating agreements, Charter controls the affairs of Charter Holdco and its limited liability company subsidiaries. In addition, Charter provides management services to Charter Holdco and its subsidiaries under a management services agreement.
Interim Holding Companies. As indicated in the organizational chart above, our interim holding companies indirectly own the subsidiaries that own or operate all of our cable systems, subject to a CC VIII, LLC ("CC VIII") 100% preferred interest held by CCH I, and four of these companies, CCO Holdings, LLC ("CCO Holdings"), CCOH Safari, Charter Operating and CCO Safari, LLC ("CCO Safari") had debt obligations as of December 31, 2014. The amounts borrowed under CCO Safari's term loan G facility are not considered when calculating the leverage ratio on CCO Holdings' indentures as CCO Safari has been designated as an Unrestricted Subsidiary under CCO Holdings' indentures. For a description of the debt issued by these issuers please see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Description of Our Outstanding Debt.”
Products and Services
Through our hybrid fiber and coaxial cable network, weWe offer our customers traditional cablesubscription-based video services, as well as advanced video services (such asincluding video on demand HD(“VOD”), high definition (“HD”) television, and DVR service),digital video recorder (“DVR”) service, Internet services and voice services. Our voice services are primarily provided using voice overAs of December 31, 2017, 74% of our footprint was all-digital enabling us to offer more HD channels, faster Internet protocol (“VoIP”) technology,speeds and better video picture quality and we intend to transmit digital voice signals overtransition the remaining portions of our systems.Legacy TWC and Legacy Bright House footprints to all-digital. Our video, Internet, and voice services are offered to residential and commercial customers on a subscription basis, with prices and related charges based on the types of service selected, whether the services are sold as a “bundle” or on an individual basis, and the equipment necessary to receive theour services. Bundled services are available to substantially all of our passings, and approximately 59% of our customers subscribe to a bundle of services.
All customer statistics as of December 31, 2017 include the operations of Legacy TWC, Legacy Bright House and Legacy Charter, each of which is based on individual legacy company reporting methodology. These methodologies differ and their differences may be material. Statistical reporting will be conformed over time to a single reporting methodology. The following table summarizes our customer statistics for video, Internet and voice as of December 31, 20142017 and 20132016 (in thousands except per customer data and footnotes).
|
| | | | | | | |
| | Approximate as of |
| | December 31, |
| | 2014 (a) | | 2013 (a) |
| Residential | | | |
| Video (b) | 4,160 |
| | 4,177 |
|
| Internet (c) | 4,766 |
| | 4,383 |
|
| Voice (d) | 2,439 |
| | 2,273 |
|
| Residential PSUs (e) | 11,365 |
| | 10,833 |
|
| | | | |
| Residential Customer Relationships (f) | 5,841 |
| | 5,561 |
|
| Monthly Residential Revenue per Residential Customer (g) | $ | 111.52 |
| | $ | 108.12 |
|
| | | | |
| Commercial | | | |
| Video (b)(h) | 133 |
| | 165 |
|
| Internet (c) | 306 |
| | 257 |
|
| Voice (d) | 180 |
| | 145 |
|
| Commercial PSUs (e) | 619 |
| | 567 |
|
| | | | |
| Commercial Customer Relationships (f)(h) | 386 |
| | 375 |
|
|
| | | | | | | |
| | Approximate as of |
| | December 31, |
| | 2017 (a) | | 2016 (a)(b) |
Customer Relationships (c) | | | |
| Residential | 25,639 |
| | 24,801 |
|
| Small and Medium Business | 1,560 |
| | 1,404 |
|
| Total Customer Relationships | 27,199 |
| | 26,205 |
|
| | | | |
| Residential Primary Service Units ("PSUs") | | | |
| Video | 16,544 |
| | 16,836 |
|
| Internet | 22,545 |
| | 21,374 |
|
| Voice | 10,427 |
| | 10,327 |
|
| | 49,516 |
| | 48,537 |
|
| | | | |
Monthly Residential Revenue per Residential Customer (d) | $ | 109.75 |
| | $ | 109.57 |
|
| | | | |
| Small and Medium Business PSUs | | | |
| Video | 453 |
| | 400 |
|
| Internet | 1,358 |
| | 1,219 |
|
| Voice | 912 |
| | 778 |
|
| | 2,723 |
| | 2,397 |
|
| | | | |
Monthly Small and Medium Business Revenue per Customer (e) | $ | 207.36 |
| | $ | 213.87 |
|
| | | | |
Enterprise PSUs (f) | 114 |
| | 97 |
|
| |
(a) | We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of December 31, 20142017 and 2013,2016, customers include approximately 35,100245,800 and 11,300208,400 customers, respectively, whose accounts were over 60 days past due, approximately 1,50019,500 and 80015,500 customers, respectively, whose accounts were over 90 days past due, and approximately 90012,600 and 9008,000 customers, respectively, whose accounts were over 120 days. The increase in aging of customer accounts over 60 days is primarily related to a third quarter change in our collections policy consistent with broader cable industry practices. past due. |
| |
(b) | “Video customers” represent those customers who subscribeIn the second quarter of 2017, we conformed the seasonal customer program in the Legacy Bright House footprint to our program. Prior to the plan change, Legacy Bright House customers enrolling in the seasonal plan were charged a one-time fee and counted as customer disconnects, and as new connects, when moving off the seasonal plan. Under our seasonal plan, residential customers pay a reduced monthly fee while the seasonal plan is active and remain reported as customers. Excluding the impact of customer activity related to Legacy Bright House's previous seasonal plan, residential customer relationships and video, cable services. Our methodology for reporting residential video customers generally excludes units under bulk arrangements, unless those unitsInternet and voice PSUs at December 31, 2016 would have a digital set-top box, thus a direct billing relationship. As we completed our all-digital transition, bulk units were supplied with digital set-top boxes adding to our bulk digital upgrade customers. Full year 2014been higher by approximately 10,000, 8,000, 12,000 and 2013 residential video net additions include 56,000 and 18,000, respectively, bulk video units as a result of adding digital set-top boxes to bulk units.7,000 respectively. |
| |
(c) | “Internet customers” represent those customers who subscribe to our Internet service. |
| |
(d) | “Voice customers” represent those customers who subscribe to our voice service. |
| |
(e) | “Primary Service Units” or “PSUs” represent the total of video, Internet and voice customers. |
| |
(f) | "Customer Relationships"relationships include the number of customers that receive one or more levels of service, encompassing video, Internet and voice services, without regard to which service(s) such customers receive. This statistic is computedCustomers who reside in accordance with the guidelines of the National Cable & Telecommunications Association ("NCTA"). Commercial customer relationships include video customers in commercial structures, which are calculated on an EBU basis (see footnote (h)) and non-video commercial customer relationships.residential |
multiple dwelling units (“MDUs”) and that are billed under bulk contracts are counted based on the number of billed units within each bulk MDU. Total customer relationships excludes enterprise customer relationships.
| |
(g)(d) | "Monthly Residential Revenueresidential revenue per Residential Customer"residential customer is calculated as total residential video, Internet and voice quarterlyannual revenue divided by threetwelve divided by average residential customer relationships during the respective quarter.year. |
| |
(h)(e) | Included within commercial video customers are those in commercial structures, which areMonthly small and medium business revenue per customer is calculated on an equivalent bulk unit (“EBU”) basis. We calculate EBUsas total small and medium business annual revenue divided by dividing the bulk price charged to accounts in an areatwelve divided by the published rate charged to non-bulk residential customers in that market for the comparable tier of service. This EBU method of estimating basic video customers is consistent with the methodology used in determining costs paid to programmersaverage small and is consistent with the methodology used by other multiple system operators. As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers. For example, commercial video customers decreased by 18,000medium business customer relationships during the year ended December 31, 2014 due to a higher applicable video rate applied and other revisions to customer reporting methodology.respective year. |
| |
(f) | Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering as an individual PSU. |
Residential Services
Video Services
In 2014, residential video services represented approximately 49% of our total revenues. Our video service offerings include the following:
Video. All of our video customers receive a package of basic programming which, in our all-digital markets, generally consists of local broadcast television, local community programming, including governmental and public access, and limited satellite-delivered or non-broadcast channels, such as weather, shopping and religious programming along withincludes a digital set-top box that provides an interactive electronic programming guide with parental controls, access to pay-per-view channels,services, including video on demandVOD (available to nearly everywhere)all of our passings), digital quality music channels and the option to also receive a cable card.view certain video services on third party devices. Customers have the option to purchase additional tiers of services including premium channels which provide original programming, commercial-free movies, sports, and other special event entertainment programming. AlthoughSubstantially all of our video programming is available in HD. We also offer certain video packages containing a limited number of channels via our cable television systems.
In the vast majority of our footprint, we offer subscriptions to premium channels on an individual basis, we also offer premium channels combined with our Internet and voice services. Much of our programming is now offered through video on demand and increasingly over the Internet.
Video On Demand, Subscription On Demand and Pay-Per-View. In most areas, we offer video on demandVOD service which allows customers to select from 10,000 or moreapproximately 35,000 titles at any time. Video on demandVOD includes standard definition, HD and three dimensional ("3D"(“3D”) content. Video on demandVOD programming options may be accessed for free if the content is associated with thea customer’s linear subscription, or for a fee on a transactional basis. Video on demandVOD services mayare also be offered on a subscription basis included in a digital tier premium channel subscription or for a monthly fee. Pay-per-view channels allow customers to pay on a per-event basis to view a single showing of a recently released movie, a one-time special sporting event, music concert, or similar event on a commercial-free basis.
High Definition Television. HD television offersOur goal is to provide our digitalvideo customers certain videowith the programming at a higher resolution to improve picture and audio quality versus standard basic or digital video images. In 2014, we completed our transition to all-digital transmission of channels which allowed us to increase the number of HD channels offered to more than 200
in substantially all of our markets. We are also rolling out HD auto-tune in our markets which is a feature that ensures HD set-tops tune to the HD version of a channel eventhey want, when the standard definition version is selected.
Digital Video Recorder.they want it, on any device. DVR service enables customers to digitally record programming and to pause and rewind live programming. Charter customers may lease multiple DVRCustomers can also use our Spectrum TV application available on mobile devices, residential devices and on our website, to watch up to 250 channels of cable TV, view VOD programming, remotely control digital set-top boxes to maximize recording capacity on multiple televisionswhile in the home. Mosthome and to program DVRs remotely. Customers also have access to programmer authenticated applications and websites (known as TV Everywhere services) such as HBO Go®, Fox Now®, Discovery Go® and WatchESPN®.
In certain markets, we have launched Spectrum Guide®, a network or “cloud-based” user interface that can run on traditional set-top boxes, with a look and feel that is similar to that of the Spectrum TV App. Spectrum Guide® is designed to allow our customers to enjoy a state-of-the-art video experience on the majority of our set-top boxes, including accessing third-party video applications such as Netflix. The guide enables customers also have the ability to program their DVR's remotely via tabletfind video content more easily across cable TV channels and phone applications orVOD options. We plan to continue to deploy Spectrum Guide across our website. footprint and enhance this technology in 2018 and beyond.
| |
• | Charter TV App. The Charter TV App enables Charter video customers to search and discover content on a variety of customer owned devices, including the iPhone®, iPad®, and iPod Touch®, as well as the most popular Android™ based tablets. The Charter TV App allows customers to watch over 100 channels of cable TV and use the device as a remote to control their digital set-top box while in their home. It also allows customers the ability to browse Charter's program guide, search for programming, and schedule DVR recordings from inside and outside the home. Charter's online offerings include many of our largest and most popular networks. We also currently offer content already available online through Charter.net such as HBO Go® and WatchESPN® with other online content. We are currently testing Spectrum Guide, a network based user interface with the same look and feel of the Charter TV App. The user interface is being designed to work with all of our existing and future set-top boxes. Spectrum Guide was launched in one market in 2014 and will be more widely deployed in 2015.
|
Internet Services
In 2014, residential2017, we completed our launch of Spectrum pricing and packaging (“SPP”) and now offer an entry level Internet download speed of at least 100 megabits per second (“Mbps”) across 99% of our footprint and 200 Mbps across 17% of our footprint, which among other things, allows several people within a single household to stream HD video content online while simultaneously using our Internet service for non-video purposes. Additionally, leveraging DOCSIS 3.1 technology, we had introduced speed offerings of 940 Mbps ("Spectrum Internet Gig") in 17% of our footprint as of December 31, 2017. Finally, we offer a security suite with our Internet services represented approximately 28% of our total revenues. Approximately 95% of our estimated passings have DOCSIS 3.0 wideband technology, allowing us to offer our residentialwhich, upon installation by customers, multiple tiers of Internet services with download speeds of up to 100 Mbps, and up to 120 Mbps in certain markets. Our Internet services also include a new and improved Internet portal, Charter.net, making it easier for customers to manage their account, seek self-help and watch TV online. Charter.net also provides multiple e-mail addresses, as well as variety of content and media from local, national and international providers including entertainment, games, news and sports. Finally, Charter Security Suite is included with Charter Internet services and protects computers fromprotection against computer viruses and spyware and providesincludes parental control features.
Accelerated growth in the number of IP devices and bandwidth used in homes has created a need for faster speeds and greater reliability. Charter is focused on providing services to fill those needs. Charter offersWe offer an in-home WiFi product permittingthat provides customers to lease awith high performingperformance wireless routerrouters to maximize their in-home wireless Internet experience. Since going all-digital,Additionally, we offer an out-of-home WiFi service (“Spectrum WiFi”) in most of our basefootprint to our Internet download speed offering is 60 Mbps, and 100 Mbps in certain markets.customers at designated “hot spots.” In 2018, we expect to continue to expand WiFi accessibility to our customers through our network of WiFi hotspots.
Voice Services
In 2014, residential voice services represented approximately 6% of our total revenues. We provide voice communications services primarily using VoIPvoice over Internet protocol ("VoIP") technology to transmit digital voice signals over our network. Charter Voice includesOur voice services include unlimited local and long distance calling to the United States, Canada, Mexico and Puerto Rico, voicemail, call waiting, caller ID, call forwarding and other features and offers international calling either by the minute, or through packages of minutes per month. For Charter Voicecustomers that subscribe to both our voice and video customers,offerings, caller ID on TV is also available in most areas.
Mobile Services
Our mobile strategy is built on the long-term vision of an integrated fixed/wireless network with differentiated products, and the ability to maximize the potential of our existing cable business. We intend to launch our Spectrum-branded mobile service in 2018 to residential customers via our mobile virtual network operator (“MVNO”) reseller agreement with Verizon Wireless. In the second phase, we plan to use our WiFi network in conjunction with additional unlicensed or licensed spectrum to improve network performance and expand capacity to offer consumers a superior wireless service. In furtherance of this second phase, we have experimental wireless licenses from the Federal Communications Commission ("FCC") that we are utilizing to test next generation wireless services in several markets around the country. We currently plan to only offer our Spectrum mobile service to residential customers subscribing to our Internet service. In the future, we may also offer mobile service to our small and medium business customers on similar terms. We believe Spectrum-branded mobile services will drive more sales of our core products, create longer customer lives and increase profitability and cash flow over time. As we launch our new mobile services, we expect an initial funding period to grow a new product as well as negative working capital impacts from the timing of device-related cash flows when we provide the handset or tablet to customers pursuant to equipment installment plans.
We are exploring working with a variety of partners and vendors in a number of operational areas within the wireless space, including: creating common operating platforms; technical standards development and harmonization; device forward and reverse logistics; and emerging wireless technology platforms. The efficiencies created are expected to provide more choice, innovative products and competitive prices for customers. We intend to consider and pursue opportunities in the mobile space which may include entering into joint ventures or partnerships with wireless or cable providers which may require significant investment. There is no assurance we will enter into such arrangements or that if we do, that they will be successful.
Commercial Services
In 2014, commercial services represented approximately 11% of our total revenues. Commercial services offered through Charter Business, includeWe offer scalable broadband communications solutions for businesses and carrier organizations of all sizes, such asselling Internet access, data networking, fiber connectivity to cellular towers and office buildings, video entertainment services and business telephone services.
Small Business. Charterand Medium Business
Spectrum Business offers Internet, voice and video services to small and medium businesses (1 - 19 employees) servicesover our hybrid fiber coaxial network that are similar to those that we provide to our residential offerings includingcustomers. Spectrum Business includes a full range of video programming tiers and music services, coaxentry-level Internet speeds of up to 100 Mbps downstream and 10 Mbps upstream. Additionally, customers can upgrade their Internet speeds to 200 or 300 Mbps in certain markets, and up to 7 Mbps upstream in its DOCSIS 3.0 markets,downstream. Spectrum Business also includes a set of business cloud services including web hosting, e-mail and security, and multi-line telephone services with more than 30 business features including web-based service management.
management, that are generally not available to residential customers.
Medium Business. In addition to its other offerings, Charter also offers medium sized businesses (20-199 employees) more complex products such as fiber Internet with symmetrical speeds of up to 10 Gbps and voice trunking services such as Primary Rate Interface ("PRI") and Session Initiation Protocol ("SIP") Trunks which provide higher-capacity voice services. Charter also offers Metro Ethernet service that connects two or more locations for commercial
customers with geographically dispersed locations with services up to 10 Gbps. Metro Ethernet service can also extend the reach of the customer's local area network ("LAN") within and between metropolitan areas.Enterprise Solutions
Large Business. CharterSpectrum Enterprise offers largefiber-delivered communications and managed IT solutions to larger businesses, (200+ employees) with multiple sites more specialized solutions such as custom fiber networks, Metro and long haul Ethernet, PRI and SIP Trunk services.
Carrier Wholesale. Charter offerswell as high-capacity last-mile data connectivity services to wireless and wireline carriers, Internet Service Providers ("ISPs"(“ISPs”) and other competitive carriers on a wholesale basis. Spectrum Enterprise's product portfolio includes fiber Internet access, voice trunking services, hosted voice, Ethernet services that privately and securely connect geographically dispersed client locations, and video solutions designed to meet the needs of hospitality, education, and health care clients. In addition, Spectrum Enterprise is beginning market field trials of an innovative Hybrid Software-Defined Wide Area Network, that enables businesses to leverage the performance of Ethernet, the ubiquity of Internet connectivity and the flexibility of a software-defined solution to solve a wide array of business communications and networking challenges. Our managed IT portfolio includes Cloud Infrastructure as a Service and Cloud Desktop as a Service, and managed hosting, application, and messaging solutions, along with other related IT and professional services. Our large serviceable footprint allows us to effectively serve business customers with multiple sites across given
Sale of geographic regions. These customers can benefit from obtaining advanced services from a single provider simplifying procurement and potentially reducing their costs.
Advertising Services
In Our advertising sales division, Spectrum Reach2014®, sales of advertising represented approximately 4% of our total revenues.offers local, regional and national businesses the opportunity to advertise in individual and multiple markets on cable television networks and digital outlets. We receive revenues from the sale of local advertising on satellite-deliveredacross various platforms for networks such as MTV®, CNN® and ESPN®. In any particular market, we generallytypically insert local advertising on approximately 40up to 60 channels. In most cases, the availableOur large footprint provides opportunities for advertising customers to address broader regional audiences from a single provider and thus reach more customers with a single transaction. Our size also provides scale to invest in new technology to create more targeted and addressable advertising capabilities.
Available advertising time is generally sold by our advertising sales force, however inforce. In some markets, we have formed advertising interconnects or entered into representation agreements with other video distributors, including, among others, Verizon Communications Inc.’s (“Verizon”) fiber optic service (“FiOS”) and AT&T Inc.’s (“AT&T”) U-verse and DIRECTV platforms, under which we sell advertising on behalf of those operators. In other markets, we enter into representation agreements with contiguous cable system operators under which another operator in the area will sell advertising on our behalf for a percentagebehalf. These arrangements enable us and our partners to deliver linear commercials across wider geographic areas, replicating the reach of local broadcast television stations to the revenue.extent possible. In some markets,addition, we sell advertisingenter into interconnect agreements from time to time with other cable operators, which, on behalf of other operators.a number of video operators, sells advertising time to national and regional advertisers in individual or multiple markets.
Charter has deployed Enhanced TV Binary Interchange Format (“EBIF”) technology to set-top boxes in most service areas withinAdditionally, we sell the Charter footprint. EBIF is a technology foundation that will allow Charter to deliver enhanced and interactive television applications for advertising. From time to time, certainadvertising inventory of our vendors, including programmersowned and equipment vendors, have purchased advertising from us.operated local sports, news and lifestyle channels, of our regional sports networks that carry Los Angeles Lakers’ basketball games and other sports programming and of SportsNet LA, a regional sports network that carries Los Angeles Dodgers’ baseball games and other sports programming.
We are in the process of deploying advanced advertising products such as our Audience App, which uses our proprietary set-top box viewership data (all anonymized and aggregated) to optimize linear inventory, and household addressability, which allows for more finite targeting, within various parts of our footprint. These new products will be distributed across more of our footprint in 2018.
Other Services
Regional Sports and News Networks
We have an agreement with the Los Angeles Lakers for rights to distribute all locally available Los Angeles Lakers’ games through 2033. We broadcast those games on our regional sports network, Spectrum SportsNet. We also manage 16 local news channels, including Spectrum News NY1, a 24-hour news channel focused on New York City, 10 local sports channels and one local lifestyle community channel, and we own 26.8% of Sterling Entertainment Enterprises, LLC (doing business as SportsNet New York), a New York City-based regional sports network that carries New York Mets’ baseball games as well as other regional sports programming.
American Media Productions, LLC ("American Media Productions"), an unaffiliated third party, owns SportsNet LA, a regional sports network carrying the Los Angeles Dodgers’ baseball games and other sports programming. In accordance with agreements with American Media Productions, we act as the network’s exclusive affiliate and advertising sales representative and have certain branding and programming rights with respect to the network. In addition, we provide certain production and technical services to American Media Productions. The affiliate, advertising, production and programming agreements continue through 2038.
Security and Home Management
We provide security and home management services to our residential customers in certain markets. Our broadband cable system connects the customer’s in-home system to our emergency response center for traditional security, fire and medical emergency monitoring and dispatch. The service also allows customers to remotely arm or disarm their security system, monitor their home via indoor and outdoor cameras, and remotely operate key home functions, including setting and controlling lights, thermostats and door locks.
Pricing of Our Products and Services
Our revenues are principally derived principally from the monthly fees customers pay for the services we provide. We typically charge a one-time installation fee which is sometimes waived or discounted in certain sales channels during certain promotional periods. The prices we charge
Our SPP generally offers a standardized price for our products and services vary based on the leveleach tier of service, the customer choosesbundle of services, and in some cases the geographic market. In accordance with Federal Communications Commission ("FCC") rules, the prices we charge for video cable-related equipment, such as set-top boxesadd-on service, regardless of market and remote control devices, and for installation services, are based on actual costs plus a permitted rate of return in regulated markets.
In mid-2012, Charter launched a new pricing and packaging approach which emphasizes the triple play productsbundles of video, Internet and voice services and combines ourservices. Our most popular and competitive services are combined in core packages at what we believe is a fair price.are attractive prices. We believe the benefits of this approach are:our approach:
offers simplicity for both our customers in understandingto understand our offers, and for our employees in service delivery;
thedrives our ability to package more services at the time of sale, and include more product in each service, thus increasing revenue per customer;
offers a higher product offering quality throughand more value-based set of services, including faster Internet speeds, more HD channels, improvedlower equipment fees and a more transparent pricing for HD and HD/DVR equipment and faster Internet speeds;structure;
lower expected churn as a result ofdrives higher customer satisfaction;satisfaction, lower service calls and churn; and
allows for gradual price increases at the end of promotional periods.
As of December 31, 2014, approximately 83% of our customers are in the new pricing and packaging plan, or 86% excluding those acquired in the acquisition of Bresnan Broadband Holdings, LLC and its subsidiaries (collectively, "Bresnan"). See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.”
Our Network Technology and Customer Premise Equipment
Our network includes three key components: thea national backbone, regional/metro networks and the "last-mile"a “last-mile” network. Both our national backbone and regional/metro network components utilize or plan to utilize a redundant Internet Protocol ("IP”IP") ring/mesh architecture. The national backbone component provides connectivity from the regional demarcation points to nationally centralized content, connectivity and services. The regional/metro network components provide connectivity between the regional demarcation points and headends within a specific geographic area and enable the delivery of content and services between these network components.
Our last-mile network utilizes a hybrid fiber coaxial cable (“HFC”) architecture, which combines the use of fiber optic cable with coaxial cable. In most systems, we deliver our signals via fiber optic cable from the headend to a group of nodes, and use coaxial cable to deliver the signal from individual nodes to the homes served by that node. For our fiber Internet, Ethernet, carrier wholesale,
SIP and PRI commercialSpectrum Enterprise customers, fiber optic cable is extended from the individual nodes all the way to the customer'scustomer’s site. For certain new build and MDU sites, we increasingly bring fiber to the customer site. Our design standard is six strands of fiber to each node, with two strands activated and four strands reserved for spares and future services. This design standard allows these additional strands to be utilized for additional residential traffic capacity, and enterprise customer needs as they arise. We believe that this hybrid network design provides high capacity and signal quality. The design also provides two-way signal capabilities for the support of interactive services.
HFC architecture benefits include:
bandwidth capacity to enable traditional and two-way video and broadband services;
dedicated bandwidth for two-way services; and
signal quality and high service reliability.
Approximately 97%98% of our estimated passings are served by systems that have bandwidth of 550750 megahertz or greater and 98% are two-way activated as of December 31, 20142017. This bandwidth capacity enables us to offer digitalHD television, DOCSIS-based Internet services voice services and other advanced videovoice services.
In 2014, we completed our transition from analog to digital transmission of the channels we distribute which allows us to recapture bandwidth. TheAn all-digital platform enables us to offer a larger selection of HD channels, faster Internet speeds and better picture quality while providing greater plant security and enabling lower transaction costs.installation and disconnect service truck rolls. We are currently all-digital in 74% of our footprint and intend to transition the remaining portions of our Legacy TWC and Legacy Bright House footprints.
In 2014, we launched,We have been introducing our new set-top box, WorldBox, to consumers in onecertain markets. The WorldBox design has opened the set-top box market to new vendors and reduced our set-top box costs. WorldBox also includes more advanced features and functionality than older set-top boxes, including faster processing times, IP capabilities with increased speed, additional simultaneous recordings, increased DVR storage capacity, and a greater degree of flexibility for consumers to take Charter-provisioned set-top boxes with them, if and when, they move residences. We have also been introducing our new cloud-based user interface, Spectrum Guide®, a network, or “cloud,” based user interface designed to enable our video customers to enjoy a common user interface with a state-of-the-art video experience on all existing and future set-top boxes. We plan to continue to deploy and enhance this technology in 2015.
For set-top boxes, we are implementing a video conditional access strategy utilizing our downloadable security on a set-top box specified by us which can be manufactured by many different manufacturers. We expect to roll out downloadable security throughout our current systems to be retained after the Transactions. Where we roll out downloadable security, we will utilize the Worldbox, and we expect to introducecertain markets. Spectrum Guide® at that time as well. Ourimproves video content search and discovery, and fully enables our on-demand offering. In addition, Spectrum Guide® will deliver an improved guidecan function on all boxes. We believe Worldbox utilizing downloadable security along with the introductionmajority of Spectrum Guide® will reduce our incremental set top boxset-top boxes, reducing costs and allowcustomer disruption to swap equipment for a consistent service for all of our customers and on all of their televisions with a service that is rich in HD, has modern search and discovery features and is capable of improved implementation of future enhancements.new functionality.
Management, Customer CareOperations and Marketing
Our operations are centralized, with oursenior executives located at several key corporate officeoffices, responsible for coordinating and overseeing operations, including establishing company-wide strategies, policies and procedures. Sales and marketing, network operations, field operations, customer care,operations, engineering, advertising sales, human resources, legal, government relations, information technology and finance are all directed at the corporate level. Regional and local field operations are responsible for servicing customers and maintenance and construction of outside plant.
customer premise service transactions and maintaining and constructing that portion of our network which is located outdoors. In 2018, our field operations group continues to focus on standardizing practices, processes, procedures and metrics.
We continue to focus on improving the customer experience through improvementsenhanced product offerings, reliability of services, and delivery of quality customer service. As part of our operating strategy, we are committed to investments and hiring plans that continue to insource most of our customer care processes, product offerings and the quality and reliabilityoperations workload. In-house domestic call centers handled approximately 75% of our service.customer service calls and are managed centrally to ensure a consistent, high quality customer experience. Routing calls by particular call types to specific agents that only handle such call types, enables agents to become experts in addressing specific customer needs, thus creating a better customer experience. We also continue to migrate our call centers to full virtualization which allows calls to be routed across our call centers regardless of the location origin of the call, reducing call wait times, and saving costs. A new call center agent desktop interface tool, already used at Legacy Charter, is being developed for Legacy TWC and Legacy Bright House. This new desktop interface tool will enable virtualization of all call centers, regardless of legacy billing platform, and will better serve our customers.
We also provide customers with the opportunity to interact with us through a variety of forums in addition to telephonic communications, including through our customer website, mobile device applications, online chat and social media. Our customer care centers are managed centrally. We have twelve internal customer care locations which route calls to the appropriate agents, plus several third-party call center locations that through technologywebsites and procedures function as an integrated system. We increased the portion of service calls handled by Charter employees in 2014 and intend to continue to do so in 2015. We also utilize our website tomobile applications enable our customers to view and pay their bills, on-line, obtain information regardingmanage their account oraccounts, order new services and perform various equipment troubleshooting procedures. Our customers may also obtain support through our on-line chat functionality. utilize self-service help and support.
We sell our residential and commercial services using a national brand platform known as Spectrum®, Spectrum Business® and Spectrum Enterprise®. These brands reflect our comprehensive approach to industry-leading products, driven by speed, performance and innovation. Our marketing strategy emphasizes the sale of our bundled services through targeted direct response marketing programs to existing and potential customers, and increases awareness and the value of the CharterSpectrum brand. In 2014, Charter rolled out Charter Spectrum®, our new, national brand platform. Charter Spectrum® represents our combined video, Internet and voice offering for residential customers. This new brand reflects our comprehensive approach to industry-leading products, driven by speed, performance and innovation. Marketing expenditures increased by $41 million, or 8%, over the year ended December 31, 2013 to $529 million for the year ended December 31, 2014 as a result of the acquisition of Bresnan in July 2013, heavier sales activity and sales channel development and higher commercial marketing. Our marketing organization creates and executes marketing programs intended to grow customer relationships, increase customers,the number of services we sell per relationship, retain existing customers and cross-sell additional products to current customers. We monitor the effectiveness of our marketing efforts, customer perception, competition, pricing, and service preferences, among other factors, in order to increase our responsiveness to our customers. Ourcustomers and to improve our sales and customer retention. The marketing organization also manages and directs severalthe majority of the sales channels including direct sales, on-line, outbound telemarketing and Charter stores.
Programming
General
We believe that offering a wide variety of video programming choices influences a customer’s decision to subscribe to and retain our cable video services. We rely on our experience in programming cable systems, which includes market research, customer demographics and local programming preferences to determine channel offerings in each of our markets. We obtain basic and premium programming, usually pursuant to written contracts from a number of suppliers. Media corporation consolidation has, however, resulted in fewer suppliers usually pursuant to written contracts.and additional selling power on the part of programming suppliers. Our programming contracts are generally continue for a fixed period of time, usually from three to eightfor multiple years, and are subject to negotiated renewal. Some programming suppliers offer financial incentivesRecently, we have begun entering into agreements to supportco-produce original content which give us the launch of a channel and/or ongoing marketing support. We also negotiate volume discount pricing structures. We have more recently negotiated for additional content rights allowing usright to provide programming on-line to our authenticated customers.
Costscustomers with certain exclusive content, for a period of time.
Programming is usually made available to us for a license fee, which is generally paid based on the number of customers to whom we make suchthat programming available. Programming costs are usually payable each month based on calculations performed by us and are generally subject to annual cost escalations and may be subject to audits by the programmers. Programming license fees may include “volume” discounts available for higher numbersand financial incentives to support the launch of customers,a channel and/or ongoing marketing support, as well as discounts for channel placement or service penetration. Some channels are available without cost to us for a limited period of time, after which we pay for the programming. For home shopping channels, we typically receive a percentage of the revenue attributable to our customers’ purchases, as well as, in some instances, incentives for channel placement.purchases. We also offer VOD and pay per view channels of movies and events that are subject to a revenue split with the content provider.
Our programming costs have increased in every year we have operated in excess of customary inflationary and cost-of-living type increases. We expect themprogramming costs to continue to increase due to a variety of factors including, amounts paid for retransmission consent, annual increases imposed bypursuant to our programming contracts, contract renewals with programmers with additional selling power as a result of media consolidation, and the carriage of incremental programming, including new services, higher expanded basic video penetration and VOD programming. Increases in the cost of sports servicesprogramming and on-line linear services and video on demand programming. In particular,the amounts paid for broadcast station retransmission consent have been the largest contributors to the growth in our programming costs are increasing as a result of significant sports programming cost increases over the past several years andlast few years. Additionally, the demands of large media companies who link carriage of their most popular networks to carriage and cost increases for all of their networks. In addition, contracts to purchase sportsless popular networks, has limited our flexibility in creating more tailored and cost-sensitive programming sometimes providepackages for optional additional games to be added to the service and made available on a surcharge basis during the term of the contract. Programmers continue to create new networks and migrate popular programming, such as sporting events to those networks. Spreading popular programming across more networks often results in us having to pay more for a suite of networks offered by any one programmer. Finally, programmers have experienced declines in demand for advertising as advertisers shift more of their marketing spend online. We believe this results in programmers demanding higher programming fees from us as programmers seek to recover revenue they are losing to online advertising.consumers.
Federal law allows commercial television broadcast stations to make an election between “must-carry” rights and an alternative “retransmission-consent” regime. When a station opts for the retransmission-consent, regime, we are not allowed to carry the station’s signal without thethat station’s permission. Continuing demands by owners of broadcast stations for cash payments at substantial increases over amounts paid in prior years in exchange for retransmission consent will increase our programming costs or require us to cease carriage of popular programming, potentially leading to a loss of customers in affected markets.
Over the past several years, increases in our video service rates have not fully offset increasingthe increases in our programming costs, and with the impact of increasing competition and other marketplace factors, we do not expect themthe increases in our video service rates to do sofully offset the increase in our programming costs for the foreseeable future. Although we pass along a portion of amounts paid for retransmission consent to the majority of our customers, our inability to fully pass these programming cost increases on to our video customers has had, and is expected in the future to have, an adverse impact on our cash flow and operating margins associated with theour video product. In order to mitigate reductions of our operating margins due to rapidly increasing programming costs, we continue to review our pricing and programming packaging strategies, and we plan to continue to migrate certain program services from our basic level of service to our digital tiers, remove underperforming services and limit the launch of non-essential, new networks.strategies.
We currently have programming contracts that have expired and others that will expire at, or before the end, of 2015.2018. We will seek to renegotiate therenew these agreements on terms of these agreements.that we believe are favorable. There can be no assurance, however, that these agreements will be renewed on favorable or comparable terms. To the extent that we are unable to reach agreementagreements with certain programmers on terms that we believe are reasonable, we have been, and may in the future be, forced to remove such programming channels from our line-up, which may result in a loss of customers.
Franchises
As of December 31, 2014, our systems operated pursuant to a total of approximately 3,300 franchises, permits, and similar authorizations issued by local and state governmental authorities. Such governmental authorities often must approve a transfer to another party. Most franchises are subject to termination proceedings in the event of a material breach. In addition, most franchises require us to pay the granting authority up to 5.0% of revenues as defined in the various agreements, which is the maximum amount that may be charged under the applicable federal law. We are entitled to and generally do pass this fee through to the customer.
Prior to the scheduled expiration of most franchises, we generally initiate renewal proceedings with the granting authorities. This process usually takes three years but can take a longer period of time. The Communications Act of 1934, as amended (the “Communications Act”), which is the primary federal statute regulating interstate communications, provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. In connection with the franchise renewal process, many governmental authorities require the cable operator to make certain commitments, such as building out certain of the franchise areas, customer service requirements, and supporting and carrying public access channels. Historically, we have been able to renew our franchises without incurring significant costs, although any particular franchise may not be renewed on commercially favorable terms or otherwise. If we fail to obtain renewals of franchises representing a significant number of our customers, it could have a material adverse effect on our consolidated financial condition, results of operations, or our liquidity, including our ability to comply with our debt covenants. See “— Regulation and Legislation — Video Services — Franchise Matters.”
MarketsRegions
We operate in geographically diverse areas which are organized in regional clusters we call key market areas.clusters. These key market areasregions are managed centrally on a consolidated level. Our twelve key market areaseleven regions and the customer relationships within each marketregion as of December 31, 20142017 are as follows (in thousands):
|
| | |
Key Market AreaRegions | | Total Customer Relationships |
| | |
Alabama/Georgia | | 666 |
California | | 638 |
| Carolinas | | 6142,668 |
Central States | | 6432,870 |
MichiganFlorida | | 6582,389 |
Minnesota/NebraskaGreat Lakes | | 3592,208 |
Mountain StatesNortheast | | 394 |
New England | | 3712,970 |
| Northwest | | 5311,472 |
Tennessee/LouisianaNYC | | 5531,334 |
| South | | 2,085 |
| Southern Ohio | | 2,093 |
| Texas | | 2052,736 |
WisconsinWest | | 5954,374 |
Competition
Residential Services
We face intense competition for residential customers, both residentialfrom existing competitors and, commercial customers inas a result of the areasrapid development of price, service offerings, and service reliability. In our residential business, we compete with other providers of video, high-speed Internet access, voicenew technologies, services and other sources of home entertainment. In our commercial business, we compete with other providers of video, high-speed Internet access and related value-added services, fiber solutions, business telephony, and Ethernet services. We operate in a competitive business environment, which can adversely affect the results of our business and operations. We cannot predict the impact on us of broadband services offered by our competitors.products, from new entrants.
In termsVideo competition
Our residential video service faces competition from direct broadcast satellite (“DBS”) service providers, which have a national footprint and compete in all of our operating areas. DBS providers offer satellite-delivered pre-packaged programming services that can be received by relatively small and inexpensive receiving dishes. DBS providers offer aggressive promotional pricing, exclusive programming (e.g., NFL Sunday Ticket) and video services that are comparable in many respects to our residential video service. Our residential video service also faces competition for customers, we view ourselvesfrom companies with fiber-based networks, primarily AT&T U-verse, Frontier Communications Corporation (“Frontier”) FiOs and Verizon FiOs, which offer wireline video services in approximately 27%, 8% and 4%, respectively, of our operating areas. AT&T also owns DIRECTV, and as a member of the broadband communications industry, which encompasses multi-channelcombined company provides video for televisionservice (via IP or satellite) and related broadband services, such as high-speedvoice service (via IP or wireless) across our entire footprint, and delivers video, Internet, voice and other interactivemobile services across 45% of our passings. AT&T also announced the acquisition of Time Warner Inc. in October 2016 which is subject to regulatory approval. If approved, it is not yet clear how AT&T will use the various programming and studio assets it would acquire from Time Warner Inc. to benefit its own products on its four video services. In the broadband communications industry, our principal competitors for video services are directplatforms or what potential program access conditions, as part of any regulatory approval, might apply.
broadcast satellite (“DBS”) and telephone companies that offer video services. Our principal competitors for high-speed Internet services are the broadband services provided by telephone companies, including both traditional DSL, fiber-to-the-node, and fiber-to-the-home offerings. Our principal competitors for voice services are established telephone companies, other telephone service providers, and other carriers, including VoIP providers. At this time, we do not consider other traditional cable operators to be significant competitors in our overall market, as overbuilds are infrequent and geographically spotty (although in any particular market, a cable operator overbuilder would likely be a significant competitor at the local level). We could, however, face additional competition from other cable operators if they began distributing video over the Internet to customers residing outside their current territories.
Our key competitors include:
DBS
Direct broadcast satellite isresidential video service also faces growing competition from a significant competitor to cable systems. The two largest DBS providers now serve more than 34 million subscribers nationwide. DBS service allows the subscriber to receive video services directly via satellite using a dish antenna.
Video compression technologynumber of other sources, including companies that deliver linear network programming, movies and high powered satellites allow DBS providers to offer more than 280 digital channels. In 2014, major DBS competitors were especially competitive with promotional pricing for more basic services. While we continue to believe that the initial investment by a DBS customer exceeds that of a cable customer, the initial equipment cost for DBS has decreased substantially, as the DBS providers have aggressively marketed offers to new customers of incentives for discounted or free equipment, installation, and multiple units. DBS providers are able to offer service nationwide and are able to establish a national image and branding with standardized offerings, which together with their ability to avoid franchise fees of up to 5% of revenues and property tax, leads to greater efficiencies and lower costs in the lower tiers of service. We believe that cable-delivered videotelevision shows on demand and other video content over broadband Internet connections to televisions, computers, tablets and mobile devices. These newer categories of competitors include virtual multichannel video programming distributors (“V-MVPD”) such as DirecTV NOW, Sling TV, Playstation Vue, YouTube TV and Hulu Live, and direct to consumer products offered by programmers that have not traditionally sold programming directly to consumers, such as HBO Now, CBS All Access and Showtime Anytime. Other online video business models have also developed, including, (i) subscription video on demand (“SVOD”) services such as Netflix, Amazon Prime, and Hulu Plus, (ii) ad-supported free online video products, including YouTube and Hulu, some of which include HDoffer programming are superiorfor free to DBS service, because cable headends can provide communicationconsumers that we currently purchase for a fee, (iii) pay-per-view products, such as iTunes and Amazon Instant, and (iv) additional offerings from wireless providers which continue to deliver many titles which customers can accessintegrate and control independently, whereas DBS technology can only make available a much smaller number of titles with DVR-like customer control. DBS providersbundle video services and mobile products. Historically, we have also made attempts at deployment of Internet accessgenerally viewed SVOD online video services via satellite, but those services have been technically constrained and of limited appeal.
Telephone Companies and Utilities
Incumbent telephone companies, including AT&T Inc. (“AT&T”) and Verizon Communications, Inc. ("Verizon"), offeras complementary to our own video and other services in competition with us,offering, and we expect they will increasingly do sohave developed a cloud-based guide that is capable of incorporating video from many online video services currently offered in the future. These companies are ablemarketplace. As the proliferation of online video services grows, however, services from V-MVPDs and new direct to offer and provide two-way video, data services and digital voice services that are similar to ours in various portions of their networks. In the case of Verizon, its high-speed data services (fiber optic service (“FiOS”)) offer speeds as high as or higher than ours. In addition, these companies continue to offer their traditional telephone services,consumer offerings, as well as service bundles that include wireless voice services provided by affiliated companies. Based on internal estimates, we believe that AT&Tpiracy and Verizon are offering video services in areas serving approximately 30% and 4%, respectively,password sharing, could negatively impact the growth of our estimated passings and we have experienced customer losses in these areas. AT&T and Verizon have also launched campaigns to capture more of the multiple dwelling unit (“MDU”) market. When AT&T or Verizon have introduced or expanded their offering of video products in our market areas, we have seen a decrease in our video revenue as AT&T and Verizon typically roll out aggressive marketing and discounting campaigns to launch their products. Additionally, in May 2014, AT&T announced its intention to acquire DirecTV, the nation’s largest DBS provider. If completed, this transaction will create an even larger competitor for Charter’s video services that will have the ability to expand its video service offerings to include bundled wireless offerings.business.
In addition to incumbent telephoneInternet competition
Our residential Internet service faces competition from the phone companies’ DSL, fiber-to-the-home ("FTTH") and wireless broadband offerings, as well as from a variety of companies obtaining video franchises or alternative authorizations in some areas,that offer other forms of online services, including wireless and seeking them in others, they have been successful through various means in reducing or streamliningsatellite-based broadband services. AT&T, Frontier FiOs and Verizon’s FiOs are our primary FTTH competitors. Given the video franchising requirements applicable to them. They have had significant success at the federal and state level in securing FCC rulings and numerous statewide video franchise laws that facilitate telephone company entry into the video marketplace. Because telephone companies have been successful in avoiding or reducing franchise and other regulatory requirements that remain applicable to cable operators like us, their competitive posture has often been enhanced. The large scale entry of incumbent telephone companies as direct competitors in the video marketplace has adversely affected the profitability and valuationFTTH deployments of our cable systems.
Most telephone companies,competitors, launches of broadband services offering 1 gigabits per second (“Gbps”) speed have recently grown. Several competitors, including AT&T, Verizon's FiOs and Verizon,Google, deliver 1 Gbps broadband speed in at least a portion of their footprints which already have plant, an existing customer base, and other operational functions in place (such as billing and service personnel), offer Internet access via traditional DSL service.overlap our footprint. DSL service allows Internet access to subscribers at data transmission speeds greater than those formerly available over conventional telephone lines. We believe DSL service is an alternative to our high-speed Internet service and is often offered at prices lower than our Internet services, although typically at speeds much lower than the minimum speeds we offer. DSL providers may currently beoffer as part of SPP. Various wireless phone companies are now offering third and fourth generation (3G and 4G) wireless Internet services and some have announced that they intend to offer faster fifth generation (5G) services in the future. Some wireless phone companies offer unlimited data packages to customers. In addition, a better positiongrowing number of commercial areas, such as retail malls, restaurants and airports, offer WiFi Internet service. Numerous local governments are also considering or actively pursuing publicly subsidized WiFi Internet access networks. These options offer alternatives to offer
voice and data services to businesses since their networks tend to be more complete in commercial areas. We expect DSL to remain a significant competitor to our high-speedcable-based Internet services.access.
Many large incumbent telephone companies also provide fiber-to-the-node or fiber-to-the-home services in select areas of their footprints. Fiber-to-the-node networks can provide faster Internet speeds than conventional DSL, but still cannot typically match our Internet speeds. Our primary fiber-to-the-node competitor is AT&T's U-verse. TheVoice competition from U-verse is expected to intensify over time as AT&T completes an expansion based on plans announced in late 2012 by the end of 2015. Fiber-to-the-home networks, however, can provide Internet speeds equal to or greater than Charter's current Internet speeds. Verizon's FiOS is the primary fiber-to-the-home competitor, although AT&T has also begun fiber-to-the home builds as well.
Our residential voice service competes directly with incumbent telephonewireless and wireline phone providers, as well as other forms of communication, such as text messaging on cellular phones, instant messaging, social networking services, video conferencing and email. We also compete with “over-the-top” phone providers, such as Vonage, Skype, magicJack, Google Voice and Ooma, Inc., as well as companies and other carriers, including Internet-based VoIP providers,that sell phone cards at a cost per minute for both residentialnational and commercial voice service customers. Because we offerinternational service. The increase in the number of different technologies capable of carrying voice services and the number of alternative communication options available to customers as well as the replacement of wireline services by wireless have intensified the competitive environment in which we are subject to considerable competition from such companies andoperate our residential voice service. When launched, our mobile service will compete with other telecommunications providers, including wireless providers with an increasing numbersuch as Verizon, AT&T, T-Mobile US, Inc. ("T-Mobile") and Sprint Corporation ("Sprint").
Regional Competitors
In some of consumers choosing wireless over wired telephone services. The telecommunications and voice services industry is highly competitive and includes competitors with greater financial and personnel resources, strong brand name recognition, and long-standing relationships with regulatory authorities and customers. Moreover, mergers, joint ventures and alliances among our operating areas, other competitors have resulted in providers capable of offering cable television,built networks that offer video, Internet and voice services that compete with our services. For example, in direct competitioncertain markets, our residential video, Internet and voice services compete with us.
Additionally, we are subject to limited competition from utilities and/or municipal utilities that possess fiber optic transmission lines capable of transmitting signals with minimal signal distortion. Certain of these utilities are also developing broadband over power line technology, which may allow the provision of Internet, phoneGoogle Fiber, Cincinnati Bell Inc., Hawaiian Telcom, RCN Telecom Services, LLC, Grande Communications Networks, LLC and other broadband services to homes and offices.
Traditional Overbuilds
Cable systems are operated under non-exclusive franchises historically granted by state and local authorities. More than one cable system may legally be built in the same area. Franchising authorities may grant a second franchise to another cable operator that may contain terms and conditions more favorable than those afforded us. Well-financed businesses from outside the cable industry, such as public utilities that already possess fiber optic and other transmission lines in the areas they serve, have in some cases become competitors. There are a number of cities that have constructed their own cable systems, in a manner similar to city-provided utility services. There also has been interest in traditional cable overbuilds by private companies not affiliated with established local exchange carriers. Constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor’s overbuild would need to be able to serve the homes and businesses in the overbuilt area with equal or better service quality, on a more cost-effective basis than we can. Any such overbuild operation would require access to capital or access to facilities already in place that are capable of delivering cable television programming. We cannot predict the extent to which additional overbuild situations may occur.
Broadcast Television
Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an “off-air” antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through “off-air” reception, compared to the services provided by the local cable system. Traditionally, cable television has provided higher picture quality and more channel offerings than broadcast television. However, the recent licensing of digital spectrum by the FCC now provides traditional broadcasters with the ability to deliver HD television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video and data transmission.
Internet Delivered Video
Internet access facilitates the streaming of video, including movies and television shows, into homes and businesses. Online video services include those offered by Hulu, Netflix, Amazon and Apple. Increasingly, content owners are using Internet-based delivery of content directly to consumers, some without charging a fee to access the content. Further, due to consumer electronic innovations, consumers are able to watch such Internet-delivered content on televisions, personal computers, tablets, gaming boxes connected to televisions and mobile devices. Recently, HBO and CBS announced plans to sell their programming direct to consumers over the Internet. DISH Network has also announced Sling TV which will include ESPN among other programming, and Sony has announced Playstation Vue which is expected to include 75 channels to be launched in the first quarter of 2015. We believe some customers have chosen or will choose to receive video over the Internet rather than through our video on demand and subscription video services, thereby reducing our video revenues. We cannot predict the impact that Internet delivered video will have on our revenues and adjusted EBITDA as technologies continue to evolve.
Private CableWideOpenWest Finance, LLC.
Additional competition
In addition to multi-channel video providers, cable systems compete with other sources of news, information and entertainment, including over-the-air television broadcast reception, live events, movie theaters and the Internet. Competition is also posed by fixed wireless and satellite master antenna television systems, or SMATV systems, serving MDUs, such as condominiums, apartment complexes, and private residential communities. Private cable systems can offer improved reception
Business Services
We face intense competition across each of our business services product offerings. Our small and medium business video, Internet,
networking and voice services face competition from a variety of providers as described above. Our enterprise solutions also face competition from the competitors described above as well as other telecommunications carriers, such as metro and regional fiber-based carriers. We also compete with cloud, hosting and related service providers and application-service providers.
Advertising
We face intense competition for advertising revenue across many different platforms and from a wide range of local television stations, and many ofnational competitors. Advertising competition has increased and will likely continue to increase as new advertising avenues seek to attract the same satellite-delivered program services that are offered byadvertisers. We compete for advertising revenue against, among others, local broadcast stations, national cable systems. Although disadvantaged from a programming cost perspective, SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens and no requirement to service low density or economically depressed communities. The FCC previously adopted regulations that favor SMATVbroadcast networks, radio stations, print media and private cable operators serving MDU complexes, allowing them to continue to secure exclusive contracts with MDU owners. This regulatory disparity provides a competitive advantage to certain of our currentonline advertising companies and potential competitors.content providers.
Other CompetitorsSecurity and Home Management
Local wireless Internet services operate in some markets using available unlicensed radio spectrum. Various wireless phoneOur IntelligentHome service faces competition from traditional security companies, are now offering third and fourth generation (3G and 4G) wireless high-speed Internet services. In addition, a growing number of commercial areas, such as retail malls, restaurantsthe ADT Corporation, service providers such as Verizon and airports, offer Wi-Fi Internet service. Numerous local governments are also considering or actively pursuing publicly subsidized Wi-Fi Internet access networks. Operators are also marketing PC cardsAT&T, as well as new entrants, such as Vivint, Inc., Alarm.com, Inc. and “personal hotspots” offering wireless broadband access to their cellular networks. These service options offer another alternative to cable-based Internet access.NEST Labs, Inc.
Seasonality and Cyclicality
Our business is subject to seasonal and cyclical variations. Our results are impacted by the seasonal nature of customers receiving our cable services in college and vacation markets. Our revenue is subject to cyclical advertising patterns and changes in viewership levels. Our U.S. advertising revenue is generally higher in the second and fourth calendar quarters of each year, due in part to increases in consumer advertising in the spring and in the period leading up to and including the holiday season. U.S. advertising revenue is also cyclical, benefiting in even-numbered years from advertising related to candidates running for political office and issue-oriented advertising. Our capital expenditures and trade working capital are also subject to significant seasonality based on the timing of subscriber growth, network programs, specific projects and construction.
Regulation and Legislation
The following summary addresses the key regulatory and legislative developments affecting the cable industry and our three primary services for both residential and commercial customers: video service, Internet service, and voice service.customers. Cable system operations are extensively regulated by the federal government (primarily the FCC), certain state governments, and many local governments. A failure to comply with these regulations could subject us to substantial penalties. Our business can be dramatically impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative, or judicial rulings. Congress and the FCC have frequently revisited the subject of communications regulation and they are likely to do so again in the future. We could be materially disadvantaged in the future if we are subject to new regulations or regulatory actions that do not equally impact our key competitors. We cannot provide assurance that the already extensive regulation of our business will not be expanded in the future. In addition, we are already subject to Charter-specific conditions regarding certain business practices as a result of the FCC’s approval of the Transactions.
Video Service
Cable Rate Regulation. Federal regulations currently restrict the prices that cable systems charge for the minimum level of video programming service, referred to as “basic service,” and associated equipment. All other video service offerings are now universally exempt from rate regulation. Although basic service rate regulation operates pursuant to a federal formula, local governments, commonly referred to as local franchising authorities, are primarily responsible for administering this regulation. The majority of our local franchising authorities have never been certified to regulate basic service cable rates (and order rate reductions and refunds), but they generally retain the right to do so (subject to potential regulatory limitations under state franchising laws), except in those specific communities facing “effective competition,” as defined under federal law. We have secured FCC recognition of effective competition, and become rate deregulated, in many of our communities.Must Carry/Retransmission Consent
There have been frequent calls to impose expanded rate regulation on the cable industry. Confronted with rapidly increasing cable programming costs, it is possible that Congress may adopt new constraints on the retail pricing or packaging of cable programming. Any such constraints could adversely affect our operations.
Federal rate regulations include certain marketing restrictions that could affect our pricing and packaging of service tiers and equipment. As we attempt to respond to a changing marketplace with competitive pricing practices, we may face regulations that impede our ability to compete.
Must Carry/Retransmission Consent. There are two alternative legal methods for carriage of local broadcast television stations on cable systems. Federal “must carry” regulations require cable systems to carry local broadcast television stations upon the request of the local broadcaster. Alternatively, federal law includes “retransmission consent” regulations, by which popular commercial television stations can prohibit cable carriage unless the cable operator first negotiates for “retransmission consent,” which may be conditioned on significant payments or other concessions. Congress passed legislation in 2014 imposing certain restrictions on broadcasters’ exercise of retransmission consent authority and directing the FCC to review aspects of its existing retransmission consent rules. Popular stations invoking “retransmission consent” have been demanding substantial compensation increases in their recent negotiations with cable operators, thereby significantly increasing our operating costs.
Additional government-mandated broadcast carriage obligations, including those related to the FCC’s newly adopted enhanced technical broadcasting option (Advanced Television Systems Committee 3.0), could disrupt existing programming commitments, interfere with our preferred use of limited channel capacity, and limit our ability to offer services that appeal to our customers and generate revenues.
Cable Equipment
In 1996, Congress enacted a statute requiring the FCC to adopt regulations designed to assure the development of an independent retail market for “navigation devices,” such as cable set-top boxes. As a result, the FCC required cable operators to make a separate offering of security modules (i.e., a “CableCARD”) that can be used with retail navigation devices. Some of the FCC’s rules
requiring support for CableCARDs were vacated by the United States Court of Appeals for the District of Columbia in 2013, and another of these rules was repealed by Congress in 2014, but the basic obligation to provide separable security for retail devices remains in place. In 2016, the FCC proposed to replace its CableCARD regime with burdensome new rules that would have required us to make disaggregated “information flows” available to set-top boxes and apps supplied by third parties. That proposal was not adopted, but various parties may continue to advocate alternative regulatory approaches to reduce consumer dependency on traditional operator provided set-top boxes. It remains uncertain whether the FCC or Congress will change the legal requirements related to our set-top boxes and what the impact of any such changes might be.
Privacyand Information Security Regulation
The Communications Act of 1934, as amended (the “Communications Act”) limits our ability to collect, use, and disclose customers’ personally identifiable information for our video, voice, and Internet services, as well as provides requirements to safeguard such information. We are subject to additional federal, state, and local laws and regulations that impose additional restrictions on the collection, use and disclosure of consumer information. Further, the FCC, Federal Trade Commission ("FTC"), and many states regulate and restrict the marketing practices of communications service providers, including telemarketing and sending unsolicited commercial emails.
As a result of the FCC’s 2017 decision to reclassify broadband Internet access service as an “information service,” the FTC once again has the authority, pursuant to its authority to enforce against unfair or deceptive acts and practices, to protect the privacy of Internet service customers, including our use and disclosure of certain customer information. Although one court decision has raised questions regarding the extent of FTC jurisdiction over companies that offer both common carrier services as well as non-common carrier services, that decision has been stayed, pending review by the full Ninth Circuit Court of Appeals.
Our operations are also subject to federal and state laws governing information security. In the event of an information security breach, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures. The FCC, the FTC and state attorneys general regularly bring enforcement actions against companies related to information security breaches and privacy violations.
Various security standards provide guidance to telecommunications companies in order to help identify and mitigate cybersecurity risk. One such standard is the voluntary framework released by the National Institute for Standards and Technologies (“NIST”) in February 2014, in cooperation with other federal agencies and owners and operators of U.S. critical infrastructure.The NIST cybersecurity framework provides a prioritized and flexible model for organizations to identify and manage cyber risks inherent to their business. It was designed to supplement, not supersede, existing cybersecurity regulations and requirements. Several government agencies have encouraged compliance with the NIST cybersecurity framework, including the FCC, which is also considering expansion of its cybersecurity guidelines or the adoption of cybersecurity requirements. NIST recently proposed draft updates to this voluntary framework and is expected to release final revisions in 2018.
After the repeal of the FCC’s 2016 privacy rules through the Congressional Review Act, many states and local authorities have considered legislative or other actions that would impose additional restrictions on our ability to collect, use and disclose certain information. Despite language in the FCC’s December 2017 decision reclassifying broadband Internet access service as an “information service,” that preempts state and local privacy regulations that conflict with federal policy, we expect these state and local efforts to regulate online privacy to continue in 2018. Additionally, several state legislatures are considering the adoption of new data security and cybersecurity legislation that could result in additional network and information security requirements for our business. There are also bills pending in both the U.S. House of Representatives and Senate that could impose new privacy and data security obligations. We cannot predict whether any of these efforts will be successful or preempted, or how new legislation and regulations, if any, would affect our business.
Pole Attachments
The Communications Act requires most utilities owning utility poles to provide cable systems with access to poles and conduits and simultaneously subjects the rates charged for this access to either federal or state regulation. In 2011 and again in 2015, the FCC amended its existing pole attachment rules to promote broadband deployment. The 2011 order allows for new penalties in certain cases involving unauthorized attachments, but generally strengthens the cable industry’s ability to access investor-owned utility poles on reasonable rates, terms, and conditions. Additionally, the 2011 order reduces the federal rate formula previously applicable to “telecommunications” attachments to closely approximate the rate formula applicable to “cable” attachments. The 2015 order continues the reconciliation of rates, effectively closing the remaining “loophole” that potentially allowed for significantly higher rates for telecommunications than for “cable” attachments in certain scenarios, and minimizing the rate consequences of any of our services if deemed “telecommunications” for pole attachment purposes. Utility pole owners have appealed the 2015 order. Neither the 2011 order nor the 2015 order directly affect the rate in states that self-regulate (rather than
allow the FCC to regulate pole rates), but many of those states have substantially the same rate for cable and telecommunications attachments.
Some municipalities have enacted “one-touch” make-ready pole attachment ordinances, which permit third parties to alter components of our network attached to utility poles in ways that could adversely affect our businesses. Some of these ordinances have been challenged with differing results. In 2017, the FCC initiated a rulemaking that considers amending its pole attachment rules to permit a “one-touch” make-ready-like process for the poles within its jurisdiction. If adopted, these rules could have a similar effect as the municipal one-touch make-ready ordinances and adversely affect our businesses.
Cable Rate Regulation
Federal law strictly limits the potential scope of cable rate regulation. Pursuant to federal law, all video offerings are universally exempt from rate regulation, except for a cable system’s minimum level of video programming service, referred to as “basic service,” and associated equipment. Rate regulation of basic service and associated equipment operates pursuant to a federal formula, with local governments, commonly referred to as local franchising authorities, primarily responsible for administering this regulation. The majority of our local franchising authorities have never certified to regulate basic service cable rates. In 2015, the FCC adopted an order (which was subsequently upheld on appeal) reversing its historic approach to rate regulation certifications and requiring a local franchise authority interested in regulating cable rates to first make an affirmative showing that there is no “effective competition” (as defined under federal law) in the community. Very few local franchise authorities have filed the necessary rate regulation certification, and the FCC’s 2015 order should make it more difficult for such entities to assert rate regulation in the future.
There have been calls to impose expanded rate regulation on the cable industry. Confronted with rapidly increasing cable programming costs, it is possible that Congress may adopt new constraints on the retail pricing or packaging of cable programming. Any such constraints could adversely affect our operations.
Ownership Restrictions
Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions have been either eliminated or substantially relaxed. Changes in this regulatory area could alter the business environment in which we operate.
Access Channels. Channels
Local franchise agreements often require cable operators to set aside certain channels for public, educational, and governmental access programming. Federal law also requires cable systems to designate up to 15% of their channel capacity for commercial leased access by unaffiliated third parties, who may offer programming that our customers do not particularly desire. The FCC adopted revised rules in 2007 mandating a significant reduction in the rates that operators can charge commercial leased access users and imposing additional administrative requirements that would be burdensome on the cable industry. The effect of the FCC'sFCC’s revised rules was stayed by a federal court, pending a cable industry appeal and an adverse finding by the Office of Management and Budget. Although commercial leased access activity historically has been relatively limited, increased activity in this area could further burden the channel capacity of our cable systems.
Ownership Restrictions. Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions have been either eliminated or substantially relaxed. Changes in this regulatory area could alter the business environment in which we operate.
Pole Attachments. The Communications Act requires most utilities owning utility poles to provide cable systems with access to poles and conduits and simultaneously subjects the rates charged for this access to either federal or state regulation. In 2011, the FCC amended its existing pole attachment rules to promote broadband deployment. The 2011 order allows for new penalties in certain cases involving unauthorized attachments, but generally strengthens the cable industry's ability to access investor-owned utility poles on reasonable rates, terms, and conditions. It specifically maintains the basic rate formula applicable to “cable” attachments, but reduces the rate formula previously applicable to “telecommunications” attachments. Although the order maintains the status quo treatment of cable-provided VoIP service as an unclassified service eligible for the favorable cable rate, the issue has not been fully resolved by the FCC, and a potential change in classification in a pending proceeding (as well as an unresolved dispute over the telecommunications rate calculation) could adversely impact our pole attachment rates.
Cable Equipment. In 1996, Congress enacted a statute requiring the FCC to adopt regulations designed to assure the development of an independent retail market for “navigation devices,” such as cable set-top boxes. As a result, the FCC required cable operators to make a separate offering of security modules (i.e., a “CableCARD”) that can be used with retail navigation devices. Some of the FCC’s rules requiring support for CableCARDs were vacated by the United States Court of Appeals for the District of Columbia in 2013. The FCC had also adopted an “integration ban,” which had required cable operators to use CableCARDs in all of their new set-top boxes. In April 2013, Charter received a two-year waiver from the FCC’s “integration ban,” on the condition that Charter meet certain milestones regarding downloadable security by the end of the waiver period. This waiver affords Charter the ability to use lower-cost set-top boxes as it transitions to all-digital operations. In connection with our request for this waiver, Charter committed to continue to support CableCARDs and to follow the CableCARD-related rules that were struck down by the court in 2013. In December 2014, as part of the Satellite Television Extension and Localism Act Reauthorization Act of 2014 (“STELAR”), Congress repealed the integration ban, effective December 4, 2015, and extended the then-existing waivers, including Charter’s, through that date. STELAR also directed the FCC to establish within 45 days of enactment, a “working group of technical experts” to identify and report on downloadable security design options that are not unduly burdensome and that promote competition with respect to the availability of navigation devices. It is possible that the FCC could propose new equipment obligations as a result of the recommendation of this working group.
MDUs / Inside Wiring. The FCC has adopted a series of regulations designed to spur competition to established cable operators in MDU complexes. These regulations allow our competitors to access certain existing cable wiring inside MDUs. The FCC also adopted regulations limiting the ability of established cable operators, like us, to enter into exclusive service contracts for MDU complexes. In their current form, the FCC’s regulations in this area favor our competitors.
Privacyand Information Security Regulation. The Communications Act limits our ability to collect and disclose subscribers’ personally identifiable information for our video, voice, and Internet services, as well as provides requirements to safeguard such information. We are subject to additional federal, state, and local laws and regulations that impose additional restrictions on the collection, use and disclosure of consumer, subscriber and employee information. Further, the FCC, FTC, and many states regulate and restrict the marketing practices of cable operators, including telemarketing and online marketing efforts. Various federal agencies, including the FTC, are now considering new restrictions affecting the use of personal and profiling data for online advertising.
Our operations are also subject to federal and state laws governing information security. In the event of an information security breach, such rules may require consumer and government agency notification and may result in regulatory enforcement actions with the potential of monetary forfeitures. The FCC has recently used the existing authority under its privacy and security requirements for voice services to bring enforcement actions against two companies for failing to protect customer data from unauthorized access by and disclosure to third parties, with proposed forfeitures totaling $10 million. Similarly, the FTC and state attorneys general regularly bring enforcement actions against companies related to information security breaches and privacy violations. Congress and several state legislatures are considering the adoption of new data security and cybersecurity legislation that could result in additional network and information security requirements for our business.
On February 12, 2014, the National Institute for Standards and Technologies ("NIST"), in cooperation with other federal agencies and owners and operators of U.S. critical infrastructure, released a voluntary framework that provides a prioritized and flexible model for organizations to identify and manage cyber risks inherent to their business. The NIST cybersecurity framework was directed by an Executive Order and a Presidential Policy Directive issued in 2013, and it is designed to supplement, not supersede, existing cybersecurity regulations and requirements. Several government agencies have encouraged compliance with the NIST cybersecurity framework, including the FCC, which is also considering expansion of its cybersecurity guidelines or the adoption of cybersecurity requirements. We cannot predict what proposals may be adopted or how new legislation and regulations, if any, would affect our business.
Other FCC Regulatory Matters. Matters
FCC regulations cover a variety of additional areas, including, among other things: (1) equal employment opportunity obligations; (2) customer service standards; (3) technical service standards; (4) mandatory blackouts of certain network and syndicated programming; (5) restrictions on political advertising; (6) restrictions on advertising in children'schildren’s programming; (7) licensing of systems and facilities; (8) maintenance of public files; (9) emergency alert systems; (10) inside wiring and (10)exclusive contracts for MDU complexes; and (11) disability access, including new requirements governing video-description and closed-captioning. Each of these regulations restricts our business practices to varying degrees and may impose additional costs on our operations.
It is possible that Congress or the FCC will expand or modify its regulation of cable systems in the future, and we cannot predict at this time how that might impact our business.
Copyright. Copyright
Cable systems are subject to a federal copyright compulsory license covering carriage of television and radio broadcast signals.
The copyright law provides copyright owners the right to audit our payments under the compulsory license, and we are currently subject to ongoing compulsory copyright audits. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative proposals and administrative review and could adversely affect our ability to obtain desired broadcast programming. The Copyright Office adopted final rules in 2014 implementing audit procedures for copyright owners to review operators’ copyright royalty reporting practices, and it is possible these audits could result in copyright owner demands for additional royalty fees.
Copyright clearances for non-broadcast programming services are arranged through private negotiations. Cable operators also must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and we cannot predict with certainty whether license fee disputes may arise in the future.
Franchise Matters. CableMatters
Our cable systems generally are operated pursuant to nonexclusive franchises, permits, and similar authorizations granted by a municipality or other state or local government entity in order to utilize and cross public rights-of-way. Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for noncompliance and may be terminable if the franchisee fails to comply with material provisions. The specific terms and conditions of cable franchises vary significantly between jurisdictions. Cable franchises generally contain provisions governing cable operations, franchise fees, system construction, maintenance, technical performance, customer service standards, supporting and carrying public access channels, and changes in the ownership of the franchisee. A number of states subject cable systems to the jurisdiction of centralized state government agencies, such as public utility commissions. Although local franchising authorities have considerable discretion in establishing franchise terms, certain federal protections benefit cable operators. For example, federal law caps local franchise fees and includesfees.
Prior to the scheduled expiration of our franchises, we generally initiate renewal procedures designedproceedings with the granting authorities. The Communications Act, which is the primary federal statute regulating interstate communications, provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. In connection with the franchise renewal process, however, many governmental authorities require the cable operator to protect incumbent franchisees from arbitrary denialsmake additional costly commitments. Historically, we have been able to renew our franchises without incurring significant costs, although any particular franchise may not be renewed on commercially favorable terms or otherwise. If we fail to obtain renewals of renewal. Even iffranchises representing a franchise is renewed, however, the local franchising authority may seek to impose new and more onerous requirements assignificant number of our customers, it could have a material adverse effect on our consolidated financial condition, results of renewal.operations, or our liquidity. Similarly, if a local franchising authority'sauthority’s consent is required for the
purchase or sale of a cable system, the local franchising authority may attempt to impose more burdensome requirements as a condition for providing its consent.
The traditional cable franchising regime has recently undergone significant change as a result of various federal and state actions. The FCC has adopted rules that streamline entry for new competitors (particularly those affiliated with telephone companies) and reduce certain franchising burdens for these new entrants. The FCC adopted more modest relief for existing cable operators.
At the same time, a substantial number of states have adopted new franchising laws. Again, these laws were principally designed to streamline entry for new competitors, and they often provide advantages for these new entrants that are not immediately available to existing cable operators. In many instances, these franchising regimes do not apply to established cable operators until the existing franchise expires or a competitor directly enters the franchise territory. The exact nature of these state franchising laws, and their varying application to new and existing video providers, will impact our franchising obligations and our competitive position.
Internet Service
On January 14, 2014,In 2015, the D.C. Circuit Court of Appeals, in Verizon v. FCC, struck down majorportions of the FCC’s 2010 “net neutrality” rules governing the operating practices of determined that broadband Internet access services, such as those we offer, were a form of “telecommunications service” under the Communications Act and, on that basis, imposed rules banning service providers like us.from blocking access to lawful content, restricting data rates for downloading lawful content, prohibiting the attachment of non-harmful devices, giving special transmission priority to affiliates, and offering third parties the ability to pay for priority routing. The 2015 rules also imposed a “transparency” requirement, i.e., an obligation to disclose all material terms and conditions of our service to consumers.
In December 2017, the FCC originally designed the rules to ensureadopted an “open Internet” and included three key requirements fororder repudiating its treatment of broadband providers: (1)as a prohibition against blocking websites or other online applications; (2) a prohibition against unreasonable discrimination among Internet users or among different websites or other sources of information; and (3) a transparency requirement compelling the disclosure of network management policies. The Court struck down the first two requirements, concluding that they constitute “common carrier” restrictions that are not permissible given the FCC’s earlier decision to classify Internet access“telecommunications service,” reclassifying broadband as an “information service,” ratherand eliminating the 2015 rules other than a “telecommunications service.”the transparency requirement, which it eased in significant ways. The Court upheldFCC also ruled that state regulators may not impose obligations similar to federal obligations that the FCC removed. We expect that various parties will challenge the FCC’s transparency requirementDecember 2017 ruling in court, and, we cannot predict how any such court challenges will be resolved. Moreover, it is possible that the FCC's authorityFCC might further revise its approach to adopt regulations regardingbroadband Internet access in the Internet.future, or that Congress might enact legislation affecting the rules applicable to the service.
On May 15, 2014, the FCC initiated a new rulemaking to issue new network neutrality regulations, potentially including a reclassification ofThe FCC’s December 2017 ruling does not affect other regulatory obligations on broadband services as Title II common carrier services, which could subject our services to far more extensive and burdensome federal and state regulation. On February 4, 2015, the Chairman of the FCC released a fact sheet describing his proposed new rules. The Chairman's proposal reclassifies wireline and wireless broadband services as Title II common carrier services, and asserts legal authority to regulate broadband service offered by ISPs under Title II, Title III, and Section 706 of the Telecommunications Act. In an effort to protect consumers and edge providers, the new rules would prohibit ISPs from engaging in blocking, throttling, and paid prioritization, and the existing transparency rules would be enhanced. Reasonable network management activities would remain permitted. For the first time, the FCC would have authority to hear complaints and take enforcement action if it determines that the interconnection agreements of ISPs are not just and reasonable, or if ISPs fail to meet a new general obligation not to harm consumers or edgeInternet access providers. The Chairman has proposed forbearing from certain Title II regulation, such as rate regulation, tariffs and last-mile unbundling. The Chairman of the FCC has indicated he intends to have the Commissioners vote on his proposal at the end of February 2015. As the FCC is made up of five Commissioners with three being Democrats, including the Chairman, it is likely the FCC will adopt the Chairman's proposed rules. If adopted, severalNotably, broadband providers have already indicated their intention to challenge the regulations in court. There are also legislative proposals in Congress to preempt the Chairman’s proposed utility-style regulation, while still addressing many of the underlying concerns. We do not know at the current time if the new regulations proposedobliged by the Chairman will go into effect, nor do we know how they would be administered, but they could limit our ability to efficiently manage our cable systems and respond to operational and competitive challenges.
As the Internet has matured, it has become the subject of increasing regulatory interest. Congress and federal regulators have adopted a wide range of measures directly or potentially affecting Internet use, including, for example, consumer privacy, copyright protections, defamation liability, taxation, obscenity, and unsolicited commercial e-mail. Our Internet services are subject to the Communications Assistance for Law Enforcement Act ("CALEA") requirements regardingto configure their networks in a manner that facilitates the ability of law enforcement, surveillance. Content owners are now seeking additionalwith proper legal mechanismsauthorization, to combat copyright infringement overobtain information about
our customers, including the Internet. Pending and future legislation in this area could adversely affect our operations as ancontent of their Internet service provider and our relationship with our Internet customers. Additionally, thecommunications. The FCC and Congress also are considering subjecting Internet access services to the Universal Service funding requirements. These funding requirements could impose significant new costs on our high-speed Internet service. Also, the FCC and some state regulatory commissions direct certain subsidies to telephone companies deploying broadband to areas deemed to be “unserved” or “underserved.” Charter hasWe have opposed such subsidies when directed to areas that Charter serves.we serve. Despite Charter’sour efforts, future subsidies may be directed to areas served by Charter,us, which could result in subsidized competitors operating in our service territories. State and local governmental organizations have also adopted Internet-related regulations. These various governmental jurisdictions are also considering additional regulations in these and other areas, such as privacy, pricing, service
and product quality, imposition of local franchise fees on Internet-related revenue and taxation. The adoption of new Internet regulations or the adaptation of existing laws to the Internet could adversely affect our business.
The FCC is now considering whether online video distributors (“OVDs”) that offer programmingAside from the FCC’s generally applicable regulations, we have made certain commitments to customerscomply with a broadband Internetthe FCC’s order in connection should be classified as multichannel video programming distributors (“MVPDs”), and thereby subject towith the program access protections available to MVPDs, as well as someFCC’s approval of the regulatory requirements applicable to MVPDs. The outcome of this proceeding, which could impact how OVDs compete inTWC Transaction and the future with traditional cable service, cannot be determined at the current time.
On January 29, 2015, the FCC, in a nation-wide proceeding evaluating whether “advanced broadband” is being deployed in a reasonable and timely fashion, increased the minimum connection speeds required to qualify as advanced broadband service to 25 Mbps for downloads and 3 Mbps for uploads. As a result, the FCC concluded that advanced broadband was not being sufficiently deployed and initiated a new inquiry into what steps it might take to encourage broadband deployment. This action may lead the FCC to adopt additional measures affecting our broadband business. At the same time, the FCC has ongoing proceedings to allocate additional spectrum for advanced wireless service, which could provide additional wireless competition to our broadband business.
The FCC is also currently considering two petitions from municipalities in North Carolina and Tennessee, respectively, seeking the preemption of state laws that restrict the ability of municipalities to construct and deploy broadband systems in competition with private offerings. The Chairman has proposed an order that grants the petitions. While such an order would only preempt the laws of the states at issue, municipalities in other states may seek similar relief. There are approximately 20 such state laws now in effect. FCC preemption would be predicated on the belief that such state laws are impeding the nation-wide deployment of broadband service. Any such action would likely be subject to appeal regarding the FCC’s preemptive authority, and Congress might also adopt legislation expressly limiting the FCC’s authority in this area. If the FCC does preempt state restrictions and that preemption is upheld, it could lead to increased competition from municipal-provided broadband.Bright House Transaction (discussed below).
Voice Service
The Telecommunications Act of 1996 created a more favorable regulatory environment for us to provide telecommunications and/or competitive voice services than had previously existed. In particular, it established requirements ensuring that competitive telephone companies could interconnect their networks with those providers of traditional telecommunications services to open the market to competition. The FCC has subsequently ruled that competitive telephone companies that support VoIP services, such as those we offer our customers, are entitled to interconnection with incumbent providers of traditional telecommunications services, which ensures that our VoIP services can compete in the market. Since that time, the FCC has initiated a proceeding to determine whether such interconnection rights should extend to traditional and competitive networks utilizing IP technology, and how to encourage the transition to IP networks throughout the industry. The FCC initiated a further proceeding in 2017 to consider whether additional changes to interconnection obligations are needed, including how and where companies interconnect their networks with the networks of other providers. New rules or obligations arising from these proceedings may affect our ability to compete in the provision of voice services. On November 18, 2011,
The FCC has collected extensive data from providers of point to point transport (“special access”) services, such as us, and the FCC released an order significantly changingmay use that data to evaluate whether the rules governing intercarrier compensation paymentsmarket for such services is competitive, or whether the termination of telephone traffic between carriers. The new rules will resultmarket should be subject to further regulation, which may increase our costs or constrain our ability to compete in a substantial decrease in intercarrier compensation payments over a multi-year period. We received intercarrier compensation of approximately $23 million, $21 million and $19 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decreases over the multi-year transition will affect both the amounts that Charter pays to other carriers and the amounts that Charter receives from other carriers. The schedule and magnitude of these decreases, however, will vary depending on the nature of the carriers and the telephone traffic at issue, and the FCC's new ruling initiates further implementation rulemakings. We cannot yet predict with certainty the balance of the impact on Charter's revenues and expenses for voice services at particular times over this multi-year period.market.
Further regulatory changes are being considered that could impact our voice business and that of our primary telecommunications competitors. The FCC and state regulatory authorities are considering, for example, whether certain common carrier regulations traditionally applied to incumbent local exchange carriers should be modified or reduced, and, in some jurisdictions, the extent to which common carrier requirements should be extended to VoIP providers. The FCC has already determined that certain providers of voice services using Internet Protocol technology must comply with requirements relating to 911 emergency services (“E911”), the CALEA (the statute governing law enforcement access to and surveillance of communications), Universal Service Fund contributions, customer privacy and Customer Proprietary Network Information issues, number portability, network outage reporting, rural call completion, disability access, regulatory fees, back-up power obligations, and discontinuance of service. In March 2007, a federal appeals court affirmed the FCC’s decision concerning federal regulation of certain VoIP services, but declined to specifically find that VoIP service provided by cable companies, such as we provide, should be regulated only at the federal level. As a result, some states have begun proceedings to subject cable VoIP services to state level regulation.regulation, and at least one state has asserted jurisdiction over our VoIP services. We prevailed on a legal challenge to that state’s assertion of jurisdiction. However, the state has appealed that ruling in a case which is now pending before a federal appellate court in Minnesota. Although we have registered with, or obtained certificates or authorizations from the FCC and the state regulatory authorities in those states in which we offer competitive voice services in order to ensure
the continuity of our services and to maintain needed network interconnection arrangements, it is unclear whether and how these and other ongoing regulatory matters ultimately will be resolved.
Transaction-Related Commitments
In addition,connection with approval of the Transactions, federal and state regulators imposed a number of post-merger conditions on us including but not limited to the following.
FCC Conditions
Offer settlement-free Internet interconnection to any party that meets the requirements of our Interconnection Policy (available on Charter’s website) on terms generally consistent with the policy for seven years (with a possible reduction to five);
Deploy and offer high-speed broadband Internet access service to an additional two million locations over five years;
Refrain from charging usage-based prices or imposing data caps on any fixed mass market broadband Internet access service plans for seven years (with a possible reduction to five);
Offer 30/4 Mbps discounted broadband where technically feasible to eligible customers throughout our service area for four years from the offer’s commencement; and
Continue to provide CableCARDs to any new or existing customer upon request for use in 2013third-party retail devices for four years and continue to support such CableCARDs for seven years (in each case, unless the FCC issued a broad data collection order that will require providers of point to point transport (“special access”) services, such as Charter, to produce information tochanges the agency concerning the rates, terms and conditions of these services. relevant rules).
The FCC conditions also contain a number of compliance reporting requirements.
DOJ Conditions
The Department of Justice (“DOJ”) Order prohibits us from entering into or enforcing any agreement with a video programmer that forbids, limits or creates incentives to limit the video programmer’s provision of content to online video distributors ("OVDs"). We will usenot be able to avail ourself of other distributors’ most favored nation (“MFN”) provisions if they are inconsistent with this prohibition. The DOJ’s conditions are effective for seven years, although we may petition the dataDOJ to evaluate whethereliminate the marketconditions after five years.
State Conditions
Certain state regulators, including California, New York, Hawaii and New Jersey also imposed conditions in connection with the approval of the Transactions. These conditions include requirements related to:
Upgrading networks within the designated state, including upgrades to broadband speeds and conversion of all households served within California and New York to an all-digital platform;
Building out our network to households and business locations that are not currently served by cable within the designated states;
Offering LifeLine service discounts and low-income broadband to eligible households served within the applicable states;
Investing in service improvement programs and customer service enhancements and maintaining customer-facing jobs within the designated state;
Continuing to make legacy service offerings available, including allowing Legacy TWC and Legacy Bright House customers to maintain their existing service offerings for such services is competitive, or whether the market should be subject to further regulation, which may increase our costs or constrain our ability to compete in this market. The FCC is also considering recommendations to select a new national local number portability administrator after the current administrator’s contract expires in June 2015. Any such change may impact our ability to manage number portingperiod of three years; and related tasks.
Complying with reporting requirements.
Employees
As of December 31, 2014,2017, we had approximately 23,20094,800 active full-time equivalent employees. At December 31, 2014, approximately 140 of our employees were represented by collective bargaining agreements. We have never experienced a work stoppage.
Item 1A. Risk Factors.
Risks Related to Our Business
If we are not able to successfully complete the integration of our business with that of Legacy TWC and Legacy Bright House, the anticipated benefits of the Transactions may not be fully realized or may take longer to realize than expected. In such circumstance, we may not perform as expected and the value of Charter's Class A common stock may be adversely affected.
There can be no assurances that we can successfully complete the integration of our business with that of Legacy TWC and Legacy Bright House. We now have significantly more systems, assets, investments, businesses, customers and employees than each company did prior to the Transactions. It is possible that the integration process could result in the loss of customers, the disruption of our ongoing businesses or in unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. The process of integrating Legacy TWC and Legacy Bright House with the Legacy Charter operations requires significant capital expenditures and the expansion of certain operations and operating and financial systems. Management continues to devote a significant amount of time and attention to the integration process and there is a significant degree of difficulty and management involvement inherent in that process.
Even if the new businesses are successfully integrated, it may not be possible to realize the benefits that are expected to result from the Transactions, or realize these benefits within the time frame that is expected. For example, the benefits of our pricing and packaging and converting our video product to all-digital in certain Legacy TWC and Legacy Bright House systems may not be fully realized or may take longer than anticipated, or the benefits from the Transactions may be offset by costs incurred or
delays in integrating the businesses and increased operating costs. If the combined company fails to realize the anticipated benefits from the Transactions, our liquidity, results of operations, financial condition and/or share price may be adversely affected. In addition, at times, the attention of certain members of our management and resources may be focused on the integration of the businesses and diverted from day-to-day business operations, which may disrupt the business of the combined company.
We operate in a very competitive business environment, which affects our ability to attract and retain customers and can adversely affect our business, operations and financial results.
The industry in which we operate is highly competitive and has become more so in recent years. In some instances, we compete against companies with fewer regulatory burdens, better access to financing, greater personnel resources, greater resources for marketing, greater and more favorable brand name recognition, and long-established relationships with regulatory authorities and customers. Increasing consolidation in the cable industry and the repeal of certain ownership rules have provided additional benefits to certain of our competitors, either through access to financing, resources, or efficiencies of scale.
Our residential video service faces competition from a number of sources, including direct broadcast satellite services, as well as other companies that deliver movies, television shows and other video programming over broadband Internet connections to TVs, computers, tablets and mobile devices. Our residential Internet service faces competition from the phone companies’ DSL, FTTH and wireless broadband offerings as well as from a variety of companies that offer other forms of online services, including wireless and satellite-based broadband services. Our residential voice service and our planned mobile service competes with wireless and wireline phone providers, as well as other forms of communication, such as text messaging on cellular phones, instant messaging, social networking services, video conferencing and email. Competition from these companies, including intensive marketing efforts with aggressive pricing, exclusive programming and increased HD broadcasting may have an adverse impact on our ability to attract and retain customers.
Overbuilds could also adversely affect our growth, financial condition, and results of operations, by creating or increasing competition. We are aware of traditional overbuild situations impacting certain of our markets, however, we are unable to predict the extent to which additional overbuild situations may occur.
Our services may not allow us to compete effectively. Competition may reduce our expected growth of future cash flows which may contribute to future impairments of our franchises and goodwill and our ability to meet cash flow requirements, including debt service requirements. For additional information regarding the competition we face, see “Business -Competition” and “-Regulation and Legislation.”
We face risks relating to competition for the leisure time and discretionary spending of audiences, which has intensified in part due to advances in technology and changes in consumer expectations and behavior.
In addition to the various competitive factors discussed above, we are subject to risks relating to increasing competition for the leisure time, shifting consumer needs and discretionary spending of consumers. We compete with all other sources of entertainment, news and information delivery, as well as a broad range of communications products and services. Technological advancements, such as new video formats and Internet streaming and downloading of programming that can be viewed on televisions, computers, smartphones and tablets, many of which have been beneficial to us, have nonetheless increased the number of entertainment and information delivery choices available to consumers and intensified the challenges posed by audience fragmentation.
Newer products and services, particularly alternative methods for the distribution, sale and viewing of content will likely continue to be developed, further increasing the number of competitors that we face. The increasing number of choices available to audiences, including low-cost or free choices, could negatively impact not only consumer demand for our products and services, but also advertisers’ willingness to purchase advertising from us. We compete for the sale of advertising revenue with television networks and stations, as well as other advertising platforms, such as radio, print and, increasingly, online media. Our failure to effectively anticipate or adapt to new technologies and changes in consumer expectations and behavior could significantly adversely affect our competitive position and our business and results of operations.
Our exposure to the economic conditions of our current and potential customers, vendors and third parties could adversely affect our cash flow, results of operations and financial condition.
We are exposed to risks associated with the economic conditions of our current and potential customers, the potential financial instability of our customers and their financial ability to purchase our products. If there were a general economic downturn, we may experience increased cancellations by our customers or unfavorable changes in the mix of products purchased, including an increase in the number of homes that replace their video service with Internet-delivered and/or over-air content, which would negatively impact our ability to attract customers, increase rates and maintain or increase revenue. In addition, providing video
services is an established and highly penetrated business. Our ability to gain new video subscribers is dependent to a large extent on growth in occupied housing in our service areas, which is influenced by both national and local economic conditions. Weak economic conditions may also have a negative impact on our advertising revenue. These events have adversely affected us in the past, and may adversely affect our cash flow, results of operations and financial condition if a downturn were to occur.
In addition, we are susceptible to risks associated with the potential financial instability of the vendors and third parties on which we rely to provide products and services or to which we outsource certain functions. The same economic conditions that may affect our customers, as well as volatility and disruption in the capital and credit markets, also could adversely affect vendors and third parties and lead to significant increases in prices, reduction in output or the bankruptcy of our vendors or third parties upon which we rely. Any interruption in the services provided by our vendors or by third parties could adversely affect our cash flow, results of operation and financial condition.
We face risks inherent in our commercial business.
We may encounter unforeseen difficulties as we increase the scale of our service offerings to businesses. We sell Internet access, data networking and fiber connectivity to cellular towers and office buildings, and video and business voice services to businesses and have increased our focus on growing this business. In order to grow our commercial business, we expect to continue to invest in technology, equipment and personnel focused on the commercial business. Commercial business customers often require service level agreements and generally have heightened customer expectations for reliability of services. If our efforts to build the infrastructure to scale the commercial business are not successful, the growth of our commercial services business would be limited. We depend on interconnection and related services provided by certain third parties for the growth of our commercial business. As a result, our ability to implement changes as the services grow may be limited. If we are unable to meet these service level requirements or expectations, our commercial business could be adversely affected. Finally, we expect advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment. Consequently, we are unable to predict the effect that ongoing or future developments in these areas might have on our voice and commercial businesses and operations.
Programming costs are rising at a much faster rate than wages or inflation, and we may not have the ability to reduce or moderate the growth rates of, or pass on to our customers, our increasing programming costs, which would adversely affect our cash flow and operating margins.
Video programming has been, and is expected to continue to be, our largest operating expense item. In recent years, the cable industry has experienced a rapid escalation in the cost of programming. We expect programming costs to continue to increase due to a variety of factors including amounts paid for broadcast station retransmission consent, annual increases imposed by programmers, including sports programmers, and the carriage of incremental programming, including new services and VOD programming. The inability to fully pass programming cost increases on to our customers has had, and is expected in the future to have, an adverse impact on our cash flow and operating margins associated with the video product. We have programming contracts that have expired and others that will expire at or before the end of 2018. There can be no assurance that these agreements will be renewed on favorable or comparable terms. In addition, a number of programmers have begun to sell their services through alternative distribution channels, including IP-based platforms, which are less secure than our own video distribution platforms. There is growing evidence that these less secure video distribution platforms are leading to video product theft via password sharing among consumers. Password sharing may drive down the number of customers who pay for certain programming, putting programmer revenues at risk, and which in turn may cause certain programmers to seek even higher programming fees from us. To the extent that we are unable to reach agreement with certain programmers on terms that we believe are reasonable, we have been, and may be in the future, forced to remove such programming channels from our line-up, which may result in a loss of customers. Our failure to carry programming that is attractive to our customers could adversely impact our customer levels, operations and financial results. In addition, if our Internet customers are unable to access desirable content online because content providers block or limit access by our customers as a class, our ability to gain and retain customers, especially Internet customers, may be negatively impacted.
Increased demands by owners of some broadcast stations for carriage of other services or payments to those broadcasters for retransmission consent are likely to further increase our programming costs. Federal law allows commercial television broadcast stations to make an election between “must-carry” rights and an alternative “retransmission-consent” regime. When a station opts for the retransmission consent regime, we are not allowed to carry the station’s signal without that station’s permission. In some cases, we carry stations under short-term arrangements while we attempt to negotiate new long-term retransmission agreements. If negotiations with these programmers prove unsuccessful, they could require us to cease carrying their signals, possibly for an indefinite period. Any loss of stations could make our video service less attractive to customers, which could result in less subscription and advertising revenue. In retransmission-consent negotiations, broadcasters often condition consent with respect to one station on carriage of one or more other stations or programming services in which they or their affiliates have an interest.
Carriage of these other services, as well as increased fees for retransmission rights, may increase our programming expenses and diminish the amount of capacity we have available to introduce new services, which could have an adverse effect on our business and financial results.
Our inability to respond to technological developments and meet customer demand for new products and services could adversely affect our ability to compete effectively.
We operate in a highly competitive, consumer-driven and rapidly changing environment. From time to time, we may pursue strategic initiatives, including, for example, our mobile strategy. Our success is, to a large extent, dependent on our ability to acquire, develop, adopt, upgrade and exploit new and existing technologies to address consumers’ changing demands and distinguish our services from those of our competitors. We may not be able to accurately predict technological trends or the success of new products and services. If we choose technologies or equipment that are less effective, cost-efficient or attractive to customers than those chosen by our competitors, if we offer services that fail to appeal to consumers, are not available at competitive prices or that do not function as expected, or we are not able to fund the expenditures necessary to keep pace with technological developments, our competitive position could deteriorate, and our business and financial results could suffer.
The ability of some of our competitors to introduce new technologies, products and services more quickly than we do may adversely affect our competitive position. Furthermore, advances in technology, decreases in the cost of existing technologies or changes in competitors’ product and service offerings may require us in the future to make additional research and development expenditures or to offer at no additional charge or at a lower price certain products and services that we currently offer to customers separately or at a premium. In addition, the uncertainty of our ability, and the costs, to obtain intellectual property rights from third parties could impact our ability to respond to technological advances in a timely and effective manner.
Our inability to maintain and expand our upgraded systems and provide advanced services such as a state of the art user interface in a timely manner, or to anticipate the demands of the marketplace, could materially adversely affect our ability to attract and retain customers. In addition, as we launch our new mobile services using virtual network operator rights from a third party, we expect an initial funding period to grow a new product as well as negative working capital impacts from the timing of device-related cash flows when we provide the handset or tablet pursuant to equipment installation plans. Consequently, our growth, financial condition and results of operations could suffer materially.
We depend on third party service providers, suppliers and licensors; thus, if we are unable to procure the necessary services, equipment, software or licenses on reasonable terms and on a timely basis, our ability to offer services could be impaired, and our growth, operations, business, financial results and financial condition could be materially adversely affected.
We depend on a limited number of third party service providers, suppliers and licensors to supply some of the services, hardware, software and operational support necessary to provide some of our services. Some of our hardware, software and operational support vendors, and service providers represent our sole source of supply or have, either through contract or as a result of intellectual property rights, a position of some exclusivity. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform its obligations in a timely manner, demand exceeds these vendors’ capacity, they experience operating or financial difficulties, they significantly increase the amount we pay for necessary products or services, or they cease production of any necessary product due to lack of demand, profitability or a change in ownership or are otherwise unable to provide the equipment or services we need in a timely manner, at our specifications and at reasonable prices, our ability to provide some services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials or services might delay our ability to serve our customers. In addition, the existence of only a limited number of vendors of key technologies can lead to less product innovation and higher costs. These events could materially and adversely affect our ability to retain and attract customers and our operations, business, financial results and financial condition.
Our cable systems have historically been restricted to using one of two proprietary conditional access security systems, which we believe has limited the number of manufacturers producing set-top boxes for such systems. As an alternative, we developed a new conditional access security system which can be downloaded into set-top boxes with features we specify that could be provided by a variety of manufacturers. We refer to our specified set-top box as our Worldbox. Additionally, we are developing technology to allow our two current proprietary conditional access security systems to be software downloadable into our Worldbox. In order to realize the broadest benefits of our Worldbox technology, we must now complete the support for the downloadable proprietary conditional access security systems within the Worldbox. We cannot provide assurances that this implementation will ultimately be successful or completed in the expected timeframe or at the expected budget.
Our business may be adversely affected if we cannot continue to license or enforce the intellectual property rights on which our business depends.
We rely on patent, copyright, trademark and trade secret laws and licenses and other agreements with our employees, customers, suppliers and other parties to establish and maintain our intellectual property rights in technology and the products and services used in our operations. Also, because of the rapid pace of technological change, we both develop our own technologies, products and services and rely on technologies developed or licensed by third parties. However, any of our intellectual property rights could be challenged or invalidated, or such intellectual property rights may not be sufficient to permit us to take advantage of current industry trends or otherwise to provide competitive advantages, which could result in costly redesign efforts, discontinuance of certain product or service offerings or other competitive harm. We may not be able to obtain or continue to obtain licenses from these third parties on reasonable terms, if at all. In addition, claims of intellectual property infringement could require us to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question, which could require us to change our business practices or offerings and limit our ability to compete effectively. Even unsuccessful claims can be time-consuming and costly to defend and may divert management’s attention and resources away from our business. In recent years, the number of intellectual property infringement claims has been increasing in the communications and entertainment industries, and, with increasing frequency, we are party to litigation alleging that certain of our services or technologies infringe the intellectual property rights of others.
Various events could disrupt our networks, information systems or properties and could impair our operating activities and negatively impact our reputation and financial results.
Network and information systems technologies are critical to our operating activities, both for our internal uses, such as network management and supplying services to our customers, including customer service operations and programming delivery. Network or information system shutdowns or other service disruptions caused by events such as computer hacking, dissemination of computer viruses, worms and other destructive or disruptive software, “cyber attacks,” process breakdowns, denial of service attacks and other malicious activity pose increasing risks. Both unsuccessful and successful “cyber attacks” on companies have continued to increase in frequency, scope and potential harm in recent years. While we develop and maintain systems seeking to prevent systems-related events and security breaches from occurring, the development and maintenance of these systems is costly and requires ongoing monitoring and updating as techniques used in such attacks become more sophisticated and change frequently. We, and the third parties on which we rely, may be unable to anticipate these techniques or implement adequate preventive measures. While from time to time attempts have been made to access our network, these attempts have not as yet resulted in any material release of information, degradation or disruption to our network and information systems.
Our network and information systems are also vulnerable to damage or interruption from power outages, telecommunications failures, accidents, natural disasters (including extreme weather arising from short-term or any long-term changes in weather patterns), terrorist attacks and similar events. Further, the impacts associated with extreme weather or long-term changes in weather patterns, such as rising sea levels or increased and intensified storm activity, may cause increased business interruptions or may require the relocation of some of our facilities. Our system redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities.
Any of these events, if directed at, or experienced by, us or technologies upon which we depend, could have adverse consequences on our network, our customers and our business, including degradation of service, service disruption, excessive call volume to call centers, and damage to our or our customers’ equipment and data. Large expenditures may be necessary to repair or replace damaged property, networks or information systems or to protect them from similar events in the future. Moreover, the amount and scope of insurance that we maintain against losses resulting from any such events or security breaches may not be sufficient to cover our losses or otherwise adequately compensate us for any disruptions to our business that may result. Any such significant service disruption could result in damage to our reputation and credibility, customer dissatisfaction and ultimately a loss of customers or revenue. Any significant loss of customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth, financial condition and results of operations.
Furthermore, our operating activities could be subject to risks caused by misappropriation, misuse, leakage, falsification or accidental release or loss of information maintained in our information technology systems and networks and those of our third-party vendors, including customer, personnel and vendor data. We provide certain confidential, proprietary and personal information to third parties in connection with our business, and there is a risk that this information may be compromised.
As a result of the increasing awareness concerning the importance of safeguarding personal information, the potential misuse of such information and legislation that has been adopted or is being considered regarding the protection, privacy and security of personal information, information-related risks are increasing, particularly for businesses like ours that process, store and transmit large amount of data, including personal information for our customers. We could be exposed to significant costs if such risks
were to materialize, and such events could damage our reputation, credibility and business and have a negative impact on our revenue. We could be subject to regulatory actions and claims made by consumers in private litigations involving privacy issues related to consumer data collection and use practices. We also could be required to expend significant capital and other resources to remedy any such security breach.
The risk described above may be increased during the period in which we are integrating our people, processes and systems as a result of the Transactions.
For tax purposes, Charter could experience a deemed ownership change in the future that could limit its ability to use its tax loss carryforwards.
Charter had approximately $10.9 billion of federal tax net operating loss carryforwards resulting in a gross deferred tax asset of approximately $2.3 billion as of December 31, 2017. These losses resulted from the operations of Charter Communications Holdings Company, LLC ("Charter Holdco") and its subsidiaries and from loss carryforwards received as a result of the TWC Transaction. Federal tax net operating loss carryforwards expire in the years 2018 through 2035. In addition, Charter had state tax net operating loss carryforwards resulting in a gross deferred tax asset (net of federal tax benefit) of approximately $359 million as of December 31, 2017. State tax net operating loss carryforwards generally expire in the years 2018 through 2037.
In the past, Charter has experienced ownership changes as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change occurs whenever the percentage of the stock of a corporation owned, directly or indirectly, by 5-percent stockholders (within the meaning of Section 382 of the Code) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned, directly or indirectly, by such 5-percent stockholders at any time over the preceding three years. As a result, Charter is subject to an annual limitation on the use of its loss carryforwards which existed at November 30, 2009 for the first ownership change, those that existed at May 1, 2013 for the second ownership change, and those created at May 18, 2016 for the third ownership change. The limitation on Charter's ability to use its loss carryforwards, in conjunction with the loss carryforward expiration provisions, could reduce Charter's ability to use a portion of its loss carryforwards to offset future taxable income, which could result in Charter being required to make material cash tax payments. Charter's ability to make such income tax payments, if any, will depend at such time on its liquidity or its ability to raise additional capital, and/or on receipt of payments or distributions from Charter Holdco and its subsidiaries.
If Charter were to experience additional ownership changes in the future (as a result of purchases and sales of stock by its 5-percent stockholders, new issuances or redemptions of our stock, certain acquisitions of its stock and issuances, redemptions, sales or other dispositions or acquisitions of interests in its 5-percent stockholders), Charter's ability to use its loss carryforwards could become subject to further limitations.
If LegacyTWC’s Separation Transactions (as defined below), including the Distribution (as defined below), do not qualify as tax-free, either as a result of actions taken or not taken by Legacy TWC or as a result of the failure of certain representations by Legacy TWC to be true, Legacy TWC has agreed to indemnify Time Warner Inc. for its taxes resulting from such disqualification, which would be significant.
As part of Legacy TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009 (the “Separation”), Time Warner received a private letter ruling from the Internal Revenue Service ("IRS") and Time Warner and Legacy TWC received opinions of tax counsel confirming that the transactions undertaken in connection with the Separation, including the transfer by a subsidiary of Time Warner of its 12.43% non-voting common stock interest in TW NY to Legacy TWC in exchange for 80 million newly issued shares of Legacy TWC’s Class A common stock, Legacy TWC’s payment of a special cash dividend to holders of Legacy TWC’s outstanding Class A and Class B common stock, the conversion of each share of Legacy TWC’s outstanding Class A and Class B common stock into one share of Legacy TWC common stock, and the pro-rata dividend of all shares of Legacy TWC common stock held by Time Warner to holders of record of Time Warner’s common stock (the “Distribution” and, together with all of the transactions, the “Separation Transactions”), should generally qualify as tax-free to Time Warner and its stockholders for U.S. federal income tax purposes. The ruling and opinions rely on certain facts, assumptions, representations and undertakings from Time Warner and Legacy TWC regarding the past and future conduct of the companies’ businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Time Warner and its stockholders may not be able to rely on the ruling or the opinions and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions, the IRS could determine on audit that the Separation Transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated, or for other reasons, including as a result of significant changes in the stock ownership of Time Warner or Legacy TWC after the Distribution.
Under the tax sharing agreement among Time Warner and Legacy TWC, Legacy TWC generally would be required to indemnify Time Warner against its taxes resulting from the failure of any of the Separation Transactions to qualify as tax-free as a result of (i) certain actions or failures to act by Legacy TWC or (ii) the failure of certain representations made by Legacy TWC to be true. In addition, even if Legacy TWC bears no contractual responsibility for taxes related to a failure of the Separation Transactions to qualify for their intended tax treatment, Treasury regulation section 1.1502-6 imposes on Legacy TWC several liability for all Time Warner federal income tax obligations relating to the period during which Legacy TWC was a member of the Time Warner federal consolidated tax group, including the date of the Separation Transactions. Similar provisions may apply under foreign, state or local law. Absent Legacy TWC causing the Separation Transactions to not qualify as tax-free, Time Warner has indemnified Legacy TWC against such several liability arising from a failure of the Separation Transactions to qualify for their intended tax treatment.
If we are unable to retain key employees, our ability to manage our business could be adversely affected.
Our operational results have depended, and our future results will depend, upon the retention and continued performance of our management team. Our ability to retain and hire new key employees for management positions could be impacted adversely by the competitive environment for management talent in the broadband communications industry. The loss of the services of key members of management and the inability or delay in hiring new key employees could adversely affect our ability to manage our business and our future operational and financial results.
Risks Related to Our Indebtedness
We have a significant amount of debt and may incur significant additional debt, including secured debt, in the future, which could adversely affect our financial health and our ability to react to changes in our business.
We have a significant amount of debt and may (subject to applicable restrictions in our debt instruments) incur additional debt in the future. As of December 31, 2014,2017, our total principal amount of debt was approximately $21.1 billion, including $7.0 billion of debt for which proceeds are held in escrow pending consummation of the Transactions.$69.0 billion.
Our significant amount of debt could have consequences, such as:
impact our ability to raise additional capital at reasonable rates, or at all;
make us vulnerable to interest rate increases, in part because approximately 28%14% of our borrowings are,as of December 31, 2017 were, and may continue to be, subject to variable rates of interest;
expose us to increased interest expense to the extent we refinance existing debt with higher cost debt;
require us to dedicate a significant portion of our cash flow from operating activities to make payments on our debt, reducing our funds available for working capital, capital expenditures, and other general corporate expenses;
limit our flexibility in planning for, or reacting to, changes in our business, the cable and telecommunications industries, and the economy at large;
place us at a disadvantage compared to our competitors that have proportionately less debt; and
adversely affect our relationship with customers and suppliers.
If current debt amounts increase, our business results are lower than expected, or credit rating agencies downgrade our debt limiting our access to investment grade markets, the related risks that we now face will intensify.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity.
Our credit facilities and the indentures governing our debt contain a number of significant covenants that could adversely affect our ability to operate our business, our liquidity, and our results of operations. These covenants restrict, among other things, our and our subsidiaries’ ability to:
incur additional debt;
repurchase or redeem equity interests and debt;
issue equity;
make certain investments or acquisitions;
pay dividends or make other distributions;
dispose of assets or merge;
enter into related party transactions; and
grant liens and pledge assets.
Additionally, the Charter Operating credit facilities require Charter Operating to comply with a maximum total leverage covenant and a maximum first lien leverage covenant. The breach of any covenants or obligations in our indentures or credit facilities, not
otherwise waived or amended, could result in a default under the applicable debt obligations and could trigger acceleration of those obligations, which in turn could trigger cross defaults under other agreements governing our long-term indebtedness. In addition, the secured lenders under our notes and the Charter Operating credit facilities could foreclose on their collateral, which includes equity interests in our subsidiaries, and exercise other rights of secured creditors.
We depend on generating sufficient cash flow to fund our debt obligations, capital expenditures, and ongoing operations.
We are dependent on our cash on hand and cash flow from operations to fund our debt obligations, capital expenditures and ongoing operations.
Our ability to service our debt and to fund our planned capital expenditures and ongoing operations will depend on our ability to continue to generate cash flow and our access (by dividend or otherwise) to additional liquidity sources at the applicable obligor. Our ability to continue to generate cash flow is dependent on many factors, including:
our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;
the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, DSL providers, video provided over the Internet and providers of advertising over the Internet;
general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;
our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents);
the development and deployment of new products and technologies; and
the effects of governmental regulation on our business or potential business combination transactions.
Some of these factors are beyond our control. If we are unable to generate sufficient cash flow or we are unable to access additional liquidity sources, we may not be able to service and repay our debt, operate our business, respond to competitive challenges, or fund our other liquidity and capital needs.
Restrictions in our subsidiaries' debt instruments and under applicable law limit their ability to provide funds to us and our subsidiaries that are debt issuers.
Our primary assets are our equity interests in our subsidiaries. Our operating subsidiaries are separate and distinct legal entities and are not obligated to make funds available to their debt issuer holding companies for payments on our notes or other obligations in the form of loans, distributions, or otherwise. Charter Operating’s ability to make distributions to us, CCOH Safari or CCO Holdings, our other primary debt issuers, to service debt obligations is subject to its compliance with the terms of its credit facilities, and restrictions under applicable law. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Limitations on Distributions” and “— Summary of Restrictive Covenants of Our Notes – Restrictions on Distributions.” Under the Delaware Limited Liability Company Act (the “Act”), our subsidiaries may only make distributions if the relevant entity has “surplus” as defined in the Act. Under fraudulent transfer laws, our subsidiaries may not pay dividends if the relevant entity is insolvent or is rendered insolvent thereby. The measures of insolvency for purposes of these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if:
the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
it could not pay its debts as they became due.
While we believe that our relevant subsidiaries currently have surplus and are not insolvent, these subsidiaries may become insolvent in the future. Our direct or indirect subsidiaries include the borrowers under the CCO Safari credit facility and the borrowers and guarantors under the Charter Operating credit facilities. CCOH Safari and CCO Holdings are each an obligor under their respective senior notes. As of December 31, 2014, our total principal amount of debt was approximately $21.1 billion, including $7.0 billion of debt for which proceeds are held in escrow pending consummation of the Transactions.
In the event of bankruptcy, liquidation, or dissolution of one or more of our subsidiaries, that subsidiary's assets would first be applied to satisfy its own obligations, and following such payments, such subsidiary may not have sufficient assets remaining to make payments to its parent company as an equity holder or otherwise. In that event:
the lenders under Charter Operating's credit facilities, whose interests are secured by substantially all of our operating assets, and all holders of other debt of CCOH Safari, CCO Holdings, Charter Operating and CCO Safari, will have the right to be paid in full before us from any of our subsidiaries' assets; and
CCH I, the holder of preferred membership interests in our subsidiary, CC VIII, would have a claim on a portion of CC VIII’s assets that may reduce the amounts available for repayment to holders of CCO Holdings' and CCOH Safari's outstanding notes.
All of our outstanding debt is subject to change of control provisions. We may not have the ability to raise the funds necessary to fulfill our obligations under our indebtedness following a change of control, which would place us in default under the applicable debt instruments.
We may not have the ability to raise the funds necessary to fulfill our obligations under our notes and our credit facilities following a change of control. Under the indentures governing our notes, upon the occurrence of specified change of control events, the debt issuer is required to offer to repurchase all of its outstanding notes. However, we may not have sufficient access to funds at the time of the change of control event to make the required repurchase of the applicable notes, and Charter Operating is limited in its ability to make distributions or other payments to any debt issuer to fund any required repurchase. In addition, a change of control under the Charter Operating credit facilities would result in a default under those credit facilities. Because such credit facilities are obligations of Charter Operating, the credit facilities would have to be repaid before Charter Operating's assets could be available to CCO Holdings or CCOH Safari to repurchase their notes. Any failure to make or complete a change of control offer would place CCO Holdings or CCOH Safari in default under its notes. The failure of our subsidiaries to make a change of control offer or repay the amounts accelerated under their notes and credit facilities would place them in default.
Risks Related to Our Business
We operate in a very competitive business environment, which affects our ability to attract and retain customers and can adversely affect our business, operations and financial results.
The industry in which we operate is highly competitive and has become more so in recent years. In some instances, we compete against companies with fewer regulatory burdens, better access to financing, greater personnel resources, greater resources for marketing, greater and more favorable brand name recognition, and long-established relationships with regulatory authorities and customers. Increasing consolidation in the cable industry and the repeal of certain ownership rules have provided additional benefits to certain of our competitors, either through access to financing, resources, or efficiencies of scale. We could also face additional competition from multi-channel video providers if they began distributing video over the Internet to customers residing outside their current territories.
Our principal competitors for video services throughout our territory are DBS providers. The two largest DBS providers are DirecTV and DISH Network. Competition from DBS, including intensive marketing efforts with aggressive pricing, exclusive programming and increased HD broadcasting has had an adverse impact on our ability to retain customers. DBS companies have also expanded their activities in the MDU market.
Telephone companies, including two major telephone companies, AT&T and Verizon, offer video and other services in competition with us, and we expect they will increasingly do so in the future. Upgraded portions of these networks carry two-way video, data services and provide digital voice services similar to ours. In the case of Verizon, FIOS high-speed data services offer speeds as high as or higher than ours. In addition, these companies continue to offer their traditional telephone services, as well as service bundles that include wireless voice services provided by affiliated companies. Based on our internal estimates, we believe that AT&T and Verizon are offering video services in areas serving approximately 30% and 4%, respectively, of our estimated passings and we have experienced customer losses in these areas. AT&T and Verizon have also launched campaigns to capture more of the MDU market. AT&T has publicly stated that it expects to roll out its video product beyond the territories currently served although it is unclear where and to what extent. When AT&T or Verizon have introduced or expanded their offering of video products in our market areas, we have seen a decrease in our video revenue as AT&T and Verizon typically roll out aggressive marketing and discounting campaigns to launch their products. Additionally, in May 2014, AT&T announced its intention to acquire DirecTV, the nation’s largest DBS provider. If completed, this transaction will create an even larger competitor for Charter’s video services that will have the ability to expand its video service offerings to include bundled wireless offerings.
Due to consumer electronic innovations, content owners are allowing consumers to watch Internet-delivered content on televisions, personal computers, tablets, gaming boxes connected to televisions and mobile devices, some without charging a fee to access the content. Technological advancements, such as video-on-demand, new video formats, and Internet streaming and downloading, have increased the number of entertainment and information delivery choices available to consumers, and intensified the challenges posed by audience fragmentation. For example, online video services continue to offer consumers alternatives including Hulu, Netflix, Amazon and Apple. Recently, HBO and CBS announced plans to sell their programming direct to consumers over the Internet. DISH has also announced Sling TV which will include ESPN among other programming, and Sony has announced PlayStation Vue which is expected to include 75 TV channels to be launched in the first quarter of 2015. The increasing number of choices available to audiences could also negatively impact advertisers’ willingness to purchase advertising from us, as well as the price they are willing to pay for advertising.
With respect to our Internet access services, we face competition, including intensive marketing efforts and aggressive pricing, from telephone companies, primarily AT&T and Verizon, and other providers of DSL, fiber-to-the-node and fiber-to-the-home services. DSL service competes with our Internet service and is often offered at prices lower than our Internet services, although often at speeds lower than the speeds we offer. Fiber-to-the-node networks can provide faster Internet speeds than conventional DSL, but still cannot typically match our Internet speeds. Fiber-to-the-home networks, however, can provide Internet speeds equal to or greater than our current Internet speeds. In addition, in many of our markets, DSL providers have entered into co-marketing arrangements with DBS providers to offer service bundles combining video services provided by a DBS provider with DSL and traditional telephone and wireless services offered by the telephone companies and their affiliates. These service bundles offer customers similar pricing and convenience advantages as our bundles.
Continued growth in our residential voice business faces risks. The competitive landscape for residential and commercial telephone services is intense; we face competition from providers of Internet telephone services, as well as incumbent telephone companies. Further, we face increasing competition for residential voice services as more consumers in the United States are replacing traditional telephone service with wireless service. We expect to continue to price our voice product aggressively as part of our triple play strategy which could negatively impact our revenue from voice services to the extent we do not increase volume.
The existence of more than one cable system operating in the same territory is referred to as an overbuild. Overbuilds could adversely affect our growth, financial condition, and results of operations, by creating or increasing competition. We are aware of traditional overbuild situations impacting certain of our markets, however, we are unable to predict the extent to which additional overbuild situations may occur.
In order to attract new customers, from time to time we make promotional offers, including offers of temporarily reduced price or free service. These promotional programs result in significant advertising, programming and operating expenses, and also may require us to make capital expenditures to acquire and install customer premise equipment. Customers who subscribe to our services as a result of these offerings may not remain customers following the end of the promotional period. A failure to retain customers could have a material adverse effect on our business.
Mergers, joint ventures, and alliances among franchised, wireless, or private cable operators, DBS providers, local exchange carriers, and others, may provide additional benefits to some of our competitors, either through access to financing, resources, or efficiencies of scale, or the ability to provide multiple services in direct competition with us.
In addition to the various competitive factors discussed above, our business competes with all other sources of entertainment and information delivery, including broadcast television, movies, live events, radio broadcasts, home video products, console games, print media, and the Internet. If we do not respond appropriately to further increases in the leisure and entertainment choices available to consumers, our competitive position could deteriorate, and our financial results could suffer.
Our services may not allow us to compete effectively. Competition may reduce our expected growth of future cash flows which may contribute to future impairments of our franchises and goodwill and our ability to meet cash flow requirements, including debt service requirements.
Our exposure to the economic conditions of our current and potential customers, vendors and third parties could adversely affect our cash flow, results of operations and financial condition.
We are exposed to risks associated with the economic conditions of our current and potential customers, the potential financial instability of our customers and their financial ability to purchase our products. If there were a general economic downtown, we may experience increased cancellations by our customers or unfavorable changes in the mix of products purchased. These events have adversely affected us in the past, and may adversely affect our cash flow, results of operations and financial condition if a downturn were to occur.
In addition, we are susceptible to risks associated with the potential financial instability of the vendors and third parties on which we rely to provide products and services or to which we outsource certain functions. The same economic conditions that may affect our customers, as well as volatility and disruption in the capital and credit markets, also could adversely affect vendors and third parties and lead to significant increases in prices, reduction in output or the bankruptcy of our vendors or third parties upon which we rely. Any interruption in the services provided by our vendors or by third parties could adversely affect our cash flow, results of operation and financial condition.
We face risks inherent in our commercial business.
We may encounter unforeseen difficulties as we increase the scale of our service offerings to businesses. We sell Internet access, data networking and fiber connectivity to cellular towers and office buildings, video and business voice services to businesses and have increased our focus on growing this business. In order to grow our commercial business, we expect to continue investment in technology, equipment and personnel focused on the commercial business. Commercial business customers often require service level agreements and generally have heightened customer expectations for reliability of services. If our efforts to build the infrastructure to scale the commercial business are not successful, the growth of our commercial services business would be limited. We depend on interconnection and related services provided by certain third parties for the growth of our commercial business. As a result, our ability to implement changes as the services grow may be limited. If we are unable to meet these service level requirements or expectations, our commercial business could be adversely affected. Finally, we expect advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment. Consequently, we are unable to predict the effect that ongoing or future developments in these areas might have on our voice and commercial businesses and operations.
Programming costs are rising at a much faster rate than wages or inflation, and we may not have the ability to reduce or moderate the growth rates of, or pass on to our customers, our increasing programming costs, which would adversely affect our cash flow and operating margins.
Programming has been, and is expected to continue to be, our largest operating expense item. In recent years, the cable industry has experienced a rapid escalation in the cost of programming. We expect programming costs to continue to increase because of a variety of factors including amounts paid for retransmission consent, annual increases imposed by programmers with additional selling power as a result of media consolidation, incremental programming, including new sports services, out-of-home or non-linear programming and attempts by programmers to replace advertising revenue they are losing to online marketing options and as a result of declining viewership ratings. The inability to fully pass these programming cost increases on to our customers has had an adverse impact on our cash flow and operating margins associated with the video product. We have programming contracts that have expired and others that will expire at or before the end of 2015. There can be no assurance that these agreements will be renewed on favorable or comparable terms. To the extent that we are unable to reach agreement with certain programmers on terms that we believe are reasonable, we may be forced to remove such programming channels from our line-up, which could result in a further loss of customers.
Increased demands by owners of some broadcast stations for carriage of other services or payments to those broadcasters for retransmission consent are likely to further increase our programming costs. Federal law allows commercial television broadcast stations to make an election between “must-carry” rights and an alternative “retransmission-consent” regime. When a station opts for the latter, cable operators are not allowed to carry the station’s signal without the station’s permission. In some cases, we carry stations under short-term arrangements while we attempt to negotiate new long-term retransmission agreements. If negotiations with these programmers prove unsuccessful, they could require us to cease carrying their signals, possibly for an indefinite period. Any loss of stations could make our video service less attractive to customers, which could result in less subscription and advertising revenue. In retransmission-consent negotiations, broadcasters often condition consent with respect to one station on carriage of one or more other stations or programming services in which they or their affiliates have an interest. Carriage of these other services, as well as increased fees for retransmission rights, may increase our programming expenses and diminish the amount of capacity we have available to introduce new services, which could have an adverse effect on our business and financial results.
Our inability to respond to technological developments and meet customer demand for new products and services could limit our ability to compete effectively.
Our business is characterized by rapid technological change and the introduction of new products and services, some of which are bandwidth-intensive. We may not be able to fund the capital expenditures necessary to keep pace with technological developments, execute the plans to do so, or anticipate the demand of our customers for products and services requiring new technology or bandwidth. The implementation of our network-based user interface, Spectrum Guide, and downloadable security necessary for our Worldbox set-top box strategy, may ultimately be unsuccessful or more expensive than anticipated. In order to realize the
benefits of our Worldbox technology, we must implement our downloadable conditional access security in our regional video networks. Our inability to maintain and expand our upgraded systems and provide advanced services such as a state of the art user interface in a timely manner, or to anticipate the demands of the marketplace, could materially adversely affect our ability to attract and retain customers. Consequently, our growth, financial condition and results of operations could suffer materially.
We depend on third party service providers, suppliers and licensors; thus, if we are unable to procure the necessary services, equipment, software or licenses on reasonable terms and on a timely basis, our ability to offer services could be impaired, and our growth, operations, business, financial results and financial condition could be materially adversely affected.
We depend on third party service providers, suppliers and licensors to supply some of the services, hardware, software and operational support necessary to provide some of our services. We obtain these materials from a limited number of vendors, some of which do not have a long operating history or which may not be able to continue to supply the equipment and services we desire. Some of our hardware, software and operational support vendors, and service providers represent our sole source of supply or have, either through contract or as a result of intellectual property rights, a position of some exclusivity. If demand exceeds these vendors’ capacity or if these vendors experience operating or financial difficulties, or are otherwise unable to provide the equipment or services we need in a timely manner, at our specifications and at reasonable prices, our ability to provide some services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials or services might delay our ability to serve our customers. These events could materially and adversely affect our ability to retain and attract customers, and have a material negative impact on our operations, business, financial results and financial condition. A limited number of vendors of key technologies can lead to less product innovation and higher costs. Our cable systems have historically been restricted to using one of two proprietary conditional access security systems, which we believe has limited the number of manufacturers producing set-top boxes for such systems. As an alternative, Charter has developed a conditional access security system which may be downloaded into set-top boxes with features we specify that could be provided by a variety of manufacturers. We refer to our specified set-top box as our Worldbox. In order to realize the benefits of our Worldbox technology, we must now implement the conditional access security system across our video network. We cannot provide assurances that this implementation will ultimately be successful or completed in the expected timeframe or at the expected budget.
We further depend on patent, copyright, trademark and trade secret laws and licenses to establish and maintain our intellectual property rights in technology and the products and services used in our operating activities. Any of our intellectual property rights could be challenged or invalidated, or such intellectual property rights may not be sufficient to permit us to continue to use certain intellectual property, which could result in discontinuance of certain product or service offerings or other competitive harm, our incurring substantial monetary liability or being enjoined preliminarily or permanently from further use of the intellectual property in question.
Various events could disrupt our networks, information systems or properties and could impair our operating activities and negatively impact our reputation.
Network and information systems technologies are critical to our operating activities, as well as our customers' access to our services. We may be subject to information technology system failures and network disruptions. Malicious and abusive activities, such as the dissemination of computer viruses, worms, and other destructive or disruptive software, computer hackings, social engineering, process breakdowns, denial of service attacks and other malicious activities have become more common in industry overall. If directed at us or technologies upon which we depend, these activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers, and damage to our or our customers' equipment and data. Further, these activities could result in security breaches, such as misappropriation, misuse, leakage, falsification or accidental release or loss of information maintained in our information technology systems and networks, and in our vendors’ systems and networks, including customer, personnel and vendor data. System failures and network disruptions may also be caused by natural disasters, accidents, power disruptions or telecommunications failures. If a significant incident were to occur, it could damage our reputation and credibility, lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to service our customers and protect our network. These events also could result in large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar events in the future. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Any significant loss of customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth, financial condition and results of operations.
For tax purposes, we could experience a deemed ownership change in the future that could limit our ability to use our tax loss carryforwards.
As of December 31, 2014, we had approximately $9.5 billion of federal tax net operating loss carryforwards resulting in a gross deferred tax asset of approximately $3.3 billion. Federal tax net operating loss carryforwards expire in the years 2020 through
2034. These losses resulted from the operations of Charter Holdco and its subsidiaries. In addition, as of December 31, 2014, we had state tax net operating loss carryforwards resulting in a gross deferred tax asset (net of federal tax benefit) of approximately $321 million. State tax net operating loss carryforwards generally expire in the years 2015 through 2034. Due to uncertainties in projected future taxable income, valuation allowances have been established against the gross deferred tax assets for book accounting purposes, except for future taxable income that will result from the reversal of existing temporary differences for which deferred tax liabilities are recognized. Such tax loss carryforwards can accumulate and be used to offset our future taxable income.
In the past, we have experienced “ownership changes” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned, directly or indirectly, by “5-percent stockholders” (within the meaning of Section 382 of the Code) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned, directly or indirectly, by such “5-percent stockholders” at any time over the preceding three years. As a result, we are subject to an annual limitation on the use of our loss carryforwards which existed at November 30, 2009 for the first "ownership change" and those that existed at May 1, 2013 for the second "ownership change." The limitation on our ability to use our loss carryforwards, in conjunction with the loss carryforward expiration provisions, could reduce our ability to use a portion of our loss carryforwards to offset future taxable income, which could result in us being required to make material cash tax payments. Our ability to make such income tax payments, if any, will depend at such time on our liquidity or our ability to raise additional capital, and/or on receipt of payments or distributions from Charter Holdco and its subsidiaries.
If we were to experience a third ownership change in the future (as a result of purchases and sales of stock by our "5-percent stockholders," new issuances or redemptions of our stock, certain acquisitions of our stock and issuances, redemptions, sales or other dispositions or acquisitions of interests in our "5-percent stockholders"), our ability to use our loss carryforwards could become subject to further limitations. Our common stock is subject to certain transfer restrictions contained in our amended and restated certificate of incorporation. These restrictions, which are designed to minimize the likelihood of an ownership change occurring and thereby preserve our ability to utilize our loss carryforwards, are not currently operative but could become operative in the future if certain events occur and the restrictions are imposed by our board of directors. However, there can be no assurance that our board of directors would choose to impose these restrictions or that such restrictions, if imposed, would prevent an ownership change from occurring.
If we are unable to retain key employees, our ability to manage our business could be adversely affected.
Our operational results have depended, and our future results will depend, upon the retention and continued performance of our management team. Our ability to retain and hire new key employees for management positions could be impacted adversely by the competitive environment for management talent in the broadband communications industry. The loss of the services of key members of management and the inability or delay in hiring new key employees could adversely affect our ability to manage our business and our future operational and financial results.
Our inability to successfully acquire and integrate other businesses, assets, products or technologies could harm our operating results.
We continuously evaluate and pursue small and large acquisitions and strategic investments in businesses, products or technologies that we believe could complement or expand our business or otherwise offer growth or cost-saving opportunities. From time to time, including in the near term, we may enter into letters of intent with companies with which we are negotiating for potential acquisitions or investments, or as to which we are conducting due diligence. An investment in, or acquisition of, complementary businesses, products or technologies in the future could materially decrease the amount of our available cash or require us to seek additional equity or debt financing. We may not be successful in negotiating the terms of any potential acquisition, conducting thorough due diligence, financing the acquisition or effectively integrating the acquired business, product or technology into our existing business and operations. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or customer issues.
Additionally, in connection with any acquisitions we complete, we may not achieve the growth, synergies or other benefits we expected to achieve, and we may incur write-downs, impairment charges or unforeseen liabilities that could negatively affect our operating results or financial position or could otherwise harm our business. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology, individually or across multiple opportunities, could divert management and employee time and resources from other matters.
Risks Related to Ownership Position of Liberty Broadband Corporation and Advance/Newhouse Partnership
Liberty Broadband Corporation owns a significant amount of Charter’s common stock, giving itand A/N have governance rights that give them influence over corporate transactions and other matters.
Liberty Broadband currently owns a significant amount of Charter Class A common stock and is entitled to certain governance rights with respect to Charter. A/N currently owns Charter Class A common stock and a significant amount of membership interests in our subsidiary Charter Holdings that are convertible into Charter Class A common stock and is entitled to certain governance rights with respect to Charter. Members of ourthe Charter board of directors include directors who are also officers and directors of our principal stockholder.Liberty Broadband and directors who are current or former officers and directors of A/N. Dr. John Malone is the Chairman of Liberty Broadband, Corporation, and Mr. Greg Maffei is the president and chief executive officer of Liberty Broadband Corporation.Broadband. Steven Miron is the Chief Executive Officer of A/N and Michael Newhouse is an officer or director of several of A/N’s affiliates. As of December 31, 2014,2017, Liberty Broadband Corporation beneficially held approximately 25.75%approximately 21% of ourCharter’s Class A common stock.stock (including shares owned by Liberty Interactive over which Liberty Broadband Corporationholds an irrevocable voting proxy) and A/N beneficially held approximately approximately 13% of Charter’s Class A common stock, in each case assuming the conversion of the membership interests held by A/N. Pursuant to the stockholders agreement between Liberty Broadband, A/N and Charter, Liberty Broadband currently has the right to designate up to fourthree directors as nominees for ourCharter’s board of directors through our 2015 annual meetingand A/N currently has the right to designate up to two directors as nominees for Charter’s board of stockholdersdirectors with one designated director to be appointed to each of the Audit Committee,audit committee, the Nominatingnominating and Corporate Governance Committeecorporate governance committee, the compensation and benefits committee and the CompensationFinance Committee, in each case provided that each maintains certain specified voting or equity ownership thresholds and Benefits Committee.each nominee meets certain applicable requirements or qualifications.
In connection with the TWC Transaction, Liberty Broadband Corporationand Liberty Interactive entered into a proxy and right of first refusal agreement, pursuant to which Liberty Interactive granted Liberty Broadband an irrevocable proxy to vote all Charter Class A common stock owned beneficially or of record by Liberty Interactive, with certain exceptions. In addition, at the closing of the Bright House Transaction, A/N and Liberty Broadband entered into a proxy agreement pursuant to which A/N granted to Liberty Broadband a 5-year irrevocable proxy (which we refer to as the “A/N proxy”) to vote, subject to certain exceptions, that number of shares of Charter Class A common stock and Charter Class B common stock, in each case held by A/N (such shares are referred to as the “proxy shares”), that will result in Liberty Broadband having voting power in Charter equal to 25.01% of the outstanding voting power of Charter, provided, that the voting power of the proxy shares is capped at 7.0% of the outstanding voting power of Charter. Therefore, giving effect to the Liberty Interactive proxy and the A/N proxy and the voting cap contained in the stockholders agreement, Liberty Broadband has 25.01% of the outstanding voting power in Charter. The stockholders agreement and Charter’s amended and restated certificate of incorporation fixes the size of the board at 13 directors. Liberty Broadband and A/N are required to vote (subject to the applicable voting cap) their respective shares of Charter Class A common stock and Charter Class B common stock for the director nominees nominated by the nominating and corporate governance committee of the board of directors, including the respective designees of Liberty Broadband and A/N, and against any other nominees, except that, with respect to the unaffiliated directors, Liberty Broadband and A/N must instead vote in the same proportion as the voting securities are voted by stockholders other than A/N and Liberty Broadband or any group which includes any of them are voted, if doing so would cause a different outcome with respect to the unaffiliated directors. As a result of their rights under the stockholders agreement and their significant equity and voting stakes in Charter, Liberty Broadband and/or A/N, who may have interests different from those of other stockholders, will be able to exercise substantial influence over allcertain matters requiring stockholder approval,relating to the governance of Charter, including the election of directors and approval of significant corporate action,actions, such as mergers and other business combination transactions should Liberty Broadband Corporation retain a significant ownership interest in us. Liberty Broadband Corporation and its affiliates are not restricted from investing in, and have invested in, and engaged in, other businesses involving or related to the operation of cable television systems, video programming, Internet service, voice or business and financial transactions conducted through broadband interactivity and Internet services. Liberty Broadband Corporation and its affiliates may also engage in other businesses that compete or may in the future compete with us.transactions.
Liberty Broadband Corporation's substantial influence over our management and affairs could create conflicts of interest if Liberty Broadband Corporation faced decisions that could have different implications for it and us.
Risks Related to the Transactions
As a result of the Transactions, current Charter stockholders’ ownership interest in Charter will be diluted from 100% to approximately 92%.
Immediately following the Transactions, it is expected that the current stockholders of Charter, who presently own 100% of Charter, will own approximately 92% of the outstanding common stock of Charter. The Transactions therefore will result in substantial dilution of the ownership interest of the current Charter stockholders. Additionally, due to the ownership dilution, Charter’s current stockholders as a group will be able to exercise less influence after the Transactions than they currently exercise over the management, operations and policies for Charter. If GreatLand Connections raises less proceeds in the related financing Transactions than currently contemplated, Charter is obligated pursuant to the Merger Agreement and the financing arrangements to increase its stock consideration paid in the Charter Merger, which would further dilute existing Charter stockholders. Also, pursuant to the Merger Agreement, if the price at which shares of Charter trade were to be lower during the 60 days leading up to the closing of the Transactions, Charter would have to issue more shares further diluting existing Charter stockholders.
Completion of the Transactions is subject to a number of conditions and if these conditions are not satisfied or waived, the Transactions will not be completed.
Our obligation and the obligation of Comcast to complete the Transactions are subject to satisfaction or waiver of a number of conditions, including, among others:
completion of Comcast’s acquisition of TWC;
expiration or termination of the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") waiting period and receipt of certain regulatory approvals for the Transactions, in most cases without the imposition of a burdensome condition;
unless not required under applicable law, approval by our stockholders;
receipt of opinions of counsel as to the tax-free nature of certain of the Transactions;
absence of injunction or legal impediment on any of the Transactions;
effectiveness of a registration statement for GreatLand Connections shares to be issued in the Transactions and approval for the listing on NASDAQ of the shares of GreatLand Connections’ common stock to be issued in the Transactions;
effectiveness of the registration statement filed by CCH I, which will become New Charter upon the closing of the Transactions ("New Charter") and approval for listing on NASDAQ of the shares of New Charter’s common stock;
accuracy of the representations and warranties with respect to each of the Transactions, subject to certain materiality thresholds;
performance of covenants with respect to each of the Transactions, subject to certain materiality thresholds;
with respect to Charter’s obligations, absence of a material adverse change with respect to the assets and liabilities transferred to GreatLand Connections and the assets and liabilities transferred by Comcast to us, taken as a whole, and
The stockholders agreement provides A/N and Liberty Broadband with preemptive rights with respect to Comcast’s obligations, absenceissuances of a material adverse change with respect to the assets and liabilities transferred by us to Comcast and absence of a material adverse effect with respect to us, and also with respect to Charter’s obligations, absence of the assertion by Charter’s financing sources of a material adverse effect with respect to us; and
completion of the debt-for-debt exchange contemplatedCharter equity in connection with the GreatLand Connections spin-off from Comcast.
There can be no assurance that the conditions to closing of the Transactions will be satisfied or waived or that the Transactions will be completed.
In order to complete the Transactions, we along with Comcast must obtain certain governmental authorizations,transactions, and if such authorizations are not granted or are granted with conditions to the parties, completion of the Transactions may be jeopardized or the anticipated benefits of the Transactions could be reduced.
Completion of the Transactions is conditioned upon the expiration or early termination of the waiting periods relating to the Transactions under the HSR Act and the required governmental authorizations, including an order of the FCC, having been obtained and being in full force and effect. Although we and Comcast have agreed in the Transactions Agreement to use reasonable best efforts, subject to certain limitations, to obtain the required governmental authorizations, there can be no assuranceevent that the relevant waiting periods will expireA/N or that the relevant authorizations will be obtained. In addition, the governmental authorities with or from whichLiberty Broadband exercises these authorizations are required have broad discretion in administering the governing regulations. As a condition to authorization of the Transactions, these governmental authorities may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of our business after completion of the Transactions. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Transactions or imposing additional material costs on or materially limiting the revenues of New Charter following the Transactions, or otherwise adversely affect our business and results of operations after completion of the Transactions. In addition, we can provide no assurance that these conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Transactions.
We have relied on publicly available information and ongoing diligence on the systems being acquired by Charter and by GreatLand Connections.
We have relied on publicly available information and ongoing diligence regarding the systems being acquired by Charter and by GreatLand Connections. The Transactions accordingly provide for assumption by Charter and by GreatLand Connections of only those liabilities that are primarily related to the systems acquired by each of them respectively, and for valuation terms that will depend on actual Carveout 2014 EBITDA (as defined in the Transactions Agreement) produced by such systems, including true-up adjustment payments related to EBITDA and, in some cases, working capital. However, it is possible that significant liabilities, present, future or contingent, may be assumed by Charter or GreatLand Connections that are not fully reflected in the valuation terms, and accordingly could have a material adverse effect on Charter and/or its investment in GreatLand Connections. Similarly, it is possible that certain assets required to operate the systems acquired by GreatLand Connections and/or Charter, such as licenses, technologies and/or employees, may not be transferred in the Transactions, requiring GreatLand Connections and/or Charter to incur additional costs and invest additional resources to procure such assets and/or hire employees with expertise in the transferred business, which may adversely affect Charter’s ability to realize the anticipated benefits of the Transactions. As we have already entered into the Agreement for the Transactions without any diligence conditions, our ongoing diligence is not expected to give rise to any material adjustments in the Transactions, and our ongoing diligence continues to focus on the transition of the to be acquired systems to our ownership or the provision of services in the case of GreatLand Connections.
We may not realize anticipated cost synergies and growth opportunities.
We expect that we will realize cost synergies, growth opportunities and other financial and operating benefits as a result of the Transactions. Our success in realizing these cost synergies, growth opportunities and other financial and operating benefits, and the timing of this realization, depends on the successful integration of the business operations obtained in the Asset Exchange and the Asset Purchase and our ability to provide certain services to GreatLand Connections effectively pursuant to a services agreement. Even if we are able to integrate the business operations obtained in the Asset Exchange and the Asset Purchase successfully, we cannot predict with certainty if or when these cost synergies, growth opportunities and benefits will occur, or the extent to which they actually will be achieved. For example, the benefits from the Transactions may be offset by costs incurred in integrating the new business operations or in obtaining or attempting to obtain regulatory approvals for the Transactions, or negatively impacted by potential programming dis-synergies that we may experience as a result of the Transactions. Realization of any benefits and cost synergies could be affected by the factors described in other risk factors and a number of factors beyond our control, including, without limitation, general economic conditions, increased operating costs, the response of competitors and regulatory developments.
In addition, certain license and customer contracts which are required to be transferred to GreatLand Connections or Charter by Comcast require the consent of the licensor or customer party to the contract to effect this assignment. Comcast, GreatLand Connections and Charter may be unable to obtain these consents on terms favorable to GreatLand Connections or Charter, respectively, or at all, which could have a material adverse impact on GreatLand Connections’ (and hence on us) or on our business, financial condition and results of operations after the Transactions. There can be no assurance that third-party consents will be obtained prior to completion of the Transactions or at all.
The integration of the business acquired in the Asset Exchange and Asset Purchase with the businesses we operated prior to the Asset Exchange and Asset Purchase may not be successful or the anticipated benefits from the Asset Exchange and Asset Purchase may not be realized.
After consummation of the Asset Exchange and Asset Purchase, we will have significantly more systems, assets, investments, businesses, customers and employees than we did prior to the Asset Exchange and Asset Purchase. The process of integrating these assets with the businesses we operated prior to the Asset Exchange and Asset Purchase will require us to expend significant capital and significantly expand the scope of our operations and operating and financial systems. Our management will be required to devote a significant amount of time and attention to the process of integrating the operations of the acquired assets with our operations before the Asset Exchange and Asset Purchase. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include:
integrating the operations of the acquired assets while carrying on the ongoing operations of the businesses we operated prior to the Asset Exchange and Asset Purchase;
integrating information, purchasing, provisioning, accounting, finance, sales, billing, payroll, reporting and regulatory compliance systems;
integrating and unifying the product offerings and services available to customers, including customer premise equipment and video user interfaces;
completing the conversion of analog systems to all-digital for the systems to be acquired;
managing a significantly larger company than before consummation of the Asset Exchange and Asset Purchase;
integrating separate business cultures;
attracting and retaining the necessary personnel associated with the acquired assets; and
creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters; and
the impact on our business of providing services to GreatLand Connections which will also face the foregoing difficulties.
Charter and Comcast have agreed to provide each other with transition services in connection with the transferred systems and relevant assets. Providing such services could divert management attention and result in additional costs, particularly as Charter starts up infrastructure and staff to take over transition services and provides transition services to Comcast for former Charter systems. In addition, the inability to procure such services could negatively impact our expected results of operations.
There is no assurance that the assets acquired in the Asset Exchange and Asset Purchase will be successfully or cost-effectively integrated into the businesses we operated prior to the Asset Exchange and Asset Purchase. The process of integrating the acquired assets into our operations prior to the Asset Exchange and Asset Purchase may cause an interruption of, or loss of momentum in, the activities of our business. If our management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and our liquidity, results of operations and financial condition may be materially adversely impacted.
Even if we are able to successfully integrate the new assets, it may not be possible to realize the benefits that are expected to result from the Asset Exchange and Asset Purchase, or realize these benefits within the time frame that is expected. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Asset Exchange and Asset Purchase may be offset by costs incurred or delays in integrating the companies. Programming dis-synergies could also be larger than expected. If we fail to realize the benefits we anticipate from the acquisition, our liquidity, results of operations or financial condition may be adversely affected.
The value of our interests in GreatLand Connections following the Transactions may fluctuate from time to time based on factors beyond our control.
Following the Transactions, the value of our interests in GreatLand Connections will depend on GreatLand Connections’ operational performance and fluctuations in its share price. We will not control the management and operations of GreatLand Connections, and we will therefore not be able to prevent or address any decline in the operational performance or trading value of GreatLand Connections. In addition, the operational performance and trading value of GreatLand Connections may be influenced by other
factors outside our control, including risks resulting from the separation of the cable systems from Comcast; changes in earnings estimated by securities analysts or GreatLand Connections’ ability to meet those estimates; and domestic and foreign economic conditions.
If the operating results for GreatLand Connections following the Transactions are poor, we may not achieve the increases in revenues and earnings per share that we expect as a result of the Transactions.
We have projected that we will derive a portion of our revenues and earnings per share from GreatLand Connections after the Transactions, through receipt of a services fee of 4.25% of GreatLand Connections’ revenues pursuant to a services agreement. In addition, we will record 33% of GreatLand Connections’ net income, which will also have an impact on our operating results. Therefore, any negative impact on GreatLand Connections or the operations of GreatLand Connections' business could harm our operating results. Some of the significant factors that could harm GreatLand Connections and the operations of the GreatLand Connections' business, and therefore harm our future operating results after the Transactions, include competitive pressure from existing or new companies and a decline in the markets served by GreatLand Connections.
If the operating results of the TWC assets acquired in the Asset Exchange and the Asset Purchase are less than our expectations, or an increase in the capital expenditures to upgrade and maintain those assets as well as to keep pace with technological developments is necessary, Charter may not achieve the expected level of financial results from the Transactions.
We have projected that we will derive a portion of our revenues and earnings per share from the operation of the TWC assets that we will acquire in the Asset Exchange and the Asset Purchase. Therefore, any negative impact on the TWC assets to be acquired by us or the operating results derived from such exchanged and purchased assets could harm our operating results.
Our business is characterized by rapid technological change and the introduction of new products and services. We intend to make all-digital investments in the TWC assets acquired in the Asset Exchange and Asset Purchase and transition toward only using two-way interactive set-top boxes. The increase in capital expenditures necessary for the all-digital investment and the transition toward two-way set-top boxes in the TWC assets may negatively impact the expected financial results from the Transactions. We may not be able to fund the capital expenditures necessary to keep pace with technological developments, execute the plans to do so, or anticipate the demand of our customers for products and services requiring new technology or bandwidth. Our inability to maintain, expand and upgrade our existing or acquired assets, including through all-digital initiatives for the TWC assets, could materially adversely affect our financial condition and results of operations.
Because of high debt levels, we may not be able to service our debt obligations in accordance with our terms after the Transactions.
Our ability to meet our expense and debt service obligations contained in the agreements governing our indebtedness will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer preferences, the success of product and marketing innovation and pressure from competitors. Should our sales decline after the Transactions, we may not be able to generate sufficient cash flow to pay our debt service obligations when due. If we are unable to meet our debt service obligations after the Transactions or should we fail to comply with our financial and other restrictive covenants contained in the agreements governing our indebtedness, we may be required to refinance all or part of our debt, sell important strategic assets at unfavorable prices or borrow more money. We may not be able to, at any given time, refinance our debt, sell assets or borrow more money on terms acceptable to us or at all. Our inability to refinance our debt could have a material adverse effect on our financial condition and results from operations after the Transactions.
We may have difficulty attracting, motivating and retaining executives and other employees in light of the Transactions.
Uncertainty about the effect of the Transactions on our employees may have an adverse effect on us. This uncertainty may impair our ability to attract, retain and motivate personnel until the Transactions are completed. Employee retention may be particularly challenging during the pendency of the Transactions, as employees may feel uncertain about their future roles with us after the Transactions. If our employees depart because of issues relating to the uncertainty and difficulty of integration, our ability to realize the anticipated benefits of the Transactions could be reduced. Similar challenges exist for us in retaining employees being transferred to Charter in the Transactions and in attracting any additional personnel we may need after the Transactions.
A delay in the completion of the Transactions may diminish the anticipated benefits of the Transactions.
Completion of the Transactions is conditioned upon the receipt of certain governmental consents and approvals, orders, authorizations, and rulings, including the expiration or termination of any applicable waiting period (or extension thereof) under the HSR Act and the adoption of an order by the FCC granting its consent to the transfer of control or assignment of certain licenses and authorizations issued by the FCC. The requirement to receive these consents and approvals, orders, authorizations and rulings
before the Transactions could delay the completion of the Transactions if, for example, government agencies request additional information from the parties in order to facilitate their review of the Transactions or require any conditions precedent to granting their approval of the Transactions. In addition, these governmental agencies may attempt to condition their approval of the Transactions on the imposition of conditions that could have a material adverse effect on us after the Transactions, including but not limited to our operating results or the valuerights, holders of Charter Class A common stock. Any delay in the completion of the Transactions could diminish the anticipated benefits of the Transactions or result in additional transaction costs, loss of revenue or other effects associated with uncertainty about the Transactions. Any uncertainty over the ability of the companies to complete the Transactions could make it more difficult for us and GreatLand Connections to retain key employees or to pursue business strategies. In addition, until the Transactions are completed, the attention of our managementstock may be diverted from ongoing business concerns and regular business responsibilities to the extent management is focused on matters relating to the Transactions.experience further dilution.
Failure to complete the Transactions could negatively impact our stock priceThe stockholders agreement provides that A/N and our future business and financial results.
If the Transactions are not completed for any reason, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Transactions, we would be subject to a number of risks:
We may experience negative reactions from the financial markets, including negative impacts on our stock price;
We may experience negative reactions from our customers, regulators and employees;
We may be required to pay significant costs relating to the Transactions, andLiberty Broadband will have paid significant costs relatedcertain contractual preemptive rights over issuances of Charter equity securities in connection with capital raising transactions, merger and acquisition transactions, and in certain other circumstances. Holders of Charter Class A common stock will not be entitled to the Transactions such as interest on the $7.0 billion of debt incurred to fund the Transactions;
The Transactions Agreement places certain restrictions on the conduct of our businesssimilar preemptive rights with respect to our assets being transferredsuch transactions. As a result, if Liberty Broadband and/or A/N elect to Comcast prior to completion ofexercise their preemptive rights, (i) these parties would not experience the Transactions. Such restrictions, the waiver of which is subject to the consent ofdilution experienced by the other party (in certain cases, not to be unreasonably withheld, conditioned or delayed), may have prevented us from taking certain specified actions or otherwise pursuing business opportunities during the pendencyholders of the Transactions; and
Matters relating to the Transactions (including integration planning) will require substantial commitments of time and resources by our management and expenditures, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us in the absence of the Transactions.
If the Transactions are not completed, the risks described above may materialize and they may adversely affect our business, financial condition, financial results and stock price.
In addition, we could be subject to litigation related to any failure to complete the Transactions or related to any enforcement proceeding commenced against us to perform our obligations under the Transactions Agreement.
If the Spin-Off does not qualify as a tax-free reorganization under Sections 368(a)(1)(D) and 355 of the Code, including as a result of subsequent acquisitions of stock of GreatLand Connections, then Comcast may recognize a very substantial amount of taxable gain and GreatLand Connections (and in certain circumstances, Charter) may be obligated to indemnify Comcast for these taxes.
The completion of the Transactions is conditioned upon the receipt of opinions from counsel as to the tax free nature of certain of the Transactions, including the Spin-Off. The opinions of counsel will be based on, among other things, current law and certain assumptions and representations as to factual matters made by Comcast, GreatLand Connections and Charter. Any change in currently applicable law, which may be retroactive, or the failure of any representation to be true, correct and complete, could adversely affect the conclusions reached by counsel in the opinions. Moreover, the opinions will not be binding on the Internal Revenue Service (“IRS”) or the courts, and the IRS or the courts may not agree with the conclusions reached in the opinions.
Even if the Spin-Off otherwise qualifies as a tax-free spin-off for U.S. federal income tax purposes, the Spin-Off will be taxable to Comcast pursuant to section 355(e) of the Code if 50% or more of the stock of either Comcast or GreatLand Connections is acquired, directly or indirectly (taking into account the stock of GreatLand Connections acquired by New Charter in the Merger and the stock of Comcast and GreatLand Connections acquired by TWC shareholders in the transaction between Comcast and TWC and in the Spin-Off), as part of a plan or series of related transactions that includes the Spin-Off. Because GreatLand Connections stockholders that are former Comcast shareholders (exclusive of former TWC shareholders) will own more than 50% of theClass A common stock, and (ii) such other holders of GreatLand Connections following the Merger, the Merger standing alone is not expected to cause the Spin-Off to be taxable to Comcast under section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of GreatLand ConnectionsCharter Class A common stock or Comcast common stock, either before or after the Spin-Off are partmay experience further dilution of a plan or series of related transactions that includes the Spin-Off,their interest in Charter upon such determination could result in the recognition of gain by Comcast under section 355(e) of the Code. If section 355(e) of the Code applied, Comcast might recognize a very substantial amount of taxable gain.
Under the tax sharing agreement that will be entered into by Comcast, GreatLand Connections and, to a limited extent, New Charter, in certain circumstances, and subject to certain limitations, GreatLand Connections will be required to indemnify Comcast against taxes on the Spin-Off that arise as a result of certain actions or failures to act by GreatLand Connections or as a result of certain changes in ownership of the stock of GreatLand Connections after the completion of the Transactions. GreatLand Connections will be unable to take certain actions after the Transactions because such actions could adversely affect the tax-free status of the Spin-Off, and such restrictions could be significant. If GreatLand Connections is required to indemnify Comcast in the event the Spin-Off is taxable, this indemnification obligation would be substantial and could have a material adverse effect on GreatLand Connections.
Moreover, under the tax sharing agreement, in certain circumstances, and subject to certain limitations, New Charter will be required to indemnify Comcast against taxes on the Spin-Off that arise from New Charter taking any actions that would result in New Charter holding GreatLand Connections shares in excess of the percentage of GreatLand Connections shares acquired in the Merger during the two year period following the Spin-Off. If New Charter is required to indemnify Comcast in the event the Spin-Off is taxable, this indemnification obligation would be substantial and could have a material adverse effect on New Charter.
New Charter and GreatLand Connections will be unable to take certain actions after the Transactions because such actions could adversely affect the tax-free status of the Spin-Off, and such restrictions could be significant.
The tax sharing agreement will prohibit New Charter, Charter and GreatLand Connections from taking actions that could cause the Spin-Off to be taxable to Comcast. In particular, for two years after the completion of the Transactions, New Charter and GreatLand Connections will not be permitted to take actions that would result in New Charter holding (or being treated as holding) GreatLand Connections shares in excess of the percentage of GreatLand Connections shares acquired by New Charter in the merger. These actions could include entering into certain merger or consolidation transactions, certain stock issuances and certain other desirable strategic transactions.
Because of these restrictions, GreatLand Connections may be limited in the amount of stock that it can issue to make acquisitions or raise additional capital in the two years subsequent to the completion of the Charter Merger, which could have a material adverse effect on GreatLand Connections’ liquidity and financial condition.
The tax sharing agreement will also provide that in certain circumstances, and subject to certain limitations, GreatLand Connections and New Charter will be required to indemnify Comcast against taxes on the Spin-Off that arise as a result of actions in violation of the prohibitions and limitations described above. If GreatLand Connections or New Charter is required to indemnify Comcast in the event the Spin-Off is taxable, this indemnification obligation would be substantial and could have a material adverse effect on GreatLand Connections or New Charter, as applicable.
We will incur significant transaction-related costs in connection with the Transactions.
We expect to incur a number of non-recurring costs associated with the Transactions before, at, and after closing the Transactions. We also will incur transaction fees and costs related to formulating and implementing integration plans, including facilities and systems implementation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the Transactions and integration. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all. In addition, if the Transactions are not consummated, we would bear some or all of these costs without the benefit of efficiencies from the integration of the businesses. Such costs could have a material adverse impact on our financial results.
Sales of our common stock after the Transactions may negatively affect the market price of New Charter common stock.
The shares of our common stock to be issued in the Transactions to holders of GreatLand Connections common stock (initially, the Comcast shareholders) will generally be eligible for immediate resale. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after the consummation of the Transactions or even the perception that these sales could occur.
Currently, Comcast shareholders may include index funds that have performance tied to the Standard & Poor’s 500 Index or other stock indices, and institutional investors subject to various investing guidelines. Because New Charter may not be included in these indices following the consummation of the Transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may decide to or may be required to sell the common stock that they receive
in the Transactions. These sales, or the possibility that these sales may occur, may also make it more difficult for New Charter to obtain additional capital by selling equity securities in the future at a time and at a price that it deems appropriate.exercise.
Risks Related to Regulatory and Legislative Matters
Our business is subject to extensive governmental legislation and regulation, which could adversely affect our business.
Regulation of the cable industry has increased cable operators'operators’ operational and administrative expenses and limited their revenues. Cable operators are subject to various laws and regulations including those covering the following:
the provision of high-speed Internet service, including transparency rules;
the provision of voice communications;
cable franchise renewals and transfers;
the provisioning and marketing of cable equipment and compatibility with new digital technologies;
subscribercustomer and employee privacy and data security;
limited rate regulation of video service;
copyright royalties for retransmitting broadcast signals;
when a cable system must carry a particular broadcast station and when it must first obtain retransmission consent to carry a broadcast station;
the provision of channel capacity to unaffiliated commercial leased access programmers;
limitations on our ability to enter into exclusive agreements with multiple dwelling unit complexes and control our inside wiring;
the provision of high-speed Internet service, including net neutrality rules;
the provision of voice communications;
cable franchise renewals and transfers;
equal employment opportunity, emergency alert systems, disability access, technical standards, marketing practices, customer service, and consumer protection; and
approval for mergers and acquisitions often accompanied by the imposition of restrictions and requirements on an applicant'sapplicant’s business in order to secure approval of the proposed transaction.
Additionally, many aspectsLegislators and regulators at all levels of government frequently consider changing, and sometimes do change, existing statutes, rules, regulations, or interpretations thereof, or prescribe new ones. Any future legislative, judicial, regulatory or administrative actions may increase our costs or impose additional restrictions on our businesses.
As a result of the closing of the Transactions, our businesses are subject to the conditions set forth in the FCC Order and the DOJ Consent Decree and those imposed by state utility commissions and local franchise authorities, and there can be no assurance that these lawsconditions will not have an adverse effect on our businesses and results of operations.
In connection with the Transactions, the FCC Order, the DOJ Consent Decree, and the approvals from state utility commissions and local franchise authorities incorporated numerous commitments and voluntary conditions made by the parties and imposed numerous conditions on our businesses relating to the operation of our business and other matters. Among other things, (i) we are not permitted to charge usage-based prices or impose data caps and are prohibited from charging interconnection fees for qualifying parties; (ii) we are prohibited from entering into or enforcing any agreement with a programmer that forbids, limits or creates incentives to limit the programmer’s provision of content to OVD and cannot retaliate against programmers for licensing to OVDs; (iii) we are not able to avail ourself of other distributors’ MFN provisions if they are inconsistent with this prohibition; (iv) we must undertake a number of actions designed to promote diversity; (v) we appointed an independent compliance monitor and comply with a broad array of reporting requirements; and (vi) we must satisfy various other conditions relating to our Internet services, including building out an additional two million locations with access to a high-speed connection of at least 60 megabits per second, and implementing a reduced price high-speed Internet program for low income families. These and other conditions and commitments relating to the Transactions are of varying duration, ranging from three to seven years. In light of the breadth and duration of the conditions and potential changes in market conditions during the time the conditions and commitments are in effect, there can be no assurance that our compliance, and ability to comply, with the conditions will not have a material adverse effect on our business or results of operations.
Changes to existing statutes, rules, regulations, are often the subjector interpretations thereof, or adoption of judicial proceedings and administrative or legislative proposals. new ones, could have an adverse effect on our business.
There are also ongoing efforts to amend or expand the federal, state, and local regulation of some of the services offered over our cable systems, which may compound the regulatory risks we already face, and proposals that might make it easier forface. For example, with respect to our employees to unionize. Some states are considering adopting energy efficiency regulations governingretail broadband Internet access service, the operation of equipment (such as broadband modems) that we use to deliver Internet services, which could constrain innovation in broadband services and equipment. Congress is considering whether to rewriteFCC has reclassified the entire Communications Act to account for changesservice twice in the communications marketplace. Congresslast few years, with the first change adding regulatory obligations and various federal agencies are also considering more focusedthe second change largely removing those new regulatory obligations. These changes suchreflect a lack of regulatory certainty in this business area, which may continue as a result of litigation, as well as future legislative or administrative changes.
Other potential legislative and regulatory changes could adversely impact our business by increasing our costs and competition and limiting our ability to offer services in a manner that that would maximize our revenue potential. These changes could include, for example, the adoption of new privacy restrictions on our collection, use and new restrictions on the usedisclosure of personal and profilingcertain customer information, for behavioral advertising. In response to recent global data breaches, malicious activity and cyber threats, as well as the general increasing concerns regarding the protection of consumers’ personal information, Congress and various federal agencies are also considering the adoption of new data security and cybersecurity legislation and regulationmandates that could result in additional network and information security requirements for our business. Thesebusiness, new laws,restraints on our discretion over programming decisions, including the provision of public, educational and governmental access programming and unaffiliated, commercial leased access programming, new restrictions on the rates we charge for video programming and the marketing of that video programming, changes to the cable industry’s compulsory copyright license to carry broadcast signals, new requirements to assure the availability of navigation devices (such as well as existing legalset-top boxes) from third party providers, new Universal Service Fund obligations on our provision of Internet service that would add to the cost of that service; increases in government-administered broadband subsidies to rural areas that could result in subsidized overbuilding of our more rural facilities, and changes in the regulatory framework for VoIP phone service, including the scope of regulatory obligations associated with our VoIP service and our ability to interconnect our VoIP service with incumbent providers of traditional telecommunications service.
If any of these pending laws and regulations are enacted, they could affect our operations and require significant expenditures. In addition, federal, state,We cannot predict future developments in these areas, and local regulators could deny necessarywe are already subject to Charter-specific conditions regarding certain Internet practices as a result of the FCC’s approval of the Transactions, but any changes to the regulatory framework for our video, Internet or impose additionalVoIP services could have a negative impact on our business and results of operations.
It remains uncertain what rule changes, if any, will ultimately be adopted by Congress and the FCC and what operating or financial impact any such rules might have on us, including on our programming agreements, customer privacy and the user experience. In addition, the FCC’s Enforcement Bureau has been actively investigating certain industry practices of various companies and imposing forfeitures for alleged regulatory conditions in connection with their review of the Transactions that could affect our operations.violations.
Our cable system franchises are subject to non-renewal or termination.termination and are non-exclusive. The failure to renew a franchise or the grant of additional franchises in one or more key markets could adversely affect our business.
Our cable systems generally operate pursuant to franchises, permits, and similar authorizations issued by a state or local governmental authority controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, local franchises have not been renewed at expiration, and we have operated and are operating under either temporary operating agreements or without a franchise while negotiating renewal terms with the local franchising authorities.
The traditional cable franchising regime has recently undergone significant change as a result of various federal and state actions. Some state franchising laws do not allow incumbent operators like us to opt into favorable statewide franchising as quickly as
new entrants, and often require us to retain certain franchise obligations that are more burdensome than those applied to new entrants.
We cannot assure you that we will be able to comply with all significant provisions of our franchise agreements and certain of our franchisers have from time to time alleged that we have not complied with these agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, we cannot assure you that we will be able to renew, or to renew as favorably, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect our business in the affected geographic area.
Our cable system franchises are non-exclusive. Accordingly, local and state franchising authorities can grant additional franchises and create additional competition for our products, resulting in overbuilds, which could adversely affect results of operations.
Our cable system franchises are non-exclusive. Consequently, local and state franchising authorities can grant additional franchises to competitors in the same geographic area or operate their own cable systems. In some cases, local government entities and municipal utilities may legally compete with us on more favorable terms. As a result, competing operators may build systems in areas in which we hold franchises.Potential competitors (like Google) have recently pursued and obtained local franchises that are more favorable than the incumbent operator’s franchise.
The FCC has adopted rules that streamline entry for new competitors (particularly those affiliated with telephone companies) and reduce franchising burdens for these new entrants. At the same time, a substantial number of states have adopted new franchising laws, principally designed to streamline entry for new competitors, and often provide advantages for these new entrants that are not immediately available to existing operators. Broadband delivery of video content is not necessarily subject to the same franchising obligations applicable to our traditional cable systems.
The FCC administers a program that collects Universal Service Fund contributions from telecommunications service providers and uses them to subsidize the provision of telecommunications services in high-cost areas and to low-income consumers and the provision of Internet and telecommunications services to schools, libraries and certain health care providers. A variety of regulatory changes may lead the FCC to expand the collection of Universal Service Fund contributions to encompass Internet service providers.
The FCC already has begun to redirect the expenditure of some Universal Service Funding to broadband deployment in ways that could assist competitors in competing with our services.
Local franchise authorities have the ability to impose additional regulatory constraints on our business, which could further increase our expenses.
In addition to the franchise agreement, cable authorities in some jurisdictions have adopted cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases the cost of operating our business. Local franchising authorities may impose new and more restrictive requirements. Local franchising authorities who are certified to regulate rates in the communities where they operate generally have the power to reduce rates and order refunds on the rates charged for basic service and equipment.
Tax legislation and administrative initiatives or challenges to our tax and fee positions could adversely affect our results of operations and financial condition.
We operate cable systems in locations throughout the United States and, as a result, we are subject to the tax laws and regulations of federal, state and local governments. From time to time, various legislative and/or administrative initiatives may be proposed that could adversely affect our tax positions. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these initiatives. Certain states and localities have imposed or are considering imposing new or additional taxes or fees on our services or changing the methodologies or base on which certain fees and taxes are computed. The federal Internet Tax Freedom Act, which prohibits many taxes on Internet access service, will expire October 1, 2015, unless it is renewed by Congress. Potential changes include additional taxes or fees on our services which could impact our customers, combined reportingchanges to income tax sourcing rules and other changes to general business taxes, central/unit-level assessment of property taxes and other matters that could increase our income, franchise, sales, use and/or property tax liabilities. For example, some local franchising authorities are seeking to impose franchise fee assessments on our broadband Internet access service, and more may do so in the future. If they do so, and challenges to such assessments are unsuccessful, it could adversely impact our costs. In addition, federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
Further regulation of the cable industry could impair our ability to raise rates to cover our increasing costs, resulting in increased losses.
Currently, rate regulation of cable systems is strictly limited to the basic service tier and associated equipment and installation activities. However, the FCC and Congress continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the FCC or Congress will further restrict the ability of cable system operators to implement rate increases for our video services or even for our high-speed Internet and voice services. Should this occur, it would impede our ability to raise our rates. If we are unable to raise our rates in response to increasing costs, our losses would increase.
There has been legislative and regulatory interest in requiring companies that own multiple cable networks to make each of them available on a standalone, rather than a bundled basis to cable operators, and in requiring cable operators to offer historically bundled programming services on an á la carte basis to consumers. While any new regulation or legislation designed to enable cable operators to purchase programming on a standalone basis could be beneficial to Charter, any regulation or legislation that limits how we sell programming could adversely affect our business.
Actions by pole owners might subject us to significantly increased pole attachment costs.
Pole attachments are cable wires that are attached to utility poles. Cable system attachments to investor-owned public utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates for attachments used to provide cable service. In contrast, utility poles owned by municipalities or cooperatives are not subject to federal regulation and are generally exempt from state regulation. In 2011, the FCC amended its pole attachment rules to promote broadband deployment. The order overall strengthens the cable industry's ability to access investor-owned utility poles on reasonable rates, terms and conditions. It also allows for new penalties in certain cases involving unauthorized attachments that could result in additional costs for cable operators. The new rules were affirmed in 2013. Future regulatory changes in this area could impact the pole attachment rates we pay utility companies.
Increasing regulation of our Internet service product could adversely affect our ability to provide new products and services.
On May 15, 2014, the FCC initiated a rulemaking to issue new "network neutrality" regulations, potentially including a reclassification of broadband services as Title II common carrier services, which could subject our services to far more extensive and burdensome federal and state regulation. On February 4, 2015, the Chairman of the FCC released a fact sheet describing his proposed new rules. The Chairman’s proposal reclassifies wireline and wireless broadband services as Title II common carrier services. The new rules would prohibit ISPs from engaging in blocking, throttling, and paid prioritization, and the existing transparency rules compelling the disclosure of network management policies would be enhanced. The FCC would also have authority under the proposed rules to hear complaints and take enforcement action if it determines that the interconnection of ISPs are not just and reasonable, or if ISPs fail to meet a new general obligation not to harm consumers or edge providers. We do not know at the current time whether the regulations proposed by the Chairman will be adopted by the full Commission at a meeting scheduled for February 26, 2015, whether any rules adopted actually will go into effect or be struck down by a legal appeal, or how any new rules actually would be administered by the FCC, but such rules could limit our ability to efficiently manage our cable systems and respond to operational and competitive challenges.
Changes in channel carriage regulations could impose significant additional costs on us.
Cable operators also face significant regulation of their video channel carriage. We can be required to devote substantial capacity to the carriage of programming that we might not carry voluntarily, including certain local broadcast signals; local public, educational and governmental access (“PEG”) programming; and unaffiliated, commercial leased access programming (required channel capacity for use by persons unaffiliated with the cable operator who desire to distribute programming over a cable system). The FCC adopted revised commercial leased access rules which would dramatically reduce the rate we can charge for leasing this capacity and dramatically increase our administrative burdens, but these remain stayed while under appeal. Legislation has been introduced in Congress in the past that, if adopted, could impact our carriage of broadcast signals by simultaneously eliminating the cable industry’s compulsory copyright license and the retransmission consent requirements governing cable’s retransmission of broadcast signals. The FCC also continues to consider changes to the rules affecting the relationship between programmers (including broadcasters) and multichannel video distributors. Future regulatory changes could disrupt existing programming commitments, interfere with our preferred use of limited channel capacity, increase our programming costs, and limit our ability to offer services that would maximize our revenue potential. It is possible that other legal restraints will be adopted limiting our discretion over programming decisions.
Our voice service is subject to regulatory burdens which may increase, causing us to incur additional costs.
We offer voice communications services over our broadband network using VoIP services. The FCC has ruled that competitive telephone companies that support VoIP services, such as those we offer our customers, are entitled to interconnect with incumbent providers of traditional telecommunications services, which ensures that our VoIP services can compete in the market. The scope of these interconnection rights are being reviewed in a current FCC proceeding, which may affect our ability to compete in the provision of voice services or result in additional costs. The FCC has also declared that certain VoIP services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of state and local regulation of VoIP services is not yet clear. Telecommunications companies generally are subject to other significant regulation which could also be extended to VoIP providers. If additional telecommunications regulations are applied to our VoIP service, it could cause us to incur additional costs. The FCC has already extended certain traditional telecommunications carrier requirements to many VoIP providers such as us, including E911, Universal Service fund collection, CALEA, privacy of Customer Proprietary Network Information, number porting, network outage reporting, rural call completion reporting, disability access and discontinuance of service requirements. In November 2011, the FCC released an order significantly changing the rules governing intercarrier compensation payments for the origination and termination of telephone traffic between carriers, including VoIP service providers like us. The United States Court of Appeals for the Tenth Circuit upheld the rules in May 2014. The new rules will result in a substantial decrease in intercarrier compensation payments over a multi-year period. We received intercarrier compensation of approximately $23 million, $21 million and $19 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal physical assets consist of cable distribution plant and equipment, including signal receiving, encoding and decoding devices, headend reception facilities, distribution systems, and customer premise equipment for each of our cable systems.
Our cable plant and related equipment are generally attached to utility poles under pole rental agreements with local public utilities and telephone companies, and in certain locations are buried in underground ducts or trenches. We own or lease real property for signal reception sites, and own our service vehicles.
Our subsidiariesWe generally lease space for business offices. Our headend and tower locations are located on owned or leased parcels of land, and we generally own the towers on which our equipment is located. Charter Holdco owns the land and building for our St. Louis corporate office. We lease space for our offices in Denver, Colorado and for our corporate headquarters in Stamford, Connecticut.
The physical components of our cable systems require maintenance as well as periodic upgrades to support the new services and products we introduce. See “Item 1. Business – Our Network Technology.Technology and Customer Premise Equipment.” We believe that our properties are generally in good operating condition and are suitable for our business operations.
Item 3. Legal Proceedings.
On January 15, 2014,The legal proceedings information set forth in Note 20 to the California Department of Justice,accompanying consolidated financial statements contained in conjunction with the Alameda County, California District Attorney’s Office, initiated an investigation into whether Charter’s waste disposal policies, practices,“Part II. Item 8. Financial Statements and procedures violate the provisions of the California Health and Safety Code, the California Hazardous Waste Control Law, and any of their related regulations. CharterSupplementary Data” in this Annual Report on Form 10-K is cooperating with the investigation. At this time Charter does not expect that its outcome will have a material effect on our operations, financial condition, or cash flows.incorporated herein by reference.
Patent Litigation
We are defendants or co-defendants in several unrelated lawsuits involving alleged infringement of various patents relating to various aspects of our businesses. Other industry participants are also defendants in certain of these cases.
In the event that a court ultimately determines that we infringe on any intellectual property rights, we may be subject to substantial damages and/or an injunction that could require us or our vendors to modify certain products and services we offer to our subscribers, as well as negotiate royalty or license agreements with respect to the patents at issue. While we believe the lawsuits are without merit and intend to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to our consolidated financial condition, results of operations, or liquidity.
Other Proceedings
We are party to other lawsuits and claims that arise in the ordinary course of conducting our business, including lawsuits claiming violation of anti-trust laws and violation of wage and hour laws. The ultimate outcome of these other legal matters pending against us or our subsidiaries cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on our consolidated financial condition, results of operations, or liquidity, such lawsuits could have in the aggregate a material adverse effect on our consolidated financial condition, results of operations, or liquidity. Whether or not we ultimately prevail in any particular lawsuit or claim, litigation can be time consuming and costly and injure our reputation.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Charter’s Class A common stock is listed on the NASDAQ Global Select Market under the symbol “CHTR.”
The following table sets forth, for the periods indicated, the range of high and low last reported sale price per share of Charter’s Class A common stock on the NASDAQ Global Select Market.
Class A Common Stock
| | | | | High | | Low | | High | | Low |
| 2013 | | | | | |
| 2016 | | | | | |
| First quarter | | $ | 106.29 |
| | $ | 76.19 |
| | $ | 204.10 |
| | $ | 159.53 |
|
| Second quarter | | $ | 128.57 |
| | $ | 99.41 |
| | $ | 233.11 |
| | $ | 197.91 |
|
| Third quarter | | $ | 137.29 |
| | $ | 119.06 |
| | $ | 277.56 |
| | $ | 231.77 |
|
| Fourth quarter | | $ | 144.02 |
| | $ | 125.68 |
| | $ | 292.19 |
| | $ | 244.10 |
|
| | | | | | | | | |
| 2014 | | | | | |
| 2017 | | | | | |
| First quarter | | $ | 138.86 |
| | $ | 121.25 |
| | $ | 333.15 |
| | $ | 285.77 |
|
| Second quarter | | $ | 158.38 |
| | $ | 117.83 |
| | $ | 353.03 |
| | $ | 313.11 |
|
| Third quarter | | $ | 164.15 |
| | $ | 151.37 |
| | $ | 402.50 |
| | $ | 328.67 |
|
| Fourth quarter | | $ | 169.70 |
| | $ | 140.25 |
| | $ | 371.09 |
| | $ | 316.29 |
|
As of December 31, 20142017, there were approximately 3814,101 holders of record of Charter’s Class A common stock and one holder of Charter's Class B common stock.
Charter has not paid stock or cash dividends on any of its common stock.stock and does not intend to do so in the foreseeable future.
Charter would be dependent on distributions from its subsidiaries if Charter were to make any dividends. Covenants in the indentures and credit agreement governing the debt obligations of our subsidiaries restrict their ability to make distributions to us, and accordingly, limit our ability to declare or pay cash dividends. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Future cash dividends, if any, will be at the discretion of Charter’s board of directors and will depend upon, among other things, our future operations and earnings, capital requirements, general financial condition, contractual restrictions and such other factors as Charter’s board of directors may deem relevant.
(D) Securities Authorized for Issuance Under Equity Compensation Plans
The following information is provided as of December 31, 20142017 with respect to equity compensation plans:
| | | Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans |
| | | | | | | | | |
| Equity compensation plans approved by security holders | | 4,014,471 |
| (1) | | $ | 87.72 |
| | 6,181,469 |
| (1) | | 12,039,412 |
| (1) | | $ | 200.07 |
| | 5,844,588 |
| (1) |
| Equity compensation plans not approved by security holders | | — |
| | $ | — |
| | — |
| | | — |
| | $ | — |
| | — |
| |
| | | | | | | | | | | | | | | |
| TOTAL | | 4,014,471 |
| (1) | | | | 6,181,469 |
| (1) | | 12,039,412 |
| (1) | | | | 5,844,588 |
| (1) |
| |
| (1) | This total does not include 430,9429,517 shares issued pursuant to restricted stock grants made under our 2009 Stock Incentive Plan, which are subject to vesting based on continued employment and market conditions. |
For information regarding securities issued under our equity compensation plans, see Note 1516 to our accompanying consolidated financial statements contained in “Item“Part II. Item 8. Financial Statements and Supplementary Data.”
(E) Performance Graph
The graph below shows the cumulative total return on Charter’s Class A common stock for the period from December 2, 200931, 2012 through December 31, 20142017, in comparison to the cumulative total return on Standard & Poor’s 500 Index and a peer group consisting of the national cable operators that are most comparable to us in terms of size and nature of operations. The Company’s 2017 peer group consists of CablevisionVerizon, Comcast, AT&T, T-Mobile, Sprint, Dish Network Corporation, Time Warner Inc., Viacom, Inc., CenturyLink, Inc., The Walt Disney Company, Liberty Global Plc, Cisco Systems, Corporation ("Cablevision")Inc., 21st Century Fox, Inc., BCE Inc. and CBS Corporation. The 2017 peer group was created as a result of merger and acquisition activity that impacted our 2016 peer group index, which had consisted of Comcast and TWC.Legacy TWC, as well as to match the peer group utilized by our Compensation and Benefits Committee. The results shown assume that $100 was invested on December 2, 2009 in Charter and peer group stock or on November 30, 2009 for the S&P 500 index31, 2012 and that all dividends were reinvested. These indices are included for comparative purposes only and do not reflect whether it is management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved, nor are they intended to forecast or be indicative of future performance of Charter’s Class A common stock.
(F) Recent Sales of Unregistered Securities
During 20142017, there were no unregistered sales of securities of the registrant other than those previously reported on a Quarterly Report on Form 10-Q or Current Report on Form 8-K.registrant.
(G) Purchases of Equity Securities by the Issuer
The following table presents Charter'sCharter’s purchases of equity securities completed during the fourth quarter of 20142017 representing shares withheld from employees for the payment of taxes upon the vesting of equity awards.(dollars in millions, except per share data).
|
| | | | | | | |
Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 1 - 31, 2014 | 4,414 | $ | 145.16 |
| — |
| N/A |
| November 1 - 30, 2014 | 338 | $ | 154.97 |
| — |
| N/A |
| December 1 - 31, 2014 | 13,863 | $ | 165.29 |
| — |
| N/A |
|
| | | | | | | |
| Period |
Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
| October 1 - 31, 2017 | 6,756,815 | $ | 353.40 |
| 6,748,900 |
| $2,566 |
| November 1 - 30, 2017 | 3,506,402 | $ | 335.97 |
| 3,495,881 |
| $1,425 |
| December 1 - 31, 2017 | 1,198,216 | $ | 336.03 |
| 1,190,300 |
| $1,083 |
| |
(1) | Includes 7,915, 10,521 and 7,916 shares withheld from employees for the payment of taxes and exercise costs upon the exercise of stock options or vesting of other equity awards for the months of October, November and December 2017, respectively. |
| |
(2) | During the three months ended December 31, 2017, Charter purchased approximately 11.4 million shares of its Class A common stock for approximately $4.0 billion. As of December 31, 2017, Charter had remaining board authority to purchase an additional $1.1 billion of Charter’s Class A common stock and/or Charter Holdings common units. Charter Holdings purchased 2.1 million Charter Holdings common units from A/N at an average price per unit of $354.18, or $743 million during the three months ended December 31, 2017. In addition to open market purchases including pursuant to Rule 10b5-1 plans adopted from time to time, Charter may also buy shares of Charter Class A common stock, from time to time, pursuant to private transactions outside of its Rule 10b5-1 plan and any such repurchases would also trigger the repurchases from A/N pursuant to and to the extent provided in the Letter Agreement (defined below). See "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." |
Item 6. Selected Financial Data.
The following table presents selected consolidated financial data for the periods indicated (dollars in millions, except per share data):
| | | | Years Ended December 31, | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | Years Ended December 31, |
| | | | | | | | | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | |
| Revenues | $ | 9,108 |
| | $ | 8,155 |
| | $ | 7,504 |
| | $ | 7,204 |
| | $ | 7,059 |
| $ | 41,581 |
| | $ | 29,003 |
| | $ | 9,754 |
| | $ | 9,108 |
| | $ | 8,155 |
|
| Income from operations | $ | 971 |
| | $ | 909 |
| | $ | 915 |
| | $ | 1,041 |
| | $ | 1,024 |
| |
| Income from operations (a) | | $ | 4,106 |
| | $ | 2,456 |
| | $ | 1,114 |
| | $ | 971 |
| | $ | 909 |
|
| Interest expense, net | $ | (911 | ) | | $ | (846 | ) | | $ | (907 | ) | | $ | (963 | ) | | $ | (877 | ) | $ | 3,090 |
| | $ | 2,499 |
| | $ | 1,306 |
| | $ | 911 |
| | $ | 846 |
|
Income (loss) before income taxes | $ | 53 |
| | $ | (49 | ) | | $ | (47 | ) | | $ | (70 | ) | | $ | 58 |
| $ | 1,028 |
| | $ | 820 |
| | $ | (331 | ) | | $ | 53 |
| | $ | (49 | ) |
| Net loss | $ | (183 | ) | | $ | (169 | ) | | $ | (304 | ) | | $ | (369 | ) | | $ | (237 | ) | |
| Loss per common share, basic and diluted | $ | (1.70 | ) | | $ | (1.65 | ) | | $ | (3.05 | ) | | $ | (3.39 | ) | | $ | (2.09 | ) | |
| Weighted-average shares outstanding, basic and diluted | 108,374,160 |
| | 101,934,630 |
| | 99,657,989 |
| | 108,948,554 |
| | 113,138,461 |
| |
| Net income (loss) attributable to Charter shareholders | | $ | 9,895 |
| | $ | 3,522 |
| | $ | (271 | ) | | $ | (183 | ) | | $ | (169 | ) |
| Income (loss) per common share, basic | | $ | 38.55 |
| | $ | 17.05 |
| | $ | (2.68 | ) | | $ | (1.88 | ) | | $ | (1.83 | ) |
| Income (loss) per common share, diluted | | $ | 34.09 |
| | $ | 15.94 |
| | $ | (2.68 | ) | | $ | (1.88 | ) | | $ | (1.83 | ) |
| Weighted average shares outstanding, basic (b) | | 256,720,715 |
| | 206,539,100 |
| | 101,152,647 |
| | 97,991,915 |
| | 92,169,292 |
|
| Weighted average shares outstanding, diluted (b) | | 296,703,956 |
| | 234,791,439 |
| | 101,152,647 |
| | 97,991,915 |
| | 92,169,292 |
|
| | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data (end of period): | | | | | | | | | | | | | | | | | | |
| Investment in cable properties | $ | 16,652 |
| | $ | 16,556 |
| | $ | 14,870 |
| | $ | 14,843 |
| | $ | 15,027 |
| $ | 142,712 |
| | $ | 144,396 |
| | $ | 16,375 |
| | $ | 16,652 |
| | $ | 16,556 |
|
| Total assets | $ | 24,550 |
| | $ | 17,295 |
| | $ | 15,596 |
| | $ | 15,601 |
| | $ | 15,737 |
| $ | 146,623 |
| | $ | 149,067 |
| | $ | 39,316 |
| | $ | 24,388 |
| | $ | 17,129 |
|
| Total debt | $ | 21,023 |
| | $ | 14,181 |
| | $ | 12,808 |
| | $ | 12,856 |
| | $ | 12,306 |
| $ | 70,231 |
| | $ | 61,747 |
| | $ | 35,723 |
| | $ | 20,887 |
| | $ | 14,031 |
|
| Shareholders’ equity | $ | 146 |
| | $ | 151 |
| | $ | 149 |
| | $ | 409 |
| | $ | 1,478 |
| |
| Total shareholders’ equity (deficit) | | $ | 47,531 |
| | $ | 50,366 |
| | $ | (46 | ) | | $ | 146 |
| | $ | 151 |
|
| | | | | | | | | | | | | | | | | | | |
| Other Financial Data: | | | | | | | | | | | | | | | | | | |
| Ratio of earnings to fixed charges (a) | 1.06 |
| | N/A |
| | N/A |
| | N/A |
| | 1.07 |
| |
| Deficiency of earnings to cover fixed charges (a) | N/A |
| | $ | 49 |
| | $ | 47 |
| | $ | 70 |
| | N/A |
| |
| Ratio of earnings to fixed charges (c) | | 1.33 |
| | 1.33 |
| | N/A |
| | 1.06 |
| | N/A |
|
| Deficiency of earnings to cover fixed charges (c) | | N/A |
| | N/A |
| | $ | 331 |
| | N/A |
| | $ | 49 |
|
| |
| (a) | The year ended December 31, 2016 has been restated to reflect the adoption of Accounting Standards Update (“ASU”) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). See Note 22 to our accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.” |
| |
| (b) | Weighted average number of shares outstanding for the years ended December 31, 2015, 2014 and 2013 have been recast to reflect the application of the Parent Merger Exchange Ratio (as defined in the Merger Agreement). See Note 3 to our accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.” |
| |
| (c) | Earnings include income (loss) before non-controlling interest and income taxes plus fixed charges. Fixed charges consist of interest expense and an estimated interest component of rent expense. |
Comparability of the above information from year to year is affected by acquisitions and dispositions completed by us, including the acquisition of Bresnan in July 2013 and restricted cash and cash equivalents currently held in escrow pending consummation of the Transactions. See “Part II.I. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”1. Business” for a discussion regarding the Transactions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Reference is made to “Part I. Item 1A. Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements,” which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited consolidated financial statements and
accompanying notes thereto of Charter Communications, Inc. and subsidiaries included in “Part II. Item 8. Financial Statements and Supplementary Data.”
Overview
We are athe second largest cable operator providing services in the United States with approximately 6.2 million residential and commercial customers at December 31, 2014. We offer our customers traditional cablea leading broadband communications services company providing video, programming, Internet services, and voice services as well as advancedto approximately 27.2 million residential and business customers at December 31, 2017. In addition, we sell video services such as video on demand, HD television and DVR service.online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed IT solutions to large enterprise customers. We also sell local advertising on cableown and operate regional sports networks and provide fiber connectivity to cellular towers.local sports, news and community channels and sell security and home management services in the residential marketplace. See “Part I. Item 1. Business — Products and Services” for further description of these services, including “customers.”customer statistics for different services.
In the first half of 2017, we completed the roll-out of SPP to Legacy TWC and Legacy Bright House markets simplifying our offers and improving our packaging of products, allowing us to deliver more value to new and existing customers. As of December 31, 2017, approximately 60% of our residential customers are in an SPP package. In the second half of 2017, we began converting the remaining Legacy TWC and Legacy Bright House analog markets to an all-digital platform enabling us to deliver more HD channels and higher Internet speeds. The bulk of this all-digital initiative will take place in 2018. Our corporate organization, as well as our marketing, sales and product development departments, are centralized. Field operations are managed through eleven regional areas, each designed to represent a combination of designated marketing areas. In 2017, we began migrating Legacy TWC and Legacy Bright House customer care centers to Legacy Charter's model of using virtualized, U.S.-based in-house call centers. We are focused on deploying superior products and service with minimal service disruptions as we integrate our information technology and network operations. We intend to continue to insource the Legacy TWC and Legacy Bright House workforces in our call centers and in our field operations which we expect to lead to lower customer churn and longer customer lifetimes.
Our most significant competitors are DBS providersintegration activities will continue in 2018 with the expectation that by 2019 we will have substantially integrated the practices and certain telephone companies that offer services that provide featuressystems of Legacy Charter, Legacy TWC and functions similar toLegacy Bright House. In 2018, we will also launch our video, high-speed Internet,mobile product. As a result of growth costs for a new product line and voice services, including in some cases wireless services,implementing our operating strategy across Legacy TWC and they also offer these services in bundles similar to ours. Customers have been more willing to consider our competitors' products, partially because of increased marketing highlighting perceived differences between competitive video products, especially when those competitors are often offering significant incentives to switch providers. Some consumers have chosen to receive video over the Internet rather than through pay television services including from us, thereby reducing our video revenues. See “Part I. Item 1. Business — Competition.” In the recent past, we have grown revenues by offsetting basic video customer losses with price increases and sales of incremental services such as high-speed Internet, video on demand, DVR and HD television. We expect to continue to grow revenues by increasing the number of products in our current customer homes and obtaining new customers with an improved value offering. In addition, we expect to increase revenues by expanding the sales of services to our commercial customers. However,Legacy Bright House, we cannot assure yoube certain that we will be able to grow revenues or maintain our margins at recent historical rates.
Our business plans include goals for increasing customers and revenue. To reach our goals, we have actively invested in our network and operations, and have improved the quality and value of the products and packages that we offer. We have enhanced our video product by moving to an all-digital platform, offering more HD channels and increasing digital and HD-DVR penetration. We simplified our offers and pricing and improved our packaging of products to bring more value to new and existing customers. As part of our effort to create more value for customers, we have focused on driving penetration of our triple play offering, which includes more than 200 HD channels in most of our markets, video on demand, Internet service, and fully-featured voice service. In addition, we have implemented a number of changes to our organizational structure, selling methods and operating tactics. We have fully insourced our direct sales workforce and are increasingly insourcing our field operations and call center workforces and modifying the way our sales workforce is compensated, which we believe positions us for better customer service and growth. We expect that our enhanced product set combined with improved customer service will lead to lower customer churn and longer customer lifetimes, allowing us to grow our customer base and revenue more quickly and economically. We expect our capital expenditures to remain elevated as we strive to increase digital and HD-DVR penetration and place higher levels of customer premise equipment per transaction.
In July 2013, CharterThe Company realized revenue, Adjusted EBITDA and Charter Operating acquired Bresnanincome from a wholly owned subsidiary of Cablevision, for $1.625 billion in cash,operations during the periods presented as well as a working capital adjustment and a reduction for certain funded indebtedness of Bresnan (the "Bresnan Acquisition")follows (in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding). Bresnan managed cable operating systems in Colorado, Montana, Wyoming and Utah that passed approximately 670,000 homes and served approximately 375,000 residential and commercial customer relationships at the time they were acquired.
Total revenue growth was 12% for the year ended December 31, 2014 compared to the corresponding period in 2013, and 9% for the year ended December 31, 2013 compared to the corresponding period in 2012, due to the Bresnan Acquisition and growth in our video, Internet and commercial businesses. Total revenue growth on a pro forma basis for the Bresnan Acquisition as if it had occurred on January 1, 2012 was 8% for the year ended December 31, 2014 compared to the corresponding period in 2013, and 5% for the year ended December 31, 2013 compared to the corresponding period in 2012. For the years ended December 31, 2014, 2013 and 2012, Adjusted EBITDA was $3.2 billion, $2.9 billion and $2.7 billion, respectively. |
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | Growth |
| | 2017 | | 2016 | | 2015 | | 2017 over 2016 | | 2016 over 2015 |
| Actual | | | | | | | | | |
| Revenues | $ | 41,581 |
| | $ | 29,003 |
| | $ | 9,754 |
| | 43.4 | % | | 197.3 | % |
| Adjusted EBITDA | $ | 15,301 |
| | $ | 10,592 |
| | $ | 3,406 |
| | 44.5 | % | | 211.0 | % |
| Income from operations | $ | 4,106 |
| | $ | 2,456 |
| | $ | 1,114 |
| | 67.2 | % | | 120.5 | % |
| | | | | | | | | | |
| Pro Forma | | | | | | | | | |
| Revenues | $ | 41,581 |
| | $ | 40,023 |
| | $ | 37,394 |
| | 3.9 | % | | 7.0 | % |
| Adjusted EBITDA | $ | 15,301 |
| | $ | 14,464 |
| | $ | 13,004 |
| | 5.8 | % | | 11.2 | % |
Income from operations(a) | $ | 4,106 |
| | $ | 3,886 |
| | $ | 3,323 |
| | 5.7 | % | | 16.9 | % |
| |
(a) | Income from operations for the year ended December 31, 2016 has been reduced from what was previously reported by $899 million to reflect the adoption of pension accounting guidance, and on a pro forma basis, income from operations for the years ended December 31, 2016 and 2015 have been reduced from what was previously reported by $915 million and $73 million, respectively. For more information, see Note 22 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.” |
Adjusted EBITDA is defined as consolidated net lossincome (loss) plus net interest expense, income tax expense,taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, gain (loss)(gain) loss on derivativefinancial instruments, net, other pension benefits, other (income) expense, net and other operating (income) expenses, such as merger and acquisitionrestructuring costs, special charges and (gain) lossgain (loss) on sale or retirement of assets. See “—Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA.EBITDA and free cash flow.
Growth in total revenue, Adjusted EBITDA increased 12% for the year ended December 31, 2014 comparedand income from operations was primarily due to the corresponding periodTransactions. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, total revenue growth was primarily due to growth in 2013our Internet and 6% for the year ended December 31, 2013 comparedcommercial businesses. Revenue growth during 2017 was offset by lower advertising sales revenue due to a decrease in political and local advertising and an early contract termination benefit at Legacy TWC and Legacy Bright House in 2016. In addition to the corresponding period in 2012 asitems noted above, Adjusted EBITDA growth on a result of the Bresnan Acquisition, which contributed $96 million and $90 million, respectively, and an increase in residential and commercial revenues offsetpro forma basis was affected by increases in programming costs and, in 2017, offset by decreases in costs to service customers and other operating costs. For the years ended December 31, 2014, 2013costs and 2012, our incomeexpenses. Income from operations on a pro forma basis was $971 million, $909 million and $915 million, respectively. In addition to the factors discussed above, income from operations wasadditionally affected by increases in depreciation and amortization primarily due to the Bresnan Acquisition and current capital expenditures.
In connection with the Transactions, in 2014 we have incurred approximately $14 million in operating costs and expenses and $27 million of capital expenditures related to incremental transition costs required to position Charter to double its service footprint. We also incurred $38 million of incremental expenses related to advisory, legal and accounting fees which are reflected in other operating expenses, as well as approximately $75 million of interest expense associated with term loan G that was entered intochanges in September 2014merger and the issuance of the CCOH Safari Notes in November 2014. See "Part I. Item 1. Business — Transactions with Comcast."restructuring costs.
Approximately 90%91%, 89%90% and 87%91% of our revenues for years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively, are attributable to monthly subscription fees charged to customers for our video, Internet, voice and commercial services provided by our cable systems. Generally, these customer subscriptions may be discontinued by the customer at any time subject to a fee for certain commercial customers. The remaining 10%9%, 11%10% and 13%9% of revenue for fiscal years 2014, 20132017, 2016 and 2012,2015, respectively, is derived primarily from advertising revenues, franchise and other regulatory fee revenues (which are collected by us but then paid to local authorities), pay-per-viewVOD and video on demandpay-per-view programming, installation, processing fees or reconnection fees charged to customers to commence or reinstate service, revenue from regional sports and news channels and commissions related to the sale of merchandise by home shopping services.
Our expenses primarily consist of operating costs, depreciation and amortization expense and interest expense. Operating costs primarily include programming costs, connectivity, franchise and other regulatory costs, the cost to service our customers such as field, network and customer operations costs and marketing costs.
We have a history of net losses. Our net losses are principally attributable to insufficient revenue to coverincurred the combination offollowing transition costs in connection with the Transactions (in millions).
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operating expenses | $ | 124 |
| | $ | 156 |
| | $ | 72 |
|
| Other operating expenses | $ | 351 |
| | $ | 970 |
| | $ | 70 |
|
| Interest expense | $ | — |
| | $ | 390 |
| | $ | 521 |
|
| Capital expenditures | $ | 489 |
| | $ | 460 |
| | $ | 115 |
|
Amounts included in transition operating expenses and transition capital expenditures represent incremental costs incurred to integrate the Legacy TWC and Legacy Bright House operations and to bring the three companies’ systems and processes into a uniform operating structure. Costs are incremental and would not be incurred absent the integration. Other operating expenses associated with the Transactions represent merger and restructuring costs and include advisory, legal and accounting fees, employee retention costs, employee termination costs and other exit costs. Interest expense associated with the Transactions represents interest expenses that we incur becauseincurred on the CCO Safari II, CCO Safari III and CCOH Safari notes issued in advance of our debt, depreciation expenses resulting from the capital investments we have made and continueclosing of the Transactions, the proceeds of which were held in escrow to make in our cable properties, amortization expenses related to our customer relationship intangibles and non-cash taxes resulting from increases in our deferred tax liabilities.finance the Transactions.
Critical Accounting Policies and Estimates
Certain of our accounting policies require our management to make difficult, subjective and/or complex judgments. Management has discussed these policies with the Audit Committee of Charter’s board of directors, and the Audit Committee has reviewed the following disclosure. We consider the following policies to be the most critical in understanding the estimates, assumptions and judgments that are involved in preparing our financial statements, and the uncertainties that could affect our results of operations, financial condition and cash flows:
Property, plant and equipment
Capitalization of labor and overhead costs
Valuation and impairment of property, plant and equipment
Useful lives of property, plant and equipment
Intangible assets
Valuation and impairment of franchises
Valuation and impairment of goodwill
Valuation, impairment and amortization of customer relationships
Valuation and impairment of goodwill
Impairment of trademarks
Income taxes
Litigation
Programming agreements
Pension plans
In addition, there are other items within our financial statements that require estimates or judgment that are not deemed critical, such as the allowance for doubtful accounts and valuations of our derivativefinancial instruments, but changes in estimates or judgment in these other items could also have a material impact on our financial statements.
Property, plant and equipment
The cable industry is capital intensive, and a large portion of our resources are spent on capital activities associated with extending, rebuilding, and upgrading our cable network. As of December 31, 20142017 and 20132016, the net carrying amount of our property, plant and equipment (consisting primarily of cable network assets)distribution systems) was approximately $8.433.9 billion (representing 34%23% of total assets) and $8.033.0 billion (representing 46%22% of total assets), respectively. Total capital expenditures for the years ended December 31, 20142017, 20132016 and 20122015 were approximately $8.7 billion, $2.2 billion, $1.85.3 billion and $1.71.8 billion, respectively.
Capitalization of labor and overhead costs. Costs associated with network construction or upgrades, initial placement of the customer installations, installation refurbishments,drop to the dwelling and the additioninitial placement of networkoutlets within a dwelling along with the costs associated with the initial deployment of customer premise equipment necessary to provide newvideo, Internet or advanced videovoice services, are capitalized. Costs capitalized include materials, direct labor and certain indirect costs. These indirect costs are associated with the activities of personnel who assist in installation activities, and consist of compensation and overhead costs associated with these support functions. While our capitalization is based on specific activities, once capitalized, we track these costs on a composite basis by fixed asset category at the cable system level, and not on a specific asset basis. For assets that are sold or retired, we remove the estimated applicable cost and accumulated depreciation. Costs capitalized as part of initial customer installations include materials, direct labor, and certain indirect costs. These indirect costs are associated with the activities of personnel who assist in connecting and activating the new service, and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service atand removing customer premise equipment from a customer’s dwelling and the costs to reconnect a customer drop or reconnecting service to aredeploy previously installed dwellingcustomer premise equipment are charged to operating expense in the periodas incurred. Costs for repairs and maintenance are charged to operating expense as incurred, while plant and equipment replacement, including replacement of certain components, and betterments, includingand replacement of cable drops from the pole to the dwelling,and outlets, are capitalized.
We make judgments regarding the installation and construction activities to be capitalized. We capitalize direct labor and overhead using standards developed from actual costs and applicable operational data. We calculate standards annually (or more frequently if circumstances dictate) for items such as the labor rates, overhead rates, and the actual amount of time required to perform a capitalizable activity. For example, the standard amounts of time required to perform capitalizable activities are based on studies of the time required to perform such activities. Overhead rates are established based on an analysis of the nature of costs incurred
in support of capitalizable activities, and a determination of the portion of costs that is directly attributable to capitalizable activities. The impact of changes that resulted from these studies were not material in the periods presented.
Labor costs directly associated with capital projects are capitalized. Capitalizable activities performed in connection with customer installations include such activities as:
dispatching a “truck roll” to the customer’s dwelling or business for service connection;connection or placement of new equipment;
verification of serviceability to the customer’s dwelling or business (i.e., determining whether the customer’s dwelling is capable of receiving service by our cable network and/or receiving advanced or Internet services)network);
customer premise activities performed by in-house field technicians and third-party contractors in connection with customer installations, installation of network equipment in connection with the installation, of advanced services, and equipment replacement and betterment;betterment of equipment and materials to enable video, Internet or voice services; and
verifying the integrity of the customer’s network connection by initiating test signals downstream from the headend to the customer’s digital set-top box.customer premise equipment, as well as testing signal levels at the utility pole or pedestal.
Judgment is required to determine the extent to which overhead costs incurred result from specific capital activities, and therefore should be capitalized. The primary costs that are included in the determination of the overhead rate are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, consisting primarily of installation and construction vehicle costs, (iii) the cost of support personnel, such as care personnel and dispatchers, who directly assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities.
While we believe our existing capitalization policies are appropriate, a significant change in the nature or extent of our system activities could affect management’s judgment about the extent to which we should capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization policies, and perform updates to our internal studies on an ongoing basis to determine whether facts or circumstances warrant a change to our capitalization policies. We capitalized internal direct labor and overhead of $277 million, $219$1.7 billion, $991 million and $202$420 million, respectively, for the years ended December 31, 20142017, 20132016 and 20122015.
Valuation and impairment.impairment of property, plant and equipment. We evaluate the recoverability of our property, plant and equipment upon the occurrence of events or changes in circumstances indicating that the carrying amount of an asset may not be recoverable. Such events or changes in circumstances could include such factors as the impairment of our indefinite life franchises,assets, changes in technological advances, fluctuations in the fair value of such assets, adverse changes in relationships with local franchise authorities, adverse changes in market conditions, or a deterioration of current or expected future operating results. A long-lived asset is deemed impaired when the carrying amount of the asset exceeds the projected undiscounted future cash flows associated with the asset. No impairments of long-lived assets to be held and used were recorded in the years ended December 31, 20142017, 20132016 and 20122015.
We utilize the cost approach as the primary method used to establish fair value for our property, plant and equipment in connection with business combinations. The cost approach considers the amount required to replace an asset by constructing or purchasing a new asset with similar utility, then adjusts the value in consideration of all forms ofphysical depreciation and functional and economic obsolescence as of the appraisal date for physical depreciation and function and economic obsolescence.valuation date. The cost approach relies on management’s assumptions regarding current material and labor costs required to rebuild and repurchase significant components of our property, plant and equipment along with assumptions regarding the age and estimated remaining useful lives of our property, plant and equipment.
Useful lives of property, plant and equipment. We evaluate the appropriateness of estimated useful lives assigned to our property, plant and equipment, based on annual analysis of such useful lives, and revise such lives to the extent warranted by changing facts and circumstances. Any changes in estimated useful lives as a result of this analysis are reflected prospectively beginning in the period in which the study is completed. Our analysis of useful lives in 20142017 did not indicate a changeany significant changes in useful lives. The effect of a one-year decrease in the weighted average remaining useful life of our property, plant and equipment as of December 31, 20142017 would be an increase in annual depreciation expense of approximately $83$943 million. The effect of a one-year increase in the weighted average remaining useful life of our property, plant and equipment as of December 31, 20142017 would be a decrease in annual depreciation expense of approximately $224 million.$1.4 billion.
Depreciation expense related to property, plant and equipment totaled $1.8$7.8 billion, $1.6$5.0 billion and $1.4$1.9 billion for the years ended December 31, 20142017, 20132016 and 20122015, respectively, representing approximately 22%21%, 22%19% and 21% of costs and expenses, respectively. Depreciation is recorded using the straight-line composite method over management’s estimate of the useful lives of the related assets as listed below:
|
| | |
Cable distribution systems………………………………systems | | 7-208-20 years |
Customer premise equipment and installations………………….. | installations | 3-8 years |
Vehicles and equipment…………………………………equipment | | 3-64-9 years |
Buildings and leasehold improvements………………… | improvements | 15-40 years |
Furniture, fixtures and equipment….……………………equipment | | 6-107-10 years |
Intangible assets
Valuation and impairment of franchises. The net carrying value of franchises as of December 31, 20142017 and 20132016 was approximately $6.067.3 billion (representing 24%46% of total assets) and $6.0$67.3 billion (representing 35%45% of total assets), respectively. For more information and a complete discussion of how we value and test franchise assets for impairment, see Note 6 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
In 2014, 2013We perform an impairment assessment of franchise assets annually or more frequently as warranted by events or changes in circumstances. We performed a qualitative assessment in 2017. Our assessment included consideration of a fair value appraisal performed for tax purposes in the beginning of 2017 as of a December 31, 2016 valuation date (the "Appraisal") along with a multitude of factors that affect the fair value of our franchise assets. Examples of such factors include environmental and 2012,competitive changes within our operating footprint, actual and projected operating performance, the consistency of our operating margins, equity and debt market trends, including changes in our market capitalization, and changes in our regulatory and political landscape, among other factors. Based on our assessment, we concluded that it iswas more likely than not that the estimated fair valuevalues of theour franchise assets in each unit of accountingequals or exceeds thetheir carrying value of such assetsvalues and therefore did not performthat a quantitative analysis. At our last quantitative assessment,impairment test is not required.
The Appraisal indicated that the fair value of franchisesour franchise assets exceeded carrying value by more than 40% in the book values for eachaggregate. At our unit of accounting level for franchise asset impairment testing, the amount by 24%which fair value exceeded carrying value varied based on the extent to 89%which the unit of accounting was comprised of operations acquired in 2016. For units of accounting comprised entirely or substantially of newly-acquired operations, the Appraisal fair value exceeded carrying value by a range of 16% to 46% due to the recency of the Transactions, while fair value for units of accounting comprised of at least 25% Legacy Charter operations, exceeded carrying value by a range of 29% to 264%.
Valuation and impairment of goodwill. The net carrying value of goodwill as of December 31, 20142017 and 20132016 was approximately $1.2$29.6 billion (representing 5%20% of total assets) and $1.2$29.5 billion (representing 7%20% of total assets), respectively. For more information and a complete discussion on how we test goodwill for impairment, see Note 6 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.” We perform our impairment assessment of goodwill annually as of November 30. As with our franchise impairment testing, we elected to perform a qualitative assessment of goodwill in 2017 which included the fair value appraisal and other factors described above. Based on the Appraisal, we determined that the fair value of our goodwill exceeded carrying value by approximately 53%. Given the completion of the assessment and absence of significant adverse changes in factors impacting our fair value estimates, we concluded that it is more likely than not that our goodwill is not impaired.
Valuation, impairment and amortization of customer relationships.The net carrying value of customer relationships as of December 31, 2017 and 2016 was approximately $12.0 billion (representing 8% of total assets) and $14.6 billion (representing 10% of total assets), respectively. Amortization expense related to customer relationships for the years ended December 31, 2017, 2016 and 2015 was approximately $2.7 billion, $1.9 billion and $249 million, respectively. No impairment of customer relationships was recorded in the years ended December 31, 2017, 2016 and 2015. For more information and a complete discussion on our valuation methodology and amortization method, see Note 6 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
As with our franchise impairment testing, in 2014, 2013 and 2012, we elected to perform a qualitative assessment for our goodwill impairment testing and concluded that our goodwill is not impaired.
Valuation, impairment and amortization of customer relationships.The net carrying value of customer relationships as of December 31, 2014 and 2013 was approximately $1.1 billion (representing 5% of total assets) and $1.4 billion (representing 8% of total assets), respectively. Amortization expense related to customer relationships for the years ended December 31, 2014, 2013 and 2012 was approximately $282 million, $284 million and $280 million, respectively. For more information and a complete discussion on our valuation methodology, see Note 6 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Impairment of trademarks.The net carrying value of trademarks as of both December 31, 2014 and 2013 was approximately $159 million and $158 million, respectively (representing 1% of total assets for both periods). For more information and a complete discussion on our valuation methodology, see Note 6 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.” The qualitative analysis in 2014, 2013 and 2012 did not identify any factors that would indicate that it was more likely than not that the fair value of trademarks were less than the carrying value and thus resulted in no impairment.
Income taxes
All of Charter’s operations are held through Charter Holdco and its direct and indirect subsidiaries. Charter Holdco and the majority of its subsidiaries are generally limited liability companies that are not subject to income tax. However, certain of these
limited liability companies are subject to state income tax. In addition, the indirect subsidiaries that are corporations are subject to federal and state income tax. All of the remaining taxable income, gains, losses, deductions and credits of Charter Holdco pass through to Charter and its direct subsidiaries.
As of December 31, 20142017, Charter and its indirect corporate subsidiaries had approximately $9.510.9 billion of federal tax net operating loss carryforwards resulting in a gross deferred tax asset of approximately $3.32.3 billion. Federal tax net operating loss carryforwards expire in the years 2020 through 2034. These losses resulted from the operations of Charter Holdco and its subsidiaries.subsidiaries and from loss carryforwards received as a result of the TWC Transaction. Federal tax net operating loss carryforwards
expire in the years 2018 through 2035. In addition, as of December 31, 20142017, Charter and its indirect corporate subsidiaries had state tax net operating loss carryforwards, resulting in a gross deferred tax asset (net of federal tax benefit) of approximately $321359 million. State tax net operating loss carryforwards generally expire in the years 20152018 through 2034. Due to uncertainties in projected future taxable income, valuation allowances have been established against the gross deferred tax assets for book accounting purposes, except for future taxable income that will result from the reversal of existing temporary differences for which deferred tax liabilities are recognized.2037. Such tax loss carryforwards can accumulate and be used to offset Charter’s future taxable income.
As of December 31, 20142017, $5.3 billionall of Charter's federal tax loss carryforwards are unrestricted and available for Charter’s immediate use, while approximately $4.2 billion of federal tax loss carryforwards are still subject to Section 382 and other restrictions. Pursuant to these restrictions, Charter estimates that approximately $2.0$8.7 billion and $400in 2018, $654 million in the years 2015 and 2016, respectively,2019 and an additional $226 million annually over each of the next eightfive years of federal tax loss carryforwards, should become unrestricted and available for Charter’s use. BothAn additional $415 million is currently subject to a valuation allowance. Charter’s indirect corporate subsidiary and state tax loss carryforwards are subject to similar but varying restrictions.
In addition to itsIncome tax loss carryforwards, Charter also has tax basis of $4.5 billion in intangible assets and $4.6 billion in property, plant, and equipment as of benefit for the year ended December 31, 2014. The tax basis2017 was recognized primarily as a result of the enactment of the Tax Cuts & Jobs Act (“Tax Reform”) in these assets is not subject to Section 382 limitations and therefore is currently deductible as depreciated or amortized. For illustrative purposes, Charter expects to reflect tax-deductible amortization and depreciation on assets owned asDecember 2017. Among other things, the primary provisions of December 31, 2014, beginning at approximately $1.9 billion in 2015 and $3.9 billion between 2016 through 2019, decelerating annually. The foregoing projected deductions do not include any amortization or depreciation related to future capital spend or potential acquisitions. In addition,Tax Reform impacting us are the deductions assume Charter does not dispose of a material portion of its business or make modificationsreductions to the underlying partnerships it owns, all of which may materially affect the timing or amount of its existing amortization and depreciation deductions. Any one of these factors including pending transactions, future legislation or adjustments by the IRS upon examination could also affect the projected deductions.
As of December 31, 2014 and 2013, we have recorded net deferredU.S. corporate income tax liabilities of $1.6 billionrate from 35% to 21% and $1.4 billion, respectively. Nettemporary 100% bonus depreciation for certain assets. The change in tax law required us to remeasure existing net deferred tax liabilities includedusing the lower rate in the period of enactment resulting in an income tax benefit of approximately $236 million and $226 million at $9.3 billion to reflect these changes in the year ended December 31, 2014 and 2013, respectively, relating to certain indirect subsidiaries of Charter Holdco that file separate federal or state2017. We have reported provisional amounts for the income tax returns. The remaindereffects of our net deferredTax Reform for which the accounting is incomplete but a reasonable estimate could be determined. There were no specific impacts of Tax Reform that could not be reasonably estimated which we accounted for under prior tax liability arose from Charter's investment in Charter Holdco,law. Based on a continued analysis of the estimates and was largely attributablefurther guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period. Overall, the changes due to the characterization of franchises for financial reporting purposes as indefinite-lived. As part of our net liability,Tax Reform will favorably affect income tax expense on December 31, 2014 and 2013, we had gross deferred tax assets of $4.4 billion and $3.9 billion, respectively, which primarily relate to tax losses allocated to Charter from Charter Holdco. future U.S. earnings.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, management takes into account various factors, including the expected level of future taxable income, available tax planning strategies and reversals of existing taxable temporary differences. Due to ourLegacy Charter’s history of losses, and limitations imposed by Section 382 of the Code discussed above, we wereLegacy Charter was historically unable to assume future taxable income in ourits analysis and accordingly valuation allowances have beenwere established except for deferred benefits available to offset certain deferred tax liabilities that will reverse over time. Accordingly, our gross deferred tax assets have been offset with a corresponding valuation allowance of $3.1 billion and $3.0 billion at December 31, 2014 and 2013, respectively. The amount ofagainst the deferred tax assets, considered realizablenet of deferred tax liabilities, from definite-lived assets for book accounting purposes. However, as a result of the TWC Transaction in 2016, deferred tax liabilities resulting from the acquisition accounting increased significantly and therefore, reflectedfuture taxable income that will result from the reversal of existing temporary differences for which deferred tax liabilities are recognized, is sufficient to conclude it is more likely than not that we will realize substantially all of our deferred tax assets. As a result, in 2016 Charter reversed approximately $3.3 billion of its valuation allowance and recognized a corresponding income tax benefit in the consolidated balance sheet, would be increased at such time that it is more-likely-than-not future taxable income will be realized duringstatements of operations for the carryforward period. We periodically evaluate the facts and circumstances surrounding this assessment and, at the time this consideration is met, an adjustment to reverse some portionyear ended December 31, 2016. Approximately $87 million of the existing valuation allowance would result.associated with federal tax net operating loss carryforwards and approximately $50 million of valuation allowance associated with state tax loss carryforwards and other miscellaneous deferred tax assets remains on the December 31, 2017 consolidated balance sheet.
In determining our tax provision for financial reporting purposes, Charter establisheswe establish a reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon examination, based on their technical merits. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in our financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized when the position is ultimately resolved. There is considerable judgment involved in determining whether positions taken on the tax return are “more likely than not” of being sustained.
Charter adjusts its We adjust our uncertain tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations.
No tax years for Charter, Charter Holdings or Charter Holdco for income tax purposes, are currently under examination by the IRS. TaxCharter and Charter Holdings' 2016 and 2017 tax years remain open for examination and assessment. Legacy Charter’s tax years ending 20112014 through 2014the short period return dated May 17, 2016 remain subject to examination and assessment. Years prior to 20112014 remain open solely for purposes of examination of Legacy Charter’s loss and credit carryforwards. The IRS is currently examining Legacy TWC’s income tax returns for 2011 through 2014. Legacy TWC’s tax year 2015 remains subject to examination and assessment. Prior to Legacy TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009 (the “Separation”), Legacy TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS is currently examining Time Warner’s 2008 through 2010 income tax returns. Time Warner’s income tax returns for 2005 to 2007, which are periods prior to the Separation, were settled with the exception of an immaterial item that has been referred to the IRS Appeals Division. We do not anticipate that these examinations will have a material impact on our consolidated financial position or results of operations. In addition, we are also subject to ongoing examinations of our tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on our consolidated financial position or results of operations during the year ended December 31, 2017, nor do we anticipate a material impact in the future.
Litigation
Legal contingencies have a high degree of uncertainty. When a loss from a contingency becomes estimable and probable, a reserve is established. The reserve reflects management'smanagement’s best estimate of the probable cost of ultimate resolution of the matter and is revised as facts and circumstances change. A reserve is released when a matter is ultimately brought to closure or the statute of limitations lapses. We have established reserves for certain matters. Although certainthese matters are not expected individually to have a material adverse effect on our consolidated financial condition, results of operations or liquidity, such matters could have, in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or liquidity.
Programming Agreementsagreements
We exercise significant judgment in estimating programming expense associated with certain video programming contracts. Our policy is to record video programming costs based on the substance of our contractual agreements with our programming vendors, which are generally multi-year agreements that provide for us to make payments to the programming vendors at agreed upon market rates based on the number of customers to which we provide the programming service. If a programming contract expires prior to the parties'parties’ entry into a new agreement and we continue to distribute the service, we estimate the programming costs during the period there is no contract in place. In doing so, we consider the previous contractual rates, inflation and the status of the negotiations in determining our estimates. When the programming contract terms are finalized, an adjustment to programming expense is recorded, if necessary, to reflect the terms of the new contract. We also make estimates in the recognition of programming expense related to other items such as the accounting for free periods, timing of rate increases and credits from service interruptions, as well asincluding the allocation of consideration exchanged between the parties among the various items in multiple-element transactions.
Significant judgmentJudgment is also involved when we enter into agreements that result in us receiving cash consideration from the programming vendor, usually in the form of advertising sales, channel positioning fees, launch support or marketing support. In these situations, we must determine based upon facts and circumstances if such cash consideration should be recorded as revenue, a reduction in programming expense or a reduction in another expense category (e.g., marketing).
Pension plans
We sponsor two qualified defined benefit pension plans, the TWC Pension Plan and the TWC Union Pension Plan (collectively, the “TWC Pension Plans”), that provide pension benefits to a majority of Legacy TWC employees. We also provide a nonqualified defined benefit pension plan for certain employees under the TWC Excess Pension Plan. As of December 31, 2017, the accumulated benefit obligation and fair value of plan assets for the TWC Pension Plans was $3.6 billion and $3.3 billion, respectively, and the net underfunded liability of the TWC Pension Plans was recorded as a $1 million noncurrent asset, $5 million current liability and $292 million long-term liability. As of December 31, 2016, the accumulated benefit obligation and fair value of plan assets for the TWC Pension Plans was $3.3 billion and $2.9 billion, respectively, and the net underfunded liability of the TWC Pension Plans was recorded as a $1 million noncurrent asset, $6 million current liability and $309 million long-term liability.
Pension benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. We have elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period. We use a December 31 measurement date for our pension plans.
We recognized net periodic pension benefits of $1 million and $813 million in 2017 and 2016, respectively. Net periodic pension benefit or expense is determined using certain assumptions, including the expected long-term rate of return on plan assets, discount rate and mortality assumptions. We determined the discount rate used to compute pension expense based on the yield of a large population of high-quality corporate bonds with cash flows sufficient in timing and amount to settle projected future defined benefit payments. In developing the expected long-term rate of return on assets, we considered the current pension portfolio’s composition, past average rate of earnings, and our asset allocation targets. We used a discount rate of 4.20% from January 1, 2017 to September 30, 2017 and 3.88% from October 1, 2017 to December 31, 2017 to compute 2017 pension expense. A decrease in the discount rate of 25 basis points would result in a $173 million increase in our pension plan benefit obligation as of December 31, 2017 and net periodic pension expense recognized in 2017 under our mark-to-market accounting policy. Our expected long-term rate of return on plan assets used to compute 2017 pension expense was 6.50%. A decrease in the expected long-term rate of return of 25 basis points, from 6.50% to 6.25%, while holding all other assumptions constant, would result in an increase in our 2018 net periodic pension expense of approximately $8 million. See Note 21 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” for additional discussion on these assumptions.
Results of Operations
The following table sets forth the percentages of revenues that items in the accompanying consolidated statements of operations constituted for the periods presented (dollars in millions, except per share data):
| | | | Year Ended December 31, | | | | | | | |
| | 2014 | | 2013 | | 2012 | Year Ended December 31, |
| | | | | | | | | | | | | 2017 | 2016 | 2015 |
| Revenues | $ | 9,108 |
| | 100 | % | | $ | 8,155 |
| | 100 | % | | $ | 7,504 |
| | 100 | % | $ | 41,581 |
| | $ | 29,003 |
| | $ | 9,754 |
|
| | | | | | | | | | | | | | | | | |
| Costs and Expenses: | | | | | | | | | | | | | | | | |
| Operating costs and expenses (excluding depreciation and amortization) | 5,973 |
| | 66 | % | | 5,345 |
| | 66 | % | | 4,860 |
| | 65 | % | |
| Operating costs and expenses (exclusive of items shown separately below) | | 26,541 |
| | 18,655 |
| | 6,426 |
|
| Depreciation and amortization | 2,102 |
| | 23 | % | | 1,854 |
| | 23 | % | | 1,713 |
| | 23 | % | 10,588 |
| | 6,907 |
| | 2,125 |
|
| Other operating expenses, net | 62 |
| | 1 | % | | 47 |
| | 1 | % | | 16 |
| | — | % | 346 |
| | 985 |
| | 89 |
|
| | 8,137 |
| | 90 | % | | 7,246 |
| | 89 | % | | 6,589 |
| | 88 | % | 37,475 |
| | 26,547 |
| | 8,640 |
|
| Income from operations | 971 |
| | 10 | % | | 909 |
| | 11 | % | | 915 |
| | 12 | % | 4,106 |
| | 2,456 |
| | 1,114 |
|
| | | | | | | |
| Other Expenses: | | | | | | |
| Interest expense, net | (911 | ) | | | | (846 | ) | | | | (907 | ) | | | (3,090 | ) | | (2,499 | ) | | (1,306 | ) |
| Loss on extinguishment of debt | — |
| | | | (123 | ) | | | | (55 | ) | | | (40 | ) | | (111 | ) | | (128 | ) |
| Gain (loss) on derivative instruments, net | (7 | ) | | | | 11 |
| | | | — |
| | | |
| Gain (loss) on financial instruments, net | | 69 |
| | 89 |
| | (4 | ) |
| Other pension benefits | | 1 |
| | 899 |
| | — |
|
| Other expense, net | | (18 | ) | | (14 | ) | | (7 | ) |
| | | (3,078 | ) | | (1,636 | ) | | (1,445 | ) |
| | | | | | | |
| Income (loss) before income taxes | 53 |
| | | | (49 | ) | | | | (47 | ) | | | 1,028 |
| | 820 |
| | (331 | ) |
| Income tax benefit | | 9,087 |
| | 2,925 |
| | 60 |
|
| Consolidated net income (loss) | | 10,115 |
| | 3,745 |
| | (271 | ) |
| Less: Net income attributable to noncontrolling interests | | (220 | ) | | (223 | ) | | — |
|
| Net income (loss) attributable to Charter shareholders | | $ | 9,895 |
| | $ | 3,522 |
| | $ | (271 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax expense | (236 | ) | | | | (120 | ) | | | | (257 | ) | | | |
| Net loss | $ | (183 | ) | | | | $ | (169 | ) | | | | $ | (304 | ) | | | |
| EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: | | | | | | |
| Basic | | $ | 38.55 |
| | $ | 17.05 |
| | $ | (2.68 | ) |
| Diluted | | $ | 34.09 |
| | $ | 15.94 |
| | $ | (2.68 | ) |
| | | | | | | | | | | | | | | | | |
| LOSS PER COMMON SHARE, BASIC AND DILUTED: | $ | (1.70 | ) | | | | $ | (1.65 | ) | | | | $ | (3.05 | ) | | | |
| | | | | | | | | | | | | |
| Weighted average common shares outstanding, basic and diluted | 108,374,160 |
| | | | 101,934,630 |
| | | | 99,657,989 |
| | | |
| Weighted average common shares outstanding, basic | | 256,720,715 |
| | 206,539,100 |
| | 101,152,647 |
|
| Weighted average common shares outstanding, diluted | | 296,703,956 |
| | 234,791,439 |
| | 101,152,647 |
|
Revenues. Total revenues grew $953 million$12.6 billion or 12%43.4% in the year ended December 31, 20142017 as compared to 20132016 and grew $651 million$19.2 billion or 9%197.3% in the year ended December 31, 20132016 as compared to 20122015. Revenue growth primarily reflects the Transactions and increases in the number of residential Internet and triple play customers and in commercial business customers, price adjustments as well as growth in expanded basic and digital penetration, promotional and annual rate increases, and higher advanced servicesvideo penetration offset by a decrease in limited basic video customers. The Bresnan AcquisitionTransactions increased revenues in 2014for the years ended 2017 and 2016 as compared to 2013the corresponding prior periods by approximately $276 million$11.4 billion and approximately $270 million in 2013$18.6 billion, respectively. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, total revenue growth was 3.9% and 7.0% for the years ended December 31, 2017 and 2016 as compared to the corresponding prior periods.2012.
Revenues by service offering were as follows (dollars in millions; all percentages are calculated using actual amounts.whole numbers. Minor differences may exist due to rounding):
| | | | Years ended December 31, | | | | | Years ended December 31, | | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | | 2014 over 2013 | | 2013 over 2012 | Actual | | Pro Forma |
| | Revenues | | % of Revenues | | Revenues | | % of Revenues | | Revenues | | % of Revenues | | Change | | % Change | | Change | | % Change | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 Growth | | 2016 vs. 2015 Growth | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 Growth | | 2016 vs. 2015 Growth |
| Video | $ | 4,443 |
| | 49 | % | | $ | 4,040 |
| | 50 | % | | $ | 3,649 |
| | 49 | % | | $ | 403 |
| | 10 | % | | $ | 391 |
| | 11 | % | $ | 16,641 |
| | $ | 11,967 |
| | $ | 4,587 |
| | 39.1 | % | | 160.9 | % | | $ | 16,641 |
| | $ | 16,390 |
| | $ | 16,029 |
| | 1.5 | % | | 2.3 | % |
| Internet | 2,576 |
| | 28 | % | | 2,186 |
| | 27 | % | | 1,866 |
| | 25 | % | | 390 |
| | 18 | % | | 320 |
| | 17 | % | 14,105 |
| | 9,272 |
| | 3,003 |
| | 52.1 | % | | 208.7 | % | | 14,105 |
| | 12,688 |
| | 11,295 |
| | 11.2 | % | | 12.3 | % |
| Voice | 575 |
| | 6 | % | | 644 |
| | 8 | % | | 828 |
| | 11 | % | | (69 | ) | | (11 | )% | | (184 | ) | | (22 | )% | 2,542 |
| | 2005 |
| | 539 |
| | 26.8 | % | | 272.2 | % | | 2,542 |
| | 2,905 |
| | 2,842 |
| | (12.5 | )% | | 2.2 | % |
| Commercial | 993 |
| | 11 | % | | 812 |
| | 10 | % | | 648 |
| | 9 | % | | 181 |
| | 22 | % | | 164 |
| | 25 | % | |
| Residential revenue | | 33,288 |
| | 23,244 |
| | 8,129 |
| | 43.2 | % | | 185.9 | % | | 33,288 |
| | 31,983 |
| | 30,166 |
| | 4.1 | % | | 6.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Small and medium business | | 3,686 |
| | 2,480 |
| | 764 |
| | 48.6 | % | | 224.7 | % | | 3,686 |
| | 3,409 |
| | 3,009 |
| | 8.1 | % | | 13.3 | % |
| Enterprise | | 2,210 |
| | 1,429 |
| | 363 |
| | 54.7 | % | | 293.0 | % | | 2,210 |
| | 2,025 |
| | 1,818 |
| | 9.1 | % | | 11.4 | % |
| Commercial revenue | | 5,896 |
| | 3,909 |
| | 1,127 |
| | 50.8 | % | | 246.7 | % | | 5,896 |
| | 5,434 |
| | 4,827 |
| | 8.5 | % | | 12.6 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Advertising sales | 341 |
| | 4 | % | | 291 |
| | 4 | % | | 334 |
| | 4 | % | | 50 |
| | 17 | % | | (43 | ) | | (13 | )% | 1,510 |
| | 1235 |
| | 309 |
| | 22.3 | % | | 300.3 | % | | 1,510 |
| | 1,696 |
| | 1,524 |
| | (10.9 | )% | | 11.3 | % |
| Other | 180 |
| | 2 | % | | 182 |
| | 2 | % | | 179 |
| | 2 | % | | (2 | ) | | (1 | )% | | 3 |
| | 2 | % | 887 |
| | 615 |
| | 189 |
| | 44.1 | % | | 225.0 | % | | 887 |
| | 910 |
| | 877 |
| | (2.6 | )% | | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | $ | 41,581 |
| | $ | 29,003 |
| | $ | 9,754 |
| | 43.4 | % | | 197.3 | % | | $ | 41,581 |
| | $ | 40,023 |
| | $ | 37,394 |
| | 3.9 | % | | 7.0 | % |
| | $ | 9,108 |
| | 100 | % | | $ | 8,155 |
| | 100 | % | | $ | 7,504 |
| | 100 | % | | $ | 953 |
| | 12 | % | | $ | 651 |
| | 9 | % | |
Video revenues consist primarily of revenues from basic and digital video services provided to our non-commercialresidential customers, as well as franchise fees, equipment rental and video installation revenue. Residential video customers decreased by 17,000292,000 in 20142017 and, excluding the impacts of the Transactions, increased 188,000by 42,000 in 2013. However, after giving effect to the Bresnan Acquisition, residential basic video customers decreased by 109,000 in 2013.2016. The changesincreases in video revenues are attributable to the following (dollars in millions):
|
| | | | | | | | |
| | | 2014 compared to 2013 | | 2013 compared to 2012 |
| | | | | |
| Incremental video services, price adjustments and bundle revenue allocation | | $ | 330 |
| | $ | 375 |
|
| Decrease in basic video customers | | (49 | ) | | (98 | ) |
| Decrease in premium, video on demand and pay-per-view | | (16 | ) | | (20 | ) |
| Bresnan Acquisition | | 138 |
| | 134 |
|
| | | | | |
| | | $ | 403 |
| | $ | 391 |
|
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Bundle revenue allocation and price adjustments | $ | 383 |
| | $ | 103 |
|
| Increase (decrease) in VOD and pay-per-view | 35 |
| | (22 | ) |
| Increase (decrease) in average basic video customers | (179 | ) | | 35 |
|
| TWC Transaction | 3,806 |
| | 6,263 |
|
| Bright House Transaction | 629 |
| | 1,001 |
|
| | $ | 4,674 |
| | $ | 7,380 |
|
On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, residential video customers decreased by 226,000 in 2016 and the increases in video revenues is attributable to the following (dollars in millions):
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Bundle revenue allocation and price adjustments | $ | 513 |
| | $ | 498 |
|
| Increase (decrease) in VOD and pay-per-view | 32 |
| | (69 | ) |
| Decrease in average basic video customers | (294 | ) | | (68 | ) |
| | $ | 251 |
| | $ | 361 |
|
Residential Internet customers grew by 383,0001,171,000 in 2017 and, 598,000excluding the impacts of the Transactions, grew by 461,000 customers in 20142016 and 2013, respectively, or 324,000 customers in 2013, after giving effect to the Bresnan Acquisition.. The increases in Internet revenues from our residential customers are attributable to the following (dollars in millions):
|
| | | | | | | | |
| | | 2014 compared to 2013 | | 2013 compared to 2012 |
| | | | | |
| Increase in residential Internet customers | | $ | 200 |
| | $ | 142 |
|
| Service level changes and price adjustments | | 116 |
| | 106 |
|
| Bresnan Acquisition | | 74 |
| | 72 |
|
| | | | | |
| | | $ | 390 |
| | $ | 320 |
|
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in average residential Internet customers | $ | 599 |
| | $ | 284 |
|
| Price adjustments, bundle revenue allocation and service level changes | 395 |
| | 62 |
|
| TWC Transaction | 3,268 |
| | 5,063 |
|
| Bright House Transaction | 571 |
| | 860 |
|
| | $ | 4,833 |
| | $ | 6,269 |
|
On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, residential Internet customers increased by 1,463,000 in 2016 and the increases in Internet revenues is attributable to the following (dollars in millions):
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in average residential Internet customers | $ | 818 |
| | $ | 957 |
|
| Price adjustments, bundle revenue allocation and service level changes | 599 |
| | 436 |
|
| | $ | 1,417 |
| | $ | 1,393 |
|
Residential voice customers grew by 166,000100,000 in 2017 and, 359,000excluding the impacts of the Transactions, grew by 95,000 customers in 20142016 and 2013, respectively, or 200,000 customers in 2013, after giving effect to the Bresnan Acquisition.. The changesincreases in voice revenues from our residential customers areis attributable to the following (dollars in millions):
|
| | | | | | | | |
| | | 2014 compared to 2013 | | 2013 compared to 2012 |
| | | | | |
| Price adjustments and bundle revenue allocation | | $ | (135 | ) | | $ | (259 | ) |
| Increase in residential voice customers | | 43 |
| | 51 |
|
| Bresnan Acquisition | | 23 |
| | 24 |
|
| | | | | |
| | | $ | (69 | ) | | $ | (184 | ) |
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in average residential voice customers | $ | 27 |
| | $ | 28 |
|
| Bundle revenue allocation and price adjustments | (319 | ) | | (18 | ) |
| TWC Transaction | 707 |
| | 1,247 |
|
| Bright House Transaction | 122 |
| | 209 |
|
| | $ | 537 |
| | $ | 1,466 |
|
On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, residential voice customers increased by 368,000 in 2016 and the increase in voice revenues is attributable to the following (dollars in millions):
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in average residential voice customers | $ | 49 |
| | $ | 229 |
|
| Price adjustments and bundle revenue allocation | (412 | ) | | (166 | ) |
| | $ | (363 | ) | | $ | 63 |
|
Commercial revenues consist primarily of revenues from services provided to our commercial customers. CommercialSmall and medium business PSUs increased 52,000by 326,000 in 2017 and, 100,000excluding the impacts of the Transactions, increased by 128,000 in 20142016 and 2013, respectively, or 64,000 customers in 2013, after giving effect to the Bresnan Acquisition.. The increases in small and medium business commercial revenues are attributable to the following (dollars in millions):
|
| | | | | | | | |
| | | 2014 compared to 2013 | | 2013 compared to 2012 |
| | | | | |
| Sales to small-to-medium sized business customers | | $ | 115 |
| | $ | 97 |
|
| Carrier site customers | | 16 |
| | 25 |
|
| Other | | 18 |
| | 11 |
|
| Bresnan Acquisition | | 32 |
| | 31 |
|
| | | | | |
| | | $ | 181 |
| | $ | 164 |
|
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in small and medium business customers | $ | 295 |
| | $ | 127 |
|
| Price adjustments related to SPP | (118 | ) | | (38 | ) |
| TWC Transaction | 890 |
| | 1,408 |
|
| Bright House Transaction | 139 |
| | 219 |
|
| | $ | 1,206 |
| | $ | 1,716 |
|
On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, small and medium business PSUs increased by 291,000 in 2016 and the increases in small and medium business commercial revenues is attributable to the following (dollars in millions):
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in small and medium business customers | $ | 393 |
| | $ | 359 |
|
| Price adjustments related to SPP | (116 | ) | | 41 |
|
| | $ | 277 |
| | $ | 400 |
|
Enterprise PSUs increased by 17,000 in 2017 and, excluding the impacts of the Transactions, increased by 6,000 in 2016. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, enterprise PSUs increased by 16,000 in 2016. The Transactions increased enterprise commercial revenues for years ended 2017 and 2016 as compared to the corresponding prior periods by approximately $655 million and $1.0 billion, respectively. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, enterprise commercial revenues increased $185 million and $207 million during the years ended 2017 and 2016, respectively, as compared to the corresponding prior periods primarily due to growth in customers.
Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors.vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues increased in 20142017 and 2016 primarily as a result of an increase in revenue fromdue to the political sector of $30 million. Advertising sales revenues decreased in 2013 primarily as a result of a decrease in revenue from the political and retail sectors of $30 million and $20 million, respectively.Transactions. The Bresnan AcquisitionTransactions increased advertising sales revenue by approximately $7 million in each of 2014revenues for the years ended 2017 and 20132016 as compared to the corresponding prior year periods.periods by $425 million and $898 million, respectively. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, advertising sales revenues decreased $186 million and increased $172 million during the years ended 2017 and 2016, respectively, as compared to the corresponding prior periods primarily due to political advertising.
Other revenues consist of revenue from regional sports and news channels (excluding intercompany charges or advertising sales on those channels), home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues. The decreaseincrease in 20142017 and 2016 was primarily due to a decrease in wire maintenance fees.the Transactions. The increase in 2013 was primarily the result of increases in late payment fees. The Bresnan AcquisitionTransactions increased other revenues in each of 2014for the years ended 2017 and 20132016 as compared to the corresponding prior year periods by approximately $2 million.$255 million and $429 million, respectively. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, other revenues decreased $23 million and increased $33 million during the years ended 2017 and 2016, respectively, as compared to the corresponding prior periods primarily due to a settlement incurred in 2016 related to an early contract termination at Legacy TWC and Legacy Bright House.
Operating costs and expenses. The increases in our operating costs and expenses are attributable to the following (dollars in millions):
| | | | | 2014 compared to 2013 | | 2013 compared to 2012 | | | | | |
| | | | | | 2017 compared to 2016 | | 2016 compared to 2015 |
| Programming | | $ | 234 |
| | $ | 108 |
| $ | 3,562 |
| | $ | 4,356 |
|
| Franchise, regulatory and connectivity | | 11 |
| | (1 | ) | |
| Regulatory, connectivity and produced content | | 597 |
| | 1,032 |
|
| Costs to service customers | | 67 |
| | 116 |
| 2,126 |
| | 3,774 |
|
| Marketing | | 27 |
| | 38 |
| 713 |
| | 1,078 |
|
| Transition costs | | (32 | ) | | 84 |
|
| Other | | 109 |
| | 44 |
| 920 |
| | 1,905 |
|
| Bresnan Acquisition | | 180 |
| | 180 |
| |
| | | | | | $ | 7,886 |
| | $ | 12,229 |
|
| | | $ | 628 |
| | $ | 485 |
| |
Programming costs were approximately $10.6 billion, $7.0 billion and $2.7 billion, representing $2.5 billion40%, $2.1 billion38% and $2.0 billion, representing 41%, 40% and 40%42% of operating costs and expenses for each of the years ended December 31, 20142017, 20132016 and 20122015, respectively. The increase in operating costs and expenses for the years ended 2017 and 2016 as compared to the corresponding prior periods was primarily due to the Transactions.
The increase in other expense is attributable to the following (dollars in millions):
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Enterprise | $ | 245 |
| | $ | 383 |
|
| Advertising sales expense | 244 |
| | 405 |
|
| Corporate costs | 207 |
| | 607 |
|
| Property tax and insurance | 109 |
| | 198 |
|
| Stock compensation expense | 17 |
| | 166 |
|
| Other | 98 |
| | 146 |
|
| | $ | 920 |
| | $ | 1,905 |
|
The increases in other expense for the years ended 2017 and 2016 as compared to the corresponding prior periods were primarily due to the Transactions.
On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, increases in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, are attributable to the following (dollars in millions):
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Programming | $ | 982 |
| | $ | 661 |
|
| Regulatory, connectivity and produced content | (29 | ) | | 28 |
|
| Costs to service customers | (144 | ) | | 72 |
|
| Marketing | 52 |
| | 59 |
|
| Transition costs | (32 | ) | | 84 |
|
| Other | (142 | ) | | 314 |
|
| | $ | 687 |
| | $ | 1,218 |
|
On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, programming costs were approximately $9.6 billion and $9.0 billion, representing 37% and 36% of total operating costs and expenses for the years ended December 31, 2016 and 2015, respectively.
Programming costs consist primarily of costs paid to programmers for basic, digital, premium, video on demand,VOD, and pay-per-view programming. The increase in programming costs on a pro forma basis, assuming the Transactions occurred as of January 1, 2015, is primarily a result of annual contractual rate adjustments, including renewals and increases in amounts paid for retransmission consents, broader carriage of certain networkshigher expanded basic video package customers and higher pay-per-view events offset by synergies as a result of our all-digital initiative and the introduction of new networks to Charter's video offering.Transactions. We expect programming expenses towill continue to increase due to a variety of factors, including annual increases imposed by programmers with additional selling power as a result of media consolidation, increased demands by owners of broadcast stations for payment for retransmission consent or linking carriage of other services to retransmission consent, and additional programming, particularly new sports services. We have been unable to fully pass these increases on to our customers nor do we expect to be able to do so in the future without a potential loss of customers.
Costs to service customers include residentialdecreased $144 million during 2017 as compared to 2016, on a pro forma basis, assuming the Transactions occurred as of January 1, 2015, primarily due to benefits from combining Legacy TWC and commercialLegacy Bright House into Charter, including lower employee benefit and maintenance costs, related to field operations, network operationshigher labor and material capitalization with increases in placement of new customer care including internalequipment and third party labor for installations, service and repair, maintenance, billing and collection, occupancy and vehicle costs. The increase in costs to service customers was primarily the result of higher spending on labor to deliver
improved products and service levels and higher collection costs. During 2013, the increase was also the result of greater reconnect expense.productivity.
The increase in marketing costs during 2014 and 2013 wasOn a pro forma basis, assuming the resultTransactions occurred as of heavier sales activity and sales channel development.
The increasesJanuary 1, 2015, the change in other expense areis attributable to the following (dollars in millions):
|
| | | | | | | | |
| | | 2014 compared to 2013 | | 2013 compared to 2012 |
| | | | | |
| Administrative labor | | $ | 46 |
| | $ | (4 | ) |
| Commercial sales expense | | 27 |
| | 30 |
|
| Advertising sales expense | | 17 |
| | 6 |
|
| Bad debt | | 16 |
| | (6 | ) |
| Stock compensation expense | | 7 |
| | (2 | ) |
| Property tax and insurance | | (9 | ) | | 14 |
|
| Other | | 5 |
| | 6 |
|
| | | | | |
| | | $ | 109 |
| | $ | 44 |
|
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Corporate costs | $ | (157 | ) | | $ | 114 |
|
| Stock compensation expense | (34 | ) | | 49 |
|
| Property, tax and insurance | (21 | ) | | — |
|
| Advertising sales expense | 37 |
| | 100 |
|
| Enterprise | 25 |
| | 42 |
|
| Other | 8 |
| | 9 |
|
| | $ | (142 | ) | | $ | 314 |
|
Corporate costs and stock compensation expense decreased in 2017 as compared to 2016 primarily as a result of lower headcount as a result of integration synergies.
The increase in administrative labor in 2014corporate costs during 2016 as compared to 2013 relates primarily to increases in the number of employees. Commercial sales expense and advertising sales expenses increased in 2014 and 2013 compared to the corresponding prior periods primarily related to growth in these businesses. The increase in bad debt in 2014 compared to 2013 is primarily related to a third quarter change in our collections policy and lower recoveries. The increase in property tax and insurance in 2013 compared to 20122015 relates primarily to increases in the number of employees including increases in engineering and vehicles.IT. The increase in advertising sales expense relates primarily to higher advertising sales revenue. Stock compensation expense increased during 2016 as compared to 2015 primarily due to increases in headcount and the value of equity issued.
Depreciation and amortization. Depreciation and amortization expense increased by $248 million$3.7 billion and $141 million$4.8 billion in 20142017 and 2013, respectively, which2016 as compared to the corresponding prior periods primarily representsas a result of additional depreciation on more recentand amortization related to the Transactions, inclusive of the incremental amounts as a result of the higher fair values recorded in acquisition accounting and, in 2017, higher capital expenditures and the Bresnan Acquisition offset by certain assets becoming fully depreciated.expenditures.
Other operating expenses, net. The changes in other operating expenses, net are attributable to the following (dollars in millions):
|
| | | | | | | | |
| | | 2014 compared to 2013 | | 2013 compared to 2012 |
| | | | | |
| Increases in merger and acquisitions costs | | $ | 22 |
| | $ | 15 |
|
| Increases in (gain) loss on sales of assets | | $ | 2 |
| | $ | 13 |
|
| Increases (decreases) in special charges, net | | (9 | ) | | 3 |
|
| | | | | |
| | | $ | 15 |
| | $ | 31 |
|
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Merger and restructuring costs | $ | (619 | ) | | $ | 900 |
|
| Special charges, net | (38 | ) | | 2 |
|
| (Gain) loss on sale of assets, net | 18 |
| | (6 | ) |
| | $ | (639 | ) | | $ | 896 |
|
The changes in merger and restructuring costs is primarily due to approximately $262 million of contingent financing and advisory transaction fees paid at the closing of the Transactions in 2016 as well as approximately $279 million and $611 million of employee retention and employee termination costs incurred during 2017 and 2016, respectively.For more information, see Note 1415 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Interest expense, net. Net interest expense increased by $591 million in 2017 from 2016 and by $1.2 billion in 2016 from 2015. The increase in 2017 as compared to 2016 is primarily due to an increase in weighted average debt outstanding of $11.7 billion primarily as a result of the issuance of notes in 2017 for general corporate purposes including stock buybacks. Interest expense associated with debt assumed from Legacy TWC also increased interest expense during the year ended December 31, 2017 compared to the corresponding period in 2016 by approximately $336 million. The increase in 2016 as compared to 2015 is primarily due to an increase of $463 million of interest expense associated with the debt incurred to fund the Transactions and $604 million associated with debt assumed from Legacy TWC.
Loss on extinguishment of debt. Loss on extinguishment of debt of $40 million, $111 million and $128 million for the years ended December 31, 2017, 2016 and 2015 primarily represents losses recognized as a result of the repurchase of CCO Holdings notes and amendments to Charter Operating's credit facilities. For more information, see Note 9 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Gain (loss) on financial instruments, net. Gains and losses on financial instruments are recognized due to changes in the fair value of our interest rate and our cross currency derivative instruments, and the foreign currency remeasurement of the fixed-rate British pound sterling denominated notes (the “Sterling Notes”) into U.S. dollars. For more information, see Note 12 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Other pension benefits. Other pension benefits decreased by $898 million during 2017 compared to 2016 and increased $899 million during 2016 compared to 2015 primarily due to the pension curtailment gain of $675 million and remeasurement gain of $195 million recognized in 2016 as opposed to remeasurement losses of $55 million recognized in 2017. For more information, see Note 21 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Other expense, net. Other expense, net primarily represents equity losses on our equity-method investments. For more information, see Note 7 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Income tax benefit.We recognized income tax benefit of $9.1 billion, $2.9 billion and $60 million for the years ended December 31, 2017, 2016 and 2015, respectively. The income tax benefit for the year ended December 31, 2017 was recognized primarily through the enactment of Tax Reform which resulted in an income tax benefit of approximately $9.3 billion as well as by approximately $88 million due to the recognition of excess tax benefits resulting from share based compensation as a component of the provision for income taxes following the prospective application of accounting guidance related to employee-share based payments (see Note 22 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”).
Income tax benefit for the year ended December 31, 2016 was the result of a reduction of substantially all of Legacy Charter's preexisting valuation allowance associated with its deferred tax assets of approximately $3.3 billion as certain of the deferred tax liabilities that were assumed in connection with the closing of the TWC Transaction will reverse and provide a source of future taxable income.
The income tax benefit in 2015 was primarily due to the deemed liquidation of Charter Holdco solely for federal and state income tax purposes, resulting in a $187 million deferred income tax benefit offset by income tax expense primarily through increases in deferred tax liabilities. For more information, see Note 17 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Interest expense, net. Net interest expense increased by $65 millionincome attributable to noncontrolling interest. in 2014 from 2013Net income attributable to noncontrolling interest for financial reporting purposes represents A/N’s portion of Charter Holdings’ net income based on its effective common unit ownership interest of approximately 10% and decreased by $61on the preferred dividend of $150 million in 2013 from 2012. Net interest expense increased in 2014 compared to 2013 primarily as a result of an increase in our weighted average debt outstanding from $13.6 billion for the year ended December 31, 2013 to $15.8 billion for the year ended December 31, 2014 offset by a decrease in our weighted average interest rate from 5.8% for the year ended December 31, 2013 to 5.5% for the year ended December 31, 2014. During the year ended December 31, 2014, we incurred approximately $75 and $93 million of interest expense associated with debt which proceeds are currently held in escrow pending consummation of the Transactions. Net interest expense decreased in 2013 compared to 2012 primarily as a result of a decrease in our weighted average interest rate from 6.5% for the year ended December 31, 2012 to 5.8% for the year ended December 31, 2013 offset by an increase in our weighted average debt outstanding from $13.0 billion for the year ended December 31, 2012 to $13.6 billion for the year ended December 31, 2013.
Loss on extinguishment of debt. Loss on extinguishment of debt consists of the following for the years ended December 31, 2014, 20132017 and 2012 (dollars in millions):
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Charter Operating credit amendment / prepayments | | $ | — |
| | $ | 58 |
| | $ | 92 |
|
| CCH II notes redemptions | | — |
| | — |
| | (46 | ) |
| Charter Operating notes repurchases | | — |
| | — |
| | 9 |
|
| CCO Holdings notes repurchases | | — |
| | 65 |
| | — |
|
| | | | | | | |
| | | $ | — |
| | $ | 123 |
| | $ | 55 |
|
For more information, see Note 8 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Gain (loss) on derivative instruments, net. Interest rate derivative instruments are held to manage our interest costs and reduce our exposure to increases in floating interest rates. We recognized a loss of $7 million and a gain of $11 million during the years ended December 31, 2014 and 2013, respectively, which represents the amortization of accumulated other comprehensive loss for interest rate derivative instruments no longer designated as hedges for accounting purposes offset by their change in fair value.2016, respectively. For more information, see Note 11 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
Income tax expense.Net income (loss) attributable to Charter shareholders. Income tax expense of $236 million, $120 millionNet income attributable to Charter shareholders was $9.9 billion and $257 million was recognized$3.5 billion for the years ended December 31, 2014, 20132017 and 2012,2016, respectively, primarily through increases in deferred tax liabilities relatedand net loss attributable to our investment in Charter Holdco and certain of our indirect subsidiaries, in addition to $3shareholders was $271 million $8 million and $7 million of current federal and state income tax expense, respectively. Income tax expense for the year ended December 31, 2013 decreased compared to the corresponding prior period, primarily as a result of step-ups in basis of indefinite-lived assets for tax, but not GAAP purposes, including the effects of partnership gains related to financing transactions and a partnership restructuring, which decreased our net deferred tax liability related to indefinite-lived assets by $137 million. Our tax provision in future periods will vary based on various factors including changes in our deferred tax liabilities attributable to indefinite-lived intangibles, as well as future operating results, however we do not anticipate having such a large reduction in income tax expense attributable to these items unless we enter into restructuring transactions or similar future financing. The ultimate impact on the tax provision of such future financing and restructuring activities, if any, will be dependent on the underlying facts and circumstances at the time.
Net loss.We incurred net loss of $183 million, $169 million and $304 million for the years ended December 31, 2014, 2013 and 2012, respectively,2015 primarily as a result of the factors described above. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, net income attributable to Charter shareholders was $1.1 billion and $159 million for the years ended December 31, 2016 and 2015, respectively.
Loss per common share.During 2014 and 2013, net loss per common share increased by $0.05 and decreased by $1.40, respectively, as a result of the factors described above.
Use of Adjusted EBITDA and Free Cash Flow
We use certain measures that are not defined by GAAPU.S. generally accepted accounting principles (“GAAP”) to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, consolidated net lossincome (loss) and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to consolidated net lossincome (loss) and net cash flows from operating activities, respectively, below.
Adjusted EBITDA is defined as net loss plus net interest expense, income taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, (gain) loss on derivative instruments, net and other operating expenses, such as merger and acquisition costs, special charges and (gain) loss on sale or retirement of assets. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. Adjusted EBITDA is used by management and Charter’s board of directors to evaluate the performance of our business. However, this measure is limited in that it does not reflect
the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. Management evaluates theseThese costs are evaluated through other financial measures.
Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.
We believe thatManagement and Charter’s board of directors use Adjusted EBITDA and free cash flow provide information useful to investors in assessingassess our performance and our ability to service our debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the United States Securities and Exchange Commission)SEC). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which fees were in the amount of $253 million1.1 billion, $201930 million and $191322 million for the years ended December 31, 20142017, 20132016 and 20122015, respectively.
| | | | Years ended December 31, | Years ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | Actual |
| Net loss | $ | (183 | ) | | $ | (169 | ) | | $ | (304 | ) | |
| Consolidated net income (loss) | | $ | 10,115 |
| | $ | 3,745 |
| | $ | (271 | ) |
| Plus: Interest expense, net | 911 |
| | 846 |
| | 907 |
| 3,090 |
| | 2,499 |
| | 1,306 |
|
| Income tax expense | 236 |
| | 120 |
| | 257 |
| |
| Income tax benefit | | (9,087 | ) | | (2,925 | ) | | (60 | ) |
| Depreciation and amortization | 2,102 |
| | 1,854 |
| | 1,713 |
| 10,588 |
| | 6,907 |
| | 2,125 |
|
| Stock compensation expense | 55 |
| | 48 |
| | 50 |
| 261 |
| | 244 |
| | 78 |
|
| Loss on extinguishment of debt | — |
| | 123 |
| | 55 |
| 40 |
| | 111 |
| | 128 |
|
| (Gain) loss on derivative instruments, net | 7 |
| | (11 | ) | | — |
| |
| (Gain) loss on financial instruments, net | | (69 | ) | | (89 | ) | | 4 |
|
| Other pension benefits | | (1 | ) | | (899 | ) | | — |
|
| Other, net | 62 |
| | 47 |
| | 16 |
| 364 |
| | 999 |
| | 96 |
|
| | | | | | | |
| Adjusted EBITDA | $ | 3,190 |
| | $ | 2,858 |
| | $ | 2,694 |
| $ | 15,301 |
| | $ | 10,592 |
| | $ | 3,406 |
|
| | | | | | | | | | | |
| Net cash flows from operating activities | $ | 2,359 |
| | $ | 2,158 |
| | $ | 1,876 |
| $ | 11,954 |
| | $ | 8,041 |
| | $ | 2,359 |
|
| Less: Purchases of property, plant and equipment | (2,221 | ) | | (1,825 | ) | | (1,745 | ) | (8,681 | ) | | (5,325 | ) | | (1,840 | ) |
| Change in accrued expenses related to capital expenditures | 33 |
| | 76 |
| | 13 |
| 820 |
| | 603 |
| | 28 |
|
| | | | | | | |
| Free cash flow | $ | 171 |
| | $ | 409 |
| | $ | 144 |
| $ | 4,093 |
| | $ | 3,319 |
| | $ | 547 |
|
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | Pro Forma |
| Consolidated net income | $ | 1,399 |
| | $ | 338 |
|
| Plus: Interest expense, net | 2,883 |
| | 2,968 |
|
| Income tax expense | 498 |
| | 102 |
|
| Depreciation and amortization | 9,555 |
| | 9,348 |
|
| Stock compensation expense | 295 |
| | 246 |
|
| Loss on extinguishment of debt | 111 |
| | 128 |
|
| (Gain) loss on financial instruments, net | (89 | ) | | 4 |
|
| Other pension benefits | (915 | ) | | (73 | ) |
| Other, net | 727 |
| | (57 | ) |
| Adjusted EBITDA | $ | 14,464 |
| | $ | 13,004 |
|
Liquidity and Capital Resources
IntroductionOverview
This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt, including approximately $7.0 billion which proceeds are currently held in escrow pending consummation of the Transactions.debt. The accreted valueprincipal amount of our debt as of December 31, 20142017 was $21.0$69.0 billion,, consisting of $7.2$9.5 billion of credit facility debt, $40.6 billion of investment grade senior secured notes and $13.8$18.9 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt. As of December 31, 2014, $91 million of our long-term debt matures in 2015, $127 million in 2016, $1.1 billion in 2017, $967 million in 2018, $1.5 billion in 2019 and $17.3 billion thereafter. As of December 31, 2014, we had other contractual obligations, including interest on our debt, totaling $9.3 billion.
Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. As we launch our new mobile services, we expect an initial funding period to grow a new product as well as negative working capital impacts from the timing of device-related cash flows when we provide the handset or tablet to customers pursuant to equipment installment plans. Free cash flow was $171$4.1 billion, $3.3 billion and $547 million, $409 million and $144 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. As of December 31, 2014,2017, the amount available under our credit facilities was approximately
$817 million. In addition, a $500 million revolver extension is currently committed $3.6 billion and available to Charter. The availability of this revolver is not contingent or related to the closing of the Transactions.cash on hand was approximately $621 million. We expect to utilize free cash flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of or reduce the principal on our obligations. The timing and terms of any refinancing transactions will be subject to market conditions.conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating'sOperating’s revolving credit facility as well as access to the capital markets to fund our projected operating cash needs.
We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to reduce our leverage, and to invest in our business growth and other strategic opportunities, including mergers and acquisitions as well as stock repurchases and dividends. Our target leverage remains at 4 to 4.5 times, and up to 3.5 times at the Charter Operating level. Our leverage ratio was 4.5 as of December 31, 2017. We may increase the total amount of our indebtedness to maintain leverage within our target leverage range. During the years ended December 31, 2017 and 2016, we purchased approximately 33.4 million and 5.1 million shares, respectively, of Charter Class A common stock for approximately $11.6 billion and $1.3 billion, respectively. As of December 31, 2017, Charter had remaining board authority to purchase an additional $1.1 billion of Charter’s Class A common stock and/or Charter Holdings common units. Charter is not obligated to acquire any particular amount of common stock, and the timing of any purchases that may occur cannot be predicted and will largely depend on market conditions and other potential uses of capital. Purchases may include open market purchases, tender offers or negotiated transactions.
As possible acquisitions, swaps or dispositions arise, in our industry, we actively review them against our objectives including, among other considerations, improving the operational efficiency, clustering, product development or technology capabilities of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisition, dispositionacquisitions, dispositions or system swap, including the transactions with Comcast,swaps, or that any such transactions will be material to our operations or results. See "Part I. Item 1A. Risk Factors - Our inability to successfully acquire and integrate other businesses, assets, products or technologies could harm our operating results."
In December 2016, Charter and A/N entered into a letter agreement (the "Letter Agreement") that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to
the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis once Charter or Charter Holdings have repurchased shares of Class A common stock or Charter Holdings common units from A/N and its affiliates for an aggregate purchase price of $537 million, which threshold has been met. On December 21, 2017, Charter and A/N entered into an amendment to the Letter Agreement resetting the aggregate purchase price to $400 million. Charter Holdings purchased from A/N 4.8 million and 0.8 million Charter Holdings common units at an average price per unit of $347.03 and $289.83, or $1.7 billion and $218 million during the years ended December 31, 2017 and 2016, respectively.
Free Cash Flow
Free cash flow was $171increased $774 million, $409 million and $144 million for$2.8 billion during the years ended December 31, 2014, 20132017 and 2012, respectively. The decrease in free cash flow in 20142016 compared to 2013 is primarilythe corresponding prior periods, respectively, due to an increase of $396 million in capital expenditures primarily driven by our all-digital transition, an increase of $87 million in cash paid for interest, changes in operating assets and liabilities, excluding the change in accrued interest, that provided $52 million less cash during 2014 and an increase of $22 million in merger and acquisition costs. The increase in cash paid for interest includes approximately $52 million related to debt which proceeds are currently held in escrow pending consummation of the Transactions. The decrease in free cash flow was offset by an increase of $332 million in Adjusted EBITDA.following.
The increase in free cash flow in 2013 compared to 2012 is primarily due to an increase of $164 million in Adjusted EBITDA, a decrease of $141 million in cash paid for interest due to a decrease in our average interest rate and timing of interest payments with the completion of refinancings, and changes in operating assets and liabilities, excluding the change in accrued interest, that provided $31 million more cash during 2013. The increase in free cash flow was offset by an increase of $80 million in capital expenditures of which $30 million was related to Bresnan.
Long-Term Debt
As of December 31, 2014, the accreted value of our total debt was approximately $21.0 billion, as summarized below (dollars in millions):
|
| | | | | | | | | | | | |
| | | December 31, 2014 | | | | |
| | | Principal Amount | | Accreted Value (a) | | Semi-Annual Interest Payment Dates | | Maturity Date (b) |
| CCOH Safari, LLC: | | | | | | | | |
| 5.500% senior notes due 2022 | | $ | 1,500 |
| | $ | 1,500 |
| | 6/1 & 12/1 | | 12/1/2022 |
| 5.750% senior notes due 2024 | | 2,000 |
| | 2,000 |
| | 6/1 & 12/1 | | 12/1/2024 |
| CCO Holdings, LLC: | | | | | | | | |
| 7.250% senior notes due 2017 | | 1,000 |
| | 1,000 |
| | 4/30 & 10/30 | | 10/30/2017 |
| 7.000% senior notes due 2019 | | 1,400 |
| | 1,394 |
| | 1/15 & 7/15 | | 1/15/2019 |
| 8.125% senior notes due 2020 | | 700 |
| | 700 |
| | 4/30 & 10/30 | | 4/30/2020 |
| 7.375% senior notes due 2020 | | 750 |
| | 750 |
| | 6/1 & 12/1 | | 6/1/2020 |
| 5.250% senior notes due 2021 | | 500 |
| | 500 |
| | 3/15 & 9/15 | | 3/15/2021 |
| 6.500% senior notes due 2021 | | 1,500 |
| | 1,500 |
| | 4/30 & 10/30 | | 4/30/2021 |
| 6.625% senior notes due 2022 | | 750 |
| | 747 |
| | 1/31 & 7/31 | | 1/31/2022 |
| 5.250% senior notes due 2022 | | 1,250 |
| | 1,240 |
| | 3/30 & 9/30 | | 9/30/2022 |
| 5.125% senior notes due 2023 | | 1,000 |
| | 1,000 |
| | 2/15 & 8/15 | | 2/15/2023 |
| 5.750% senior notes due 2023 | | 500 |
| | 500 |
| | 3/1 & 9/1 | | 9/1/2023 |
| 5.750% senior notes due 2024 | | 1,000 |
| | 1,000 |
| | 1/15 & 7/15 | | 1/15/2024 |
| Charter Communications Operating, LLC: | | | | | | | | |
| Credit facilities | | 3,742 |
| | 3,709 |
| | | | Varies |
| CCO Safari, LLC (an Unrestricted Subsidiary): | | | | | | | | |
| Credit facility | | 3,500 |
| | 3,483 |
| | | | 9/12/2021 |
| | | | | | | | | |
| | | $ | 21,092 |
| | $ | 21,023 |
| | | | |
|
| | | | | | | |
| | 2017 compared to 2016 | | 2016 compared to 2015 |
| Increase in Adjusted EBITDA | $ | 4,709 |
| | $ | 7,186 |
|
| Increase in capital expenditures | (3,356 | ) | | (3,485 | ) |
| Changes in working capital, excluding change in accrued interest, net of effects from acquisitions | (361 | ) | | 1,387 |
|
| Increase in cash paid for interest, net | (761 | ) | | (1,602 | ) |
| (Increase) decrease in merger and restructuring costs | 420 |
| | (652 | ) |
| Other, net | 123 |
| | (62 | ) |
| | $ | 774 |
| | $ | 2,772 |
|
| |
(a) | The accreted values presented above represent the principal amount of the debt less the original issue discount at the time of sale, plus the accretion to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. We have availability under our credit facilities of approximately $817 million as of December 31, 2014. In addition, a $500 million revolver extension is currently committed and available to Charter. The availability of this revolver is not contingent or related to the closing of the Transactions.
|
| |
(b) | In general, the obligors have the right to redeem all of the notes set forth in the above table in whole or in part at their option, beginning at various times prior to their stated maturity dates, subject to certain conditions, upon the payment of the outstanding principal amount (plus a specified redemption premium) and all accrued and unpaid interest. For additional information see "Description of our Outstanding Debt" below. |
Contractual Obligations
The following table summarizes our payment obligations as of December 31, 20142017 under our long-term debt and certain other contractual obligations and commitments (dollars in millions.)
| | | | | | Payments by Period | | | Payments by Period |
| | | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | | | | | | | | | | | |
| Contractual Obligations (a) | | | | | | | | | | | |
| Long-Term Debt Principal Payments (a) | Long-Term Debt Principal Payments (a) | | $ | 21,092 |
| | $ | 91 |
| | $ | 1,264 |
| | $ | 2,429 |
| | $ | 17,308 |
| Long-Term Debt Principal Payments (a) | | $ | 69,003 |
| | $ | 2,207 |
| | $ | 7,164 |
| | $ | 6,864 |
| | $ | 52,768 |
|
| Long-Term Debt Interest Payments (b) | Long-Term Debt Interest Payments (b) | | 8,053 |
| | 1,130 |
| | 2,365 |
| | 2,178 |
| | 2,380 |
| Long-Term Debt Interest Payments (b) | | 44,013 |
| | 3,762 |
| | 6,850 |
| | 6,315 |
| | 27,086 |
|
| Capital and Operating Lease Obligations (c) | Capital and Operating Lease Obligations (c) | | 169 |
| | 43 |
| | 74 |
| | 41 |
| | 11 |
| Capital and Operating Lease Obligations (c) | | 1,512 |
| | 286 |
| | 434 |
| | 297 |
| | 495 |
|
| Programming Minimum Commitments (d) | Programming Minimum Commitments (d) | | 795 |
| | 271 |
| | 491 |
| | 19 |
| | 14 |
| Programming Minimum Commitments (d) | | 164 |
| | 103 |
| | 61 |
| | — |
| | — |
|
| Other (e) | Other (e) | | 319 |
| | 291 |
| | 25 |
| | 3 |
| | — |
| Other (e) | | 13,626 |
| | 1,917 |
| | 1,870 |
| | 1,152 |
| | 8,687 |
|
| | | | | | | | | | | | | | | $ | 128,318 |
| | $ | 8,275 |
| | $ | 16,379 |
| | $ | 14,628 |
| | $ | 89,036 |
|
| | Total | | $ | 30,428 |
| | $ | 1,826 |
| | $ | 4,219 |
| | $ | 4,670 |
| | $ | 19,713 |
| |
| |
(a) | The table presents maturities of long-term debt outstanding as of December 31, 2014, including approximately $7.0 billion of debt which proceeds are currently held in escrow pending consummation of the Transactions.2017. Refer to Notes 89 and 1820 to our accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” for a description of our long-term debt and other contractual obligations and commitments. |
| |
(b) | Interest payments on variable debt are estimated using amounts outstanding at December 31, 20142017 and the average implied forward London Interbank Offering Rate (“LIBOR”) rates applicable for the quarter during the interest rate reset based on the yield curve in effect at December 31, 2014.2017. Actual interest payments will differ based on actual LIBOR rates and actual amounts outstanding for applicable periods. |
| |
(c) | We lease certain facilities and equipment under noncancelable capital and operating leases. Capital lease obligations represented $123 million of total capital and operating lease obligations as of December 31, 2017. Leases and rental costs charged to expense for the years ended December 31, 20142017, 20132016 and 20122015, were $43321 million, $34215 million and $2849 million, respectively. |
| |
(d) | We pay programming fees under multi-year contracts ranging from three to ten years, typically based on a flat fee per customer, which may be fixed for the term, or may in some cases escalate over the term. Programming costs included in the accompanying statement of operations were approximately $2.5$10.6 billion,, $2.1 $7.0 billion and $2.0$2.7 billion,, for the years ended December 31, 20142017, 20132016 and 20122015, respectively. Certain of our programming agreements are based on a flat fee per month or have guaranteed minimum payments. The table sets forth the aggregate guaranteed minimum commitments under our programming contracts. |
minimum payments. The table sets forth the aggregate guaranteed minimum commitments under our programming contracts.
| |
(e) | “Other” represents other guaranteed minimum commitments, which consist primarily ofincluding rights negotiated directly with content owners for distribution on company-owned channels or networks, commitments related to our role as an advertising and distribution sales agent for third party-owned channels or networks, commitments to our customer premise equipment vendors.vendors and contractual obligations related to third-party network augmentation. |
The following items are not included in the contractual obligations table because the obligations are not fixed and/or determinable due to various factors discussed below. However, we incur these costs as part of our operations:
We rent utility poles used in our operations. Generally, pole rentals are cancelable on short notice, but we anticipate that such rentals will recur. Rent expense incurred for pole rental attachments for the years ended December 31, 20142017, 20132016 and 20122015 was $49167 million, $49115 million and $4753 million, respectively.
We pay franchise fees under multi-year franchise agreements based on a percentage of revenues generated from video service per year. We also pay other franchise related costs, such as public education grants, under multi-year agreements. Franchise fees and other franchise-related costs included in the accompanying statement of operations were $208705 million, $190534 million and $176212 million for the years ended December 31, 20142017, 20132016 and 20122015, respectively.
We also have $85291 million in letters of credit, of which $137 million is secured under the Charter Operating credit facility, primarily to our various worker’s compensation, property and casualty and general liability carriers as collateral for reimbursement of workers' compensation, auto liability and general liability claims.
Limitations on DistributionsMinimum pension funding requirements have not been presented in the table above as such amounts have not been determined beyond 2017. We made no cash contributions to the qualified pension plans in 2017; however, we are permitted to make discretionary cash contributions to the qualified pension plans in 2018. For the nonqualified pension plan, we contributed $18 million during 2017 and will continue to make contributions in 2018 to the extent benefits are paid.
Distributions by Charter’s subsidiaries toSee "Part I. Item 1. Business — Transaction-Related Commitments" for a parent company for paymentlisting of principal on parent company notes are restricted under indentures and credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution. As of December 31, 2014, there was no default under any of these indentures or credit facilities and each subsidiary met its applicable leverage ratio
tests based on December 31, 2014 financial results. Such distributions would be restricted, however, if any such subsidiary fails to meet these tests at the timecommitments as a result of the contemplated distribution. In the past, certain subsidiaries have from time to time failed to meet their leverage ratio test. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on CCO Holdings' notes or CCOH Safari Notes are further restricted by the covenants in its credit facilities.
In addition to the limitation on distributions under the various indentures discussed above, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act.Transactions.
Historical Operating, Investing, and Financing Activities
Cash and Cash Equivalents. We held $3$621 million and $21 million$1.5 billion in cash and cash equivalents as of December 31, 20142017 and 2013,2016, respectively. We held $7.1 billion in restricted cash and cash equivalents as of December 31, 2014.
Operating Activities. Net cash provided by operating activities increased $201 million from $2.2$3.9 billion for during the year ended December 31, 20132017 compared to$2.4 billion for the year ended December 31, 2014,2016, primarily due to an increase in Adjusted EBITDA of $332 million$4.7 billion offset by an $87 million increase in cash paid for interest, net of $761 million as a result of the Transactions and a $22 million increase in merger and acquisition costs.long-term debt issued for general corporate purposes including stock buybacks.
Net cash provided by operating activities increased $282 million from $1.9$5.7 billion for during the year ended December 31, 20122016 compared to$2.2 billion for the year ended December 31, 2013,2015, primarily due to an increase in Adjusted EBITDA of $164 million and a $141 million decrease$7.2 billion offset by an increase in our cash paid for interest, offset by changes in operating assets and liabilities, excludingnet of $1.6 billion primarily as a result of the change in accrued interest and in liabilities related to capital expenditures, that provided $32 million less cash during 2013.Transactions.
Investing Activities. Net cash used in investing activities for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, was $9.3$8.1 billion,, $2.4 $11.3 billion and $1.7$17.0 billion,, respectively. The increasechanges in 2014 compared to 2013 iscash used were primarily due to the investmentacquisition of $7.1 billion of net proceeds from the issuanceLegacy TWC and Legacy Bright House in 2016 as well as increases in capital expenditures as a result of the term loan G and CCOH Safari Notes in long-term restricted cash and cash equivalents and higher capital expenditures offset by $676 million cash paid for the Bresnan Acquisition (net of debt assumed) in 2013. The increase in 2013 compared to 2012 is primarily due to $676 million cash paid for the Bresnan Acquisition (net of debt assumed) and higher capital expenditures.Transactions.
Financing Activities. Net cash provided by financing activities was $6.9 billion and $299 million for the years ended December 31, 2014 and 2013, respectively, and net cash used in financing activities was $134 million for the year ended December 31, 2012. The increase in cash providedincreased $9.5 billion during the year ended December 31, 2014 as2017 compared to the corresponding period in 2013, wasyear ended December 31, 2016 primarily due to increases in the issuancepurchase of the term loan Gtreasury stock and CCOH Safari Notesnoncontrolling interest as well as a decrease in 2014. Theequity issued offset by an increase in borrowings of long-term debt exceeding repayments.
Net cash provided in financing activities decreased $9.9 billion during the year ended December 31, 2013 as2016 compared to the corresponding periodyear ended December 31, 2015 primarily due to a decrease in2012, was primarily the result of an increase in the amount by which borrowings of long-term debt exceededexceeding repayments as well as increases in the purchase of long-term debttreasury stock and noncontrolling interest offset by an increase in proceeds fromequity issued for the exerciseacquisition of optionsLegacy TWC and warrants.Legacy Bright House in 2016.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were $2.2$8.7 billion,, $1.8 $5.3 billion and $1.7$1.8 billion for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. The increase was driven by approximately $410 million relatedthe Transactions. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, the increase during 2017 as compared to 2016 was driven
by higher CPE purchases for SPP, our all-digital transition, investment in CPEinitiative and early inventory purchases to operationally stage 2018 activity, higher support customer growth, higher product developmentcapital investments and ongoing insourcing initiative and the acquisition of Bresnan.line extensions. See the table below for more details.
We currently expect capital expenditures in 2015 to be approximately $1.7 billion excluding potential expenditures related to the Transactions. We anticipate 2015 capital expenditures to be driven by growth in residential and commercial customers along with further spend related to product development. Our expected capital expenditures for 2015 are lower than capital expenditures in 2014 due to the completion of our all-digital initiative in 2014. The actual amount of our capital expenditures in 20152018 will depend on a number of factors, including our all-digital transition in the paceLegacy TWC and Legacy Bright House markets, further spend related to product development and growth rates of transition planning to service a larger customer base upon closing of the Transactions.both our residential and commercial businesses.
Our capital expenditures are funded primarily from cash flows from operating activities and borrowings on our credit facility. In addition, our accrued liabilities related to capital expenditures increased by $33$820 million,, $76 $603 million and $13$28 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively.
The following table presentstables present our major capital expenditures categories on an actual and pro forma basis, assuming the Transactions occurred as of January 1, 2015, in accordance with NCTANational Cable and Telecommunications Association (“NCTA”) disclosure guidelines for the years ended December 31, 2014, 20132017, 2016 and 2012.2015. The disclosure is intended to provide more consistency in the reporting of capital expenditures among peer companies in the cable industry. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):
| | | | Year ended December 31, | Year ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | Actual |
| Customer premise equipment (a) | $ | 1,082 |
| | $ | 841 |
| | $ | 795 |
| $ | 3,385 |
| | $ | 1,864 |
| | $ | 582 |
|
| Scalable infrastructure (b) | 455 |
| | 352 |
| | 387 |
| 2,007 |
| | 1,390 |
| | 523 |
|
| Line extensions (c) | 176 |
| | 219 |
| | 192 |
| 1,176 |
| | 721 |
| | 194 |
|
| Upgrade/rebuild (d) | 167 |
| | 183 |
| | 212 |
| 572 |
| | 456 |
| | 128 |
|
| Support capital (e) | 341 |
| | 230 |
| | 159 |
| 1,541 |
| | 894 |
| | 413 |
|
| Total capital expenditures | | $ | 8,681 |
| | $ | 5,325 |
| | $ | 1,840 |
|
| | | | | | | | | | | |
| Total capital expenditures (f) | $ | 2,221 |
| | $ | 1,825 |
| | $ | 1,745 |
| |
| Capital expenditures included in total related to: | | | | | | |
| Commercial services | | $ | 1,298 |
| | $ | 824 |
| | $ | 260 |
|
Transition (f) | | $ | 489 |
| | $ | 460 |
| | $ | 115 |
|
|
| | | | | | | |
| | Year ended December 31, |
| | 2016 | | 2015 |
| | Pro Forma |
Customer premise equipment (a) | $ | 2,761 |
| | $ | 2,650 |
|
Scalable infrastructure (b) | 2,009 |
| | 1,702 |
|
Line extensions (c) | 1,005 |
| | 977 |
|
Upgrade/rebuild (d) | 610 |
| | 594 |
|
Support capital (e) | 1,160 |
| | 1,046 |
|
| Total capital expenditures | $ | 7,545 |
| | $ | 6,969 |
|
| |
(a) | Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, includingunits. It also includes customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems). |
| |
(b) | Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment). |
| |
(c) | Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering). |
| |
(d) | Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments. |
| |
(e) | Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles). |
| |
(f) | Total capital expenditures include $410 millionTransition represents incremental costs incurred to integrate the Legacy TWC and $88 million relatedLegacy Bright House operations and to our all-digital transition forbring the years ended December 31, 2014three companies’ systems and 2013 and $242 million, $300 million and $269 million related to commercial services for the years ended December 31, 2014, 2013 and 2012, respectively.
processes into a uniform operating structure. |
Description of Our Outstanding
Debt
Overview
As of December 31, 2014 and 2013, the blended weighted average interest rate on our debt was 5.4% and 5.6%, respectively. The interest rate on approximately 72% and 84% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate hedge agreements as of December 31, 2014 and 2013, respectively, and including $7.0 billion of debt which proceeds are currently held in escrow pending consummation of the Transactions as of December 31, 2014. The fair2017, the accreted value of our high-yield notestotal debt was $14.2approximately $70.2 billion, and $10.4 billion at December 31, 2014 and 2013, respectively. The fair value of our credit facilities was $7.2 billion and $3.8 billion at December 31, 2014 and 2013, respectively. The fair value of our high-yield notes and credit facilities were based on quoted market prices. as summarized below (dollars in millions):
|
| | | | | | | | | | | |
| | December 31, 2017 | | | | |
| | Principal Amount | | Accreted Value (a) | | Interest Payment Dates | | Maturity Date (b) |
| CCO Holdings, LLC: | | | | | | | |
| 5.250% senior notes due 2021 | $ | 500 |
| | $ | 497 |
| | 3/15 & 9/15 | | 3/15/2021 |
| 5.250% senior notes due 2022 | 1,250 |
| | 1,235 |
| | 3/30 & 9/30 | | 9/30/2022 |
| 5.125% senior notes due 2023 | 1,000 |
| | 993 |
| | 2/15 & 8/15 | | 2/15/2023 |
| 4.000% senior notes due 2023 | 500 |
| | 495 |
| | 3/1 & 9/1 | | 3/1/2023 |
| 5.125% senior notes due 2023 | 1,150 |
| | 1,143 |
| | 5/1 & 11/1 | | 5/1/2023 |
| 5.750% senior notes due 2023 | 500 |
| | 496 |
| | 3/1 & 9/1 | | 9/1/2023 |
| 5.750% senior notes due 2024 | 1,000 |
| | 992 |
| | 1/15 & 7/15 | | 1/15/2024 |
| 5.875% senior notes due 2024 | 1,700 |
| | 1,687 |
| | 4/1 & 10/1 | | 4/1/2024 |
| 5.375% senior notes due 2025 | 750 |
| | 745 |
| | 5/1 & 11/1 | | 5/1/2025 |
| 5.750% senior notes due 2026 | 2,500 |
| | 2,464 |
| | 2/15 & 8/15 | | 2/15/2026 |
| 5.500% senior notes due 2026 | 1,500 |
| | 1,489 |
| | 5/1 & 11/1 | | 5/1/2026 |
| 5.875% senior notes due 2027 | 800 |
| | 794 |
| | 5/1 & 11/1 | | 5/1/2027 |
| 5.125% senior notes due 2027 | 3,250 |
| | 3,216 |
| | 5/1 & 11/1 | | 5/1/2027 |
| 5.000% senior notes due 2028 | 2,500 |
| | 2,462 |
| | 2/1 & 8/1 | | 2/1/2028 |
| Charter Communications Operating, LLC: | | | | | | | |
| 3.579% senior notes due 2020 | 2,000 |
| | 1,988 |
| | 1/23 & 7/23 | | 7/23/2020 |
| 4.464% senior notes due 2022 | 3,000 |
| | 2,977 |
| | 1/23 & 7/23 | | 7/23/2022 |
| 4.908% senior notes due 2025 | 4,500 |
| | 4,462 |
| | 1/23 & 7/23 | | 7/23/2025 |
| 3.750% senior notes due 2028 | 1,000 |
| | 985 |
| | 2/15 & 8/15 | | 2/15/2028 |
| 4.200% senior notes due 2028 | 1,250 |
| | 1,238 |
| | 3/15 & 9/15 | | 3/15/2028 |
| 6.384% senior notes due 2035 | 2,000 |
| | 1,981 |
| | 4/23 & 10/23 | | 10/23/2035 |
| 6.484% senior notes due 2045 | 3,500 |
| | 3,466 |
| | 4/23 & 10/23 | | 10/23/2045 |
| 5.375% senior notes due 2047 | 2,500 |
| | 2,506 |
| | 5/1 & 11/1 | | 5/1/2047 |
| 6.834% senior notes due 2055 | 500 |
| | 495 |
| | 4/23 & 10/23 | | 10/23/2055 |
| Credit facilities | 9,479 |
| | 9,387 |
| | | | Varies |
| Time Warner Cable, LLC: | | | | | | | |
| 6.750% senior notes due 2018 | 2,000 |
| | 2,045 |
| | 1/1 & 7/1 | | 7/1/2018 |
| 8.750% senior notes due 2019 | 1,250 |
| | 1,337 |
| | 2/14 & 8/14 | | 2/14/2019 |
| 8.250% senior notes due 2019 | 2,000 |
| | 2,148 |
| | 4/1 & 10/1 | | 4/1/2019 |
| 5.000% senior notes due 2020 | 1,500 |
| | 1,579 |
| | 2/1 & 8/1 | | 2/1/2020 |
| 4.125% senior notes due 2021 | 700 |
| | 730 |
| | 2/15 & 8/15 | | 2/15/2021 |
| 4.000% senior notes due 2021 | 1,000 |
| | 1,045 |
| | 3/1 & 9/1 | | 9/1/2021 |
5.750% sterling senior notes due 2031 (c) | 845 |
| | 912 |
| | 6/2 | | 6/2/2031 |
| 6.550% senior debentures due 2037 | 1,500 |
| | 1,686 |
| | 5/1 & 11/1 | | 5/1/2037 |
| 7.300% senior debentures due 2038 | 1,500 |
| | 1,788 |
| | 1/1 & 7/1 | | 7/1/2038 |
| 6.750% senior debentures due 2039 | 1,500 |
| | 1,724 |
| | 6/15 & 12/15 | | 6/15/2039 |
| 5.875% senior debentures due 2040 | 1,200 |
| | 1,258 |
| | 5/15 & 11/15 | | 11/15/2040 |
| 5.500% senior debentures due 2041 | 1,250 |
| | 1,258 |
| | 3/1 & 9/1 | | 9/1/2041 |
5.250% sterling senior notes due 2042 (d) | 879 |
| | 847 |
| | 7/15 | | 7/15/2042 |
| 4.500% senior debentures due 2042 | 1,250 |
| | 1,137 |
| | 3/15 & 9/15 | | 9/15/2042 |
| Time Warner Cable Enterprises LLC: | | | | | | | |
| 8.375% senior debentures due 2023 | 1,000 |
| | 1,232 |
| | 3/15 & 9/15 | | 3/15/2023 |
| 8.375% senior debentures due 2033 | 1,000 |
| | 1,312 |
| | 7/15 & 1/15 | | 7/15/2033 |
| | $ | 69,003 |
| | $ | 70,231 |
| | | | |
The following description is a summary
| |
(a) | The accreted values presented in the table above represent the principal amount of the debt less the original issue discount at the time of sale, deferred financing costs, and, in regards to the Legacy TWC debt assumed, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the Sterling Notes, the principal amount of the debt and any premium or discount is remeasured into US dollars as of each balance sheet date. We have availability under our credit facilities of approximately $3.6 billion as of December 31, 2017. |
| |
(b) | In general, the obligors have the right to redeem all of the notes set forth in the above table in whole or in part at their option, beginning at various times prior to their stated maturity dates, subject to certain conditions, upon the payment of the outstanding principal amount (plus a specified redemption premium) and all accrued and unpaid interest. |
| |
(c) | Principal amount includes £625 million valued at $845 million as of December 31, 2017 using the exchange rate as of December 31, 2017. |
| |
(d) | Principal amount includes £650 million valued at $879 million as of December 31, 2017 using the exchange rate as of December 31, 2017. |
See Note 9 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” for further details regarding our outstanding debt and other financing arrangements, including certain provisions of our credit facilitiesinformation about maturities, covenants and our note indentures (the “Debt Agreements”). The summary does not restate the terms of the Debt Agreements in their entirety, nor does it describe all the terms of the Debt Agreements.restrictions related to such debt and financing arrangements. The agreements and instruments governing each of the Debt Agreementsour debt and financing arrangements are complicated and you should consult such agreements and instruments which are filed with the SEC for more detailed information regarding the Debt Agreements.information.
Charter Operating Credit Facilities – General
The Charter Operating credit facilities have an outstanding principal amount of $3.7 billion at At December 31, 2014 as follows:
A term loan A with a remaining principal amount of $684 million, which is repayable in quarterly installments and aggregating $38 million in 2015, $66 million in 2016 and $75 million in 2017, with the remaining balance due at final maturity on April 22, 2018;
A term loan E with a remaining principal amount of approximately $1.5 billion, which is repayable in equal quarterly installments and aggregating $15 million in each loan year, with the remaining balance due at final maturity on July 1, 2020;
A term loan F with a remaining principal amount of approximately $1.2 billion, which is repayable in equal quarterly installments and aggregating $12 million in each loan year, with the remaining balance due at final maturity on January 3, 2021; and
A revolving loan with an outstanding balance of $399 million at December 31, 2014 and allowing for borrowings of up to $1.3 billion, maturing on April 22, 2018.
Amounts outstanding under the Charter Operating credit facilities bear interest, at Charter Operating’s election, at a base rate or LIBOR, as defined, plus a margin. The applicable LIBOR margin for the term loan A is currently 2.00%. The term loans E and F bear interest at LIBOR plus 2.25%, with a LIBOR floor of 0.75%. Charter Operating pays interest equal to LIBOR plus 2.00% on amounts borrowed under the revolving credit facility and pays a revolving commitment fee of 0.30% per annum on the daily average available amount of the revolving commitment, payable quarterly.
The Charter Operating credit facilities also allow us to enter into incremental term loans in the future (including the incremental term loan A-2 described below), with amortization as set forth in the notices establishing such term loans. Although the Charter Operating credit facilities allow for the incurrence of a certain amount of incremental term loans subject to pro-forma compliance with its financial maintenance covenants, no assurance can be given that we could obtain additional incremental term loans in the future if Charter Operating sought to do so or what amount of incremental term loans would be allowable at any given time under the terms of the Charter Operating credit facilities.
As previously announced in July 2014, Charter Operating received a commitment from certain lenders to provide up to $1.0 billion in an incremental term loan A-2. The incremental term loan A-2 loan forms a portion of the incremental facilities commitments that would be used to fund the purchase of certain assets pursuant to the Transaction. If issued, such term loan A-2 loan would be issued under the Charter Operating credit facilities, would have a five year maturity and would bear interest at LIBOR plus 2.00%.
The obligations of Charter Operating under the Charter Operating credit facilities are guaranteed by Charter Operating’s immediate parent company, CCO Holdings, and subsidiaries of Charter Operating. The obligations are also secured by (i) a lien on substantially all of the assets of Charter Operating and its subsidiaries (excluding CCO Safari), to the extent such lien can be perfected under the Uniform Commercial Code by the filing of a financing statement, and (ii) a pledge by CCO Holdings of the equity interests owned by it in Charter Operating or any of Charter Operating’s subsidiaries, as well as intercompany obligations owing to it by any of such entities.
CCO Safari Credit Facility - General
In September 2014, Charter Operating entered into a new term loan G facility pursuant to the terms of the Charter Operating credit agreement providing for a $3.5 billion term loan maturing in 2021. Pricing on the term loan G was set at LIBOR plus 3.50% with a LIBOR floor of 0.75% and issued at a price of 99.50% of the aggregate principal amount. The term loan G forms a portion of the incremental facilities commitments as announced by us in July 2014 that will be used to fund the purchase of certain assets pursuant to the Transactions. Charter Operating assigned all of its obligations with respect to the term loan G and transferred all of the proceeds from the term loan G to a newly-created subsidiary, CCO Safari, which is considered a Non-Recourse Subsidiary under Charter Operating’s credit agreement, and CCO Safari placed the funds in an escrow account pending closing of the Transactions over which the administrative agent has a perfected first priority security interest on behalf of the lenders that are a party to the CCO Safari credit facility. The amounts borrowed under the term loan G facility are not considered when calculating the leverage ratio on the CCO Holdings Indentures as CCO Safari has been designated as an Unrestricted Subsidiary under the CCO Holdings Indenture. At closing of the Transactions, subject to certain conditions, Charter Operating will re-assume the obligations in respect of the term loan G under the Charter Operating credit agreement and the term loan G will be subject to the terms and conditions of the Charter Operating credit facilities. Such amounts, along with required original issuance discount and one month of interest, were placed in escrow and classified as noncurrent restricted cash and cash equivalents in our consolidated balance sheet as of December 31, 2014. To the extent the Transactions do not close, such amounts placed in escrow must be used to settle amounts outstanding under the term loan G. See "Part I. Item I. Business — Transactions with Comcast."
Charter Operating Credit Facilities — Restrictive Covenants
The Charter Operating credit facilities contain representations and warranties, and affirmative and negative covenants customary for financings of this type. The financial covenants measure performance against standards set for leverage to be tested as of the end of each quarter. The Charter Operating credit facilities contain provisions requiring mandatory loan prepayments under specific circumstances, including in connection with certain sales of assets, so long as the proceeds have not been reinvested in the business. Additionally, the Charter Operating credit facilities provisions contain an allowance for restricted payments so long as the consolidated leverage ratio at Charter Operating (excludes debt of CCO Safari since it is a Non-Recourse Subsidiary) is no greater
than 3.5 after giving pro forma effect to such restricted payment. The Charter Operating credit facilities permit Charter Operating and its subsidiaries to make distributions to pay interest on the currently outstanding subordinated and parent company indebtedness, provided that, among other things, no default has occurred and is continuing under the Charter Operating credit facilities.
The events of default under the Charter Operating credit facilities include, among other things:
the failure to make payments when due or within the applicable grace period;
the failure to comply with specified covenants including the covenant to maintain the consolidated leverage ratio at Charter Operating (excluding debt of CCO Safari since it is a Non-Recourse Subsidiary) at or below 5.0 to 1.0 and the consolidated first lien leverage ratio at or below 4.0 to 1.0;
the failure to pay or the occurrence of events that cause or permit the acceleration of other indebtedness owing by CCO Holdings, Charter Operating, or Charter Operating’s subsidiaries in aggregate principal amounts in excess of $100 million; and
similar to provisions contained in the note indentures, the consummation of any change of control transaction resulting in any person or group having power, directly or indirectly, to vote more than 50% of the ordinary voting power for the management of Charter Operating on a fully diluted basis and the occurrence of a ratings event including a downgrade in the corporate family rating during a ratings decline period.
At December 31, 2014, Charter Operating had a consolidated leverage ratio of approximately 1.33.0 to 1.0 and a consolidated first lien leverage ratio of 1.02.9 to 1.0. Both ratios are in compliance with the ratios required by the Charter Operating credit facilities.facilities of 5.0 to 1.0 consolidated leverage ratio and 4.0 to 1.0 consolidated first lien leverage ratio. A failure by Charter Operating to maintain the financial covenants would result in an event of default under the Charter Operating credit facilities and the debt of CCO Holdings. See “— Cross Acceleration” and “Part I. Item 1A. Risk Factors — The agreements and instruments governing our debt contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity."”
CCO Safari Credit Facility — Restrictive Covenants
The term loan G is subject to the terms and conditions of a separate credit facility and escrow agreement until Charter Operating reassumes its obligations for the loan. The CCO Safari credit facility contains customary representations and warranties and affirmative covenants with limited negative covenants prohibiting CCO Safari from engaging in any material activities other than performing its obligations under the credit facility and the escrow agreement or otherwise issuing other indebtedness pursuant to escrow arrangements similar to the CCO Safari credit facility and escrow agreement. As required by the CCO Safari credit facility, CCO Safari, Bank of America, N.A., and U.S. Bank, N.A., as escrow agent, entered into an escrow agreement pursuant to which, CCO Safari is required to maintain an escrow account over which the administrative agent has a perfected first priority security interest on behalf of the CCO Safari credit facility lenders. The events of default under the CCO Safari credit facility include, among others:
the failure to make payments when due or within the applicable grace period;
any acceleration of the loans and termination of the commitments under the Charter Operating credit facilities; and
the escrow agreement shall cease to be in full force and effect or the lien in the escrow account shall cease to be enforceable with the same effect and priority.
CCOH Safari Notes
In October 2014, Charter created CCOH Safari as a 100% wholly-owned indirect finance subsidiary of Charter. In November 2014, CCOH Safari, closed on transactions in which it issued $1.5 billion aggregate principal amount of 5.50% senior notes due 2022 and $2.0 billion aggregate principal amount of 5.75% senior notes due 2024. The net proceeds of the offering and sale of the CCOH Safari Notes and the next semi-annual interest payment will be held in escrow to fund a portion of the purchase of certain assets pursuant to the Transactions. The release of the proceeds from the escrow will be subject to the satisfaction of certain conditions, including the closing of the Transactions. Substantially concurrently with the escrow release, the CCOH Safari Notes will become obligations of CCO Holdings and CCO Holdings Capital. CCOH Safari will merge into CCO Holdings. Should the Transactions Agreement be terminated prior to the consummation of the Transactions, or upon expiration of the escrow agreement on November 5, 2015, such amounts placed in escrow must be used to settle amounts outstanding under the CCOH Safari Notes at par value. The amounts held in escrow are classified as noncurrent restricted cash and cash equivalents in our consolidated balance sheet as of December 31, 2014. See "Part I. Item I. Business — Transactions with Comcast."
Initially, the CCOH Safari Notes are senior debt obligations of CCOH Safari. Upon release of the proceeds from escrow, the CCOH Safari Notes will be senior debt obligations of CCO Holdings and CCO Holdings Capital Corp. and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. The CCOH
Safari Notes are structurally subordinated to all obligations of subsidiaries of CCO Holdings, including the Charter Operating and CCO Safari credit facilities. The CCOH Safari Notes are guaranteed by Charter.
CCO Holdings Notes
The CCO Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings Capital Corp. Such notes are guaranteed by Charter. They rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings, including the Charter Operating credit facilities.
Redemption Provisions of Our Notes
The various notes issued by our subsidiaries included in the table may be redeemed in accordance with the following table or are not redeemable until maturity as indicated:
|
| | | | |
Note Series | | Redemption Dates | | Percentage of Principal |
CCOH Safari, LLC: | | | | |
5.500% senior notes due 2022 | | December 1, 2017 - November 30, 2018 | | 104.125% |
| | December 1, 2018 - November 30, 2019 | | 102.750% |
| | December 1, 2019 - November 30, 2020 | | 101.375% |
| | Thereafter | | 100.000% |
5.750% senior notes due 2024 | | December 1, 2019 - November 30, 2020 | | 102.875% |
| | December 1, 2020 - November 30, 2021 | | 101.917% |
| | December 1, 2021 - November 30, 2022 | | 100.958% |
| | Thereafter | | 100.000% |
CCO Holdings, LLC: | | | | |
7.250% senior notes due 2017 | | October 30, 2014 – October 29, 2015 | | 103.625% |
| | October 30, 2015 – October 29, 2016 | | 101.813% |
| | Thereafter | | 100.000% |
7.000% senior notes due 2019 | | January 15, 2015 – January 14, 2016 | | 103.500% |
| | January 15, 2016 – January 14, 2017 | | 101.750% |
| | Thereafter | | 100.000% |
8.125% senior notes due 2020 | | April 30, 2015 – April 29, 2016 | | 104.063% |
| | April 30, 2016 – April 29, 2017 | | 102.708% |
| | April 30, 2017 – April 29, 2018 | | 101.354% |
| | Thereafter | | 100.000% |
7.375% senior notes due 2020 | | December 1, 2015 – November 30, 2016 | | 103.688% |
| | December 1, 2016 – November 30, 2017 | | 101.844% |
| | Thereafter | | 100.000% |
5.250% senior notes due 2021 | | March 15, 2016 – March 14, 2017 | | 103.938% |
| | March 15, 2017 – March 14, 2018 | | 102.625% |
| | March 15, 2018 – March 14, 2019 | | 101.313% |
| | Thereafter | | 100.000% |
6.500% senior notes due 2021 | | April 30, 2015 – April 29, 2016 | | 104.875% |
| | April 30, 2016 – April 29, 2017 | | 103.250% |
| | April 30, 2017 – April 29, 2018 | | 101.625% |
| | Thereafter | | 100.000% |
6.625% senior notes due 2022 | | January 31, 2017 – January 30, 2018 | | 103.313% |
| | January 31, 2018 – January 30, 2019 | | 102.208% |
| | January 31, 2019 – January 30, 2020 | | 101.104% |
| | Thereafter | | 100.000% |
|
| | | | |
5.250% senior notes due 2022 | | September 30, 2017 – September 29, 2018 | | 102.625% |
| | September 30, 2018 – September 29, 2019 | | 101.750% |
| | September 30, 2019 – September 29, 2020 | | 100.875% |
| | Thereafter | | 100.000% |
5.125% senior notes due 2023 | | February 15, 2018 – February 14, 2019 | | 102.563% |
| | February 15, 2019 – February 14, 2020 | | 101.708% |
| | February 15, 2020 – February 14, 2021 | | 100.854% |
| | Thereafter | | 100.000% |
5.750% senior notes due 2023 | | March 1, 2018 – February 28, 2019 | | 102.875% |
| | March 1, 2019 – February 29, 2020 | | 101.917% |
| | March 1, 2020 – February 28, 2021 | | 100.958% |
| | Thereafter | | 100.000% |
5.750% senior notes due 2024 | | July 15, 2018 – July 14, 2019 | | 102.875% |
| | July 15, 2019 – July 14, 2020 | | 101.917% |
| | July 15, 2020 – July 14, 2021 | | 100.958% |
| | Thereafter | | 100.000% |
In the event that a specified change of control event occurs, each of the respective issuers of the notes must offer to repurchase any then outstanding notes at 101% of their principal amount or accrued value, as applicable, plus accrued and unpaid interest, if any.
Summary of Restrictive Covenants of Our Note Indentures
The following description is a summary of certain restrictions of our note indentures. The summary does not restate the terms of the note indentures in their entirety, nor does it describe all restrictions. The agreements and instruments governing each of the notes issued are complicated and you should consult such agreements and instruments for more detailed information regarding the notes issued.
The CCOH Safari Notes were issued pursuant to a base indenture and a first and second supplemental indenture to that base all dated November 5, 2014 (the “CCOH Safari Indentures”). The CCOH Safari Indentures provide that, with limited exceptions of covenants regarding compliance certificates and stay, extension and usury laws, covenants restricting the activities of the note issuer and its subsidiaries do not apply until such time as the CCOH Safari note proceeds are released from escrow. As stated previously, substantially concurrently with the escrow release, the CCOH Safari Notes will become obligations of CCO Holdings and CCO Holdings Capital, CCOH Safari will merge with CCO Holdings and the terms and conditions of the CCOH Safari Indentures will apply to CCO Holdings and CCO Holdings Capital.
The notes issued by CCO Holdings and CCO Holdings Capital were issued pursuant to certain indentures referred to in this section as the “CCO Holdings Indentures.” The CCO Holdings Indentures and the CCOH Safari Indentures (following the release of proceeds from escrow) contain covenants that restrict the ability of CCO Holdings and its subsidiaries to, among other things:
incur indebtedness;
pay dividends or make distributions in respect of capital stock and other restricted payments;
issue equity;
make investments;
create liens;
sell assets;
consolidate, merge, or sell all or substantially all assets;
create restrictions on the ability of restricted subsidiaries to make certain payments; or
enter into transactions with affiliates.
However, such covenants are subject to a number of important qualifications and exceptions. Below we set forth a brief summary of certain of the restrictive covenants.
Restrictions on Additional Debt
The limitations on incurrence of debt and issuance of preferred stock contained in the CCO Holdings Indentures and the CCOH Safari Indentures permit CCO Holdings and its restricted subsidiaries to incur additional debt or issue preferred stock, so long as, after giving pro forma effect to the incurrence, the leverage ratio would be below a specified level for CCO Holdings. The leverage ratio under the indentures is 6.0 to 1.
In addition, regardless of whether the leverage ratio could be met, so long as no default exists or would result from the incurrence or issuance, CCO Holdings and its restricted subsidiaries are permitted to issue among other permitted indebtedness:
up to $1.5 billion of debt under credit facilities not otherwise allocated;
up to the greater of $300 million (or $600 million in the case of the notes issued under the CCOH Safari Indentures)
and 5% of consolidated net tangible assets to finance the purchase or capital lease of new assets;
up to the greater of $300 million (or $600 million in the case of the notes issued under the CCOH Safari Indentures)
and 5% of consolidated net tangible assets of additional debt for any purpose; and
other items of indebtedness for specific purposes such as intercompany debt, refinancing of existing debt, and interest rate swaps to provide protection against fluctuation in interest rates.
Indebtedness under a single facility or agreement may be incurred in part under one of the categories listed above and in part under another, and generally may also later be reclassified into another category including as debt incurred under the leverage ratio. Accordingly, indebtedness under our credit facilities may be incurred under a combination of the categories of permitted indebtedness listed above. The restricted subsidiaries of CCO Holdings are generally not permitted to issue subordinated debt securities.
Restrictions on Distributions
Generally, under the indentures governing notes issued by CCO Holdings and CCOH Safari, CCO Holdings and its respective restricted subsidiaries are permitted to pay dividends on or repurchase equity interests, or make other specified restricted payments, only if it can incur $1.00 of new debt under the 6.0 to 1.0 leverage ratio test after giving effect to the transaction and if no default exists or would exist as a consequence of such incurrence. If those conditions are met, restricted payments may be made in a total amount of up to the sum of 100% of CCO Holdings’ Consolidated EBITDA, as defined, minus 1.3 times its Consolidated Interest Expense, as defined, cumulatively from April 1, 2010, plus 100% of new cash and appraised non-cash equity proceeds received by CCO Holdings and not allocated to certain investments, cumulatively from the issue date, plus $2 billion.
In addition, CCO Holdings may make distributions or restricted payments, so long as no default exists or would be caused by transactions among other distributions or restricted payments:
to repurchase management equity interests in amounts not to exceed $10 million per fiscal year (or $50 million per fiscal year in the case of notes issued under the CCOH Safari Indentures);
to pay pass-through tax liabilities in respect of ownership of equity interests in the applicable issuer or its restricted subsidiaries; or
to make other specified restricted payments including merger fees up to 1.25% of the transaction value, repurchases using concurrent new issuances, and certain dividends on existing subsidiary preferred equity interests.
Restrictions on Investments
CCO Holdings and its respective restricted subsidiaries may not make investments except (i) permitted investments or (ii) if, after giving effect to the transaction, their leverage would be above the applicable leverage ratio.
Permitted investments include, among others:
investments in and generally among restricted subsidiaries or by restricted subsidiaries in the applicable issuer;
investments aggregating up to $750 million (or $1.1 billion in the case of notes issued under CCO Holdings Indentures for the year 2011 through the date of this filing and for notes issued under the CCOH Safari Indentures) at any time outstanding; and
investments aggregating up to 100% of new cash equity proceeds received by CCO Holdings since the issue date to the extent the proceeds have not been allocated to the restricted payments covenant.
Restrictions on Liens
The restrictions on liens for CCO Holdings only apply to liens on assets of the issuer itself and do not restrict liens on assets of CCO Holdings' subsidiaries. Permitted liens include liens securing indebtedness and other obligations under credit facilities, liens securing the purchase price of financed new assets, liens securing indebtedness of up to the greater of $50 million (or $90 million in the case of notes issued under the CCOH Safari Indentures) and 1.0% of consolidated net tangible assets and other specified liens.
Restrictions on the Sale of Assets; Mergers
CCO Holdings is generally not permitted to sell all or substantially all of its assets or merge with or into other companies unless its leverage ratio after any such transaction would be no greater than its leverage ratio immediately prior to the transaction, or unless after giving effect to the transaction, leverage would be below 6.0 to 1.0, no default exists, and the surviving entity is a U.S. entity that assumes the applicable notes.
CCO Holdings and its restricted subsidiaries may generally not otherwise sell assets or, in the case of restricted subsidiaries, issue equity interests, in excess of $100 million unless they receive consideration at least equal to the fair market value of the assets or equity interests, consisting of at least 75% in cash, assumption of liabilities, securities converted into cash within 60 days, or productive assets. CCO Holdings and its restricted subsidiaries are then required within 365 days after any asset sale either to use or commit to use the net cash proceeds over a specified threshold to acquire assets used or useful in their businesses or use the net cash proceeds to repay specified debt, or to offer to repurchase the issuer’s notes with any remaining proceeds.
Prohibitions on Restricting Dividends
CCO Holdings' restricted subsidiaries may generally not enter into arrangements involving restrictions on their ability to make dividends or distributions or transfer assets to CCO Holdings unless those restrictions with respect to financing arrangements are on terms that are no more restrictive than those governing the credit facilities existing when they entered into the applicable indentures or are not materially more restrictive than customary terms in comparable financings and will not materially impair CCO Holdings' ability to make payments on the notes.
Affiliate Transactions
The CCO Holdings Indentures and CCOH Safari Indentures also restrict the ability of CCO Holdings and its restricted subsidiaries to enter into certain transactions with affiliates involving consideration in excess of $25 million without a determination by the board of directors that the transaction complies with this covenant, or transactions with affiliates involving over $100 million without receiving an opinion as to the fairness to the holders of such transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing.
Cross Acceleration
The CCO Holdings Indentures and CCOH Safari Indentures include various events of default, including cross acceleration provisions. Under these provisions, a failure by CCO Holdings or any of its restricted subsidiaries to pay at the final maturity thereof the principal amount of other indebtedness having a principal amount of $100 million or more (or any other default under any such indebtedness resulting in its acceleration) would result in an event of default under the indenture governing the applicable notes. As a result, an event of default related to the failure to repay principal at maturity or the acceleration of the indebtedness under the notes issued under the CCO Holdings Indentures or the CCOH Safari Indentures or the Charter Operating credit facilities could cause cross-defaults under all outstanding indentures.
Recently Issued Accounting Standards
In April 2014,See Note 22 to the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Presentation ofaccompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and DisclosuresSupplementary Data” for a discussion of Disposals of components of an Entity ("ASU 2014-08"). ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new guidance, a disposed component of an organization that represents a strategic shift that has (or will have) a major effect on its operations and financial results is a discontinued operation. For disposals of individually significant components that do not qualify for discontinued operations presentation, an entity must disclose pre-tax profit or loss of the disposed component. ASU 2014-08 requires prospective application to all disposals that are classified as held for sale and that occur within annual and interim periods beginning on or after December 15, 2014, with earlier application permitted for disposals that have not been reported in
previouslyrecently issued financial statements. We adopted ASU 2014-08 on January 1, 2015. The adoption of ASU 2014-8 did not have a material impact on our consolidated financial statements.accounting standards.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The effective date of ASU 2014-09 is fiscal years beginning after December 15, 2016, and interim periods within those years, with earlier adoption prohibited. Companies can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We have not yet selected a transition method nor have we determined the effect of ASU 2014-09 to our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various market risks, including fluctuations in interest rates. We use interest rate derivative instruments to manage our interest costs and reduce our exposure to increases in floating interest rates. We manage our exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt. Using interest rate risk on variable debt and foreign exchange risk on the Sterling Notes, and do not hold or issue derivative instruments for speculative trading purposes.
Cross-currency derivative instruments are used to effectively convert £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency derivative instruments have maturities of June 2031 and July 2042. We are required to post collateral on the cross-currency derivative instruments when such instruments are in a liability position. In May 2016, we agreeentered into a collateral holiday agreement for 80% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to exchange, at specified intervals throughpost collateral for three years. The fair value of our cross-currency derivatives included in other long-term liabilities on our consolidated balance sheets was $25 million and $251 million as of December 31, 2017 the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.2016, respectively. For more information, see Note 1112 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data.”
As of December 31, 20142017 and 2013, the principal amount of our debt was approximately $21.1 billion and $14.2 billion, respectively, including $7.0 billion of debt which proceeds are currently held in escrow pending consummation of the Transactions as of December 31, 2014. As of December 31, 2014 and 2013,2016, the weighted average interest rate on the credit facility debt including the effects of our interest rate swap agreements, was approximately 3.8%3.4% and 3.6%2.9%, respectively, and the weighted average interest rate on the high-yieldsenior notes was approximately 6.2%5.7% and 6.4%5.9%, respectively, resulting in a blended weighted average interest rate of 5.4% and 5.6%5.4%, respectively. The interest rate on approximately 72%86% and 84%87% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate swap agreements, as of December 31, 20142017 and 20132016, respectively. Excluding $7.0 billion of debt whose proceeds are currently held in escrow, the interest rate on 82% of the total principal amount of our debt was effectively fixed, including the effectsAll of our interest rate swap agreements,derivatives were expired as of December 31, 20142017..
The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of December 31, 20142017 (dollars in millions):
| | | | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total | | Fair Value at December 31, 2014 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | Fair Value |
| Debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate | | $ | — |
| | $ | — |
| | $ | 1,000 |
| | $ | — |
| | $ | 1,400 |
| | $ | 11,450 |
| | $ | 13,850 |
| | $ | 14,205 |
| | $ | 2,000 |
| | $ | 3,250 |
| | $ | 3,500 |
| | $ | 2,200 |
| | $ | 4,250 |
| | $ | 44,324 |
| | $ | 59,524 |
| | $ | 63,443 |
|
| Average Interest Rate | | — | % | | — | % | | 7.25 | % | | — | % | | 7.00 | % | | 5.99 | % | | 6.19 | % | | | | 6.75 | % | | 8.44 | % | | 4.19 | % | | 4.32 | % | | 4.70 | % | | 5.70 | % | | 5.67 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Variable Rate | | $ | 91 |
| | $ | 127 |
| | $ | 137 |
| | $ | 967 |
| | $ | 62 |
| | $ | 5,858 |
| | $ | 7,242 |
| | $ | 7,186 |
| | $ | 207 |
| | $ | 207 |
| | $ | 207 |
| | $ | 207 |
| | $ | 207 |
| | $ | 8,444 |
| | $ | 9,479 |
| | $ | 9,440 |
|
| Average Interest Rate | | 3.17 | % | | 3.91 | % | | 4.57 | % | | 4.42 | % | | 5.18 | % | | 5.71 | % | | 5.45 | % | | | | 3.60 | % | | 3.90 | % | | 3.98 | % | | 4.01 | % | | 4.05 | % | | 4.39 | % | | 4.34 | % | | |
| | | | | | | | | | | | | | | | | | |
| Interest Rate Instruments: | | | | | | | | | | | | | | | | | |
| Variable to Fixed Rate | | $ | 300 |
| | $ | 250 |
| | $ | 850 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,400 |
| | $ | 18 |
| |
| Average Pay Rate | | 4.99 | % | | 3.89 | % | | 3.84 | % | | — | % | | — | % | | — | % | | 4.10 | % | | | |
| Average Receive Rate | | 2.53 | % | | 4.03 | % | | 4.55 | % | | — | % | | — | % | | — | % | | 4.03 | % | | | |
At December 31, 2014, we had $1.4 billion in notional amounts of interest rate swaps outstanding. This includes $150 million in delayed start interest rate swaps that become effective in March 2015. Also in March 2015, $300 million of currently effective swaps expire and therefore the notional amount of currently effective interest rate derivative instruments will decrease.
The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of our exposure to credit loss. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The estimated fair value is determined using a present value calculation based on an implied forward LIBOR curve (adjusted for Charter Operating’s or counterparties’ credit risk). Interest rates on variablevariable-rate debt are estimated using the
average implied forward LIBOR for the year of maturity based on the yield curve in effect at December 31, 20142017 including applicable bank spread.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements, the related notes thereto, and the reports of independent accountants are included in this annual report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this annual report. The evaluation was based in part upon reports and certifications provided by a number of executives. Based upon,on, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, we believe that our controls provide such reasonable assurances.
ThereDuring the quarter ended December 31, 2017, there was no change in our internal control over financial reporting during the fourth quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) for the Company. Our internal control system was designed to provide reasonable assurance to Charter’sour management and board of directors regarding the preparation and fair presentation of published financial statements.
Management has assessed the effectiveness of our internal control over financial reporting as of 2014December 31, 2017. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework (2013). Based on management’s assessment utilizing these criteria we believe that, as of December 31, 20142017, our internal control over financial reporting was effective.
Our independent auditors, KPMG LLP, have audited our internal control over financial reporting as stated in their report on page F-2.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 will be included in Charter’s 20142018 Proxy Statement (the “Proxy Statement”) under the headings “Election of Class A Directors,” “Section 16(a) Beneficial Ownership Reporting Requirements,” and “Code of Ethics,” or in amendment to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Item 11 will be included in the Proxy Statement under the headings “Executive Compensation,” “Election of Class A Directors – Director Compensation” and “Compensation Discussion and Analysis,” or in an amendment to this Annual Report on Form 10-K and is incorporated herein by reference. Information contained in the Proxy Statement or an amendment to this Annual Report on Form 10-K under the caption “Report of Compensation and Benefits Committee” is furnished and not deemed filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 will be included in the Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” or in amendment to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 will be included in the Proxy Statement under the heading “Certain Relationships and Related Transactions” and “Election of Class A Directors” or in amendment to this Annual Report on Form 10-K and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 will be included in the Proxy Statement under the heading “Accounting Matters” or in amendment to this Annual Report on Form 10-K and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
| |
| (a) | The following documents are filed as part of this annual report: |
A listing of the financial statements, notes and reports of independent public accountants required by "Part II. Item 88. Financial Statements and Supplementary Data" begins on page F-1 of this annual report.
| |
| (2) | Financial Statement Schedules. |
No financial statement schedules are required to be filed by Items 8 and 15(c) because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto.
| |
| (3) | The index to the exhibits begins on page E-1 of this annual report. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Charter Communications, Inc. has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| | | CHARTER COMMUNICATIONS, INC., |
| | | Registrant |
| | | | | |
| | | By: | | /s/ Thomas M. Rutledge |
| | | | | Thomas M. Rutledge |
| | | | | President,Chairman and Chief Executive Officer and Director |
Date: February 23, 20152, 2018 | | | | |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard R. Dykhouse and Kevin D. Howard, and each of them (with full power to each of them to act alone), 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 on his or her behalf individually and in each capacity stated below any and all amendments (including post-effective amendments) to this annual report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and 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 that said attorneys-in-fact and agents and either of them, or their 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 Charter Communications, Inc. and in the capacities and on the dates indicated.
|
| | |
| Signature | Title | Date |
| | |
/s/ Thomas M. Rutledge
Thomas M. Rutledge | President,Chairman, Chief Executive Officer, Director
(Principal Executive Officer) | February 23, 20152, 2018 |
| | | |
/s/ Christopher L. Winfrey
Christopher L. Winfrey | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | February 23, 20152, 2018 |
| | | |
/s/ Kevin D. Howard
Kevin D. Howard | Senior Vice President – Finance, Controller and Chief Accounting Officer (Principal Accounting Officer) | February 23, 20152, 2018 |
| | | |
/s/ Balan NairEric L. Zinterhofer
Balan NairEric L. Zinterhofer | Director | February 23, 20152, 2018 |
| | | |
/s/ W. Lance Conn
W. Lance Conn | Director | February 23, 20152, 2018 |
| | | |
/s/ Michael HusebyKim C. Goodman
Michael HusebyKim C. Goodman | Director | February 23, 20152, 2018 |
| | | |
/s/ Craig A. Jacobson
Craig A. Jacobson | Director | February 23, 20152, 2018 |
| | | |
/s/ Gregory Maffei
Gregory Maffei | Director | February 23, 20152, 2018 |
| | | |
/s/ John C. Malone
John C. Malone | Director | February 23, 20152, 2018 |
| | | |
/s/ John D. Markley, Jr.
John D. Markley, Jr. | Director | February 23, 20152, 2018 |
| | | |
/s/ David C. Merritt
David C. Merritt | Director | February 23, 20152, 2018 |
| | | |
/s/ Eric L. ZinterhoferSteven Miron
Eric L. ZinterhoferSteven Miron | Director | February 23, 20152, 2018 |
| | |
/s/ Balan Nair
Balan Nair | Director | February 2, 2018 |
| | |
/s/ Michael Newhouse
Michael Newhouse | Director | February 2, 2018 |
| | |
/s/ Mauricio Ramos
Mauricio Ramos | Director | February 2, 2018 |
Exhibit Index
Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K.
|
| | |
| Exhibit | | Description |
| | | |
| 2.1 | | Purchase |
2.2 | | Comcast/Charter Transactions Agreement,Mergers, dated as of April 25, 2014, by and betweenMay 23, 2015, among Time Warner Cable Inc., Charter Communications, Inc,Inc., CCH I, LLC, Nina Corporation I, Inc., Nina Company II, LLC and Comcast CorporationNina Company III, LLC (incorporated by reference to Exhibit 2.1 to the current report on Form 8-K offiled by Charter Communications, Inc. filed on April 28, 2014May 29, 2015 (File No. 001-33664)). |
| 2.2 | | Contribution Agreement, dated March 31, 2015, by and among Advance/Newhouse Partnership, A/NPC Holdings LLC, Charter Communications, Inc., CCH I, LLC, and Charter Communications Holding Company, LLC (incorporated by reference to Exhibit 2.1 to the current report on Form 8-K filed by Charter Communications, Inc. on April 1, 2015 (File No. 001-33664)). |
| 3.1 | | |
| 3.2 | | Amended and Restated |
| 4.1(a) | | |
| 4.1(b) | | Amendment toSecond Amended and Restated Stockholders Agreement, dated May 23, 2015, by and among Liberty Broadband Corporation, Liberty Media Corporation and Charter Communications, Inc., dated effective as of September 29, 2014CCH I, LLC, Liberty Broadband Corporation and Advance/Newhouse Partnership (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed on October 14, 2014 (File No. 001-33664)). |
10.1 | | Indenture relating to the 8.125% Senior Notes due 2020, dated as of April 18, 2010, by and among CCO Holdings, LLC, CCO Holdings Capital Corp. and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 10.6Annex C to the registration statement on Form S-1 of Charter Communications, Inc.S-4 filed by CCH I, LLC on June 30, 201026, 2015 (File No. 333-167877)333-205240)). |
10.210.1 | | Indenture relating to the 7.25% senior notes due 2017, dated as of September 27, 2010, by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed on September 30, 2010 (File No. 001-33664)). |
10.3 | | Indenture relating to the 7.00% senior notes due 2019, dated as of January 11, 2011, by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed on January 14, 2011 (File No. 001-33664)). |
10.4 | | Indenture dated as of May 10, 2011, by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K of Charter Communications, Inc. filed on May 13,16, 2011 (File No. 001-33664)). |
10.510.2 | | First Supplemental Indenture dated as of May 10, 2011 by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K of Charter Communications, Inc. filed on May 13, 2011 (File No. 001-33664)). |
10.6 | | Second Supplemental Indenture dated as of December 14, 2011 by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K of Charter Communications, Inc. filed on December 20, 2011 (File No. 001-33664)). |
10.7 | | Third Supplemental Indenture dated as of January 26, 2012 by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K of Charter Communications, Inc. filed on February 1, 2012 (File No. 001-33664)) |
10.810.3 | | |
|
| | |
10.910.4 | | |
10.1010.5 | | Sixth Supplemental Indenture relating to the 5.25% senior notes due 2021, dated as of March 14, 2013, by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed March 15, 2013 (File No. 001-33664)). |
10.1110.6 | | Seventh Supplemental Indenture relating to the 5.75% senior notes due 2023, dated as of March 14, 2013, by and among CCO Holdings, LLC, and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K of Charter Communications, Inc. filed March 15, 2013 (File No. 001-33664)). |
10.1210.7 | | Eighth Supplemental Indenture relating to the 5.75% senior notes due 2024, dated as of May 3, 2013, by and among CCO Holdings, LLC and CCO Holdings Capital Corp., as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q of Charter Communications, Inc. filed on May 7, 2013 (File No. 001-33664)). |
10.1310.8 | | Indenture dated as of November 5, 2014, by and among CCO Holdings, LLC, CCO Holdings Capital Corp. and CCOH Safari, LLC, as Issuers, Charter Communications, Inc., as Parent Guarantor, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K of Charter Communications, Inc. filed on November 10, 2014 (File No. 001-33664)). |
|
10.14 | | |
| 10.9 | | FirstThird Supplemental Indenture, dated as of November 5, 2014, by andApril 21, 2015, among CCOH Safari,CCO Holdings, LLC, as Issuer, and The Bank of New York Mellon Trust Company, N.A.CCO Holdings Capital Corp., as Trustee (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K of Charter Communications, Inc. filed on November 10, 2014 (File No. 001-33664)). |
10.15 | | Second Supplemental Indenture dated as of November 5, 2014, by and among CCOH Safari, LLC, as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K of Charter Communications, Inc. filed on November 10, 2014 (File No. 001-33664)). |
10.16 | | Escrow Agreement, dated as of November 5, 2014, among CCOH Safari, LLC, Charter Communications, Inc., U.S. Bank National Association, as escrow agent,guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.44.1 to the current report on Form 8-K offiled by Charter Communications, Inc. filed on November 10, 2014April 22, 2015 (File No. 001-33664)). |
10.17(a)10.10 | | RestatementFourth Supplemental Indenture, dated as of April 21, 2015, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed by Charter Communications, Inc. on April 22, 2015 (File No. 001-33664)). |
| 10.11 | | Fifth Supplemental Indenture, dated as of April 21, 2015, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed by Charter Communications, Inc. on April 22, 2015 (File No. 001-33664)). |
| 10.12 | | Exchange and Registration Rights Agreement, dated as of April 11, 2012 by and21, 2015 relating to the 5.125% Senior Notes due 2023, among Charter Communications Operating,CCO Holdings, LLC, CCO Holdings LLC, the lenders party thereto and Bank of America, N.A.Capital Corp., Charter Communications, Inc., as Administrative Agentguarantor, and Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on April 22, 2015 (File No. 001-33664)). |
| 10.13 | | Exchange and Registration Rights Agreement relating to the 5.375% Senior Notes due 2025, dated as of April 21, 2015, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on April 22, 2015 (File No. 001-33664)). |
| 10.14 | | Exchange and Registration Rights Agreement relating to the 5.875% Senior Notes due 2027, dated as of April 21, 2015, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed by Charter Communications, Inc. on April 22, 2015 (File No. 001-33664)). |
| 10.15 | | Indenture, dated as of July 23, 2015, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp. and CCO Safari II, LLC, as issuers, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed by Charter Communications, Inc. on July 27, 2015 (File No. 001-33664)). |
| 10.16 | | First Supplemental Indenture, dated as of July 23, 2015, among CCO Safari II, LLC, as escrow issuer, CCH II, LLC, as limited guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed by Charter Communications, Inc. on July 27, 2015 (File No. 001-33664)). |
| 10.17 | | Exchange and Registration Rights Agreement, dated July 23, 2015 relating to the 3.579% Senior Secured Notes due 2020, 4.464% Senior Secured Notes due 2022, 4.908% Senior Secured Notes due 2025, 6.384% Senior Secured Notes due 2035, 6.484% Senior Secured Notes due 2045 and 6.834% Senior Secured Notes due 2055, between CCO Safari II, LLC and Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and UBS Securities LLC, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on July 27, 2015 (File No. 001-33664)). |
| 10.18 | | Indenture, dated as of November 20, 2015, among CCO Holdings, LLC, CCO Holdings Capital Corp. and CCOH Safari, LLC, as issuers, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed by Charter Communications, Inc. on November 25, 2015 (File No. 001-33664)). |
| 10.19 | | First Supplemental Indenture, dated as of November 20, 2015, between CCOH Safari, LLC, as escrow issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed by Charter Communications, Inc. on November 25, 2015 (File No. 001-33664)). |
| 10.20 | | Exchange and Registration Rights Agreement, dated November 20, 2015 relating to the 5.750% Senior Notes due 2026, between CCOH Safari, LLC and Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC and Deutsche Bank Securities Inc., as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on November 25, 2015 (File No. 001-33664)). |
| 10.21 | | Sixth Supplemental Indenture, dated as of February 19, 2016, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed by Charter Communications, Inc. on February 22, 2016 (File No. 001-33664)). |
|
| | |
| 10.22 | | Exchange and Registration Rights Agreement, dated February 19, 2016, relating to the 5.875% Senior Notes due 2024, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and Deutsche Bank Securities Inc., Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, Citigroup Global Markets Inc. and Wells Fargo Securities, LLC, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on February 22, 2016 (File No. 001-33664)). |
| 10.23 | | Seventh Supplemental Indenture, dated as of April 21, 2016, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed by Charter Communications, Inc. on April 27, 2016 (File No. 001-33664)). |
| 10.24 | | Exchange and Registration Rights Agreement, dated April 21, 2016, relating to the 5.500% Senior Notes due 2026, among CCO Holdings, LLC, CCO Holdings Capital Corp., Charter Communications, Inc., as guarantor, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., UBS Securities LLC and Wells Fargo Securities, LLC, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on April 27, 2016 (File No. 001-33664)). |
| 10.25 | | Second Supplemental Indenture, dated as of May 18, 2016, by and among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., CCO Safari II, LLC and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to the current report on Form 8-K filed by Charter Communications, Inc. on May 24, 2016 (File No. 001-33664)). |
| 10.26 | | |
| 10.27 | | Second Supplemental Indenture, dated as of May 18, 2016, by and among CCO Holdings, LLC, CCO Holdings Capital Corp., CCOH Safari, LLC and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed by Charter Communications, Inc. on May 24, 2016 (File No. 001-33664)). |
| 10.28 | | Third Supplemental Indenture, dated as of February 6, 2017, among CCO Holdings, LLC, CCO Holdings Capital Corp., and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to the current report on Form 8-K filed by Charter Communications, Inc. on February 6, 2017 (File No. 001-33664)). |
| 10.29 | | Exchange and Registration Rights Agreement, dated February 6, 2017, relating to the 5.125% Senior Notes due 2027, among CCO Holdings, LLC, CCO Holdings Capital Corp., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., UBS Securities LLC, and Wells Fargo Securities, LLC, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on February 6, 2017 (File No. 001-33664)). |
| 10.30 | | Exchange and Registration Rights Agreement, dated March 29, 2017, relating to the 5.125% Senior Notes due 2027, among CCO Holdings, LLC, CCO Holdings Capital Corp., and Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., UBS Securities LLC, and Wells Fargo Securities, LLC, as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on March 31, 2017 (File No. 001-33664)). |
| 10.31 | | Fifth Supplemental Indenture, dated as of April 20, 2017, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed by Charter Communications, Inc. on April 26, 2017 (File No. 001-33664)). |
| 10.32 | | |
| 10.33 | | Exchange and Registration Rights Agreement, dated April 20, 2017, relating to the 5.375% Senior Notes due 2047, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and Citigroup Global Markets Inc., as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on April 26, 2017 (File No. 001-33664)). |
| 10.34 | | Sixth Supplemental Indenture, dated as of July 6, 2017, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed by Charter Communications, Inc. on July 12, 2017 (File No. 001-33664)). |
|
| | |
| 10.35 | | Exchange and Registration Rights Agreement, dated July 6, 2017, relating to the 3.750% Senior Notes due 2028, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on July 12, 2017 (File No. 001-33664)). |
| 10.36 | | Exchange and Registration Rights Agreement, dated July 6, 2017, relating to the 5.375% Senior Notes due 2047, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on July 12, 2017 (File No. 001-33664)). |
| 10.37 | | |
| 10.38 | | Exchange and Registration Rights Agreement, dated August 8, 2017, relating to the 5.000% Senior Notes due 2028, among CCO Holdings, LLC, CCO Holdings Capital Corp. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on August 14, 2017 (File No. 001-33664)). |
| 10.39 | | Seventh Supplemental Indenture, dated as of September 18, 2017, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.3 to the current report on Form 8-K filed by Charter Communications, Inc. on September 21, 2017 (File No. 001-33664)). |
| 10.40 | | Exchange and Registration Rights Agreement, dated September 18, 2017, relating to the 4.200% Senior Secured Notes due 2028, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on September 21, 2017 (File No. 001-33664)). |
| 10.41 | | Exchange and Registration Rights Agreement, dated September 18, 2017, relating to the 5.375% Senior Secured Notes due 2047, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., the guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., as representatives of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on September 21, 2017 (File No. 001-33664)). |
| 10.42 | | |
| 10.43 | | Exchange and Registration Rights Agreement, dated October 17, 2017, relating to the 5.000% Senior Notes due 2028, among CCO Holdings, LLC, CCO Holdings Capital Corp. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Charter Communications, Inc. on October 20, 2017 (File No. 001-33664)). |
| 10.44 | | Exchange and Registration Rights Agreement, dated October 17, 2017, relating to the 4.000% Senior Notes due 2023, among CCO Holdings, LLC, CCO Holdings Capital Corp. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on October 20, 2017 (File No. 001-33664)). |
| 10.45 | | Eighth Supplemental Indenture, dated as of December 21, 2017, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., CCO Holdings, LLC, the subsidiary guarantor parties thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.5 to the current report on Form S-3 filed by Charter Communications, Inc. on December 22, 2017 (File No. 333-222241)). |
| 10.46 | | Indenture, dated as of April 30, 1992 (the “TWCE Indenture”), as amended by the First Supplemental Indenture, dated as of June 30, 1992, among Time Warner Entertainment Company, L.P. (“TWE”), Time Warner Companies, Inc. (“TWCI”), certain of TWCI’s subsidiaries that are parties thereto and The Bank of New York, as Trustee (incorporated herein by reference to Exhibits 10(g) and 10(h) to TWCI’s current report on Form 8-K dated June 26, 1992 and filed with the SEC on July 15, 1992 (File No. 1-8637)). (P) |
| 10.47 | | Second Supplemental Indenture to the TWCE Indenture, dated as of December 9, 1992, among TWE, TWCI, certain of TWCI’s subsidiaries that are parties thereto and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.2 to Amendment No. 1 to TWE’s Registration Statement on Form S-4 dated and filed with the SEC on October 25, 1993 (Registration No. 33-67688) (the “TWE October 25, 1993 Registration Statement”)). (P) |
|
| | |
| 10.48 | | Third Supplemental Indenture to the TWCE Indenture, dated as of October 12, 1993, among TWE, TWCI, certain of TWCI’s subsidiaries that are parties thereto and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.3 to the TWE October 25, 1993 Registration Statement). (P) |
| 10.49 | | Fourth Supplemental Indenture to the TWCE Indenture, dated as of March 29, 1994, among TWE, TWCI, certain of TWCI’s subsidiaries that are parties thereto and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.4 to TWE’s Annual Report on Form 10-K for the year ended December 31, 1993 and filed with the SEC on March 30, 1994 (File No. 1-12878)). (P) |
| 10.5 | | Fifth Supplemental Indenture to the TWCE Indenture, dated as of December 28, 1994, among TWE, TWCI, certain of TWCI’s subsidiaries that are parties thereto and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.5 to TWE’s Annual Report on Form 10-K for the year ended December 31, 1994 and filed with the SEC on March 30, 1995 (File No. 1-12878)). (P) |
| 10.51 | | |
| 10.52 | | |
| 10.53 | | |
| 10.54 | | Ninth Supplemental Indenture to the TWCE Indenture, dated as of November 1, 2004, among Historic TW, TWE, Time Warner NY Cable Inc., WCI, ATC, TWC and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 to Time Warner’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-15062)). |
| 10.55 | | Tenth Supplemental Indenture to the TWCE Indenture, dated as of October 18, 2006, among Historic TW, TWE, TW NY Cable Holding Inc. (“TW NY”), Time Warner NY Cable LLC (“TW NY Cable”), TWC, WCI, ATC and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 to Time Warner’s current report on Form 8-K dated and filed October 18, 2006 (File No. 1-15062)). |
| 10.56 | | |
| 10.57 | | Twelfth Supplemental Indenture to the TWCE Indenture, dated as of September 30, 2012, among Time Warner Cable Enterprises LLC (“TWCE”), TWC, TW NY, Time Warner Cable Internet Holdings II LLC (“TWC Internet Holdings II”) and The Bank of New York Mellon, as trustee, supplementing the Indenture dated April 30, 1992, as amended (incorporated herein by reference to Exhibit 4.2 to TWC’s current report on Form 8-K dated September 30, 2012 and filed with the SEC on October 1, 2012 (File No. 001-33664)1-33335) (the “TWC September 30, 2012 Form 8-K”)). |
10.17(b)10.58 | | |
| 10.59 | | |
| 10.60 | | |
| 10.61 | | Second Supplemental Indenture to the TWC Indenture, dated as of September 30, 2012, among TWC, TW NY, TWCE, TWC Internet Holdings II and The Bank of New York Mellon, as trustee, supplementing the Indenture dated April 9, 2007, as amended (incorporated herein by reference to Exhibit 4.1 to the TWC September 30, 2012 Form 8-K). |
| 10.62 | | |
|
| | |
| 10.63 | | |
| 10.64 | | |
| 10.65 | | |
| 10.66 | | |
| 10.67 | | |
| 10.68 | | |
| 10.69 | | |
| 10.70 | | |
| 10.71 | | |
| 10.72 | | |
| 10.73 | | |
| 10.74 | | |
| 10.75 | | |
| 10.76 | | |
| 10.77 | | |
| 10.78 | | |
| 10.79 | | |
| 10.80 | | |
| 10.81 | | Amendment No. 15, dated March 22, 2013as of August 24, 2015, to the Amended and Restated Credit Agreement dated as of April 11, 2012 between Charter Communications Operating, LLC, as borrower, CCO Holdings, LLC, as guarantor, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.510.2 to the quarterlycurrent report on Form 10-Q8-K of Charter Communications, Inc. filed on May 7, 2013August 28, 2015 (File No. 001-33664)). |
10.17(c)10.82 | | Amendment No. 2Incremental Activation Notice, dated April 22, 2013as of August 24, 2015 delivered by Charter Communications Operating, LLC, CCO Holdings, LLC, the subsidiary guarantors party thereto, each Term H Lender party thereto to, each Term I Lender party thereto and Bank of America, N.A., as Administrative Agent under the Amended and Restated Credit Agreement, dated as of April 11, 2012 between Charter Communications Operating, LLC, as borrower, CCO Holdings, LLC, as guarantor, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.6 to the quarterly report on Form 10-Q of Charter Communications, Inc. filed on May 7, 2013 (File No. 001-33664)). |
10.17(d) | | Amendment No. 3, dated as of June 27, 2013, to the Amended and Restated Credit Agreement dated April 11, 2012 between Charter Communications Operating, LLC, as borrower, CCO Holdings, LLC, as guarantor, and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed byof Charter Communications, Inc. filed on July 2, 2013August 28, 2015 (File No. 001-33664)). |
10.17(e)10.83 | | Amendment No. 4,Escrow Credit Agreement, dated as of September 12, 2014, to the Amended and Restated Credit Agreement dated April 11, 2012August 24, 2015, between Charter Communications Operating,CCO Safari III, LLC, as borrower, and Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.210.3 to the current report on Form 8-K filed byof Charter Communications, Inc. filed on September 18, 2014August 28, 2015 (File No. 001-33664)). |
10.17(f)10.84(a) | | Restatement Agreement dated as of May 18, 2016, by and among Charter Communications Operating, LLC, CCO Holdings, LLC, the subsidiary guarantors party thereto, Bank of America, N.A., as administrative agent and the lenders party thereto (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K of Charter Communications, Inc. filed on May 24, 2016 (File No. 001-33664)). |
|
| | |
| 10.84(b) | | Amendment No. 1 dated as of December 23, 2016, to the Amended and Restated Credit Agreement dated as of March 18, 1999, as amended and restated on May 18, 2016, by and among Chart Communications Operating, LLC, CCO Holdings, LLC, the Lenders Party thereto and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed on December 30, 2016 (File No. 001-33664)). |
| 10.84(c) | | Restatement Agreement dated as of December 21, 2017 to the Amended and Restated Credit Agreement dated as of March 18, 1999, as amended and restated on May 18, 2016, as amended by Amendment No. 1, dated as of December 23, 2016 and as further amended by that certain Incremental Activation Notice No. 1, dated as of January 19, 2017, by and among Charter Communications Operating, LLC, CCO Holdings, LLC, the Lenders Party thereto and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed on December 28, 2017 (File No. 001-33664)). |
| 10.84(d) | | Incremental Activation Notice, dated as of May 18, 2016, by and among Charter Communications Operating, LLC, CCO Holdings, LLC, the subsidiary guarantors party thereto, Bank of America, N.A., as administrative agent and the lenders party thereto (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K of Charter Communications, Inc. filed on May 24, 2016 (File No. 001-33664)). |
| 10.85 | | |
|
| | |
10.17(g)10.86 | | Incremental Activation Notice,Collateral Agreement, dated as of May 3, 2013 delivered18, 2016, by Charter Communications Operating, LLC, CCO Holdings, LLC,Charter Communications Operating Capital Corp. and the Subsidiary Guarantors Party thereto and each Term F Lenderother grantors party thereto toin favor of The Bank of America,New York Mellon Trust Company, N.A., as Administrative Agent under the Amended and Restated Credit Agreement, dated as of April 11, 2012 (as further amended, restated or supplemented from time to time thereafter)collateral agent (incorporated by reference to Exhibit 10.6 to the quarterlycurrent report on Form 10-Q8-K of Charter Communications, Inc. filed on May 7, 201324, 2016 (File No. 001-33664)). |
10.17(h)10.87 | | Incremental Activation Notice,First Lien Intercreditor Agreement, dated as of July 1, 2013 deliveredMay 18, 2016, by and among Charter Communications Operating, LLC, CCO Holdings, LLC, the Subsidiary Guarantors Party thereto and each Term E Lenderother grantors party thereto, to Bank of America, N.A., as Administrative Agent undercredit agreement collateral agent for the Amendedcredit agreement secured parties, The Bank of New York Mellon Trust Company, N.A., as notes collateral agent for the indenture secured parties, and Restated Crediteach additional agent from time to time party thereto (incorporated by reference to Exhibit 10.7 to the current report on Form 8-K of Charter Communications, Inc. filed on May 24, 2016 (File No. 001-33664)). |
| 10.88 | | Joinder Agreement to Registration Rights Agreement, dated as of April 11, 2012 (as further amended, restatedMay 18, 2016, by and among CCO Safari II, LLC, CCH II, LLC, Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., CCO Holdings, LLC and the other guarantors party thereto (incorporated herein by reference to Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed May 24, 2016). |
| 10.89 | | |
| 10.90 | | Escrow Assumption Agreement, dated as of May 18, 2016, by and among CCO Safari III, LLC, Charter Communications Operating, LLC, Bank of America, N.A., as escrow administrative agent and Bank of America, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.3 to the current report on Form 8-K of Charter Communications, Inc. filed May 24, 2016). |
| 10.91 | | Amended and Restated Limited Liability Company Agreement of Charter Communications Holdings, LLC, dated as of May 18, 2016, by and among Charter Holdings, Charter, CCH II, LLC, Advance/Newhouse Partnership and the other party or supplemented from timeparties thereto (incorporated by reference to time thereafter)Exhibit 10.1 to the current report on Form 8-K of Charter Communications, Inc. filed on May 19, 2016 (File No. 001-33664)). |
| 10.92 | | |
10.17(i)10.93 | | Incremental Activation Notice, dated as of September 12, 2014 delivered by Charter Communications Operating, LLC, the Subsidiary Guarantors Pary thereto and each Term G Lender party thereto to Bank of America, N.A., as Administrative Agent under the Amended and Restated Credit |
| 10.94 | | |
| 10.95 | | |
10.18(a)10.96+ | | Escrow Credit Agreement, dated as of September 12, 2014, between CCO Safari, LLC, as borrower, and Bank of America, N.A., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on September 18, 2014 (File No. 001-33664)). |
10.18(b) | | Escrow Agreement, dated as of September 12, 2014, between CCO Safari, LLC, as borrower, Bank of America, N.A., as administrative agent, and U.S. Bank, N.A., as escrow agent (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed by Charter Communications, Inc. on September 18, 2014 (File No. 001-33664)). |
10.19(a) | | Registration Rights Agreement dated as of November 30, 2009, by and among Charter Communications, Inc. and certain investors listed therein (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K of Charter Communications, Inc. filed on December 4, 2009 (File No. 001-33664)). |
10.19(b) | | Amendment No. 1 to the Registration Rights Agreement dated November 30, 2009, by and among Charter Communications, Inc. and certain Investors listed therein (incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q of Charter Communications, Inc. filed on November 6, 2012 (File No. 001-33664)). |
10.20(a) | | Amended and Restated Management Agreement, dated as of June 19, 2003, between Charter Communications Operating, LLC and Charter Communications, Inc. (incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 5, 2003 (File No. 333-83887)). |
10.20(b) | | First Amendment to the Amended and Restated Management Agreement, dated as of July 20, 2010, between Charter Communications Operating, LLC and Charter Communications, Inc. (incorporated by reference to Exhibit 10.6 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 4, 2010 (File No. 001-33664)). |
10.21(a) | | Second Amended and Restated Mutual Services Agreement, dated as of June 19, 2003 between Charter Communications, Inc. and Charter Communications Holding Company, LLC (incorporated by reference to Exhibit 10.5(a) to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 5, 2003 (File No. 000-27927)). |
10.21(b) | | First Amendment to the Second Amended and Restated Mutual Services Agreement, dated as of July 20, 2010, between Charter Communications, Inc. and Charter Communications Holding Company, LLC (incorporated by reference to Exhibit 10.7 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 4, 2010 (File No. 001-33664)). |
10.22+ | | |
10.23+10.97+ | | |
|
10.24+ | | |
| 10.98+ | | |
| 10.99+ | | |
10.25+10.100+ | | |
10.26+10.101+ | | |
|
| | |
10.27+10.102+ | | |
10.28+10.103+ | | Form of Restricted Stock Unit Agreement dated April 26, 2011(incorporated by reference to Exhibit 10.4 to the quarterly report on Form 10-Q filed by Charter Communications, Inc. on August 2, 2011 (File No. 001-33664)). |
10.29+ | | |
10.30+10.104+ | | |
10.31+10.105+ | | |
10.32+10.106+ | | |
10.33+10.107+ | | |
10.34+10.108+ | | |
10.35+10.109(a)+ | | |
10.36(a)10.109(b)+ | | Amended and Restated Employment |
10.36(b)+ | | The New York Relocation Agreement and Release entered intoDecember 19, 2011 by and between Charter Communications, Inc. and Christopher WinfreyThomas M. Rutledge (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by Charter Communications, Inc. on December 19, 2011 (File No. 001-33664)). |
| 10.109(c)+ | | |
10.37(a)10.110(a)+ | | |
10.37(b)10.110(b)+ | | |
10.37(c)10.110(c)+ | | Performance-Vesting Restricted Stock Agreement dated as of April 30, 2012 by and between Charter Communications, Inc. and John Bickham (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K filed by Charter Communications, Inc. on May 1, 2012 (File No. 001-33664)) |
10.37(d)+ | | |
10.37(e)+10.111+ | | Time-Vesting Restricted Stock Agreement dated as of April 30, 2012 by and between Charter Communications, Inc. and John Bickham (incorporated by reference to Exhibit 10.5 to the current report on Form 8-K filed by Charter Communications, Inc. on May 1, 2012 (File No. 001-33664)). |
10.38+* | | Employment Agreement dated effective as of December 10, 2013 by and between Charter Communications, Inc. and Donald Detampel. |
10.39+* | | Employment Agreement dated effective as of April 9, 2014 by and between Charter Communications, Inc. and Jonathan Hargis. |
10.40 | | |
| 10.112+ | | |
| 10.113+ | | |
| 10.114+ | | |
|
| | |
| 10.115+ | | |
| 10.116+ | | |
| 10.117+ | | |
| 10.118+ | | |
| 10.119+ | | |
| 10.120+ | | |
| 10.121+ | | |
| 10.122 | | |
| 10.123 | | |
| 12.1* | | |
| 21.1* | | |
| 23.1* | | |
| 31.1* | | |
| 31.2* | | |
|
| | |
| 32.1* | | |
| 32.2* | | |
| 101 | | The following financial information from the Annual Report of Charter Communications, Inc. on Form 10-K for the year ended December 31, 2014,2017, filed with the SEC on February 23, 2015,2, 2018, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss,Income (Loss), (iv) Consolidated Statements of Changes in ShareholderShareholders’ Equity (Deficit), (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. |
_____________
* Filed herewith.
+ Management compensatory plan or arrangement
INDEX TO FINANCIAL STATEMENTS
|
| |
| | Page |
| | |
| Audited Financial Statements | |
| |
| |
| |
| |
| |
| |
| |
Report of Independent Registered Public Accounting Firm
The
To the Shareholders and Board of Directors and Shareholders
Charter Communications, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Charter Communications, Inc. and subsidiaries (the Company)“Company”) as of December 31, 20142017 and 2013, and2016, the related consolidated statements of operations, comprehensive loss,income (loss), changes in shareholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2014.2017, and the related notes (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission.
Basis for Opinion
The 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 the accompanying Management’s Report on Internal Control overOver Financial Reporting (Item 9A).Reporting. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and an opinion 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 Public Company Accounting Oversight Board (United States).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 supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.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 Reporting
A 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Charter Communications, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
(signed) KPMG LLP
We have served as the Company’s auditor since 2002.
St. Louis, Missouri
February 23, 20151, 2018
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
| | | | December 31,
2014 | | December 31,
2013 | December 31, |
| | | | | 2017 | | 2016 |
| ASSETS | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | $ | 3 |
| | $ | 21 |
| $ | 621 |
| | $ | 1,535 |
|
| Accounts receivable, less allowance for doubtful accounts of | | | | | | |
| $22 and $19, respectively | 285 |
| | 234 |
| |
| $113 and $124, respectively | | 1,635 |
| | 1,432 |
|
| Prepaid expenses and other current assets | 83 |
| | 67 |
| 299 |
| | 333 |
|
| Total current assets | 371 |
| | 322 |
| 2,555 |
| | 3,300 |
|
| | | | | | | |
| RESTRICTED CASH AND CASH EQUIVALENTS | 7,111 |
| | — |
| |
| | | | | |
| INVESTMENT IN CABLE PROPERTIES: | | | | | | |
| Property, plant and equipment, net of accumulated | | | | | | |
| depreciation of $5,484 and $4,787, respectively | 8,373 |
| | 7,981 |
| |
| depreciation of $18,077 and $11,103, respectively | | 33,888 |
| | 32,963 |
|
| Customer relationships, net | | 11,951 |
| | 14,608 |
|
| Franchises | 6,006 |
| | 6,009 |
| 67,319 |
| | 67,316 |
|
| Customer relationships, net | 1,105 |
| | 1,389 |
| |
| Goodwill | 1,168 |
| | 1,177 |
| 29,554 |
| | 29,509 |
|
| Total investment in cable properties, net | 16,652 |
| | 16,556 |
| 142,712 |
| | 144,396 |
|
| | | | | | | |
| OTHER NONCURRENT ASSETS | 416 |
| | 417 |
| 1,356 |
| | 1,371 |
|
| | | | | | | |
| Total assets | $ | 24,550 |
| | $ | 17,295 |
| $ | 146,623 |
| | $ | 149,067 |
|
| | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| CURRENT LIABILITIES: | | | | | | |
| Accounts payable and accrued liabilities | $ | 1,635 |
| | $ | 1,467 |
| $ | 9,045 |
| | $ | 7,544 |
|
| Current portion of long-term debt | | 2,045 |
| | 2,028 |
|
| Total current liabilities | 1,635 |
| | 1,467 |
| 11,090 |
| | 9,572 |
|
| | | | | | | |
| LONG-TERM DEBT | 21,023 |
| | 14,181 |
| 68,186 |
| | 59,719 |
|
| DEFERRED INCOME TAXES | 1,674 |
| | 1,431 |
| 17,314 |
| | 26,665 |
|
| OTHER LONG-TERM LIABILITIES | 72 |
| | 65 |
| 2,502 |
| | 2,745 |
|
| | | | | | | |
| SHAREHOLDERS’ EQUITY: | | | | | | |
| Class A common stock; $.001 par value; 900 million shares authorized; | | | | | | |
| 111,999,687 and 106,144,075 shares issued and outstanding, respectively | — |
| | — |
| |
| Class B common stock; $.001 par value; 25 million shares authorized; | | | | |
| no shares issued and outstanding | — |
| | — |
| |
| 238,506,059 and 268,897,792 shares issued and outstanding, respectively | | — |
| | — |
|
| Class B common stock; $.001 par value; 1,000 shares authorized; | | | | |
| 1 share issued and outstanding | | — |
| | — |
|
| Preferred stock; $.001 par value; 250 million shares authorized; | | | | | | |
| no shares issued and outstanding | — |
| | — |
| — |
| | — |
|
| Additional paid-in capital | 1,930 |
| | 1,760 |
| 35,253 |
| | 39,413 |
|
| Accumulated deficit | (1,762 | ) | | (1,568 | ) | |
| Retained earnings | | 3,832 |
| | 733 |
|
| Accumulated other comprehensive loss | (22 | ) | | (41 | ) | (1 | ) | | (7 | ) |
| Total Charter shareholders’ equity | | 39,084 |
| | 40,139 |
|
| Noncontrolling interests | | 8,447 |
| | 10,227 |
|
| Total shareholders’ equity | 146 |
| | 151 |
| 47,531 |
| | 50,366 |
|
| | | | | | | |
| Total liabilities and shareholders’ equity | $ | 24,550 |
| | $ | 17,295 |
| $ | 146,623 |
| | $ | 149,067 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F- 3
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share and share data)
| | | | Year Ended December 31, | | | | | | | |
| | 2014 | | 2013 | | 2012 | Year Ended December 31, |
| | | | | | | 2017 | | 2016 | | 2015 |
| REVENUES | $ | 9,108 |
| | $ | 8,155 |
| | $ | 7,504 |
| $ | 41,581 |
| | $ | 29,003 |
| | $ | 9,754 |
|
| | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | |
| Operating costs and expenses (excluding depreciation and amortization) | 5,973 |
| | 5,345 |
| | 4,860 |
| |
| Operating costs and expenses (exclusive of items shown separately below) | | 26,541 |
| | 18,655 |
| | 6,426 |
|
| Depreciation and amortization | 2,102 |
| | 1,854 |
| | 1,713 |
| 10,588 |
| | 6,907 |
| | 2,125 |
|
| Other operating expenses, net | 62 |
| | 47 |
| | 16 |
| 346 |
| | 985 |
| | 89 |
|
| | | | | | | |
| | 8,137 |
| | 7,246 |
| | 6,589 |
| |
| | | | | | | 37,475 |
| | 26,547 |
| | 8,640 |
|
| Income from operations | 971 |
| | 909 |
| | 915 |
| 4,106 |
| | 2,456 |
| | 1,114 |
|
| | | | | | | | | | | |
| OTHER EXPENSES: | | | | | | | | | | |
| Interest expense, net | (911 | ) | | (846 | ) | | (907 | ) | (3,090 | ) | | (2,499 | ) | | (1,306 | ) |
| Loss on extinguishment of debt | — |
| | (123 | ) | | (55 | ) | (40 | ) | | (111 | ) | | (128 | ) |
| Gain (loss) on derivative instruments, net | (7 | ) | | 11 |
| | — |
| |
| | | | | | | |
| Gain (loss) on financial instruments, net | | 69 |
| | 89 |
| | (4 | ) |
| Other pension benefits | | 1 |
| | 899 |
| | — |
|
| Other expense, net | | (18 | ) | | (14 | ) | | (7 | ) |
| | (918 | ) | | (958 | ) | | (962 | ) | (3,078 | ) | | (1,636 | ) | | (1,445 | ) |
| | | | | | | | | | | |
| Income (loss) before income taxes | 53 |
| | (49 | ) | | (47 | ) | 1,028 |
| | 820 |
| | (331 | ) |
| Income tax benefit | | 9,087 |
| | 2,925 |
| | 60 |
|
| Consolidated net income (loss) | | 10,115 |
| | 3,745 |
| | (271 | ) |
| Less: Net income attributable to noncontrolling interests | | (220 | ) | | (223 | ) | | — |
|
| Net income (loss) attributable to Charter shareholders | | $ | 9,895 |
| | $ | 3,522 |
| | $ | (271 | ) |
| | | | | | | | | | | |
| Income tax expense | (236 | ) | | (120 | ) | | (257 | ) | |
| EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: | | | | | | |
| Basic | | $ | 38.55 |
| | $ | 17.05 |
| | $ | (2.68 | ) |
| Diluted | | $ | 34.09 |
| | $ | 15.94 |
| | $ | (2.68 | ) |
| | | | | | | | | | | |
| Net loss | $ | (183 | ) | | $ | (169 | ) | | $ | (304 | ) | |
| | | | | | | |
| LOSS PER COMMON SHARE, BASIC AND DILUTED | $ | (1.70 | ) | | $ | (1.65 | ) | | $ | (3.05 | ) | |
| | | | | | | |
| Weighted average common shares outstanding, basic and diluted | 108,374,160 |
| | 101,934,630 |
| | 99,657,989 |
| |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | | | | | | |
| Basic | | 256,720,715 |
| | 206,539,100 |
| | 101,152,647 |
|
| Diluted | | 296,703,956 |
| | 234,791,439 |
| | 101,152,647 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)
(dollars in millions)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | | | | | |
| Net loss | $ | (183 | ) | | $ | (169 | ) | | $ | (304 | ) |
| Net impact of interest rate derivative instruments, net of tax | 19 |
| | 34 |
| | (10 | ) |
| | | | | | |
| Comprehensive loss | $ | (164 | ) | | $ | (135 | ) | | $ | (314 | ) |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Consolidated net income (loss) | $ | 10,115 |
| | $ | 3,745 |
| | $ | (271 | ) |
| Net impact of interest rate derivative instruments | 5 |
| | 8 |
| | 9 |
|
| Foreign currency translation adjustment | 1 |
| | (2 | ) | | — |
|
| Consolidated comprehensive income (loss) | 10,121 |
| | 3,751 |
| | (262 | ) |
| Less: Comprehensive income attributable to noncontrolling interests | (220 | ) | | (223 | ) | | — |
|
| Comprehensive income (loss) attributable to Charter shareholders | $ | 9,901 |
| | $ | 3,528 |
| | $ | (262 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(dollars in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A Common Stock | | Class B Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| | | | | | | | | | | | | | | |
| BALANCE, December 31, 2011 | | $ | — |
| | $ | — |
| | $ | 1,556 |
| | $ | (1,082 | ) | | $ | — |
| | $ | (65 | ) | | $ | 409 |
|
| Net loss | | — |
| | — |
| | — |
| | (304 | ) | | — |
| | — |
| | (304 | ) |
| Net impact of interest rate derivative instruments, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | (10 | ) | | (10 | ) |
| Stock compensation expense, net | | — |
| | — |
| | 50 |
| | — |
| | — |
| | — |
| | 50 |
|
| Exercise of options | | — |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | 15 |
|
| Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Retirement of treasury stock | | — |
| | — |
| | (5 | ) | | (6 | ) | | 11 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
| BALANCE, December 31, 2012 | | — |
| | — |
| | 1,616 |
| | (1,392 | ) | | — |
| | (75 | ) | | 149 |
|
| Net loss | | — |
| | — |
| | — |
| | (169 | ) | | — |
| | — |
| | (169 | ) |
| Net impact of interest rate derivative instruments, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 34 |
| | 34 |
|
| Stock compensation expense, net | | — |
| | — |
| | 48 |
| | — |
| | — |
| | — |
| | 48 |
|
| Exercise of options and warrants | | — |
| | — |
| | 104 |
| | — |
| | — |
| | — |
| | 104 |
|
| Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
| Retirement of treasury stock | | — |
| | — |
| | (8 | ) | | (7 | ) | | 15 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
| BALANCE, December 31, 2013 | | — |
| | — |
| | 1,760 |
| | (1,568 | ) | | — |
| | (41 | ) | | 151 |
|
| Net loss | | — |
| | — |
| | — |
| | (183 | ) | | — |
| | — |
| | (183 | ) |
| Net impact of interest rate derivative instruments, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | 19 |
|
| Stock compensation expense, net | | — |
| | — |
| | 55 |
| | — |
| | — |
| | — |
| | 55 |
|
| Exercise of options and warrants | | — |
| | — |
| | 123 |
| | — |
| | — |
| | — |
| | 123 |
|
| Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | (19 | ) | | — |
| | (19 | ) |
| Retirement of treasury stock | | — |
| | — |
| | (8 | ) | | (11 | ) | | 19 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
| BALANCE, December 31, 2014 | | $ | — |
| | $ | — |
| | $ | 1,930 |
| | $ | (1,762 | ) | | $ | — |
| | $ | (22 | ) | | $ | 146 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Charter Shareholders’ Equity (Deficit) | Non-controlling Interests | Total Shareholders’ Equity (Deficit) |
| BALANCE, December 31, 2014 | $ | — |
| $ | — |
| $ | 1,930 |
| $ | (1,762 | ) | $ | (22 | ) | $ | 146 |
| $ | — |
| $ | 146 |
|
| Consolidated net loss | — |
| — |
| — |
| (271 | ) | — |
| (271 | ) | — |
| (271 | ) |
| Stock compensation expense | — |
| — |
| 78 |
| — |
| — |
| 78 |
| — |
| 78 |
|
| Exercise of stock options | — |
| — |
| 30 |
| — |
| — |
| 30 |
| — |
| 30 |
|
| Changes in accumulated other comprehensive loss, net | — |
| — |
| — |
| — |
| 9 |
| 9 |
| — |
| 9 |
|
| Purchases and retirement of treasury stock | — |
| — |
| (10 | ) | (28 | ) | — |
| (38 | ) | — |
| (38 | ) |
| BALANCE, December 31, 2015 | — |
| — |
| 2,028 |
| (2,061 | ) | (13 | ) | (46 | ) | — |
| (46 | ) |
| Consolidated net income | — |
| — |
| — |
| 3,522 |
| — |
| 3,522 |
| 223 |
| 3,745 |
|
| Stock compensation expense | — |
| — |
| 244 |
| — |
| — |
| 244 |
| — |
| 244 |
|
| Accelerated vesting of equity awards | — |
| — |
| 248 |
| — |
| — |
| 248 |
| — |
| 248 |
|
| Settlement of restricted stock units | — |
| — |
| (59 | ) | — |
| — |
| (59 | ) | — |
| (59 | ) |
| Exercise of stock options | — |
| — |
| 86 |
| — |
| — |
| 86 |
| — |
| 86 |
|
| Changes in accumulated other comprehensive loss, net | — |
| — |
| — |
| — |
| 6 |
| 6 |
| — |
| 6 |
|
| Purchases and retirement of treasury stock | — |
| — |
| (834 | ) | (728 | ) | — |
| (1,562 | ) | — |
| (1,562 | ) |
| Issuance of shares to Liberty Broadband for cash | — |
| — |
| 5,000 |
| — |
| — |
| 5,000 |
| — |
| 5,000 |
|
| Converted TWC awards in the TWC Transaction | — |
| — |
| 514 |
| — |
| — |
| 514 |
| — |
| 514 |
|
| Issuance of shares in TWC Transaction | — |
| — |
| 32,164 |
| — |
| — |
| 32,164 |
| — |
| 32,164 |
|
| Issuance of subsidiary equity in Bright House Transaction | — |
| — |
| — |
| — |
| — |
| — |
| 10,134 |
| 10,134 |
|
| Partnership formation and change in ownership, net of tax | — |
| — |
| (364 | ) | — |
| — |
| (364 | ) | 589 |
| 225 |
|
| Purchase of noncontrolling interest, net of tax | — |
| — |
| (19 | ) | — |
| — |
| (19 | ) | (187 | ) | (206 | ) |
| Exchange of Charter Holdings units held by A/N, net of tax and TRA effects | — |
| — |
| 405 |
| — |
| — |
| 405 |
| (460 | ) | (55 | ) |
| Distributions to noncontrolling interest | — |
| — |
| — |
| — |
| — |
| — |
| (96 | ) | (96 | ) |
| Noncontrolling interests assumed in acquisitions | — |
| — |
| — |
| — |
| — |
| — |
| 24 |
| 24 |
|
| BALANCE, December 31, 2016 | — |
| — |
| 39,413 |
| 733 |
| (7 | ) | 40,139 |
| 10,227 |
| 50,366 |
|
| Consolidated net income | — |
| — |
| — |
| 9,895 |
| — |
| 9,895 |
| 220 |
| 10,115 |
|
| Stock compensation expense | — |
| — |
| 261 |
| — |
| — |
| 261 |
| — |
| 261 |
|
| Accelerated vesting of equity awards | — |
| — |
| 49 |
| — |
| — |
| 49 |
| — |
| 49 |
|
| Exercise of stock options | — |
| — |
| 116 |
| — |
| — |
| 116 |
| — |
| 116 |
|
| Changes in accumulated other comprehensive loss, net | — |
| — |
| — |
| — |
| 6 |
| 6 |
| — |
| 6 |
|
| Cumulative effect of accounting change | — |
| — |
| 9 |
| 131 |
| — |
| 140 |
| — |
| 140 |
|
| Purchases and retirement of treasury stock | — |
| — |
| (4,788 | ) | (6,927 | ) | — |
| (11,715 | ) | — |
| (11,715 | ) |
| Purchase of noncontrolling interest, net of tax | — |
| — |
| (295 | ) | — |
| — |
| (295 | ) | (1,187 | ) | (1,482 | ) |
| Exchange of Charter Holdings units held by A/N, net of tax and TRA effects | — |
| — |
| 265 |
| — |
| — |
| 265 |
| (298 | ) | (33 | ) |
| Change in noncontrolling interest ownership, net of tax | — |
| — |
| 223 |
| — |
| — |
| 223 |
| (362 | ) | (139 | ) |
| Distributions to noncontrolling interest | — |
| — |
| — |
| — |
| — |
| — |
| (153 | ) | (153 | ) |
| BALANCE, December 31, 2017 | $ | — |
| $ | — |
| $ | 35,253 |
| $ | 3,832 |
| $ | (1 | ) | $ | 39,084 |
| $ | 8,447 |
| $ | 47,531 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
| | | | | Year Ended December 31, | Year Ended December 31, |
| | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | |
| Net loss | | $ | (183 | ) | | $ | (169 | ) | | $ | (304 | ) | |
| Adjustments to reconcile net loss to net cash flows from operating activities: | | | | | | | |
| Consolidated net income (loss) | | $ | 10,115 |
| | $ | 3,745 |
| | $ | (271 | ) |
| Adjustments to reconcile consolidated net income (loss) to net cash flows from operating activities: | | | | | | |
| Depreciation and amortization | | 2,102 |
| | 1,854 |
| | 1,713 |
| 10,588 |
| | 6,907 |
| | 2,125 |
|
| Non-cash interest expense | | 37 |
| | 43 |
| | 45 |
| |
| Stock compensation expense | | 261 |
| | 244 |
| | 78 |
|
| Accelerated vesting of equity awards | | 49 |
| | 248 |
| | — |
|
| Noncash interest (income) expense | | (370 | ) | | (256 | ) | | 28 |
|
| Other pension benefits | | (1 | ) | | (899 | ) | | — |
|
| Loss on extinguishment of debt | | — |
| | 123 |
| | 55 |
| 40 |
| | 111 |
| | 128 |
|
| (Gain) loss on derivative instruments, net | | 7 |
| | (11 | ) | | — |
| |
| (Gain) loss on financial instruments, net | | (69 | ) | | (89 | ) | | 4 |
|
| Deferred income taxes | | 233 |
| | 112 |
| | 250 |
| (9,116 | ) | | (2,958 | ) | | (65 | ) |
| Other, net | | 65 |
| | 82 |
| | 45 |
| 16 |
| | 8 |
| | 11 |
|
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | | | | | | | |
| Accounts receivable | | (51 | ) | | 10 |
| | 34 |
| (84 | ) | | (160 | ) | | 5 |
|
| Prepaid expenses and other assets | | (9 | ) | | — |
| | (8 | ) | 76 |
| | 111 |
| | (3 | ) |
| Accounts payable, accrued liabilities and other | | 158 |
| | 114 |
| | 46 |
| 449 |
| | 1,029 |
| | 319 |
|
| Net cash flows from operating activities | | 2,359 |
| | 2,158 |
| | 1,876 |
| 11,954 |
| | 8,041 |
| | 2,359 |
|
| | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
| Purchases of property, plant and equipment | | (2,221 | ) | | (1,825 | ) | | (1,745 | ) | (8,681 | ) | | (5,325 | ) | | (1,840 | ) |
| Change in accrued expenses related to capital expenditures | | 33 |
| | 76 |
| | 13 |
| 820 |
| | 603 |
| | 28 |
|
| Sales (purchases) of cable systems, net | | 11 |
| | (676 | ) | | 19 |
| |
| Restricted cash in escrow | | (7,111 | ) | | — |
| | — |
| |
| Purchases of cable systems, net | | (9 | ) | | (28,810 | ) | | — |
|
| Change in restricted cash and cash equivalents | | — |
| | 22,264 |
| | (15,153 | ) |
| Real estate investments through variable interest entities | | (105 | ) | | — |
| | — |
|
| Other, net | | (16 | ) | | (18 | ) | | (24 | ) | (123 | ) | | (22 | ) | | (67 | ) |
| Net cash flows from investing activities | | (9,304 | ) | | (2,443 | ) | | (1,737 | ) | (8,098 | ) | | (11,290 | ) | | (17,032 | ) |
| | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
| Borrowings of long-term debt | | 8,806 |
| | 6,782 |
| | 5,830 |
| 25,276 |
| | 12,344 |
| | 26,045 |
|
| Repayments of long-term debt | | (1,980 | ) | | (6,520 | ) | | (5,901 | ) | (16,507 | ) | | (10,521 | ) | | (11,326 | ) |
| Payments for debt issuance costs | | (6 | ) | | (50 | ) | | (53 | ) | (111 | ) | | (284 | ) | | (36 | ) |
| Issuance of equity | | — |
| | 5,000 |
| | — |
|
| Purchase of treasury stock | | (19 | ) | | (15 | ) | | (11 | ) | (11,715 | ) | | (1,562 | ) | | (38 | ) |
| Proceeds from exercise of options and warrants | | 123 |
| | 104 |
| | 15 |
| |
| Proceeds from exercise of stock options and warrants | | 116 |
| | 86 |
| | 30 |
|
| Settlement of restricted stock units | | — |
| | (59 | ) | | — |
|
| Purchase of noncontrolling interest | | (1,665 | ) | | (218 | ) | | — |
|
| Distributions to noncontrolling interest | | (153 | ) | | (96 | ) | | — |
|
| Proceeds from termination of interest rate derivatives | | — |
| | 88 |
| | — |
|
| Other, net | | 3 |
| | (2 | ) | | (14 | ) | (11 | ) | | 1 |
| | — |
|
| Net cash flows from financing activities | | 6,927 |
| | 299 |
| | (134 | ) | (4,770 | ) | | 4,779 |
| | 14,675 |
|
| | | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | (18 | ) | | 14 |
| | 5 |
| (914 | ) | | 1,530 |
| | 2 |
|
| CASH AND CASH EQUIVALENTS, beginning of period | | 21 |
| | 7 |
| | 2 |
| 1,535 |
| | 5 |
| | 3 |
|
| CASH AND CASH EQUIVALENTS, end of period | | $ | 3 |
| | $ | 21 |
| | $ | 7 |
| $ | 621 |
| | $ | 1,535 |
| | $ | 5 |
|
| | | | | | | | | | | | |
| CASH PAID FOR INTEREST | | $ | 850 |
| | $ | 763 |
| | $ | 904 |
| $ | 3,421 |
| | $ | 2,685 |
| | $ | 1,064 |
|
| CASH PAID FOR TAXES | | $ | 41 |
| | $ | 63 |
| | $ | 3 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
1. Organization and Basis of Presentation
Organization
Charter Communications, Inc. (“Charter”(together with its controlled subsidiaries, “Charter,” or the “Company”) is the second largest cable operator in the United States and a leading broadband communications company providing video, Internet and voice services to residential and business customers. In addition, the Company sells video and online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology solutions to larger enterprise customers. The Company also owns and operates regional sports networks and local sports, news and lifestyle channels and sells security and home management services to the residential marketplace.
Charter is a holding company whose principal asset is a 100% commoncontrolling equity interest in Charter Communications Holding Company,Holdings, LLC (“Charter Holdco”Holdings”)., an indirect owner of Charter owns cable systems through its subsidiaries,Communications Operating, LLC (“Charter Operating”) under which are collectively, with Charter, referred to herein assubstantially all of the “Company.”operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.
The Company is a cable operator providing services in the United States. The Company offers to residential and commercial customers traditional cable video programming, Internet services, and voice services, as well as advanced video services such as video on demand, high definition television, and digital video recorder (“DVR”) service. The Company sells its cable video programming, Internet, voice, and advanced video services primarily on a subscription basis. The Company also sells local advertising on cable networks and on the Internet and provides fiber connectivity to cellular towers.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principlesU.S. generally accepted in the United Statesaccounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs; depreciation and amortization costs; purchase accounting valuations of assets and impairments ofliabilities including, but not limited to, property, plant and equipment, intangibles and goodwill; pension benefits; income taxes; contingencies and programming expense. Actual results could differ from those estimates.
Certain prior period amounts primarily merger and acquisition costs, have been reclassified to conform with the 20142017 presentation.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of Charter and its wholly owned subsidiaries.all entities in which Charter has a controlling interest, including variable interest entities where Charter is the primary beneficiary. The Company consolidates based upon evaluation of the Company’s power, through voting rights or similar rights, to direct the activities of another entity that most significantly impact the entity’s economic performance; its obligation to absorb the expected losses of the entity; and its right to receive the expected residual returns of the entity. Charter controls and consolidates Charter Holdings. The noncontrolling interest on the Company’s balance sheet primarily represents Advance/Newhouse Partnership's (“A/N's”) minority equity interests in Charter Holdings. See Note 11. All significant inter-company accounts and transactions among consolidated entities have been eliminated.eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost, which approximates market value. Cash and cash equivalents consist primarily of money market funds and commercial paper.funds.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost, including all material, labor and certain indirect costs associated with the construction of cable transmission and distribution facilities. While the Company’s capitalization is based on specific activities, once capitalized, costs are tracked on a composite basis by fixed asset category at the cable system level and not on a
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
specific asset basis. For assets that are sold or retired, the estimated historical cost and related accumulated depreciation is removed. Costs associated with the initial placement of the customer installationsdrop to the dwelling and the additionsinitial placement of networkoutlets within a dwelling along with the costs associated with the initial deployment of customer premise equipment necessary to enable advancedprovide video, Internet or voice services are capitalized. Costs capitalized as part of initial customer installations include materials, direct labor and certain indirect costs. Indirect costs are associated with the activities of the Company’s personnel who assist in connecting and activating the new serviceinstallation activities and consist of compensation and other costs associated with these support functions. Indirect costs primarily include employee benefits
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
and payroll taxes, direct variablevehicle and occupancy costs, associated with capitalizable activities, consisting primarilyand the costs of installationsales and construction, vehicle costs, the cost of dispatch personnel and indirect costs directly attributable toassociated with capitalizable activities. The costs of disconnecting service atand removing customer premise equipment from a customer’s dwelling and the costs to reconnect a customer drop or reconnecting service to aredeploy previously installed dwellingcustomer premise equipment are charged to operating expense in the periodas incurred. Costs for repairs and maintenance are charged to operating expense as incurred, while plant and equipment replacement, andincluding replacement of certain components, betterments, including replacement of cable drops from the pole to the dwelling,and outlets, are capitalized.
Depreciation is recorded using the straight-line composite method over management’s estimate of the useful lives of the related assets as follows:
|
| | |
| Cable distribution systems | | 7-208-20 years |
| Customer premise equipment and installations | | 3-8 years |
| Vehicles and equipment | | 3-64-9 years |
Buildings and leasehold improvements | | 15-40 years |
| Furniture, fixtures and equipment | | 6-107-10 years |
Asset Retirement Obligations
Certain of the Company’s franchise agreements and leases contain provisions requiring the Company to restore facilities or remove equipment in the event that the franchise or lease agreement is not renewed. The Company expects to continually renew its franchise agreements and has concludedtherefore cannot reasonably estimate any liabilities associated with such agreements. A remote possibility exists that all of the related franchise rights are indefinite lived intangible assets. Accordingly, the possibility is remote thatagreements could be terminated unexpectedly, which could result in the Company would be required to incurincurring significant expense in complying with restoration or removal costs related to these franchise agreements in the foreseeable future. A liability is required to be recognized for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made.provisions. The Company hasdoes not recorded an estimate for potential franchise related obligations, but would record an estimated liability in the unlikely event a franchise agreement containing such a provision were no longer expected to be renewed. The Company also expects to renew many of its lease agreements related to the continued operation of its cable business in the franchise areas. For the Company’s lease agreements, the estimatedhave any significant liabilities related to the removal provisions, where applicable, have beenasset retirements recorded and are not significant to thein its consolidated financial statements.
Other Noncurrent Assets
Other noncurrent assets primarily include trademarks, right-of-entry costs and deferred financing costs. Trademarks have been determined to have an indefinite life and are tested annually for impairment. Right-of-entry costs represent costs incurred related to agreements entered into with landlords, real estate companies or owners to gain access to a building in order to provide cable service. Right-of-entry costs are generally deferred and amortized to amortization expense over the term of the agreement. Costs related to borrowings are deferred and amortized to interest expense over the terms of the related borrowings.
Valuation of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets (e.g., property, plant and equipment and finite-lived intangible assets) to be held and used when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or changes in circumstances could include such factors as impairment of the Company’s indefinite life assets, changes in technological advances, fluctuations in the fair value of such assets, adverse changes in relationships with local franchise authorities, adverse changes in market conditions or a deterioration of current or expected future operating results. If a review indicates that the carrying value of such asset is not recoverable from estimated undiscounted cash flows, the carrying value of such asset is reduced to its estimated fair value. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect its evaluations of asset recoverability. No impairments of long-lived assets to be held and used were recorded in 20142017, 20132016 and 20122015.
Other Noncurrent Assets
Other noncurrent assets primarily include investments, trademarks, right-of-entry costs and other intangible assets. The Company accounts for its investments in less than majority owned investees under either the equity or cost method. The Company applies the equity method to investments when it has the ability to exercise significant influence over the operating and financial policies of the investee. The Company’s share of the investee’s earnings (losses) is included in other expense, net in the consolidated statements of operations. The Company monitors its investments for indicators that a decrease in investment value has occurred that is other than temporary. If it has been determined that an investment has sustained an other than temporary decline in value, the investment is written down to fair value with a charge to earnings. Investments acquired are measured at fair value utilizing the acquisition method of accounting. The difference between the fair value and the amount of underlying equity in net assets for most equity method investments is due to previously unrecognized intangible assets at the investee. These amounts are amortized as a component of equity earnings (losses), recorded within other expense, net over the estimated useful life of the asset. Trademarks
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
have been determined to have an indefinite life and are tested annually for impairment. Right-of-entry costs represent upfront costs incurred related to agreements entered into with multiple dwelling units (“MDUs”) including landlords, real estate companies or owners to gain access to a building in order to market and service customers who reside in the building. Right-of-entry costs are deferred and amortized to amortization expense over the term of the agreement.
Revenue Recognition
Revenues from residential and commercial video, Internet and voice services are recognized when the related services are provided. Advertising sales are recognized at estimated realizable values in the period that the advertisements are broadcast. In some cases, the Company coordinates the advertising sales efforts of other cable operators in a certain market and remits amounts received from customers less an agreed-upon percentage to such cable operator. For those arrangements in which the Company acts as a
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
principal, the Company records the revenues earned from the advertising customer on a gross basis and the amount remitted to the cable operator as an operating expense.
Fees imposed on Charterthe Company by various governmental authorities are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. Fees of $283961 million, $263711 million and $260255 million for the years ended December 31, 20142017, 20132016 and 20122015, respectively, are reported in video, voice and commercial revenues, on a gross basis with a corresponding operating expense because the Company is acting as a principal. Other taxes, such as sales taxes imposed on the Company'sCompany’s customers, collected and remitted to state and local authorities, are recorded on a net basis because the Company is acting as an agent in such situation.
The Company’s revenues by product line are as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | |
| Video | $ | 4,443 |
| | $ | 4,040 |
| | $ | 3,649 |
| $ | 16,641 |
| | $ | 11,967 |
| | $ | 4,587 |
|
| Internet | 2,576 |
| | 2,186 |
| | 1,866 |
| 14,105 |
| | 9,272 |
| | 3,003 |
|
| Voice | 575 |
| | 644 |
| | 828 |
| 2,542 |
| | 2,005 |
| | 539 |
|
| Commercial | 993 |
| | 812 |
| | 648 |
| |
| Residential revenue | | 33,288 |
| | 23,244 |
| | 8,129 |
|
| | | | | | | |
| Small and medium business | | 3,686 |
| | 2,480 |
| | 764 |
|
| Enterprise | | 2,210 |
| | 1,429 |
| | 363 |
|
| Commercial revenue | | 5,896 |
| | 3,909 |
| | 1,127 |
|
| | | | | | | |
| Advertising sales | 341 |
| | 291 |
| | 334 |
| 1,510 |
| | 1,235 |
| | 309 |
|
| Other | 180 |
| | 182 |
| | 179 |
| 887 |
| | 615 |
| | 189 |
|
| | | | | | | $ | 41,581 |
| | $ | 29,003 |
| | $ | 9,754 |
|
| | $ | 9,108 |
| | $ | 8,155 |
| | $ | 7,504 |
| |
Programming Costs
The Company has various contracts to obtain basic, digital and premium video programming from programming vendors whose compensation is typically based on a flat fee per customer. The cost of the right to exhibit network programming under such arrangements is recorded in operating expenses in the month the programming is available for exhibition. Programming costs are paid each month based on calculations performed by the Company and are subject to periodic audits performed by the programmers. Certain programming contracts contain incentives to be paid bycash and non-cash consideration from the programmers. TheIf consideration received does not relate to a separate product or service, the Company receives these payments and recognizes the incentivesconsideration on a straight-line basis over the life of the programming agreement as a reduction of programming expense. This offset to programming expense was $19 million, $7 millionProgramming costs included in the statements of operations were $10.6 billion, $7.0 billion and $6 million$2.7 billion for the years ended December 31, 20142017, 20132016 and 2012, respectively. Programming costs included in the accompanying statements of operations were $2.5 billion, $2.1 billion and $2.0 billion for the years ended December 31, 2014, 2013 and 20122015, respectively.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
Advertising Costs
Advertising costs associated with marketing the Company’s products and services are generally expensed as costs are incurred. Such advertising expense was $380 million, $357 million and $325 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Multiple-Element Transactions
In the normal course of business, the Company enters into multiple-element transactions where it is simultaneously both a customer and a vendor with the same counterparty or in which it purchases multiple products and/or services, or settles outstanding items contemporaneous with the purchase of a product or service from a single counterparty. Transactions, although negotiated contemporaneously, may be documented in one or more contracts. The Company’s policy for accounting for each transaction negotiated contemporaneously is to record each element of the transaction based on the respective estimated fair values of the products or services purchased and the products or services sold. In determining the fair value of the respective elements, the Company refers to quoted market prices (where available), historical transactions or comparable cash transactions. Cash consideration received from a vendor is recorded as a reduction in the price of the vendor’s product unless (i) the consideration is for the reimbursement of a specific, incremental, identifiable cost incurred, in which case the cash consideration received would be recorded as a reduction in such cost (e.g., marketing costs), or (ii) an identifiable benefit in exchange for the consideration is provided, in which case revenue would be recognized for this element.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
Stock-Based Compensation
Restricted stock, restricted stock units, stock options and performance units and sharesas well as equity awards with market conditions are measured at the grant date fair value and amortized to stock compensation expense over the requisite service period. The Company recorded $55 million, $48 million and $50 million of stock compensation expense, which is included in operating costs and expenses and other operating expenses, net for the years ended December 31, 2014, 2013 and 2012, respectively.
The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model and the fair value of equity awards with market conditions is estimated on the date of grant using Monte Carlo simulations for options and restricted stock units with market conditions.simulations. The grant date weighted average assumptions used during the years ended December 31, 20142017, 20132016 and 20122015, respectively, were: risk-free interest rate of 2.0%1.8%, 1.5%1.7% and 1.5%; expected volatility of 36.9%25.0%, 37.8%25.4% and 38.4%34.7%,; and expected lives of 6.54.6 years, 6.31.3 years and 6.36.5 years. The grant date weightedWeighted average cost of equityassumptions for 2016 include the assumptions used was 16.2% during each offor the years ended December 31, 2013 and 2012converted TWC awards (see Note 16). Volatility assumptions were based on historical volatility of Charter and a peer group. The Company’s volatility assumptions represent management’s best estimate and were partially based on historical volatility of a peer group because management does not believe Charter’s pre-emergence from bankruptcy historical volatility to be representative of its future volatility.Legacy Charter and Legacy TWC. See Note 3. Expected lives were calculated based on the simplified-method due to insufficientestimated using historical exercise data. The valuations assume no dividends are paid.
Pension Plans
The Company sponsors the TWC Pension Plan, TWC Union Pension Plan and TWC Excess Pension Plan (as defined in Note 21). Pension benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. The Company has elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and expected benefits of utilizing loss carryforwards. Since substantially all the Company’s operations are held through its partnership interest in Charter Holdings, the primary deferred tax component recorded in the consolidated balance sheet relates to the excess financial reporting outside basis, excluding amounts attributable to nondeductible goodwill, over Charter’s tax basis in its investment in the partnership. Valuation allowances are established when management determines that it is more likely than not that some portion or the entire deferred tax asset will not be realized. The impact on deferred taxes of changes in tax rates and tax law, if any, applied to the years during which temporary differences are expected to be settled, are reflected in the consolidated financial statements in the period of enactment. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon examination, based on their technical merits. There is considerable judgment involved in making such a determination. Interest and penalties are recognized on uncertain income tax positions as part of the income tax provision. See Note 16.17.
Loss per Common Share
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per common share is computed by dividing the net loss by the weighted-average common shares outstanding during the respective periods. Diluted loss per common share equals basic loss per common share for the periods presented, as the effect of stock options and other convertible securities are anti-dilutive because the Company incurred net losses.data or where indicated)
Segments
The Company’s operations are conducted through the use of a unified network and are managed and reported to its Chief Executive Officer ("CEO"(“CEO”), the Company'sCompany’s chief operating decision maker, on a consolidated basis. The CEO assesses performance and allocates resources based on the consolidated results of operations. Under this organizational and reporting structure, the Company has one reportable segment, broadbandcable services.
3. AcquisitionsMergers and DispositionsAcquisitions
Acquisition of BresnanThe Transactions
On July 1, 2013, CharterMay 18, 2016, the transactions contemplated by the Agreement and Plan of Mergers dated as of May 23, 2015 (the “Merger Agreement”), by and among Time Warner Cable Inc. (“Legacy TWC”), Charter Communications, Operating,Inc. prior to the closing of the Merger Agreement (“Legacy Charter”), CCH I, LLC, ("Charter Operating") acquired Bresnan Broadband Holdings, LLC and its subsidiaries (collectively, “Bresnan”) frompreviously a wholly owned subsidiary of Cablevision Systems Corporation ("Cablevision"Legacy Charter and certain other subsidiaries of CCH I, LLC were completed (the “TWC Transaction,” and together with the Bright House Transaction described below, the “Transactions”). As a result of the TWC Transaction, CCH I, LLC became the new public parent company that holds the operations of the combined companies and was renamed Charter Communications, Inc. As of the date of completion of the Transactions, the total value of the TWC Transaction was approximately $85 billion, including cash, equity and Legacy TWC assumed debt.
Also, on May 18, 2016, Legacy Charter and A/N, the former parent of Bright House Networks, LLC (“Legacy Bright House”), completed their previously announced transaction, pursuant to a definitive Contribution Agreement (the “Contribution Agreement”), under which Charter acquired Legacy Bright House (the “Bright House Transaction”) for $1.625approximately $12.2 billion consisting of cash and convertible preferred units of Charter Holdings and common units of Charter Holdings. Pursuant to the Bright House Transaction, Charter became the owner of the membership interests in Legacy Bright House and the other assets primarily related to Legacy Bright House (other than certain excluded assets and liabilities and non-operating cash).
In connection with the TWC Transaction, Liberty Broadband purchased shares of Charter Class A common stock to partially finance the cash as well as a working capital adjustmentportion of the TWC Transaction consideration, and a reduction for certain funded indebtednessin connection with the Bright House Transaction, Liberty Broadband purchased shares of Bresnan. Bresnan manages cable operating systems in Montana, Wyoming, ColoradoCharter Class A common stock (the “Liberty Transaction”).
Acquisition Accounting
Charter applied acquisition accounting to the Transactions. The total purchase price was allocated to the identifiable tangible and Utah. Charter fundedintangible assets acquired and the liabilities assumed based on their estimated fair values. The fair values were primarily based on third-party valuations using assumptions developed by management and other information compiled by management including, but not limited to, future expected cash flows. The excess of the purchase of Bresnan with a $1.5 billion term loan (see Note 8) and borrowings under the Charter Operating credit facilities.price over those fair values was recorded as goodwill.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
The tables below present the final allocation of the purchase price to the assets acquired and liabilities assumed in the Transactions.
TWC Allocation of Purchase Price
|
| | | |
| Cash and cash equivalents | $ | 1,058 |
|
| Current assets | 1,417 |
|
| Property, plant and equipment | 21,413 |
|
| Customer relationships | 13,460 |
|
| Franchises | 54,085 |
|
| Goodwill | 28,337 |
|
| Other noncurrent assets | 1,040 |
|
| Accounts payable and accrued liabilities | (4,107 | ) |
| Debt | (24,900 | ) |
| Deferred income taxes | (28,120 | ) |
| Other long-term liabilities | (3,162 | ) |
| Noncontrolling interests | (4 | ) |
| | $ | 60,517 |
|
Subsequent to December 31, 2016 and through the end of the measurement period, the Company made adjustments to the fair value of certain assets acquired and liabilities assumed in the TWC Transaction, including a decrease to working capital of $73 million and a decrease of $28 million to deferred income tax liabilities, resulting in a net increase of $45 million to goodwill.
Bright House Allocation of Purchase Price
|
| | | |
| Current assets | $ | 131 |
|
| Property, plant and equipment | 2,884 |
|
| Customer relationships | 2,150 |
|
| Franchises | 7,225 |
|
| Goodwill | 44 |
|
| Other noncurrent assets | 86 |
|
| Accounts payable and accrued liabilities | (330 | ) |
| Other long-term liabilities | (12 | ) |
| Noncontrolling interests | (22 | ) |
| | $ | 12,156 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
Selected Pro Forma Financial Information
The following unaudited pro forma financial information of Charterthe Company is based on the historical consolidated financial statements of Legacy Charter, Legacy TWC and the historical consolidated financial statements of BresnanLegacy Bright House and is intended to provide information about how the acquisition of BresnanTransactions and related financing may have affected Charter'sthe Company’s historical consolidated financial statements if they had closed as of January 1, 2012.2015. The pro forma financial information below is based on available information and assumptions that the Company believes are reasonable. The pro forma financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what Charter'sthe Company’s financial condition or results of operations would have been had the transactions described above occurred on the date indicated. The pro forma financial information also should not be considered representative of Charter'sthe Company’s future financial condition or results of operations.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2013 | | 2012 |
| | (unaudited) |
| Revenues | $ | 8,419 |
| | $ | 8,017 |
|
| Net loss | $ | (194 | ) | | $ | (392 | ) |
| Loss per common share, basic and diluted | $ | (1.90 | ) | | $ | (3.93 | ) |
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| Revenues | $ | 40,023 |
| | $ | 37,394 |
|
| Net income attributable to Charter shareholders | $ | 1,070 |
| | $ | 159 |
|
| Earnings per common share attributable to Charter shareholders: | | | |
| Basic | $ | 3.97 |
| | $ | 0.59 |
|
| Diluted | $ | 3.91 |
| | $ | 0.58 |
|
Transactions with Comcast
On April 25, 2014, the Company entered into a binding definitive agreement (the “Transactions Agreement”) with Comcast Corporation (“Comcast”), which contemplates the following transactions: (1) an asset purchase, (2) an asset exchange and (3) a contribution and spin-off transaction (collectively, the “Transactions”) as described in more detail below. The Transactions Agreement calls for the Transactions to be consummated substantially contemporaneously with each other as promptly as practicable following the merger of a subsidiary of Comcast with Time Warner Cable Inc. (“TWC”) as previously announced by Comcast and TWC. The completion of the Transactions will result in Charter acquiring approximately a net 1.3 million existing TWC residential and commercial video customers.
Asset Purchase
At closing, the Transactions Agreement calls for the Company to acquire from Comcast certain cable systems currently owned by TWC serving approximately 1.4 million video customers and all other assets and liabilities primarily related to such cable systems for cash consideration. The Transactions Agreement calls for the Company to pay to Comcast the tax benefit of the step-up it receives in the tax basis of the assets. The Transactions Agreement calls for such tax benefit to Charter to be paid as realized by the Company over an eight-year period, with an additional payment to be made at the end of such eight-year period in the amount of any remaining tax benefit (on a present value basis) not previously realized by Charter.
Asset Exchange
At closing, the Company and Comcast will exchange certain cable systems currently serving approximately 1.5 million TWC video customers and approximately 1.6 million Charter video customers and all other assets and liabilities primarily related to such cable systems. Most tax gains associated with the Asset Exchange are expected to be offset by Charter’s existing net operating losses.
Financing
Charter has received commitments from a number of leading Wall Street investment banks to provide incremental senior secured term loan facilities totaling up to $8.4 billion and a senior secured incremental revolving facility equal to $500 million under the Charter Operating credit facility. Pursuant to that commitment, Charter has fully drawn on $3.5 billion term loan G commitments. The amount of the commitments for incremental term loan facilities was further reduced by $3.5 billion at the closing of the offering of $1.5 billion aggregate principal amount of 5.50% senior notes due 2022 (the "2022 Notes") and $2.0 billion aggregate principal amount of 5.75% senior notes due 2024 (the "2024 Notes") (collectively, the "CCO Safari Notes") by CCOH Safari, LLC ("CCOH Safari"). Charter has $1.4 billion remaining in committed Charter Operating term loans. The proceeds from the term loan G and the Notes are being held in escrow subject to the closing of the Transactions and are recorded on the Company's consolidated balance sheet as noncurrent restricted cash and cash equivalents. The escrow for the CCOH Safari Notes continues
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
until November 5, 2015. The escrow for term loan G continues so long as we pre-fund interest and the release conditions can be satisfied. The consideration for the assets acquired and transaction expenses will be financed with new indebtedness of Charter and is currently estimated at approximately $7.2 billion. The proceeds of the incremental facilities and the Notes will be used by Charter for the purpose of financing the Asset Purchase, paying fees and expenses incurred in connection with the Asset Purchase and the other Transactions, for providing ongoing working capital and for other general corporate purposes of Charter Operating and its subsidiaries. See Note 8.
Contribution and Spin-Off Transaction
CCH I, LLC (“CCH I”), a current indirect subsidiary of Charter, will be reorganized to be a direct subsidiary of Charter. CCH I will then form a new subsidiary that will merge with Charter, through a tax-free reorganization and become the new holding company (“New Charter”) that will own 100% of Charter and indirectly Charter Holdco. New Charter will then acquire an approximate 33% stake in a new publicly-traded cable provider to be spun-off by Comcast serving approximately 2.5 million existing Comcast video customers (the "Spin-Off"). The cable systems will be contributed to Midwest Cable, Inc., which upon consummation of the Transactions, is expected to change its name to GreatLand Connections Inc. (“GreatLand Connections”). New Charter will acquire its interest in GreatLand Connections by issuing New Charter stock to Comcast shareholders (including former TWC shareholders) as a result of a merger of a wholly owned subsidiary of New Charter with and into GreatLand Connections. Comcast shareholders, including the former TWC shareholders, are expected to own approximately 67% of GreatLand Connections, while New Charter is expected to directly own approximately 33% of GreatLand Connections. GreatLand Connections expects to incur leverage of approximately 5 times its estimated pro forma EBITDA (as such term is defined by GreatLand Connections’ financing sources for purposes of the financing) to fund a distribution to Comcast and issue notes to Comcast prior to the spin-off. Additionally, the Company will provide services to GreatLand Connections, and the Company will be reimbursed the actual economic costs of such services, in addition to a fee of 4.25% of GreatLand Connections' gross revenues.
The Asset Purchase, Asset Exchange and the acquisition of interests in GreatLand Connections will be valued at a 7.125 multiple of 2014 EBITDA (as defined by the parties), subject to certain post-closing adjustments.
4. Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is summarized as follows for the years presented:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance, beginning of period | $ | 19 |
| | $ | 14 |
| | $ | 16 |
| $ | 124 |
| | $ | 21 |
| | $ | 22 |
|
| Charged to expense | 122 |
| | 101 |
| | 105 |
| 469 |
| | 328 |
| | 135 |
|
| Uncollected balances written off, net of recoveries | (119 | ) | | (96 | ) | | (107 | ) | (480 | ) | | (225 | ) | | (136 | ) |
| | | | | | | |
| Balance, end of period | $ | 22 |
| | $ | 19 |
| | $ | 14 |
| $ | 113 |
| | $ | 124 |
| | $ | 21 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
5. Property, Plant and Equipment
Property, plant and equipment consists of the following as of December 31, 20142017 and 20132016:
| | | | | December 31, | | | | | |
| | | 2014 | | 2013 | | December 31, |
| | | | | | | 2017 | | 2016 |
| Cable distribution systems | | $ | 7,919 |
| | $ | 7,556 |
| | $ | 26,104 |
| | $ | 23,317 |
|
| Customer equipment and installations | | 4,388 |
| | 4,061 |
| |
| Customer premise equipment and installations | | | 15,909 |
| | 12,867 |
|
| Vehicles and equipment | | 335 |
| | 270 |
| | 1,501 |
| | 1,212 |
|
| Buildings and leasehold improvements | | 499 |
| | 425 |
| |
| Buildings and improvements | | | 3,901 |
| | 3,426 |
|
| Furniture, fixtures and equipment | | 716 |
| | 456 |
| | 4,550 |
| | 3,244 |
|
| | | | | | |
| | | 13,857 |
| | 12,768 |
| | 51,965 |
| | 44,066 |
|
| Less: accumulated depreciation | | (5,484 | ) | | (4,787 | ) | | (18,077 | ) | | (11,103 | ) |
| | | | | | | $ | 33,888 |
| | $ | 32,963 |
|
| | | $ | 8,373 |
| | $ | 7,981 |
| |
The Company periodically evaluates the estimated useful lives used to depreciate its assets and the estimated amount of assets that will be abandoned or have minimal use in the future. A significant change in assumptions about the extent or timing of future asset retirements, or in the Company’s use of new technology and upgrade programs, could materially affect future depreciation expense.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
Depreciation expense for the years ended December 31, 20142017, 20132016 and 20122015 was $1.87.8 billion, $1.65.0 billion, and $1.41.9 billion, respectively. Property, plant and equipment increased $515 million as a result of cable system acquisitions during the year ended December 31, 2013.
6. Franchises, Goodwill and Other Intangible Assets
Franchise rights represent the value attributed to agreements or authorizations with local and state authorities that allow access to homes in cable service areas. For valuation purposes, they are defined as the future economic benefits of the right to solicit and service potential customers (customer marketing rights), and the right to deploy and market new services to potential customers (service marketing rights).
Management estimates the fair value of franchise rights at the date of acquisition and determines if the franchise has a finite life or an indefinite life. AllThe Company has concluded that all of its franchises that qualify for indefinite life treatment given that there are no legal, regulatory, contractual, competitive, economic or other factors which limit the period over which these rights will contribute to the Company's cash flows. The Company reassesses this determination periodically or whenever events or substantive changes in circumstances occur.
All franchises are tested for impairment annually or more frequently as warranted by events or changes in circumstances. In determining whether our franchises have an indefinite life, the Company considered the likelihood of franchise renewals, the expected costs of franchise renewals, and the technological state of the associated cable systems, with a view to whether or not it is in compliance with any technology upgrading requirements specified in a franchise agreement. The Company has concluded that as of December 31, 2014 and 2013 all of its franchises qualify for indefinite life treatment.
Franchise assets are aggregated into essentially inseparable units of accounting to conduct valuations. The units of accounting generally represent geographical clustering of ourthe Company's cable systems into groups. The Company assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite lived intangible asset has been impaired. If, after this optional qualitative assessment, the Company determines that it is not more likely than not that an indefinite lived intangible asset has been impaired, then no further quantitative testing is necessary. In completing the qualitative impairment testing, the Company evaluatedevaluates a multitude of factors that affect the impactfair value of variousour franchise assets. Examples of such factors toinclude environmental and competitive changes within our operating footprint, actual and projected operating performance, the expected future cash flows attributable to its unitsconsistency of accountingour operating margins, equity and to the assumed discount rate which would be used to present value those cash flows. Such factors included macro-economicdebt market trends, including changes in our market capitalization, and industry conditions including the capital markets,changes in our regulatory and competitive environment, and costspolitical landscape, among other factors. The Company performed a qualitative assessment in 2017, which also included consideration of programming and customer premise equipment along with changes to our organizational structure and strategies.a fair value appraisal performed for tax purposes in the beginning of 2017 as of a December 31, 2016 valuation date (the "Appraisal"). After consideration of thesethe qualitative factors in 2017, including the results of the Appraisal, the Company concluded that it is more likely than not that the fair value of the franchise
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
assets in each unit of accounting exceeds the carrying value of such assets and therefore did not perform a quantitative analysis in 2014, 2013 or 2012.
at the assessment date. Periodically, the Company will elect to perform a quantitative analysis for impairment testing. If the Company elects or is required to perform a quantitative analysis to test its franchise assets for impairment, the Company determinesmethodology described below is utilized.
If a quantitative analysis is performed, the estimated fair value of franchises is determined utilizing an income approach model based on the present value of the estimated discrete future cash flows attributable to each of the intangible assets identified assuming a discount rate. The fair value of franchises for impairment testing is determined based on estimated discrete discounted future cash flows using assumptions consistent with internal forecasts. The franchise after-tax cash flow is calculated as the after-tax cash flow generated by the potential customers obtained (less the anticipated customer churn), and the new services added to those customers in future periods.obtained. The sum of the present value of the franchises'franchises’ after-tax cash flow in years 1 through 10 and the continuing value of the after-tax cash flow beyond year 10 yields the fair value of the franchises.
This approach makes use of unobservable factors such as projected revenues, expenses, capital expenditures, customer trends, and a discount rate applied to the estimated cash flows. The determination of the franchise discount rate is based on aderived from the Company’s weighted average cost of capital, approach, which uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows. The Company estimates discounted future cash flows using reasonable and appropriate assumptions including among others, penetration rates for video, high-speed Internet, and voice; revenue growth rates; operating margins; and capital expenditures. The assumptions are based on the Company’s and its peers’ historical operating performance adjusted for current and expected competitive and economic factors surrounding the cable industry. The estimates and assumptions made in the Company’s valuations are inherently subject to significant uncertainties, many of which are beyond its control, and there is no assurance that these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense growth rates, the amount and timing of capital expenditures, actual customer trends and the discount rate utilized.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
The fair value of goodwill is determined using both an income approach and market approach. The Company’s income approach model used for its goodwill valuation is consistent with that used for its franchise valuation noted above except that cash flows from the entire business enterprise are used for the goodwill valuation. The Company’s market approach model estimates the fair value of the reporting unit based on market prices in actual precedent transactions of similar businesses and market valuations of guideline public companies. Goodwill is tested for impairment as of November 30 of each year, or more frequently as warranted by events or changes in circumstances. Accounting guidance also permits aan optional qualitative assessment for goodwill to determine whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount then no further quantitative testing would be necessary. If the Company elects or is required to perform the two-step test under the accounting guidance, the first step involves a comparison of the estimated fair value of eachthe reporting unit to its carrying amount. If the estimated fair value of athe reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the goodwill impairment is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed, and a comparison of the implied fair value of the reporting unit’s goodwill is compared to its carrying amount to determine the amount of impairment, if any. The fair value of the reporting unit, when performing the second step of the goodwill impairment test, is determined using a consistent income approach model as that used for franchise impairment testing. As with the Company'sCompany’s franchise impairment testing, in 2017 the Company elected to perform a qualitative assessment for its goodwill impairment testing in 2014, 2013assessment, which incorporated the results of the Appraisal and 2012 andconsideration of the same qualitative factors relevant to the Company's franchise impairment testing. As a result of that assessment, the Company concluded that goodwill is not impaired.
Customer relationships are recorded at fair value as of the date acquired less accumulated amortization. Customer relationships, for valuation purposes, represent the value of the business relationship with existing customers, (less the anticipated customer churn), and are calculated by projecting the discrete future after-tax cash flows from these customers, including the right to deploy and market additional services to these customers. The present value of these after-tax cash flows yields the fair value of the customer relationships. The use of different valuation assumptions or definitions of franchises or customer relationships, such as our inclusion of the value of selling additional services to our current customers within customer relationships versus franchises, could significantly impact our valuations and any resulting impairment. Customer relationships are amortized on an accelerated sum of years’ digits method over useful lives of 8-15 years based on the period over which current customers are expected to generate cash flows. The Company periodically evaluates the remaining useful lives of its customer relationships to determine whether events or circumstances warrant revision to the remaining periods of amortization. Customer relationships are evaluated for impairment upon the occurrence of events or changes in circumstances indicating that the carrying amount of an asset may not be recoverable. Customer relationships are deemed impaired when the carrying value exceeds the projected undiscounted future cash flows associated with the customer relationships. No impairment of customer relationships was recorded in the years ended December 31, 20142017, 20132016 or 20122015.
The fair value of trademarks is determined using the relief-from-royalty method, a variation of the income approach, which applies a fair royalty rate to estimated revenue.revenue derived under the Company’s trademarks. The fair value of the intangible is estimated to be the present value of the royalty saved because the Company owns the trademarks. Royalty rates are estimated based on a review of market royalty rates in the communications and entertainment industries. As the Company expects to continue to use each trademark indefinitely, trademarks have been assigned an indefinite life and are tested annually for impairment using either a qualitative analysis or quantitative analysis as elected by management. TheAs with the Company’s franchise impairment testing, in 2017 the Company elected to perform a qualitative trademark impairment assessment and concluded that trademarks are not impaired.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
analysis did not identify any factors that would indicate that it was more likely than not that the fair value of trademarks were less than the carrying value and thus resulted in no impairment in 2014, 2013 or 2012.
As of December 31, 20142017 and 2013, indefinite lived2016, indefinite-lived and finite-lived intangible assets are presented in the following table:
| | | | | December 31, | | December 31, |
| | | 2014 | | 2013 | | 2017 | | 2016 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | | | |
| Indefinite lived intangible assets: | | | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | |
| Franchises | | $ | 6,006 |
| | $ | — |
| | $ | 6,006 |
| | $ | 6,009 |
| | $ | — |
| | $ | 6,009 |
| | $ | 67,319 |
| | $ | — |
| | $ | 67,319 |
| | $ | 67,316 |
| | $ | — |
| | $ | 67,316 |
|
| Goodwill | | 1,168 |
| | — |
| | 1,168 |
| | 1,177 |
| | — |
| | 1,177 |
| | 29,554 |
| | — |
| | 29,554 |
| | 29,509 |
| | — |
| | 29,509 |
|
| Trademarks | | 159 |
| | — |
| | 159 |
| | 158 |
| | — |
| | 158 |
| | 159 |
| | — |
| | 159 |
| | 159 |
| | — |
| | 159 |
|
| Other intangible assets | | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| | | | | | | | | | | | | | | $ | 97,032 |
| | $ | — |
| | $ | 97,032 |
| | $ | 96,988 |
| | $ | — |
| | $ | 96,988 |
|
| | | $ | 7,337 |
| | $ | — |
| | $ | 7,337 |
| | $ | 7,348 |
| | $ | — |
| | $ | 7,348 |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer relationships | | $ | 2,616 |
| | $ | 1,511 |
| | $ | 1,105 |
| | $ | 2,617 |
| | $ | 1,228 |
| | $ | 1,389 |
| | $ | 18,229 |
| | $ | (6,278 | ) | | $ | 11,951 |
| | $ | 18,226 |
| | $ | (3,618 | ) | | $ | 14,608 |
|
| Other intangible assets | | 151 |
| | 60 |
| | 91 |
| | 130 |
| | 44 |
| | 86 |
| | 731 |
| | (201 | ) | | 530 |
| | 615 |
| | (128 | ) | | 487 |
|
| | | $ | 2,767 |
| | $ | 1,571 |
| | $ | 1,196 |
| | $ | 2,747 |
| | $ | 1,272 |
| | $ | 1,475 |
| | $ | 18,960 |
| | $ | (6,479 | ) | | $ | 12,481 |
| | $ | 18,841 |
| | $ | (3,746 | ) | | $ | 15,095 |
|
Other intangible assets consist primarily of right-of-entry costs. Amortization expense related to customer relationships and other intangible assets for the years ended December 31, 20142017, 20132016 and 20122015 was $299 million2.7 billion, $299 million1.9 billion and $293271 million, respectively.
The Company expects amortization expense on its finite-lived intangible assets will be as follows.
| | | 2015 | | $ | 267 |
| |
| 2016 | | 234 |
| |
| 2017 | | 200 |
| |
| 2018 | | 165 |
| | $ | 2,478 |
|
| 2019 | | 131 |
| | 2,195 |
|
| 2020 | | | 1,903 |
|
| 2021 | | | 1,619 |
|
| 2022 | | | 1,342 |
|
| Thereafter | | 199 |
| | 2,944 |
|
| | | | | $ | 12,481 |
|
| | | $ | 1,196 |
| |
Actual amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, impairments, adoption of new accounting standards and other relevant factors.
7. Investments
Investments consisted of the following as of December 31, 2017 and 2016:
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Equity-method investments | | 482 |
| | 519 |
|
| Other investments | | 15 |
| | 11 |
|
| Total investments | | $ | 497 |
| | $ | 530 |
|
The Company's investments include Active Video Networks ("AVN" - 35.0% owned) Sterling Entertainment Enterprises, LLC (“Sterling” - d/b/a SportsNet New York - 26.8% owned), MLB Network, LLC (“MLB Network” - 6.4% owned), iN Demand L.L.C. (“iN Demand” - 39.5% owned) and National Cable Communications LLC (“NCC” - 20.0% owned), among other less significant equity-method and cost-method investments. Sterling and MLB Network are primarily engaged in the development
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
7.of sports programming services. iN Demand provides programming on a video on demand, pay-per-view and subscription basis. NCC represents multi-video program distributors to advertisers.
The Company's equity-method investments balances reflected in the table above includes differences between the acquisition date fair value of certain investments acquired and the underlying equity in the net assets of the investee, referred to as a basis difference. This basis difference is amortized as a component of equity earnings. The remaining unamortized basis difference was $407 million and $436 million as of December 31, 2017 and 2016, respectively.
The Company applies the equity method of accounting to these and other less significant equity-method investments, all of which are recorded in other noncurrent assets in the consolidated balance sheets as of December 31, 2017 and 2016. For the years ended December 31, 2017, 2016 and 2015, net losses from equity-method investments were $18 million, $14 million and $7 million, respectively, which were recorded in other expense, net in the consolidated statements of operations.
Real estate investments through variable interest entities ("VIEs") on the consolidated statement of cash flows for the year ended December 31, 2017 represents the acquisition of a defaulted mortgage loan issued to a single-asset, special purpose entity real estate lessor (the "SPE"). As the Company has determined the SPE is a VIE of which it is the primary beneficiary, the Company has consolidated the assets and liabilities of the SPE in its consolidated balance sheet as of December 31, 2017, which are primarily composed of the building securing the mortgage loan.
8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following as of December 31, 20142017 and 20132016:
| | | | | December 31, | | | | | |
| | | 2014 | | 2013 | December 31, |
| | | | | | 2017 | | 2016 |
| Accounts payable – trade | | $ | 140 |
| | $ | 91 |
| $ | 740 |
| | $ | 454 |
|
| Accrued capital expenditures | | 268 |
| | 235 |
| |
| Deferred revenue | | 85 |
| | 90 |
| 395 |
| | 352 |
|
| Accrued liabilities: | | | | | | | |
| Programming costs | | 1,907 |
| | 1,783 |
|
| Compensation | | 1,109 |
| | 1,111 |
|
| Capital expenditures | | 1,935 |
| | 1,107 |
|
| Interest | | 212 |
| | 195 |
| 1,054 |
| | 958 |
|
| Programming costs | | 430 |
| | 379 |
| |
| Franchise related fees | | 65 |
| | 62 |
| |
| Compensation | | 169 |
| | 156 |
| |
| Taxes and regulatory fees | | 556 |
| | 538 |
|
| Property and casualty | | 408 |
| | 394 |
|
| Other | | 266 |
| | 259 |
| 941 |
| | 847 |
|
| | | | | | $ | 9,045 |
| | $ | 7,544 |
|
| | | $ | 1,635 |
| | $ | 1,467 |
| |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
8.9. Long-Term Debt
Long-term debt consists of the following as of December 31, 20142017 and 20132016:
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2014 | | 2013 |
| | Principal Amount | | Accreted Value | | Principal Amount | | Accreted Value |
| CCOH Safari, LLC: | | | | | | | |
| 5.500% senior notes due December 1, 2022 | $ | 1,500 |
| | $ | 1,500 |
| | $ | — |
| | $ | — |
|
| 5.750% senior notes due December 1, 2024 | 2,000 |
| | 2,000 |
| | — |
| | — |
|
| CCO Holdings, LLC: | | | | | | | |
| 7.250% senior notes due October 30, 2017 | 1,000 |
| | 1,000 |
| | 1,000 |
| | 1,000 |
|
| 7.000% senior notes due January 15, 2019 | 1,400 |
| | 1,394 |
| | 1,400 |
| | 1,393 |
|
| 8.125% senior notes due April 30, 2020 | 700 |
| | 700 |
| | 700 |
| | 700 |
|
| 7.375% senior notes due June 1, 2020 | 750 |
| | 750 |
| | 750 |
| | 750 |
|
| 5.250% senior notes due March 15, 2021 | 500 |
| | 500 |
| | 500 |
| | 500 |
|
| 6.500% senior notes due April 30, 2021 | 1,500 |
| | 1,500 |
| | 1,500 |
| | 1,500 |
|
| 6.625% senior notes due January 31, 2022 | 750 |
| | 747 |
| | 750 |
| | 747 |
|
| 5.250% senior notes due September 30, 2022 | 1,250 |
| | 1,240 |
| | 1,250 |
| | 1,239 |
|
| 5.125% senior notes due February 15, 2023 | 1,000 |
| | 1,000 |
| | 1,000 |
| | 1,000 |
|
| 5.750% senior notes due September 1, 2023 | 500 |
| | 500 |
| | 500 |
| | 500 |
|
| 5.750% senior notes due January 15, 2024 | 1,000 |
| | 1,000 |
| | 1,000 |
| | 1,000 |
|
| Credit facility due September 6, 2014 | — |
| | — |
| | 350 |
| | 342 |
|
| Charter Communications Operating, LLC: | | | | | | | |
| Credit facilities | 3,742 |
| | 3,709 |
| | 3,548 |
| | 3,510 |
|
| CCO Safari, LLC (an Unrestricted Subsidiary): | | | | | | | |
| Credit facilities | 3,500 |
| | 3,483 |
| | — |
| | — |
|
| | $ | 21,092 |
| | $ | 21,023 |
| | $ | 14,248 |
| | $ | 14,181 |
|
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | Principal Amount | | Accreted Value | | Principal Amount | | Accreted Value |
| CCO Holdings, LLC: | | | | | | | |
| 5.250% senior notes due March 15, 2021 | $ | 500 |
| | $ | 497 |
| | $ | 500 |
| | $ | 496 |
|
| 6.625% senior notes due January 31, 2022 | — |
| | — |
| | 750 |
| | 741 |
|
| 5.250% senior notes due September 30, 2022 | 1,250 |
| | 1,235 |
| | 1,250 |
| | 1,232 |
|
| 5.125% senior notes due February 15, 2023 | 1,000 |
| | 993 |
| | 1,000 |
| | 992 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | |
| 4.000% senior notes due March 1, 2023 | 500 |
| | 495 |
| | — |
| | — |
|
| 5.125% senior notes due May 1, 2023 | 1,150 |
| | 1,143 |
| | 1,150 |
| | 1,141 |
|
| 5.750% senior notes due September 1, 2023 | 500 |
| | 496 |
| | 500 |
| | 496 |
|
| 5.750% senior notes due January 15, 2024 | 1,000 |
| | 992 |
| | 1,000 |
| | 991 |
|
| 5.875% senior notes due April 1, 2024 | 1,700 |
| | 1,687 |
| | 1,700 |
| | 1,685 |
|
| 5.375% senior notes due May 1, 2025 | 750 |
| | 745 |
| | 750 |
| | 744 |
|
| 5.750% senior notes due February 15, 2026 | 2,500 |
| | 2,464 |
| | 2,500 |
| | 2,460 |
|
| 5.500% senior notes due May 1, 2026 | 1,500 |
| | 1,489 |
| | 1,500 |
| | 1,487 |
|
| 5.875% senior notes due May 1, 2027 | 800 |
| | 794 |
| | 800 |
| | 794 |
|
| 5.125% senior notes due May 1, 2027 | 3,250 |
| | 3,216 |
| | — |
| | — |
|
| 5.000% senior notes due February 1, 2028 | 2,500 |
| | 2,462 |
| | — |
| | — |
|
| Charter Communications Operating, LLC: | | | | | | | |
| 3.579% senior notes due July 23, 2020 | 2,000 |
| | 1,988 |
| | 2,000 |
| | 1,983 |
|
| 4.464% senior notes due July 23, 2022 | 3,000 |
| | 2,977 |
| | 3,000 |
| | 2,973 |
|
| 4.908% senior notes due July 23, 2025 | 4,500 |
| | 4,462 |
| | 4,500 |
| | 4,458 |
|
| 3.750% senior notes due February 15, 2028 | 1,000 |
| | 985 |
| | — |
| | — |
|
| 4.200% senior notes due March 15, 2028 | 1,250 |
| | 1,238 |
| | — |
| | — |
|
| 6.384% senior notes due October 23, 2035 | 2,000 |
| | 1,981 |
| | 2,000 |
| | 1,980 |
|
| 6.484% senior notes due October 23, 2045 | 3,500 |
| | 3,466 |
| | 3,500 |
| | 3,466 |
|
| 5.375% senior notes due May 1, 2047 | 2,500 |
| | 2,506 |
| | — |
| | — |
|
| 6.834% senior notes due October 23, 2055 | 500 |
| | 495 |
| | 500 |
| | 495 |
|
| Credit facilities | 9,479 |
| | 9,387 |
| | 8,916 |
| | 8,814 |
|
| Time Warner Cable, LLC: | | | | | | | |
| 5.850% senior notes due May 1, 2017 | — |
| | — |
| | 2,000 |
| | 2,028 |
|
| 6.750% senior notes due July 1, 2018 | 2,000 |
| | 2,045 |
| | 2,000 |
| | 2,135 |
|
| 8.750% senior notes due February 14, 2019 | 1,250 |
| | 1,337 |
| | 1,250 |
| | 1,412 |
|
| 8.250% senior notes due April 1, 2019 | 2,000 |
| | 2,148 |
| | 2,000 |
| | 2,264 |
|
| 5.000% senior notes due February 1, 2020 | 1,500 |
| | 1,579 |
| | 1,500 |
| | 1,615 |
|
| 4.125% senior notes due February 15, 2021 | 700 |
| | 730 |
| | 700 |
| | 739 |
|
| 4.000% senior notes due September 1, 2021 | 1,000 |
| | 1,045 |
| | 1,000 |
| | 1,056 |
|
5.750% sterling senior notes due June 2, 2031 (a) | 845 |
| | 912 |
| | 770 |
| | 834 |
|
| 6.550% senior debentures due May 1, 2037 | 1,500 |
| | 1,686 |
| | 1,500 |
| | 1,691 |
|
| 7.300% senior debentures due July 1, 2038 | 1,500 |
| | 1,788 |
| | 1,500 |
| | 1,795 |
|
| 6.750% senior debentures due June 15, 2039 | 1,500 |
| | 1,724 |
| | 1,500 |
| | 1,730 |
|
| 5.875% senior debentures due November 15, 2040 | 1,200 |
| | 1,258 |
| | 1,200 |
| | 1,259 |
|
| 5.500% senior debentures due September 1, 2041 | 1,250 |
| | 1,258 |
| | 1,250 |
| | 1,258 |
|
5.250% sterling senior notes due July 15, 2042 (b) | 879 |
| | 847 |
| | 800 |
| | 771 |
|
| 4.500% senior debentures due September 15, 2042 | 1,250 |
| | 1,137 |
| | 1,250 |
| | 1,135 |
|
| Time Warner Cable Enterprises LLC: | | | | | | | |
| 8.375% senior debentures due March 15, 2023 | 1,000 |
| | 1,232 |
| | 1,000 |
| | 1,273 |
|
| 8.375% senior debentures due July 15, 2033 | 1,000 |
| | 1,312 |
| | 1,000 |
| | 1,324 |
|
| Total debt | 69,003 |
| | 70,231 |
| | 60,036 |
| | 61,747 |
|
| Less current portion: | | | | | | | |
| 5.850% senior notes due May 1, 2017 | — |
| | — |
| | (2,000 | ) | | (2,028 | ) |
| 6.750% senior notes due July 1, 2018 | (2,000 | ) | | (2,045 | ) | | — |
| | — |
|
| Long-term debt | $ | 67,003 |
| | $ | 68,186 |
| | $ | 58,036 |
| | $ | 59,719 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
| |
(a) | Principal amount includes £625 million valued at $845 million and $770 million as of December 31, 2017 and December 31, 2016, respectively, using the exchange rate at that date. |
| |
(b) | Principal amount includes £650 million valued at $879 million and $800 million as of December 31, 2017 and December 31, 2016, respectively, using the exchange rate at that date. |
The accreted values presented in the table above represent the principal amount of the debt less the original issue discount at the time of sale, deferred financing costs, and, in regards to the Legacy TWC debt assumed, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the fixed-rate British pound sterling denominated notes (the “Sterling Notes”), the principal amount of the debt and any premium or discount is remeasured into US dollars as of each balance sheet date. See Note 12. The Company has availability under itsthe Charter Operating credit facilities of approximately $817 million as of December 31, 2014, and as such, debt maturing in the next twelve months is classified as long-term. In addition, a $500 million revolver extension is currently committed and available to Charter. The availability of this revolver is not contingent or related to the closing of the Transactions. See Note 3.
Loss on extinguishment of debt consists of the following for the years ended December 31, 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2014 | | 2013 | | 2012 |
| | | | | | | |
| Charter Operating credit amendment / prepayments | | $ | — |
| — |
| $ | 58 |
| 58 |
| $ | 92 |
|
| CCH II notes redemptions | | — |
| — |
| — |
| — |
| (46 | ) |
| Charter Operating notes repurchases | | — |
| — |
| — |
| — |
| 9 |
|
| CCO Holdings notes repurchases | | — |
| — |
| 65 |
| 65 |
| — |
|
| | | | | | | |
| | | $ | — |
| — |
| $ | 123 |
| 123 |
| $ | 55 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
CCOH Safari Notes
In October 2014, Charter created CCOH Safari as a 100% wholly-owned indirect finance subsidiary of Charter. In November 2014, CCOH Safari, closed on transactions in which it issued $1.5$3.6 billion aggregate principal amount of 5.500% senior notes due 2022 and $2.0 billion aggregate principal amount of 5.750% senior notes due 2024. The net proceeds of the offering and sale of the CCOH Safari Notes and the next semi-annual interest payment are being held in escrow to fund a portion of the purchase of certain assets pursuant to the Transactions. The release of the proceeds from the escrow will be subject to the satisfaction of certain conditions, including the closing of the Transactions. Substantially concurrently with the escrow release, the CCOH Safari Notes will become obligations of CCO Holdings and CCO Holdings Capital. CCOH Safari will merge into CCO Holdings. Should the Transactions Agreement be terminated prior to the consummation of the Transactions, or upon expiration of the escrow agreement on November 5, 2015, such amounts placed in escrow must be used to settle amounts outstanding under the CCOH Safari Notes at par value. The amounts held in escrow are classified as noncurrent restricted cash and cash equivalents in the Company's consolidated balance sheet as of December 31, 2014. See Note 3.2017.
The CCOH Safari Notes are guaranteed by Charter. Initially, they are senior debt obligations of CCOH Safari. Upon release of the proceeds from escrow, the CCOH Safari Notes will be senior debt obligations ofDuring 2015, CCO Holdings and CCO Holdings Capital Corp.closed on transactions in which they issued $2.7 billion aggregate principal amount of senior unsecured notes with varying maturities and rank equallyinterest rates. The net proceeds were used to repurchase $2.5 billion of various series of senior unsecured notes, as well as for general corporate purposes. These debt repurchases resulted in a loss on extinguishment of debt of $123 million for the year ended December 31, 2015. The Company also recorded a loss on extinguishment of debt of approximately $5 million for the year ended December 31, 2015 as a result of the repayment of debt upon termination of the proposed transactions with all other current and future unsecured, unsubordinated obligations ofComcast Corporation.
During 2016, CCO Holdings and CCO Holdings Capital Corp.closed on transactions in which they issued $3.2 billion aggregate principal amount of senior unsecured notes with varying maturities and interest rates. The CCOH Safari Notes are structurally subordinatednet proceeds were used to all obligationsrepurchase $2.9 billion of subsidiariesvarious series of CCO Holdings, includingsenior unsecured notes, as well as for general corporate purposes. These debt repurchases resulted in a loss on extinguishment of debt of $110 million for the year ended December 31, 2016.
During 2016, Charter Operating entered into an amendment to its Amended and CCO Safari, LLC ("CCO Safari"Restated Credit Agreement dated May 18, 2016 (the “Credit Agreement”) credit facilities. decreasing the applicable LIBOR margin, eliminating the LIBOR floor and extending the maturities on certain term loans. The Company recorded a loss on extinguishment of debt of $1 million for the year ended December 31, 2016 related to these transactions.
Following the release of the proceeds, CCO Holdings may redeem some or all of the CCOH Safari Notes at any time at a premium. The optional redemption price declines to 100% of the respective series' principal amount, plus accrued and unpaid interest, if any, on or after varying dates inDuring 2017, through 2020 with respect to the 2022 Notes and 2019 through 2022 with respect to the 2024 Notes.
In addition, at any time following the release of the proceeds and prior to December 1, 2017, with respect to the 2022 Notes, and December 1, 2019, with respect to the 2024 Notes, CCO Holdings and CCO Holdings Capital Corp. may redeem up to 40% of theclosed on transactions in which they issued $6.25 billion aggregate principal amount of such CCOH Safari Notes atsenior unsecured notes with varying maturities and interest rates. The net proceeds were used to fund buybacks of Charter Class A common stock or Charter Holdings common units, repurchase $2.75 billion of various series of senior secured and unsecured notes, as well as for general corporate purposes. These debt repurchases resulted in a redemption price at a premium plus accrued and unpaid interest toloss on extinguishment of debt of $34 million for the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided that certain conditions are met.year ended December 31, 2017.
In the event of specified change of control events, CCO Holdings must offer to purchase the CCOH Safari Notes from the holders at a purchase price equal to 101% of the totalDuring 2017, Charter Operating and Charter Communications Operating Capital Corp. closed on transactions in which they issued $4.75 billion aggregate principal amount of thesenior secured notes plus any accruedwith varying maturities and unpaid interest.interest rates. The net proceeds were used to fund buybacks of Charter Class A common stock or Charter Holdings common units, as well as for general corporate purposes.
During 2017, Charter Operating also entered into amendments to its Credit Agreement decreasing the applicable LIBOR margins, eliminating the LIBOR floor, increasing the capacity of the revolving loan, extending the maturities and repaying the E, F, H and I term loans with the issuance of a new term B loan. The Company recorded a loss on extinguishment of debt of $6 million for the year ended December 31, 2017 related to these transactions. See "Charter Operating Credit Facilities" below for details on the Company's term loans as of December 31, 2017.
CCO Holdings Notes
The CCO Holdings notes are guaranteed by Charter. They are senior debt obligations of CCO Holdings and CCO Holdings Capital Corp. and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. The CCO Holdings notesCapital. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings, including the Charter Operating credit facilities. Holdings.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
CCO Holdings may redeem some or all of the CCO Holdings notes at any time at a premium. The optional redemption price declines to 100% of the respective series’ principal amount, plus accrued and unpaid interest, if any, on or after varying dates in 20162019 through 2021.2025.
In addition, at any time prior to varying dates in 20152018 through 2016,2020, CCO Holdings may redeem up to 35%40% of the aggregate principal amount of thecertain notes at a redemption price at a premium plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided that certain conditions are met.
In the event of specified change of control events, CCO Holdings must offer to purchase the outstanding CCO Holdings notes from the holders at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
High-Yield Restrictive Covenants; Limitation on Indebtedness.
The indentures governing the CCO Holdings notes and CCOH Safari notes (following the release of proceeds from escrow) contain certain covenants that restrict the ability of CCO Holdings, CCO Holdings Capital Corp. and all of their restricted subsidiaries to:
incur additional debt;
pay dividends on equity or repurchase equity;
make investments;
sell all or substantially all of their assets or merge with or into other companies;
sell assets;
in the case of restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to CCO Holdings, guarantee their parent companies debt, or issue specified equity interests;
engage in certain transactions with affiliates; and
grant liens.
The above limitations in certain circumstances regarding incurrence of debt, payment of dividends and making investments contained in the indentures of CCO Holdings and CCOH Safari, permit CCO Holdings and its restricted subsidiaries to perform the above, so long as, after giving pro forma effect to the above, the leverage ratio would be below a specified level for the issuer. The leverage ratio under the indentures is 6.0 to 1.1.0.
Charter Operating Notes
The Charter Operating notes are guaranteed by CCO Holdings and substantially all of the operating subsidiaries of Charter Operating. In addition, the Charter Operating notes are secured by a perfected first priority security interest in substantially all of the assets of Charter Operating to the extent such liens can be perfected under the Uniform Commercial Code by the filing of a financing statement and the liens rank equally with the liens on the collateral securing obligations under the Charter Operating credit facilities. Charter Operating may redeem some or all of the Charter Operating notes at any time at a premium.
The Charter Operating notes are subject to the terms and conditions of the indenture governing the Charter Operating notes. The Charter Operating notes contain customary representations and warranties and affirmative covenants with limited negative covenants. The Charter Operating indenture also contains customary events of default.
Charter Operating Credit Facilities
The Charter Operating credit facilities have an outstanding principal amount of $3.7$9.5 billion at December 31, 20142017 as follows:
A term loan AA-2 with a remaining principal amount of $684 million,$2.9 billion, which is repayable in quarterly installments and aggregating $38 million in 2015, $66 million in 2016 and $75 million in 2017, with the remaining balance due at final maturity on April 22, 2018. Pricing on term loan A is LIBOR plus 2%;
A term loan E with a remaining principal amount of approximately $1.5 billion, which is repayable in equal quarterly installments and aggregating $15 million in each loan year, with the remaining balance due at final maturity on July 1, 2020. Pricing on term loan E is LIBOR plus 2.25% with a LIBOR floor of 0.75%;
A term loan F with a remaining principal amount of approximately $1.2 billion, which is repayable in equal quarterly installments and aggregating $12$144 million in each loan year, with the remaining balance due at final maturity on January 3, 2021.March 31, 2023. Pricing on term loan FA-2 is LIBOR plus 2.25%1.50%;
term loan B with a remaining principal amount of approximately $6.4 billion, which is repayable in equal quarterly installments and aggregating $64 million in each loan year, with the remaining balance due at final maturity on April 30, 2025. Pricing on term loan B is LIBOR floor of 0.75%plus 2.00%; and
A revolving loan with an outstanding balance of $399$254 million at December 31, 20142017 and allowing for borrowings of up to $1.3$4.0 billion,, maturing on April 22, 2018.March 31, 2023. Pricing on the revolving loan is LIBOR plus 2%1.50% with a commitment fee of
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
0.30%.
As of December 31, 2017, $137 million of the revolving loan was utilized to collateralize a like principal amount of letters of credit out of $291 million of letters of credit issued on the Company’s behalf.
Amounts outstanding under the Charter Operating credit facilities bear interest, at Charter Operating’s election, at a base rate or LIBOR ((1.56% and 0.17%0.77% as of December 31, 20142017 and December 31, 20132016), respectively), as defined, plus an applicable margin.
The Charter Operating credit facilities also allow us to enter into incremental term loans in the future, with amortization as set forth in the notices establishing such term loans. Although the Charter Operating credit facilities allow for the incurrence of a certain amount of incremental term loans subject to pro-formapro forma compliance with its financial maintenance covenants, no assurance can be given that the Company could obtain additional incremental term loans in the future if Charter Operating sought to do so or what amount of incremental term loans would be allowable at any given time under the terms of the Charter Operating credit facilities.
The obligations of Charter Operating under the Charter Operating credit facilities are guaranteed by Charter Operating’s immediate parent company, CCO Holdings and substantially all of the operating subsidiaries of Charter Operating. The obligations are also secured by (i) a lien on substantially all of the assets of Charter Operating and its subsidiaries, to the extent such lien can be perfected under the Uniform Commercial Code by the filing of a financing statement, and (ii) a pledge by CCO Holdings of the equity interests owned by it in any of Charter Operating’s subsidiaries, as well as inter-companyintercompany obligations owing to it by any of such entities.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
CCO Safari Credit Facility
In September 2014, Charter Operating entered into a new term loan G facility pursuant to the terms of the Charter Operating credit agreement providing for a $3.5 billion term loan maturing in 2021. Pricing on the term loan G was set at LIBOR plus 3.50% with a LIBOR floor of 0.75% and issued at a price of 99.50% of the aggregate principal amount. The term loan G forms a portion of the incremental facilities commitments as announced by Charter in July 2014 that will be used to fund the purchase of certain assets pursuant to the Transactions. Charter Operating assigned all of its obligations with respect to the term loan G and transferred all of the proceeds from the term loan G to a newly-created subsidiary, CCO Safari, which is considered a Non-Recourse Subsidiary under Charter Operating’s credit agreement, and CCO Safari placed the funds in an escrow account pending closing of the Transactions. The administrative agent has a perfected first priority security interest in the escrow funds on behalf of the lenders that are a party to the CCO Safari credit facility. The amounts borrowed under the term loan G facility are not considered when calculating the leverage ratio on CCO Holdings' indentures as CCO Safari has been designated as an Unrestricted Subsidiary under CCO Holdings' indenture. At closing of the Transactions, subject to certain conditions, Charter Operating will re-assume the obligations in respect of the term loan G under the Charter Operating credit agreement and the term loan G will be subject to the terms and conditions of the Charter Operating credit facilities. Such amounts, along with required original issuance discount and one month of interest, were placed in escrow and classified as noncurrent restricted cash and cash equivalents in the Company's consolidated balance sheet as of December 31, 2014. Should the Transactions Agreement be terminated prior to the consummation of the Transactions, such amounts placed in escrow must be used to settle amounts outstanding under the term loan G at par value less the original issue discount. See Note 3.
Charter Operating Credit Facilities — Restrictive Covenants
The Charter Operating credit facilities contain representations and warranties, and affirmative and negative covenants customary for financings of this type. The financial covenants measure performance against standards set for leverage to be tested as of the end of each quarter. The Charter Operating credit facilities contain provisions requiring mandatory loan prepayments under specific circumstances, including in connection with certain sales of assets, so long as the proceeds have not been reinvested in the business. Additionally, the Charter Operating credit facilities provisions contain an allowance for restricted payments so long as the consolidated leverage ratio is no greater than 3.5 after giving pro forma effect to such restricted payment.with certain limitations. The Charter Operating credit facilities permit Charter Operating and its subsidiaries to make distributions to pay interest on the currently outstanding subordinated and parent company indebtedness, provided that, among other things, no default has occurred and is continuing under the Charter Operating credit facilities. The Charter Operating credit facilities also contain customary events of default.
TWC, LLC Senior Notes and Debentures
The eventsTWC, LLC senior notes and debentures are guaranteed by CCO Holdings and substantially all of defaultthe operating subsidiaries of Charter Operating and rank equally with the liens on the collateral securing obligations under the Charter Operating credit facilities include, among other things:
the failure to make payments when due or within the applicable grace period;
the failure to comply with specified covenants including the covenant to maintain the consolidated leverage ratio at or below 5.0 to 1.0 and the consolidated first lien leverage ratio at or below 4.0 to 1.0;
the failure to pay or the occurrence of events that cause or permit the acceleration of other indebtedness owing by CCO Holdings, Charter Operating, or Charter Operating’s subsidiaries in aggregate principal amounts in excess of $100 million; and
similar to provisions contained in the note indenturesnotes and credit facility,facilities. Interest on each series of TWC, LLC senior notes and debentures is payable semi-annually (with the consummation of any change of control transaction resulting in any person or group having power, directly or indirectly, to vote more than 50%exception of the ordinary voting power for the management of Charter Operating on a fully diluted basis and the occurrence of a ratings event including a downgradeSterling Notes, which is payable annually) in the corporate family rating during a ratings decline period.
CCO Safari Credit Facility — Restrictive Covenantsarrears.
The term loan G is subjectTWC, LLC indenture contains customary covenants relating to restrictions on the ability of TWC, LLC or any material subsidiary to create liens and on the ability of TWC, LLC and Time Warner Cable Enterprises LLC ("TWCE") to consolidate, merge or convey or transfer substantially all of their assets. The TWC, LLC indenture also contains customary events of default.
The TWC, LLC senior notes and debentures may be redeemed in whole or in part at any time at TWC, LLC’s option at a redemption price equal to the termsgreater of (i) all of the applicable principal amount being redeemed and conditions(ii) the sum of the present values of the remaining scheduled payments on the applicable TWC, LLC senior notes and debentures discounted to the redemption date on a separate credit facility and escrow agreement until Charter Operating re-assumes its obligations forsemi-annual basis (with the loan. The CCO Safari credit facility contains customary representations and warranties and affirmative covenants with limited negative covenants prohibiting CCO Safari from engagingexception of the Sterling Notes, which are on an annual basis), at a comparable government bond rate plus a designated number of basis points as further described in any material activities other than performing its obligations under the credit facilityindenture and the escrow agreementapplicable note or otherwise issuing other indebtedness pursuantdebenture, plus, in each case, accrued but unpaid interest to, escrow arrangements similarbut not including, the redemption date.
The Company may offer to redeem all, but not less than all, of the CCO Safari credit facilitySterling Notes in the event of certain changes in the tax laws of the U.S. (or any taxing authority in the U.S.). This redemption would be at a redemption price equal to 100% of the principal amount, together with accrued and escrow agreement. As required byunpaid interest on the CCO Safari credit facility, CCO Safari, Bank of America, N.A., and U.S. Bank, N.A., as escrow agent, entered into an escrow agreement pursuantSterling Notes to, which, CCO Safari is required to maintain an escrow account over whichbut not including, the administrative agent has a perfected first priority securityredemption date.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
interest on behalfTWCE Senior Debentures
The TWCE senior debentures are guaranteed by CCO Holdings, substantially all of the CCO Safari credit facility lenders. The eventsoperating subsidiaries of default underCharter Operating and TWC, LLC and rank equally with the CCO Safari credit facility include, among others:
liens on the failure to make payments when due or within the applicable grace period;
any acceleration of the loans and termination of the commitmentscollateral securing obligations under the Charter Operating notes and credit facilities; and
the escrow agreement shall cease to befacilities. Interest on each series of TWCE senior debentures is payable semi-annually in full force and effect or the lien in the escrow account shall cease to be enforceable with the same effect and priority.arrears. The TWCE senior debentures are not redeemable before maturity.
The TWCE indenture contains customary covenants relating to restrictions on the ability of TWCE or any material subsidiary to create liens and on the ability of TWC, LLC and TWCE to consolidate, merge or convey or transfer substantially all of their assets. The TWCE indenture also contains customary events of default.
Limitations on Distributions
Distributions by the Company’s subsidiaries to a parent company for payment of principal on parent company notes are restricted under the indentures and credit facilities discussed above, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution. As of December 31, 20142017, there was no default under any of these indentures or credit facilities.facilities and each subsidiary met its applicable leverage ratio tests based on December 31, 2017 financial results. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in its credit facilities.
However, without regard to leverage, during any calendar year or any portion thereof during which the borrower is a flow-through entity for tax purposes, and so long as no event of default exists, the borrower may make distributions to the equity interests of the borrower in an amount sufficient to make permitted tax payments.
In addition to the limitation on distributions under the various indentures, discussed above, distributions by the Company’s subsidiaries may only be madelimited by applicable law, including the Delaware Limited Liability Company Act, under which the Company’s subsidiaries may make distributions if they have “surplus” as defined in the Delaware Limited Liability Company Act.act.
Liquidity and Future Principal Payments
The Company continues to have significant amounts of debt, and its business requires significant cash to fund principal and interest payments on its debt, capital expenditures and ongoing operations. As set forth below, the Company has significant future principal payments beginning in 2017 and beyond.payments. The Company continues to monitor the capital markets, and it expects to undertake refinancing transactions and utilize free cash flow and cash on hand to further extend or reduce the maturities of its principal obligations. The timing and terms of any refinancing transactions will be subject to market conditions.
Based upon outstanding indebtedness as of December 31, 20142017, the amortization of term loans, and the maturity dates for all senior and subordinated notes, total future principal payments on the total borrowings under all debt agreements as of December 31, 2014, are as follows:
|
| | | | |
| Year | | Amount |
| | | |
| 2015 | | $ | 91 |
|
| 2016 | | 127 |
|
| 2017 | | 1,137 |
|
| 2018 | | 967 |
|
| 2019 | | 1,462 |
|
| Thereafter | | 17,308 |
|
| | | |
| | | $ | 21,092 |
|
9. Treasury Stock |
| | | | |
| Year | | Amount |
| 2018 | | $ | 2,207 |
|
| 2019 | | 3,457 |
|
| 2020 | | 3,707 |
|
| 2021 | | 2,407 |
|
| 2022 | | 4,457 |
|
| Thereafter | | 52,768 |
|
| | | $ | 69,003 |
|
In December 2011, the Company purchased, in a private transaction with a shareholder, 750,000 shares at $55.18 for a total of $41 million. The Company received 700,668 of the shares prior to December 31, 2011, with 49,332 shares received in January 2012.
During the years ended December 31, 2014, 2013 and 2012, the Company withheld 141,257, 150,258 and 129,417 shares, respectively, of its common stock in payment of $19 million, $15 million and $9 million, respectively, of tax withholdings owed by employees upon vesting of restricted shares.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
In December 2014 and 2013, Charter's board of directors approved the retirement of treasury stock and 141,257 and 150,258 shares of treasury stock were retired as of December 31, 2014 and 2013, respectively.
The Company accounted for treasury stock using the cost method and the treasury shares upon repurchase were reflected on the Company’s consolidated balance sheets as a component of total shareholders’ equity. Upon retirement, these treasury shares were allocated between additional paid-in capital and accumulated deficit based on the cost of original issue included in additional paid-in capital.
10. Common Stock
Charter’s Class A common stock and Class B common stock are identical except with respect to certain voting, transfer and conversion rights. Holders of Class A common stock are entitled to one vote per share and holders ofshare. Charter’s Class B common stock are entitledrepresents the share issued to A/N in connection with the Bright House Transaction. One share of Charter’s Class B common stock has a number of votes equaling 35%reflecting the voting power of the votingCharter Holdings common units and Charter Holdings convertible preferred units held by A/N as of the applicable record date on an if-converted, if-exchanged basis, and is generally intended to reflect A/N’s economic interests in Charter on a fully diluted basis. The Company currently does not have any outstanding Class B Common Stock.Holdings.
In 2014 and 2013, the Company issued approximately 5.2 million and 4.5 million shares, respectively, of Charter Class A common stock as a result of exercises by holders who received warrants pursuant to the Joint Plan of Reorganization upon the Company's emergence from bankruptcy in 2009. The exercises resulted in proceeds to the Company of approximately $90 million and $76 million, respectively. As of December 31, 2014, there were no warrants outstanding.
The following table summarizes our shares outstanding for the three years ended December 31, 2014:2017:
|
| | | | | | |
| | Class A Common Stock | | Class B Common Stock |
| | | | |
BALANCE, December 31, 2011 | | 100,570,418 |
| | — |
|
Option exercises | | 370,715 |
| | — |
|
Restricted stock issuances, net of cancellations | | 182,537 |
| | — |
|
Stock issuances from exercise of warrants | | 179,850 |
| | — |
|
Restricted stock unit vesting | | 51,476 |
| | — |
|
Purchase of treasury stock (see Note 9) | | (178,749 | ) | | — |
|
| | | | |
BALANCE, December 31, 2012 | | 101,176,247 |
| | — |
|
Option exercises | | 543,221 |
| | — |
|
Restricted stock issuances, net of cancellations | | 4,879 |
| | — |
|
Stock issuances from exercise of warrants | | 4,481,656 |
| | — |
|
Restricted stock unit vesting | | 88,330 |
| | — |
|
Purchase of treasury stock (see Note 9) | | (150,258 | ) | | — |
|
| | | | |
BALANCE, December 31, 2013 | | 106,144,075 |
| | — |
|
Option exercises | | 640,342 |
| | — |
|
Restricted stock issuances, net of cancellations | | 9,090 |
| | — |
|
Stock issuances from exercise of warrants | | 5,243,167 |
| | — |
|
Restricted stock unit vesting | | 104,270 |
| | — |
|
Purchase of treasury stock (see Note 9) | | (141,257 | ) | | — |
|
| | | | |
BALANCE, December 31, 2014 | | 111,999,687 |
| | — |
|
|
| | | | | | |
| | | Class A Common Stock | | Class B Common Stock |
| BALANCE, December 31, 2014 | | 111,999,687 |
| | — |
|
| Exercise of stock options | | 579,173 |
| | — |
|
| Restricted stock issuances, net of cancellations | | 6,920 |
| | — |
|
| Restricted stock unit vesting | | 98,831 |
| | — |
|
| Purchase of treasury stock | | (245,783 | ) | | — |
|
| BALANCE, December 31, 2015 | | 112,438,828 |
| | — |
|
| Reorganization of common stock | | (10,771,404 | ) | | — |
|
| Issuance of shares in TWC Transaction | | 143,012,155 |
| | — |
|
| Issuance of shares to Liberty Broadband for cash | | 25,631,339 |
| | — |
|
| Issuance of share to A/N in Bright House Transaction | | — |
| | 1 |
|
| Exchange of Charter Holdings units held by A/N (see Note 11) | | 1,852,832 |
| | — |
|
| Exercise of stock options | | 1,014,664 |
| | — |
|
| Restricted stock issuances, net of cancellations | | 9,811 |
| | — |
|
| Restricted stock unit vesting | | 1,738,792 |
| | — |
|
| Purchase of treasury stock | | (6,029,225 | ) | | — |
|
| BALANCE, December 31, 2016 | | 268,897,792 |
| | 1 |
|
| Exchange of Charter Holdings units held by A/N (see Note 11) | | 1,263,497 |
| | — |
|
| Exercise of stock options | | 1,044,526 |
| | — |
|
| Restricted stock issuances, net of cancellations | | 9,517 |
| | — |
|
| Restricted stock unit vesting | | 1,159,083 |
| | — |
|
| Purchase of treasury stock | | (33,868,356 | ) | | — |
|
| BALANCE, December 31, 2017 | | 238,506,059 |
| | 1 |
|
The shares outstanding balances shown above as of and prior to December 31, 2015 represent historical shares outstanding of Legacy Charter before applying the Parent Merger Exchange Ratio (as defined in the Merger Agreement). The 10.8 million shares associated with the reorganization of Charter Class A common stock represents the reduction to Legacy Charter Class A common shares outstanding as of the acquisition date as a result of applying the Parent Merger Exchange Ratio.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
Share Repurchases
The following represents the Company's purchase of Charter Class A common stock and the effect on the consolidated statements of cash flows during the years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Shares | | $ | | Shares | | $ | | Shares | | $ |
| Share buybacks | 33,375,878 |
| | $ | 11,570 |
| | 5,070,656 |
| | $ | 1,346 |
| | — |
| | $ | — |
|
| Income tax withholding | 447,455 |
| | 145 |
| | 908,066 |
| | 216 |
| | 177,696 |
| | 38 |
|
| Exercise cost | 45,023 |
| | | | 50,503 |
| | | | 44,541 |
| | |
| | 33,868,356 |
| | $ | 11,715 |
| | 6,029,225 |
| | $ | 1,562 |
| | 222,237 |
| | $ | 38 |
|
As of December 31, 2017, Charter had remaining board authority to purchase an additional $1.1 billion of Charter’s Class A common stock and/or Charter Holdings common units. See Note 19. The Company also withholds shares of its Class A common stock in payment of income tax withholding owed by employees upon vesting of equity awards as well as exercise costs owed by employees upon exercise of stock options.
At the end of each fiscal year, Charter’s board of directors approved the retirement of the then currently outstanding treasury stock and those shares were retired as of December 31, 2017 and 2016. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity. Upon retirement, these treasury shares are allocated between additional paid-in capital and accumulated deficit based on the cost of original issue included in additional paid-in capital.
11. Noncontrolling Interests
Noncontrolling interests represents consolidated subsidiaries of which the Company owns less than 100%. The Company is a holding company whose principal asset is a controlling equity interest in Charter Holdings, the indirect owner of the Company’s cable systems. Noncontrolling interests on the Company’s balance sheet primarily includes A/N’s equity interests in Charter Holdings, which is comprised of a common ownership interest and a convertible preferred ownership interest.
As of December 31, 2017, A/N held 22.3 million Charter Holdings common units which are exchangeable at any time into either Charter Class A common stock on a one-for-one basis, or, at Charter’s option, cash, based on the then current market price of Charter Class A common stock. Net income (loss) of Charter Holdings attributable to A/N’s common noncontrolling interest for financial reporting purposes is based on the weighted average effective common ownership interest of approximately 9% and 10% and was $69 million and $129 million for the years ended December 31, 2017 and 2016, respectively. Charter Holdings distributed $3 million to A/N as a pro rata tax distribution on its common units during the years ended December 31, 2017 and 2016.
Pursuant to the letter agreement discussed in Note 19, Charter Holdings purchased 4.8 million Charter Holdings common units from A/N, at a price per unit of $347.03, or $1.7 billion during the year ended December 31, 2017, and 0.8 million Charter Holdings common units, at a price per unit of $289.83, or $218 million during the year ended December 31, 2016. The common units purchased during the year ended December 31, 2017 are reflected as a reduction in noncontrolling interest based on net carrying value of approximately $1.2 billion with the remaining $478 million recorded as reduction of additional paid-in-capital, net of $183 million of deferred income taxes. The common units purchased during the year ended December 31, 2016 are reflected as a reduction in noncontrolling interest based on net carrying value of approximately $187 million with the remaining $31 million recorded as reduction of additional paid-in-capital, net of $12 million of deferred income taxes.
In December 2017 and 2016, A/N exchanged 1.3 million and 1.9 million Charter Holdings common units, respectively, held by A/N for shares of Charter Class A common stock for an aggregate purchase price of $400 million and $537 million, respectively, pursuant to the letter agreement discussed in Note 19. The common units exchanged had a net carrying value in noncontrolling interest of approximately $298 million and $460 million as of December 31, 2017 and 2016, respectively. The exchange of A/N common units resulted in a step-up in the tax-basis of the assets of Charter Holdings which is further discussed in Note 17.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
As of December 31, 2017, A/N also held 25 million Charter Holdings convertible preferred units with a face amount of $2.5 billion that pays a 6% annual preferred dividend. The 6% annual preferred dividend is paid quarterly in cash, if and when declared, provided that, if dividends are suspended at any time, the dividends will accrue until they are paid. Net income (loss) of Charter Holdings attributable to the preferred noncontrolling interest for financial reporting purposes is based on the preferred dividend which was $150 million and $93 million for the years ended December 31, 2017 and 2016, respectively. Each convertible preferred unit is convertible into either 0.37334 of a Charter Holdings common unit (if then held by A/N) or 0.37334 of a share of Charter Class A common stock (if then held by a third party), representing a conversion price of $267.85 per unit, based on a conversion feature as defined in the Limited Liability Company Agreement of Charter Holdings. After May 18, 2021, Charter may redeem the convertible preferred units if the price of Charter Class A common stock exceeds 130% of the conversion price. These Charter Holdings common and convertible preferred units held by A/N are recorded in noncontrolling interests as permanent equity in the consolidated balance sheet.
The common units and convertible preferred units issued to A/N as consideration for the Bright House Transaction were initially measured at their fair value of $7.0 billion and $3.2 billion, respectively, in accordance with acquisition accounting. However, upon formation of Charter Holdings and subsequent to the acquisition, the carrying amounts of the controlling and noncontrolling interests were adjusted to reflect the relative effective common ownership interest in Charter Holdings. In addition to the common units purchased and exchanged with A/N as noted above, other changes in Charter Holdings' ownership resulted in an increase to noncontrolling interest of approximately $589 million and a corresponding decrease to additional paid-in capital of $589 million, net of $225 million of deferred income taxes, for the year ended December 31, 2016. Noncontrolling interest and additional paid-in-capital were also adjusted during the year ended December 31, 2017 due to the changes in Charter Holdings' ownership. These adjustments resulted in a decrease to noncontrolling interest of approximately $362 million and a corresponding increase to additional paid-in-capital of $362 million, net of $139 million of deferred income taxes, for the year ended December 31, 2017.
12. Accounting for Derivative Instruments and Hedging Activities
The Company uses interest rate derivative instruments to manage its interest costs and reduce the Company’s exposure to increases in floating interest rates. The Company manages its exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt. Using interest rate derivative instruments,risk on variable debt and foreign exchange risk on the Company agrees to exchange, at specified intervals through 2017, the difference between fixedSterling Notes, and variable interest amounts calculated by reference to agreed-upon notional principal amounts. The Company does not hold or issue derivative instruments for speculative trading purposes.
Cross-currency derivative instruments are used to effectively convert £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency swaps have maturities of June 2031 and July 2042. The Company until de-designating inis required to post collateral on the three months ended March 31, 2013, had certain interest ratecross-currency derivative instruments that werewhen the derivative contracts are in a liability position. In May 2016, the Company entered into a collateral holiday agreement for 80% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years. The fair value of the Company's cross-currency derivatives included in other long-term liabilities on the Company's consolidated balance sheets was $25 million and $251 million as of December 31, 2017 and 2016, respectively.
The Company’s derivative instruments are not designated as cash flow hedginghedges and are marked to fair value each period, with the impact recorded as a gain or loss on financial instruments, for GAAP purposes. Such instruments effectively converted variable interest payments on certain debt instruments into fixed payments. For qualifying hedges, realized derivative gains and losses offset related results on hedged itemsnet in the consolidated statements of operations. The Company formally documented, designated and assessed the effectiveness of transactions that received hedge accounting.
The effect of interest rate derivatives on the Company’s consolidated balance sheets is presented in the table below:
|
| | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | | | |
| Accrued interest | $ | 2 |
| | $ | 8 |
|
| Other long-term liabilities | $ | 16 |
| | $ | 22 |
|
| Accumulated other comprehensive loss | $ | (22 | ) | | $ | (41 | ) |
Changes in the fair value of interest rate derivative instruments that were designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, and that met effectiveness criteria were reported in accumulated other comprehensive loss. The amounts were subsequently reclassified as an increase or decrease to interest expense in the same periods in which the related interest on the floating-rate debt obligations affected earnings (losses).
Due to repayment of variable rate credit facility debt without a LIBOR floor, certain interest rate derivative instruments were de-designated as cash flow hedges during the three months ended March 31, 2013, as they no longer met the criteria for cash flow hedging specified by GAAP. In addition, on March 31, 2013, the remaining interest rate derivative instruments that continued to be highly effective cash flow hedges for GAAP purposes were electively de-designated. On the date of de-designation, the Company completed a final measurement test for each interest rate derivative instrument to determine any ineffectiveness and such amount was reclassified from accumulated other comprehensive loss into gain on derivative instruments, net in the Company's consolidated statements of operations. While these interest rate derivative instruments are no longernot designated as cash flow hedges for accounting purposes, management continues to believe such instruments are closely correlated with the respective debt, thus managing associated risk. Interest rate derivative instruments not designated as hedges are marked to fair value, with the impact recorded as a gain or loss on derivative instruments, net in the Company's consolidated statements of operations. The balance that remains in accumulated other comprehensive loss for these interest rate derivative instruments will be amortized over the respective lives of the contracts and recorded as a loss within gain (loss) on derivative instruments, net in the Company's consolidated statements of operations. The estimated net amount of existing losses that are reported in accumulated other comprehensive loss as of December 31, 2014 that is expected to be reclassified into earnings within the next twelve months is approximately $9 million.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
The effectseffect of derivativefinancial instruments on the Company’s consolidated statements of comprehensive loss and consolidated statements of operations is presented in the table below.
|
| | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| | 2014 | | 2013 | | 2012 |
| | | | | | |
| Gain (loss) on derivative instruments, net: | | | | | |
| Change in fair value of interest rate derivative instruments not designated as cash flow hedges | $ | 12 |
| | $ | 38 |
| | $ | — |
|
| Loss reclassified from accumulated other comprehensive loss into earnings as a result of cash flow hedge discontinuance | (19 | ) | | (27 | ) | | — |
|
| | $ | (7 | ) | | $ | 11 |
| | $ | — |
|
| | | | | | |
| Interest expense: | | | | | |
| Loss reclassified from accumulated other comprehensive loss into interest expense | $ | — |
| | $ | (10 | ) | | $ | (36 | ) |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Gain (Loss) on Financial Instruments, Net: | | | | | |
| Change in fair value of interest rate derivative instruments | $ | 5 |
| | $ | 8 |
| | $ | 5 |
|
| Change in fair value of cross-currency derivative instruments | 226 |
| | (179 | ) | | — |
|
| Foreign currency remeasurement of Sterling Notes to U.S. dollars | (157 | ) | | 279 |
| | — |
|
| Loss on termination of interest rate derivative instruments | — |
| | (11 | ) | | — |
|
| Loss reclassified from accumulated other comprehensive loss due to discontinuance of hedge accounting | (5 | ) | | (8 | ) | | (9 | ) |
| | $ | 69 |
| | $ | 89 |
| | $ | (4 | ) |
AsUpon closing of December 31, 2014 and 2013,the TWC Transaction, the Company had $1.4 billion and $2.2 billion in notional amounts ofacquired interest rate derivative instruments outstanding. Asinstrument assets which were terminated and settled with their respective counterparties in the second quarter of 2016 with an $88 million cash payment to the Company. The termination resulted in an $11 million loss for the year ended December 31, 2014, this includes $150 million2016 which was recorded in delayed startgain (loss) on financial instruments, net in the consolidated statements of operations. All of the Company's interest rate derivative instruments that become effective in March 2015. Also in March 2015, $300 millionderivatives were expired as of currently effective swaps expire and therefore the notional amount of currently effective interest rate derivative instruments will decrease.December 31, 2017.
The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to credit loss. The amounts exchanged were determined by reference to the notional amount and the other terms of the contracts.
12.13. Fair Value Measurements
The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of December 31, 20142017 and 20132016 using available market information or other appropriate valuation methodologies. Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented in the accompanying consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.
The carrying amounts of cash and cash equivalents, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
The Company's restrictedA portion of the Company’s cash and cash equivalents atas of December 31, 2014are primarily2017 and 2016 were invested in money market funds and 90-day or less commercial paper.funds. The money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange and the commercial paper is valued at cost plus the accretion of the discount on a yield to maturity basis, which approximates fair value. The money market funds and commercial paper potentially subject usthe Company to concentrationsconcentration of credit
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
risk. The amount invested within any one financial instrument did not exceed $550$300 million during the year endedand $250 million as of December 31, 2014.2017 and 2016, respectively. As of December 31, 2014,2017 and 2016, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.
The interest rate derivatives are valued using a present value calculation based on an implied forward LIBOR curve (adjusted for Charter Operating’s
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or counterparties’ credit risk). The weighted average pay rate for the Company’s currently effective interest rate swaps was 1.87% and 2.17% at December 31, 2014 and 2013 (exclusive of applicable spreads).per share data or where indicated)
The Company'sCompany’s financial instruments that are accounted for at fair value on a recurring basis as of December 31, 2017 and 2016 are presented in the table below.
| | | | | December 31, 2014 | | December 31, 2013 | December 31, |
| | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | 2017 | | 2016 |
| | | | | | | | | | | | | | Level 1 | | Level 2 | | Level 1 | | Level 2 |
| Assets | | | | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 4,112 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 291 |
| | $ | — |
| | $ | 1,205 |
| | $ | — |
|
| Commercial paper | | $ | — |
| | $ | 2,999 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | |
| Interest rate derivatives | | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | — |
| |
| Cross-currency derivative instruments | | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 251 |
|
A summary of the carrying value and fair value of the Company’s debt at December 31, 20142017 and 20132016 is as follows:
| | | | | | | | | | | | December 31, |
| | | December 31, 2014 | | December 31, 2013 | 2017 | | 2016 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Debt | | | | | | | | | | | | | | | |
| Senior notes | | $ | 13,831 |
| | $ | 14,205 |
| | $ | 10,329 |
| | $ | 10,384 |
| |
| Senior notes and debentures | | $ | 60,844 |
| | $ | 63,443 |
| | $ | 52,933 |
| | $ | 55,203 |
|
| Credit facilities | | $ | 7,192 |
| | $ | 7,186 |
| | $ | 3,852 |
| | $ | 3,848 |
| $ | 9,387 |
| | $ | 9,440 |
| | $ | 8,814 |
| | $ | 8,943 |
|
The estimated fair value of the Company’s senior notes at and debentures as of December 31, 20142017 and 20132016 is based on quoted market prices in active markets and is classified within Level 1 of the valuation hierarchy, while the estimated fair value of the Company'sCompany’s credit facilities is based on quoted market prices in inactive markets and is classified within Level 2.
Non-financial Assets and Liabilities
The Company’s non-financialnonfinancial assets such as equity-method investments, franchises, property, plant, and equipment, and other intangible assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as upon a business combination and when there is evidence that an impairment may exist. No impairments were recorded in 2014, 20132017, 2016 and 2012.2015.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
13.14. Operating Costs and Expenses
Operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, consist of the following for the yearsperiods presented:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Programming | $ | 2,459 |
| | $ | 2,146 |
| | $ | 1,965 |
| $ | 10,596 |
| | $ | 7,034 |
| | $ | 2,678 |
|
| Franchise, regulatory and connectivity | 428 |
| | 399 |
| | 383 |
| |
| Regulatory, connectivity and produced content | | 2,064 |
| | 1,467 |
| | 435 |
|
| Costs to service customers | 1,675 |
| | 1,561 |
| | 1,394 |
| 7,780 |
| | 5,654 |
| | 1,880 |
|
| Marketing | 529 |
| | 488 |
| | 431 |
| 2,420 |
| | 1,707 |
| | 629 |
|
| Transition costs | | 124 |
| | 156 |
| | 72 |
|
| Other | 882 |
| | 751 |
| | 687 |
| 3,557 |
| | 2,637 |
| | 732 |
|
| | | | | | | $ | 26,541 |
| | $ | 18,655 |
| | $ | 6,426 |
|
| | $ | 5,973 |
| | $ | 5,345 |
| | $ | 4,860 |
| |
Programming costs consist primarily of costs paid to programmers for basic, premium, digital, video on demand, and pay-per-view programming. Franchise, regulatoryRegulatory, connectivity and connectivityproduced content costs represent payments to franchise and regulatory authorities, and
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
costs directly related to providing video, Internet and voice services.services as well as payments for sports, local and news content produced by the Company. Included in regulatory, connectivity and produced content costs is content acquisition costs for the Los Angeles Lakers’ basketball games and Los Angeles Dodgers’ baseball games which are recorded as games are exhibited over the applicable season. Costs to service customers include residential and commercial costs related to field operations, network operations and customer care for the Company’s residential and small and medium business customers, including internal and third partythird-party labor for installations, service and repairs, maintenance, bad debt expense, billing and collection, occupancy and vehicle costs. Marketing costs representsrepresent the costs of marketing to our current and potential commercial and residential customers including labor costs. Transition costs represent incremental costs incurred to integrate the TWC and Bright House operations and to increase the scale of the Company’s business as a result of the Transactions. See Note 3. Other includes bad debt expense, corporate overhead, commercial and advertising sales expenses, indirect costs associated with the Company’s enterprise business customers and regional sports and news networks, property tax and insurance expense and stock compensation expense, among others.
14.15. Other Operating Expenses, Net
Other operating expenses, net consist of the following for the years presented:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Merger and acquisition costs | $ | 38 |
| | $ | 16 |
| | $ | 1 |
| |
| Merger and restructuring costs | | $ | 351 |
| | $ | 970 |
| | $ | 70 |
|
| Special charges, net | 14 |
| | 23 |
| | 20 |
| (21 | ) | | 17 |
| | 15 |
|
| (Gain) loss on sale of assets, net | 10 |
| | 8 |
| | (5 | ) | 16 |
| | (2 | ) | | 4 |
|
| | | | | | | $ | 346 |
| | $ | 985 |
| | $ | 89 |
|
| | $ | 62 |
| | $ | 47 |
| | $ | 16 |
| |
Merger and acquisitionrestructuring costs
Merger and acquisitionrestructuring costs representsrepresent costs incurred in connection with merger and acquisition transactions and related restructuring, such as advisory, legal and accounting fees, among others.employee retention costs, employee termination costs related to the Transactions and other exit costs. The Company expects to incur additional merger and restructuring costs in connection with the Transactions. Changes in accruals for merger and restructuring costs from January 1, 2016 through December 31, 2017 are presented below:
|
| | | | | | | | | | | | | | | | | | | |
| | Employee Retention Costs | | Employee Termination Costs | | Transaction and Advisory Costs | | Other Costs | | Total |
| Liability, December 31, 2015 | $ | — |
| | $ | — |
| | $ | 33 |
| | $ | — |
| | $ | 33 |
|
| Liability assumed in the Transactions | 80 |
| | 9 |
| | 3 |
| | — |
| | 92 |
|
| Costs incurred | 26 |
| | 337 |
| | 318 |
| | 41 |
| | 722 |
|
| Cash paid | (99 | ) | | (102 | ) | | (329 | ) | | (41 | ) | | (571 | ) |
| Remaining liability, December 31, 2016 | 7 |
| | 244 |
| | 25 |
| | — |
| | 276 |
|
| | | | | | | | | | |
| Costs incurred | 4 |
| | 226 |
| | 4 |
| | 68 |
| | 302 |
|
| Cash paid | (10 | ) | | (298 | ) | | (12 | ) | | (60 | ) | | (380 | ) |
| Remaining liability, December 31, 2017 | $ | 1 |
| | $ | 172 |
| | $ | 17 |
| | $ | 8 |
| | $ | 198 |
|
In addition to the costs indicated above, the Company recorded $49 million and $248 million of expense related to accelerated vesting of equity awards of terminated employees for the years ended December 31, 2017 and 2016, respectively.
Special charges, net
Special charges, net forprimarily includes employee termination costs not related to the years ended 2014, 2013 and 2012 primarily include severance chargesTransactions and net amounts of litigation settlements. In 2017, special charges, net also includes a $101 million benefit related to the remeasurement of the TRA liability
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
as a result of the enactment of the Tax Cuts & Jobs Act (“Tax Reform”) in December 2017 (see Note 17) offset by an $83 million charge related to the Company's withdrawal liability from a multiemployer pension plan.
(Gain) loss on sale of assets, net
(Gain) loss on sale of assets, net represents the gain ornet (gain) loss recognized on the sales and disposals of fixed assets and cable systems.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
15.16. Stock Compensation Plans
Charter’s 2009 Stock Incentive Plan provides for grants of non-qualifiednonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock, restricted stock units and restricted stock. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting services for the Company, are eligible for grants under the 2009 Stock Incentive Plan. The 2009 Stock Incentive Plan allows for the issuance of up to 1421 million shares of Charter Class A common stock (or units convertible into Charter Class A common stock).
At the closing of the TWC Transaction, Legacy TWC employee equity awards were converted into Charter Class A common stock equity awards on the same terms and conditions as were applicable under the Legacy TWC equity awards, except that the number of shares covered by each award and the option exercise prices were adjusted for the Stock Award Exchange Ratio (as defined in the Merger Agreement) such that the intrinsic value of the converted TWC awards was approximately equal to that of the original awards at the closing of the Transactions. The converted TWC awards continue to be subject to the terms of the Legacy TWC equity plans. The Parent Merger Exchange Ratio was also applied to outstanding Legacy Charter equity awards and option exercise prices; however, the terms of the equity awards did not change as a result of the Transactions.
Charter Stock options granted prior to 2014 generallyand restricted stock units cliff vest annually overupon the three or four years from either the grant date or delayed vesting commencement dates. Stock options generally expire ten years from the grant date. Restricted stock vests annually over a one to four-year period beginning from the dateyear anniversary of each grant. Certain stock options and restricted stock units vest based on achievement of stock price hurdles. RestrictedStock options generally expire ten years from the grant date and restricted stock units have no voting rights, andrights. Restricted stock generally vests one year from the date of grant. Legacy TWC restricted stock units granted prior to 2014 vest ratably over three or four years from either the grant date or delayed vesting commencement dates. Stock options andthat were converted into Charter restricted stock units granted in 2014 cliffgenerally vest over three years. 50% on each of the third and fourth anniversary of the grant date.
As of December 31, 20142017, total unrecognized compensation remaining to be recognized in future periods totaled $66211 million for stock options, $91 million for restricted stock and $26173 million for restricted stock units and the weighted average period over which they are expected to be recognized is 23 years for stock options, 1 years4 months for restricted stock and 2 years for restricted stock units.
The Company recorded $55$261 million, $48$244 million and $50$78 million of stock compensation expense for the years ended December 31, 20142017, 20132016 and 20122015, respectively, which is included in operating costs and expenses.
A summary The Company also recorded $49 million and $248 million of the activity for the Company’s stock optionsexpense for the years ended December 31, 2014, 20132017 and 2012,2016, respectively, related to accelerated vesting of equity awards of terminated employees which is as follows (amountsrecorded in thousands, except per share data):merger and restructuring costs.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | | | | | | | | | | | |
| Outstanding, beginning of period | 3,142 |
| | $ | 59.86 |
| | 3,552 |
| | $ | 54.35 |
| | 4,018 |
| | $ | 49.53 |
|
| Granted | 1,234 |
| | $ | 136.75 |
| | 276 |
| | $ | 108.89 |
| | 813 |
| | $ | 69.00 |
|
| Exercised | (640 | ) | | $ | 52.50 |
| | (543 | ) | | $ | 51.22 |
| | (371 | ) | | $ | 40.57 |
|
| Canceled | (47 | ) | | $ | 104.57 |
| | (143 | ) | | $ | 50.54 |
| | (908 | ) | | $ | 51.74 |
|
| | | | | | | | | | | | |
| Outstanding, end of period | 3,689 |
| | $ | 86.29 |
| | 3,142 |
| | $ | 59.86 |
| | 3,552 |
| | $ | 54.35 |
|
| | | | | | | | | | | | |
| Weighted average remaining contractual life | 7 |
| years | | 7 |
| years | | 8 |
| years |
| | | | | | | | | | | | |
| Options exercisable, end of period | 1,317 |
| | $ | 55.65 |
| | 1,128 |
| | $ | 52.07 |
| | 469 |
| | $ | 46.23 |
|
| | | | | | | | | | | | |
| Weighted average fair value of options granted | $ | 55.08 |
| | | | $ | 41.52 |
| | | | $ | 28.17 |
| | |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
A summary of the activity for the Company’s stock options (after applying the Parent Merger Exchange Ratio) for the years ended December 31, 2017, 2016 and 2015, is as follows (shares in thousands, except per share data):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Outstanding, beginning of period | 9,592 |
| | $ | 181.39 |
| | | | 3,923 |
| | $ | 122.03 |
| | | | 3,336 |
| | $ | 95.42 |
| | |
| Granted | 1,175 |
| | $ | 302.87 |
| | | | 5,999 |
| | $ | 218.91 |
| | | | 1,176 |
| | $ | 177.14 |
| | |
| Converted TWC awards | — |
| | $ | — |
| | | | 839 |
| | $ | 86.46 |
| | | | — |
| | $ | — |
| | |
| Exercised | (1,044 | ) | | $ | 124.32 |
| | $ | 219 |
| | (1,015 | ) | | $ | 96.33 |
| | $ | 146 |
| | (524 | ) | | $ | 72.27 |
| | $ | 68 |
|
| Canceled | (74 | ) | | $ | 251.63 |
| | | | (154 | ) | | $ | 173.98 |
| | | | (65 | ) | | $ | 155.23 |
| | |
| Outstanding, end of period | 9,649 |
| | $ | 201.83 |
| | $ | 1,295 |
| | 9,592 |
| | $ | 181.39 |
| | | | 3,923 |
| | $ | 122.03 |
| | |
| | | | | | | | | | | | | | | | | | |
| Weighted average remaining contractual life | 8 |
| years | | | | 8 |
| years | | | | 7 |
| years | | |
| Options exercisable, end of period | 1,734 |
| | $ | 90.56 |
| | $ | 425 |
| | 1,665 |
| | $ | 71.71 |
| | | | 1,224 |
| | $ | 61.88 |
| | |
| Options expected to vest, end of period | 7,915 |
| | $ | 226.20 |
| | $ | 869 |
| | | | | | | | | | | | |
| Weighted average fair value of options granted | $ | 73.67 |
| | | | | | $ | 47.42 |
| | | | | | $ | 66.20 |
| | | | |
A summary of the activity for the Company’s restricted stock (after applying the Parent Merger Exchange Ratio) for the years ended December 31, 20142017, 20132016 and 20122015, is as follows (amounts(shares in thousands, except per share data):
| | | | Year Ended December 31, | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | Year Ended December 31, |
| | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price |
| Outstanding, beginning of period | 653 |
| | $ | 56.14 |
| | 928 |
| | $ | 54.16 |
| | 1,115 |
| | $ | 45.72 |
| 10 |
| | $ | 231.81 |
| | 197 |
| | $ | 65.79 |
| | 390 |
| | $ | 63.30 |
|
| Granted | 9 |
| | $ | 138.57 |
| | 13 |
| | $ | 101.81 |
| | 244 |
| | $ | 60.48 |
| 10 |
| | $ | 343.10 |
| | 10 |
| | $ | 231.83 |
| | 6 |
| | $ | 201.34 |
|
| Vested | (231 | ) | | $ | 57.35 |
| | (280 | ) | | $ | 51.62 |
| | (370 | ) | | $ | 36.02 |
| (10 | ) | | $ | 231.81 |
| | (197 | ) | | $ | 65.79 |
| | (199 | ) | | $ | 65.16 |
|
| Canceled | — |
| | $ | — |
| | (8 | ) | | $ | 56.50 |
| | (61 | ) | | $ | 35.25 |
| — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| | | | | | | | | | | | | |
| Outstanding, end of period | 431 |
| | $ | 57.24 |
| | 653 |
| | $ | 56.14 |
| | 928 |
| | $ | 54.16 |
| 10 |
| | $ | 343.10 |
| | 10 |
| | $ | 231.81 |
| | 197 |
| | $ | 65.79 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
A summary of the activity for the Company’s restricted stock units (after applying the Parent Merger Exchange Ratio) for the years ended December 31, 20142017, 20132016 and 20122015, is as follows (amounts(shares in thousands, except per share data):
| | | | Year Ended December 31, | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 | Year Ended December 31, |
| | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price | | Shares | | Weighted Average Grant Price |
| Outstanding, beginning of period | 288 |
| | $ | 74.73 |
| | 327 |
| | $ | 61.79 |
| | 273 |
| | $ | 54.86 |
| 3,313 |
| | $ | 192.41 |
| | 337 |
| | $ | 150.96 |
| | 294 |
| | $ | 115.01 |
|
| Granted | 153 |
| | $ | 136.54 |
| | 73 |
| | $ | 109.96 |
| | 142 |
| | $ | 71.33 |
| 285 |
| | $ | 302.76 |
| | 895 |
| | $ | 213.09 |
| | 148 |
| | $ | 179.17 |
|
| Converted TWC awards | | — |
| | $ | — |
| | 4,162 |
| | $ | 224.90 |
| | — |
| | $ | — |
|
| Vested | (104 | ) | | $ | 70.23 |
| | (88 | ) | | $ | 61.17 |
| | (52 | ) | | $ | 56.59 |
| (1,159 | ) | | $ | 216.21 |
| | (1,739 | ) | | $ | 219.60 |
| | (90 | ) | | $ | 78.65 |
|
| Canceled | (12 | ) | | $ | 112.53 |
| | (24 | ) | | $ | 55.28 |
| | (36 | ) | | $ | 54.47 |
| (48 | ) | | $ | 234.99 |
| | (342 | ) | | $ | 219.91 |
| | (15 | ) | | $ | 155.43 |
|
| | | | | | | | | | | | | |
| Outstanding, end of period | 325 |
| | $ | 104.01 |
| | 288 |
| | $ | 74.73 |
| | 327 |
| | $ | 61.79 |
| 2,391 |
| | $ | 192.96 |
| | 3,313 |
| | $ | 192.41 |
| | 337 |
| | $ | 150.96 |
|
16.17. Income Taxes
AllSubstantially all of Charter’sthe Company’s operations are held through Charter HoldcoHoldings and its direct and indirect subsidiaries. Charter HoldcoHoldings and the majority of its subsidiaries are generally limited liability companies that are not subject to income tax. However, certain of these limited liability companies are subject to state income tax. In addition, the indirect subsidiaries that are corporations are subject to federal and state income tax. All ofGenerally, the remaining taxable income, gains, losses, deductions and credits of Charter HoldcoHoldings are passed through to its members, Charter and A/N. Charter is responsible for its direct subsidiaries.
Forshare of taxable income or loss of Charter Holdings allocated to it in accordance with the years ended December 31, 2014, 2013,Charter Holdings Limited Liability Company Agreement ("LLC Agreement") and 2012, the Company recorded deferred incomepartnership tax expenserules and benefits as shown below. Income tax expense is recognized primarily through increases inregulations. As a result, Charter's primary deferred tax liabilities relatedcomponent recorded in the consolidated balance sheets relates to its excess financial reporting outside basis, excluding amounts attributable to nondeductible goodwill, over Charter's tax basis in the Company's investment in Charter Holdco,Holdings.
Charter Holdings, the indirect owner of the Company’s cable systems, generally allocates its taxable income, gains, losses, deductions and credits proportionately according to the members’ respective ownership interests, except for special allocations required under Section 704(c) of the Internal Revenue Code and the Treasury Regulations (“Section 704(c)”). Pursuant to Section 704(c) and the LLC Agreement, each item of income, gain, loss and deduction with respect to any property contributed to the capital of the partnership shall, solely for tax purposes, be allocated among the members so as well as through currentto take into account any variation between the adjusted basis of such property to the partnership for U.S. federal and state income tax expensepurposes and increasesits initial gross asset value using the “traditional method” as described in the deferred tax liabilities of certain of its indirect corporate subsidiaries. Income tax benefits are realized through reductions in the deferred tax liabilities related to Charter’s investment in Charter Holdco, as well as the deferred tax liabilities of certain of Charter’s indirectTreasury Regulations.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
corporate subsidiaries.Income Tax Benefit
For the years ended December 31, 2017, 2016, and 2015, the Company recorded deferred income tax benefit as shown below. The tax provision in future periods will vary based on current and future temporary differences, as well as future operating results.
Current and deferred income tax expense is as follows: |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Current expense: | | | | | | |
| Federal income taxes | | $ | (4 | ) | | $ | (4 | ) | | $ | (1 | ) |
| State income taxes | | (25 | ) | | (29 | ) | | (4 | ) |
| Current income tax expense | | (29 | ) | | (33 | ) | | (5 | ) |
| | | | | | | |
| Deferred benefit: | | | | | | |
| Federal income taxes | | 9,082 |
| | 2,549 |
| | 53 |
|
| State income taxes | | 34 |
| | 409 |
| | 12 |
|
| Deferred income tax benefit | | 9,116 |
| | 2,958 |
| | 65 |
|
| Income tax benefit | | $ | 9,087 |
| | $ | 2,925 |
| | $ | 60 |
|
|
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2014 | | 2013 | | 2012 | |
| | | | | | | | |
| Current expense: | | | | | | | |
| Federal income taxes | | $ | (1 | ) | | $ | (1 | ) | | $ | — |
| |
| State income taxes | | (2 | ) | | (7 | ) | | (7 | ) | |
| | | | | | | | |
| Current income tax expense | | (3 | ) | | (8 | ) | | (7 | ) | |
| | | | | | | | |
| Deferred expense: | | | | | | | |
| Federal income taxes | | (192 | ) | | (101 | ) | | (223 | ) | |
| State income taxes | | (41 | ) | | (11 | ) | | (27 | ) | |
| | | | | | | | |
| Deferred income tax expense | | (233 | ) | | (112 | ) | | (250 | ) | |
| | | | | | | | |
| Total income tax expense | | $ | (236 | ) | | $ | (120 | ) | | $ | (257 | ) | |
Income tax expensebenefit for the year ended December 31, 2013 decreased compared to the corresponding prior period,2017 was recognized primarily as a result of step-upsthe enactment of Tax Reform in basisDecember 2017. Among other things, the primary provisions of indefinite-lived assetsTax Reform impacting us are the reductions to the U.S. corporate income tax rate from 35% to 21% and temporary 100% bonus depreciation for certain assets. The change in tax but not GAAP purposes, includinglaw required the effects of partnership gains relatedCompany to financing transactions and a partnership restructuring, which decreased the Company'sremeasure existing net deferred tax liabilityliabilities using the lower rate in the period of enactment resulting in an income tax benefit of approximately $9.3 billion to reflect these changes in the year ended December 31, 2017. The Company has reported provisional amounts for the income tax effects of Tax Reform for which the accounting is incomplete but a reasonable estimate could be determined. There were no specific impacts of Tax Reform that could not be reasonably estimated which the Company accounted for under prior tax law. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period. Overall, the changes due to Tax Reform will favorably affect income tax expense on future U.S. earnings. Income tax benefit for the year ended December 31, 2017 was also increased by approximately $88 million due to the recognition of excess tax benefits resulting from share based compensation as a component of the provision for income taxes following the prospective application of Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017. See Note 22.
Income tax benefit for the year ended December 31, 2016 was recognized primarily through the reversal of approximately $3.3 billion of valuation allowance (see further discussion below), net of tax effect of permanent differences, a decrease to the anticipated blended state rate applied to Legacy Charter deferred tax balances as a result of the Transactions, a change in a state tax law, and prior to the closing of the Transactions, increases (decreases) in deferred tax liabilities related to Charter’s franchises which are characterized as indefinite-lived assets by $137 million.for book financial reporting purposes.
OfPrior to July 2, 2015, Charter Communications Holding Company, LLC ("Charter Holdco") was treated as a partnership for tax purposes. Effective on July 2, 2015, Charter elected to treat two of its wholly owned subsidiaries as disregarded entities for federal and state income tax purposes (the “Election”). The subsidiaries that made the $137 million decrease in net deferred tax liability, $101 millionElection were two of deferred tax benefits correspond to gains recognized by corporate subsidiaries of Charter, which arethe three partners in Charter Holdco. This Election resulted in a deemed liquidation of Charter Holdco into Charter solely for federal and state income tax purposes, and resulted primarily from the repaymentin a net increase of Charter Operating credit facility debt with proceeds from the CCO Holdings notes issued in March 2013. The repayment of Charter Operating credit facility debt, which is not guaranteed by Charter, with proceeds from the notes, which are guaranteed by Charter, had the effect of reducing the amount of debt allocable$638 million to the non-guarantor corporate subsidiaries of Charter. For partnership tax purposes, the reduction in the amount of non-guaranteed debt available to allocate to these corporate subsidiaries caused them to recognize gains due to limited basis in their partnership interests in Charter Holdco. These gains result in a step-up in the underlying tax basis of Charter Holdco's assetsHoldco’s amortizable and a corresponding reduction indepreciable assets. After the deferred tax liabilities for financial reporting purposes.Election, all taxable income, gains, losses, deductions and credits of Charter Holdco and its indirect limited liability company subsidiaries were treated as income of Charter. In addition, on December 31, 2013,the indirect subsidiaries of Charter restructured oneHoldco that are corporations joined the Charter consolidated group. The impact of itsthe Election to the Charter income tax partnerships which resulted in a $405provision, net of valuation allowance, was $187 million net step-up to primarily intangible assets and a deferredof income tax benefit of $36 million due torecorded as a shift in step-ups to indefinite-lived intangibles. Thediscrete tax provision in future periods will vary based on various factors including changes inevent during the Company's deferred tax liabilities attributable to indefinite-lived intangibles, as well as future operating results, however the Company does not anticipate having such a large reduction in tax expense attributable to these items unless it enters into similar future financing or restructuring transactions. The ultimate impact on the tax provision of such future financing and restructuring activities, if any, will be dependent on the underlying facts and circumstances at the time.year ended December 31, 2015.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
The Company’s effective tax rate differs from that derived by applying the applicable federal income tax rate of 35% for the years ended December 31, 20142017, 20132016, and 20122015, respectively, as follows:
| | | | | Year Ended December 31, | | | | | | | |
| | | 2014 | | 2013 | | 2012 | | Year Ended December 31, |
| | | | | | | | | 2017 | | 2016 | | 2015 |
| Statutory federal income taxes | | $ | (18 | ) | | $ | 17 |
| | $ | 17 |
| | $ | (360 | ) | | $ | (288 | ) | | $ | 116 |
|
| Statutory state income taxes, net | | (2 | ) | | (7 | ) | | (7 | ) | | (34 | ) | | (36 | ) | | (4 | ) |
| Nondeductible expenses | | (10 | ) | | (3 | ) | | (6 | ) | | (21 | ) | | (62 | ) | | (12 | ) |
| Net income attributable to noncontrolling interest | | | 84 |
| | 78 |
| | — |
|
| Change in valuation allowance | | (203 | ) | | (127 | ) | | (264 | ) | | 14 |
| | 3,171 |
| | (250 | ) |
| State rate changes | | (3 | ) | | 4 |
| | — |
| |
| Excess stock compensation | | | 88 |
| | — |
| | — |
|
| Organizational restructuring | | | — |
| | — |
| | 187 |
|
| Federal tax credits | | | 21 |
| | 16 |
| | 18 |
|
| Tax rate changes | | | 9,293 |
| | 65 |
| | 4 |
|
| Other | | — |
| | (4 | ) | | 3 |
| | 2 |
| | (19 | ) | | 1 |
|
| | | | | | | | |
| Income tax expense | | $ | (236 | ) | | $ | (120 | ) | | $ | (257 | ) | |
| Income tax benefit | | | $ | 9,087 |
| | $ | 2,925 |
| | $ | 60 |
|
For the year ended December 31, 2012 , the change in valuation allowance includes an increase of $4 million related to adjustments to cash flow hedges included in other comprehensive loss. In addition, theThe change in the valuation allowance above for the year ended December 31, 2014 differs from the change between the beginning and ending deferred tax positionvaluation allowance below due to a reduction ofchange in certain deferred tax assets and the corresponding establishment of a valuation allowance withwhich results in no impact to the consolidated statements of operations.
Deferred Tax Assets (Liabilities)
The tax effects of these temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 20142017 and 20132016 are presented below.
| | | | | December 31, | | December 31, |
| | | 2014 | | 2013 | | 2017 | | 2016 |
| Deferred tax assets: | | | | | | | | |
| Goodwill | | $ | 251 |
| | $ | 274 |
| |
| Investment in partnership | | 293 |
| | 289 |
| |
| Loss carryforwards | | 3,595 |
| | 3,170 |
| | $ | 2,657 |
| | $ | 4,127 |
|
| Other intangibles | | 112 |
| | 48 |
| |
| Accrued and other | | 172 |
| | 112 |
| | 287 |
| | 243 |
|
| | | | | | |
| Total gross deferred tax assets | | 4,423 |
| | 3,893 |
| | 2,944 |
| | 4,370 |
|
| Less: valuation allowance | | (3,149 | ) | | (2,961 | ) | | (137 | ) | | (200 | ) |
| | | | | | |
| Deferred tax assets | | $ | 1,274 |
| | $ | 932 |
| | $ | 2,807 |
| | $ | 4,170 |
|
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Indefinite life intangibles | | $ | (1,428 | ) | | $ | (1,205 | ) | |
| Property, plant and equipment | | (1,247 | ) | | (901 | ) | |
| Indirect corporate subsidiaries: | | | | | |
| Indefinite life intangibles | | (122 | ) | | (122 | ) | |
| Other | | (125 | ) | | (119 | ) | |
| | | | | | |
| Investment in partnership | | | $ | (20,107 | ) | | $ | (30,832 | ) |
| Accrued and other | | | (14 | ) | | (3 | ) |
| Deferred tax liabilities | | (2,922 | ) | | (2,347 | ) | | (20,121 | ) | | (30,835 | ) |
| | | | | | |
| Net deferred tax liabilities | | $ | (1,648 | ) | | $ | (1,415 | ) | | $ | (17,314 | ) | | $ | (26,665 | ) |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollarsThe deferred tax liabilities on the investment in millions, except share or per share data or where indicated)
Included inpartnership above includes approximately $32 million and $25 million net deferred tax liabilities above is net current deferred tax assets of $26 million and $16 million as of December 31, 2014 and 2013, respectively, included in prepaid expenses and other current assets in the accompanying consolidated balance sheets of the Company. Net deferred tax liabilities included approximately $236 million and $226 million at December 31, 2014 and 2013, respectively, relating to certain indirect subsidiaries of Charter Holdco that file separate federal or state income tax returns. The remainder of the Company's net deferred tax liability arose from Charter's investment in Charter Holdco,returns at December 31, 2017 and was largely attributable to the characterization of franchises for financial reporting purposes as indefinite-lived.2016, respectively.
Valuation Allowance
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, management takes into account various factors, including the expected level of future taxable income, available tax planning strategies and reversals of existing
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
taxable temporary differences. Due to the Company’sLegacy Charter’s history of losses, Legacy Charter was historically unable to assume future taxable income in its analysis and accordingly valuation allowances were established against the limitations imposed under Section 382deferred tax assets, net of deferred tax liabilities, from definite-lived assets for book accounting purposes. However, as a result of the Internal Revenue Code, discussed below, on Charter’s ability to use existing loss carryforwards inTWC Transaction, deferred tax liabilities resulting from the future, valuation allowances have been established except forbook fair value adjustment increased significantly and future taxable income that will result from the reversal of existing temporary differences for which deferred tax liabilities are recognized. Realizationrecognized, is sufficient to conclude it is more likely than not that the Company will realize substantially all of its deferred tax assets is dependent on generating sufficient taxableassets. As a result, Charter reversed approximately $3.3 billion of its valuation allowance and recognized a corresponding income prior to expiration of the loss carryforwards. The amount of the deferred tax assets considered realizable and, therefore, reflectedbenefit in the consolidated balance sheet, would be increased at such time that it is more-likely-than-not future taxable income will be realized duringstatements of operations for the carryforward period. The Company periodically evaluates the factsyear ended December 31, 2016. As of December 31, 2017 and circumstances surrounding this assessment2016, approximately $87 million and at the time this consideration is met, an adjustment to reverse some portion$145 million, respectively, of the existing valuation allowance would result.is associated with federal tax net operating loss carryforwards acquired in the TWC Transaction and approximately $50 million and $55 million, respectively, of the valuation allowance is associated with state tax loss carryforwards and tax credits.
Net Operating Loss Carryforwards
As of December 31, 2014,2017, Charter and its indirect corporate subsidiaries had approximately $9.5$10.9 billion of federal tax net operating loss carryforwards resulting in a gross deferred tax asset of approximately $3.3 billion.$2.3 billion. Federal tax net operating loss carryforwards expire in the years 20202018 through 2034.2035. These losses resulted from the operations of Charter Holdco and its subsidiaries. In addition, as of December 31, 2014,2017, Charter and its indirect corporate subsidiaries had state tax net operating loss carryforwards, resulting in a gross deferred tax asset (net of federal tax benefit) of approximately $321 million.$359 million. State tax net operating loss carryforwards generally expire in the years 20152018 through 2034. Included in the loss carryforwards is $129 million of loss, the tax benefit of which will be recorded through equity when realized as a reduction of income tax payable.2037.
On May 1, 2013, Liberty Media Corporation (“Liberty Media”) completed its purchaseUpon closing of a 27% beneficial interest in Charter (see Note 17). Upon closing,the TWC Transaction, Charter experienced a secondthird “ownership change” as defined in Section 382 of the Internal Revenue CodeCode; resulting in a secondthird set of limitations on Charter’s use of its existing federal and state net operating losses, capital losses, and tax credit carryforwards. TheBoth the first ownership change limitations that applied as a result of ourLegacy Charter’s emergence from bankruptcy in 2009 and second ownership change limitations that applied as a result of Liberty Media Corporation’s purchase in 2013 of a 27% beneficial interest in Legacy Charter will also continue to apply. As of December 31, 2014, $5.3 billion2017, all of Charter's federal tax loss carryforwards are unrestricted and available for Charter’s immediate use, while approximately $4.2 billion of federal tax loss carryforwards are still subject to Section 382 and other restrictions. Pursuant to these restrictions, Charter estimates that approximately $2.0$8.7 billion and $400in 2018, $654 million in the years 2015 and 2016, respectively,2019 and an additional $226 million annually over each of the next eightfive years of federal tax loss carryforwards should become unrestricted and available for Charter'sCharter’s use. An additional $415 million is currently subject to a valuation allowance. Since the limitation amounts accumulate for future use to the extent they are not utilized in any given year, Charter believes its loss carryforwards should become fully available to offset future taxable income, if any.income. Charter’s state loss carryforwards and indirect corporate subsidiaries’ loss carryforwards are subject to similar, but varying, limitations on their future use. If the CompanyCharter was to experience another “ownership change” in the future, its ability to use its loss carryforwards could be subject to further limitations.
Tax Receivable Agreement
Under the LLC Agreement, A/N has rights to: (1) convert at any time some or all of its preferred units in Charter Holdings for common units in Charter Holdings, and (2) exchange at any time some or all of its common units in Charter Holdings for Charter’s Class A common stock or cash, at Charter’s option. Pursuant to a Tax Receivable Agreement ("TRA") between Charter and A/N, Charter must pay to A/N 50% of the tax benefit when realized by Charter from the step-up in tax basis resulting from any future exchange or sale of the preferred and common units. Charter did not record a liability for this obligation as of the acquisition date since the tax benefit is dependent on uncertain future events that are outside of Charter’s control, such as the timing of a conversion or exchange. A future exchange or sale is not based on a fixed and determinable date and the exchange or sale is not certain to occur. If all of A/N's partnership units were to be exchanged or sold in the future, the undiscounted value of the obligation is currently estimated to be in the range of zero to $3 billion depending on measurement of the tax step-up in the future and Charter’s ability to realize the tax benefit in the periods following the exchange or sale. Factors impacting these calculations include, but are not limited to, the fair value of the equity at the time of the exchange and the effective tax rates when the benefits are realized.
In determiningconnection with the Company’sLetter Agreement between Charter and A/N (see Note 19) whereby 1.3 million and 1.9 million Charter Holdings common units held by A/N during the year ended December 31, 2017 and 2016, respectively, were exchanged for shares of Charter Class A common stock for an aggregate purchase price of $400 million and $537 million, respectively, an immediate step-up of $487 million and $580 million, respectively, in the tax provision for financial reporting purposes,basis of the assets of Charter Holdings occurred. As it relates to the exchange and tax step-up, a net deferred tax asset of approximately $85 million and $82 million, respectively, was recorded and a resulting TRA liability owed to A/N of $118 million and $137 million, respectively, which, as a transaction with a shareholder, was recorded directly to additional paid in capital, net of tax during the year ended December 31, 2017 and 2016. The TRA liability is recorded on an iterative, undiscounted basis. The TRA liability was remeasured as a result of the enactment of Tax Reform
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
resulting in a $101 million benefit recorded to other operating expenses, net. See Note 15. Following such remeasurement, the TRA liability of $154 million is reflected in other long-term liabilities on the consolidated balance sheets as of December 31, 2017 and 2016.
Uncertain Tax Positions
In connection with the TWC Transaction, the Company establishes aassumed $181 million of gross unrecognized tax benefits, exclusive of interest and penalties, which are recorded within other long-term liabilities. The net amount of the unrecognized tax benefits recorded as of December 31, 2017 that could impact the effective tax rate is $171 million. The Company has determined that it is reasonably possible that its existing reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon examination, based on their technical merits. There is considerable judgment involved in determining whether positions taken on the tax return are “more likely than not” of being sustained. The Company did not have any unrecognized tax benefits as of December 31, 20142017 could decrease by approximately $58 million during the year ended December 31, 2018 related to various ongoing audits, settlement discussions and 2013.expiration of statute of limitations with various state and local agencies; however, various events could cause the Company’s current expectations to change in the future. These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of interest and penalties, included in other long-term liabilities on the accompanying consolidated balance sheets of the Company is as follows:
|
| | | |
| BALANCE, December 31, 2015 | $ | 5 |
|
| Additions on prior year tax positions | 1 |
|
| Additions on current year tax positions | 7 |
|
| Additions on tax positions assumed in the TWC Transaction | 181 |
|
| Reductions on settlements and expirations with taxing authorities | (22 | ) |
| | |
| BALANCE, December 31, 2016 | $ | 172 |
|
| Additions on prior year tax positions | 1 |
|
| Additions on current year tax positions | 12 |
|
| Reductions on settlements and expirations with taxing authorities | (21 | ) |
| | |
| BALANCE, December 31, 2017 | $ | 164 |
|
The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. Interest and penalties included in other long-term liabilities on the accompanying consolidated balance sheets of the Company were $39 million and $34 million as of December 31, 2017 and 2016, respectively.
No tax years for Charter, Charter Holdings, or Charter Holdco,Communications Holding Company, LLC for income tax purposes, are currently under examination by the IRS. TaxInternal Revenue Service ("IRS"). Charter and Charter Holdings' 2016 and 2017 tax years remain open for examination and assessment. Legacy Charter’s tax years ending 20112014 through 2013the short period return dated May 17, 2016 remain subject to examination and assessment. Years prior to 20112014 remain open solely for purposes of examination of Legacy Charter’s loss and credit carryforwards. The IRS is currently examining Legacy TWC’s income tax returns for 2011 through 2014. Legacy TWC’s tax year 2015 remains subject to examination and assessment. Prior to Legacy TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009 (the “Separation”), Legacy TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS is currently examining Time Warner’s 2008 through 2010 income tax returns. Time Warner’s income tax returns for 2005 to 2007, which are periods prior to the Separation, were settled with the exception of an immaterial item that has been referred to the IRS Appeals Division. The Company does not anticipate that these examinations will have a material impact on the Company’s consolidated financial position or results of operations. In addition, the Company is also subject to ongoing examinations of the Company’s tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s consolidated financial position or results of operations during the year ended December 31, 2017, nor does the Company anticipate a material impact in the future.
17.18. Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to Charter shareholders by the
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share considers the impact of potentially dilutive securities using the treasury stock and if-converted methods and is based on the weighted average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of stock options, restricted stock, restricted stock units, equity awards with market conditions and Charter Holdings convertible preferred units and common units. Basic loss per common share equaled diluted loss per common share for the year ended December 31, 2015 because the Company incurred a net loss during those periods. The following is the computation of diluted earnings per common share for the years presented.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| Numerator: | | | |
| Net income attributable to Charter shareholders | $ | 9,895 |
| | $ | 3,522 |
|
| Effect of dilutive securities: | | | |
| Charter Holdings common units | 69 |
| | 129 |
|
| Charter Holdings convertible preferred units | 150 |
| | 93 |
|
| Net income attributable to Charter shareholders after assumed conversions | $ | 10,114 |
| | $ | 3,744 |
|
| | | | |
| Denominator: | | | |
| Weighted average common shares outstanding, basic | 256,720,715 |
| | 206,539,100 |
|
| Effect of dilutive securities: | | | |
| Assumed exercise or issuance of shares relating to stock plans | 4,012,145 |
| | 3,088,871 |
|
| Weighted average Charter Holdings common units | 26,637,596 |
| | 19,333,227 |
|
| Weighted average Charter Holdings convertible preferred units | 9,333,500 |
| | 5,830,241 |
|
| Weighted average common shares outstanding, diluted | 296,703,956 |
| | 234,791,439 |
|
| | | | |
| Basic earnings per common share attributable to Charter shareholders | $ | 38.55 |
| | $ | 17.05 |
|
| Diluted earnings per common share attributable to Charter shareholders | $ | 34.09 |
| | $ | 15.94 |
|
19. Related Party Transactions
The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved or, in the case of the management arrangements, subsidiaries that are debt issuers that pay certain of their parent companies for services.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
Charter is a party to management arrangements with Charter HoldcoSpectrum Management Holding Company, LLC ("Spectrum Management") and certain of itstheir subsidiaries. Under these agreements, Charter, Spectrum Management and Charter Holdco provide management services for the cable systems owned or operated by their subsidiaries. Costs associated with providing these services are charged directly to the Company’s operating subsidiaries and are included within operating costs and expenses in the accompanying consolidated statements of operations. Such costs totaled $346 million, $305 million, and $247 million for the years ended December 31, 2014, 2013, and 2012, respectively.subsidiaries. All other costs incurred on behalf of Charter’s operating subsidiaries are considered a part of the management fee andfee. These costs are recorded as a component of operating costs and expenses, in the accompanying consolidated financial statements. The management fee charged to the Company’s operating subsidiaries approximated the expenses incurred by Spectrum Management, Charter Holdco and Charter on behalf of the Company’s operating subsidiaries in 20142017, 20132016, and 20122015.
Liberty Broadband and A/N
On May 1, 2013, Liberty Media completed its purchase from investment funds managed by, or affiliated with, Apollo Global Management, LLC ("Apollo"), Oaktree Capital Management, L.P. ("Oaktree") and Crestview Partners ("Crestview") of approximately 26.9 million shares and warrants to purchase approximately 1.1 million shares23, 2015, in Charter for approximately $2.6 billion (the "Liberty Transaction"), which represented, at the time, a price per share of $95.50 and an approximate 27% beneficial ownership in Charter.
In connection with the Liberty Transaction,execution of the Merger Agreement and the amendment of the Contribution Agreement, Charter entered into athe Amended and Restated Stockholders Agreement with Liberty Broadband, A/N and Legacy Charter (the “Stockholders Agreement”) and the LLC Agreement with Liberty Broadband and A/N. As of the closing of the Merger Agreement and the Contribution Agreement on May 18, 2016, the Stockholders Agreement replaced Legacy Charter’s existing stockholders agreement with Liberty Media (as amended, the “Stockholders Agreement”). Pursuant to the Stockholders Agreement, at the closing of the Liberty Transaction on May 1, 2013, Charter’s board of directors appointed four designees of Liberty Media to the Charter board of directors: John C. Malone, Chairman of the Board of Liberty Media, Gregory B. Maffei, President and Chief Executive Officer of Liberty Media, Balan Nair, Executive Vice President and Chief Technology Officer of Liberty Global, Plc. and Michael P. Huseby, then the Chief Financial Officer, and currently the Chief Executive Officer, of Barnes & Noble, Inc. In connection with the distribution of all of the capital stock of Liberty Broadband, Corporation (“Liberty Broadband”) to stockholders of Liberty Media in a spin off transaction that was completed in November 2014 and also in connection with the consummation of the previously announced reorganization of Charter in connection with the Transactions (the “Reorganization”), ondated September 29, 2014, Liberty Media,and superseded the amended and restated stockholders agreement among Legacy Charter, Charter, Liberty Broadband and Charter entered into an amendment to the Stockholders Agreement. Pursuant to that amendment, Liberty Media assigned all of its rights and obligations under the Stockholders Agreement to Liberty Broadband, Liberty Broadband assumed such rights and agreed to perform all such obligations and Charter consented to such assignment and assumption. As a result, Liberty Broadband was substituted for Liberty Media for all purposes under the Stockholders Agreement. Liberty Broadband also acknowledged and agreed that the four designees of Liberty Media serving on Charter’s board of directors would continue in such capacity as designees of Liberty Broadband. The amendment also provides that, effective upon the consummation of the Reorganization, Charter will assign all of its rights, liabilities and obligations under the stockholders agreement to the reorganized Charter and the reorganized Charter will assume all of Charter’s liabilities and obligations under the Stockholders agreement.A/N, dated March 31, 2015.
Subject to Liberty Broadband’s continued ownership of 20% or more of the outstanding shares of Class A common stock of Charter, the Stockholders Agreement provides that Liberty Broadband will be entitled to designate up to four persons as nominees for election to Charter’s board of directors at least until January 2016 and that one such designee director (as specified by Liberty Broadband) will serve on each of the Audit Committee, the Nominating and Corporate Governance Committee, and the Compensation and Benefits Committee of Charter’s board of directors. Consistent with these provisions, Mr. Malone serves on the Nominating and Corporate Governance Committee, Mr. Maffei serves on the Finance Committee and the Compensation and Benefits Committee and Mr. Huseby serves on the Audit Committee. Liberty Broadband has agreed that, so long as its designees are included in the group recommended by the Nominating and Corporate Governance Committee, it will vote its shares of Class A common stock in accordance with the recommendation of the Nominating and Corporate Governance Committee of the board of directors with respect to the election or removal of directors. Charter can elect, by notice to Liberty Broadband in early January 2016, to terminate the obligation to nominate Liberty Broadband’s designees to the board and, in such event, the standstill provisions noted below will also terminate. Beginning in 2017, Liberty Broadband and Charter will each have an annual right to terminate the board nomination and standstill obligations by delivering notice to the other party of such termination in early January of such year. Subject to certain limited exceptions, Liberty Broadband agreed that it will not, directly or indirectly; acquire voting securities of Charter in excess of 35% prior to the fifth business day of January 2016 and thereafter in excess of 39.99% of the outstanding voting securities of Charter. Liberty Broadband is also subject to certain customary standstill provisions that prohibit it from, among other things, engaging in any solicitation of proxies or consents relating to the election of directors, proposing a matter for submission to a vote of shareholders of Charter or calling a meeting of shareholders of Charter or taking any action or making any public statement not approved by the board of directors to seek to control or influence the management, the board of directors
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
or
Under the policiesterms of the Stockholders Agreement, the number of Charter’s directors is fixed at 13, and includes its CEO. Upon the closing of the Bright House Transaction, two designees selected by A/N became members of the board of directors of Charter and three designees selected by Liberty Broadband continued as members of the board of directors of Charter. The standstill limitations described above will cease to apply toremaining eight directors are not affiliated with either A/N or Liberty Broadband. Each of A/N and Liberty Broadband beginning in January 2016 if Charter elects to terminate its obligationis entitled to nominate Liberty Broadband’s designeesat least one director to each of the committees of Charter’s board of directors, subject to applicable stock exchange listing rules and certain specified voting or equity ownership thresholds for election at the 2016 annual meetingeach of stockholders, as described above. In addition, the standstill limitations will cease to apply onceA/N and Liberty Broadband, owns less than 5%and provided that the Nominating and Corporate Governance Committee and the Compensation and Benefit Committee each have at least a majority of directors independent from A/N, Liberty Broadband and the Company (referred to as the “unaffiliated directors”). Each of the outstandingNominating and Corporate Governance Committee and the Compensation and Benefits Committee is currently comprised of three unaffiliated directors and one designee of each of A/N and Liberty Broadband. A/N and Liberty Broadband also have certain other committee designation and other governance rights. Upon the closing of the Bright House Transaction, Mr. Thomas Rutledge, the Company’s CEO, became the chairman of the board of Charter.
In December 2016, Charter and A/N entered into a letter agreement (the "Letter Agreement") that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and upon terminationits affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by either partyCharter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis once Charter or Charter Holdings have repurchased shares of Class A common stock or Charter Holdings common units from A/N and its affiliates for an aggregate purchase price of $537 million, which threshold has been met. On December 21, 2017, Charter and A/N entered into an amendment to the Letter Agreement resetting the aggregate purchase price to $400 million. See Note 11. Pursuant to the TRA between Charter and A/N, Charter must pay to A/N 50% of the tax benefit when realized by Charter from the step-up in 2017tax basis resulting from any future exchange or sale of the preferred and thereafter as described above.common units. See Note 17 for more information.
The Company is aware that Dr. John Malone may be deemed to have a 36.0%39.2% voting interest in Liberty Interactive Corp. (“Liberty Interactive”) and is Chairman of the board of directors, an executive officer position, of Liberty Interactive. Liberty Interactive wholly owns 37.6% of the common stock of HSN, Inc. (“HSN”) and has the right to elect 20% of the board members of HSN. Liberty Interactive wholly owns QVC, IncInc. (“QVC”). The Company has programming relationships with HSN and QVC which pre-date the transaction with Liberty Media Transaction.Corporation. For the year ended December 31, 2014 and nine monthsyears ended December 31, 2013,2017, 2016 and 2015, the Company recorded paymentsrevenue in aggregate of approximately $14$77 million, $53 million and $10$17 million, respectively, from HSN and QVC as part of channel carriage fees and revenue sharing arrangements for home shopping sales made to customers in Charter'sthe Company’s footprint.
Dr. Malone and Mr. Steven Miron, each a member of Charter’s board of directors, also servesserve on the board of directors of Discovery Communications, Inc., (“Discovery”) and the. The Company is aware that Dr. Malone owns 4.5% in93.6% of the aggregateseries B common stock of Discovery, 6% of the series C common stock of Discovery and has a 28.9%28.1% voting interest in Discovery for the election of directors. The Company is aware that Advance/Newhouse Programming Partnership (“A/N PP”), an affiliate of A/N and in which Mr. Miron is the CEO, owns 100% of the Series A preferred stock of Discovery and 100% of the Series C preferred stock of Discovery and has a 31.1% voting interest for the election of directors. A/N PP has the right to appoint three directors out of a total of eleven directors to Discovery’s board to be elected by the holders of Discovery’s Series A preferred stock. In addition, Dr. Malone is a member of the board of directors of Lions Gate Entertainment Corp. ("Lions Gate," parent company of Starz, Inc.) and owns 10.1%approximately 5.5% in the aggregate of the common stock of StarzLions Gate and has 45.5%7.9% of the voting power. Mr. Maffei is a non-executive Chairmanpower, pursuant to his ownership of the board of Starz.Lions Gate Class A voting shares. The Company purchases programming from both Discovery and StarzLions Gate pursuant to agreements entered into prior to the Liberty Media Transaction and Dr. Malone and Mr. MaffeiMiron joining Charter'sCharter’s board of directors. Based on publicly available information, the Company does not believe that either Discovery or StarzLions Gate would currently be considered related parties. The amounts paid in the aggregate to Discovery and StarzLions Gate represent less than 3% of total operating costs and expenses for the year ended December 31, 2014 and nine monthsyears ended December 31, 2013.2017, 2016 and 2015.
Equity Investments
The Company has agreements with certain equity-method investees (see Note 7) pursuant to which the Company has made or received related party transaction payments. The Company recorded payments to equity-method investees totaling $317 million, $171 million and $28 million during the years ended December 31, 2017, 2016 and 2015, respectively. The Company recorded advertising revenues from transactions with equity-method investees totaling $9 million and $7 million during the years ended
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
December 31, 2017 and 2016, respectively. There were no advertising revenues received in 2015.
18.20. Commitments and Contingencies
Commitments
The following table summarizes the Company’s payment obligations as of December 31, 20142017 for its contractual obligations.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter |
| | | | | | | | | | | | | | | |
| Contractual Obligations | | | | | | | | | | | | | | |
| Capital and Operating Lease Obligations (1) | | $ | 169 |
| | $ | 43 |
| | $ | 39 |
| | $ | 35 |
| | $ | 25 |
| | 16 |
| | $ | 11 |
|
| Programming Minimum Commitments (2) | | 795 |
| | 271 |
| | 256 |
| | 235 |
| | 9 |
| | 10 |
| | 14 |
|
| Other (3) | | 319 |
| | 291 |
| | 16 |
| | 9 |
| | 3 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | |
| | Total | | $ | 1,283 |
| | $ | 605 |
| | $ | 311 |
| | $ | 279 |
| | $ | 37 |
| | $ | 26 |
| | $ | 25 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
Capital and Operating Lease Obligations (a) | $ | 1,512 |
| | $ | 286 |
| | $ | 235 |
| | $ | 199 |
| | $ | 165 |
| | $ | 132 |
| | $ | 495 |
|
Programming Minimum Commitments (b) | 164 |
| | 103 |
| | 39 |
| | 22 |
| | — |
| | — |
| | — |
|
Other (c) | 13,626 |
| | 1,917 |
| | 1,031 |
| | 839 |
| | 653 |
| | 499 |
| | 8,687 |
|
| | $ | 15,302 |
| | $ | 2,306 |
| | $ | 1,305 |
| | $ | 1,060 |
| | $ | 818 |
| | $ | 631 |
| | $ | 9,182 |
|
(1) The Company leases certain facilities and equipment under non-cancelable operating leases. Leases and rental costs charged to expense for the years ended December 31, 2014, 2013 and 2012 were $43 million, $34 million, $28 | |
(a) | The Company leases certain facilities and equipment under non-cancelable capital and operating leases. Capital lease obligations represented $123 million of total capital and operating lease obligations as of December 31, 2017. Leases and rental costs charged to expense for the years ended December 31, 2017, 2016 and 2015 were $321 million, $215 million, $49 million, respectively. |
| |
(b) | The Company pays programming fees under multi-year contracts ranging from three to ten years, typically based on a flat fee per customer, which may be fixed for the term, or may in some cases escalate over the term. Programming costs included in the statement of operations were $10.6 billion, $7.0 billion and $2.7 billion for the years ended December 31, 2017, 2016 and 2015 respectively. Certain of the Company’s programming agreements are based on a flat fee per month or have guaranteed minimum payments. The table sets forth the aggregate guaranteed minimum commitments under the Company’s programming contracts. |
| |
(c) | “Other” represents other guaranteed minimum commitments, including rights negotiated directly with content owners for distribution on company-owned channels or networks, commitments related to our role as an advertising and distribution sales agent for third party-owned channels or networks, commitments to our customer premise equipment vendors and contractual obligations related to third-party network augmentation. |
(2) The Company pays programming fees under multi-year contracts ranging from three to ten years, typically based on a flat fee per customer, which may be fixed for the term, or may in some cases escalate over the term. Programming costs included in the accompanying statement of operations were $2.5 billion, $2.1 billion and $2.0 billion for the years ended December 31, 2014, 2013, and 2012 respectively. Certain of the Company’s programming agreements are based on a flat fee per month or have guaranteed minimum payments. The table sets forth the aggregate guaranteed minimum commitments under the Company’s programming contracts.
(3) “Other” represents other guaranteed minimum commitments, which consist primarily of commitments to the Company's customer premise equipment vendors.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
The following items are not included in the contractual obligation table due to various factors discussed below. However, the Company incurs these costs as part of its operations:
The Company rents utility poles used in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the years ended December 31, 2014, 2013,2017, 2016 and 20122015 was $49$167 million,, $49 $115 million, and $47$53 million,, respectively.
The Company pays franchise fees under multi-year franchise agreements based on a percentage of revenues generated from video service per year. The Company also pays other franchise related costs, such as public education grants, under multi-year agreements. Franchise fees and other franchise-related costs included in the accompanying statement of operations were $208$705 million,, $190 $534 million, and $176$212 million for the years ended December 31, 2014, 2013,2017, 2016 and 20122015 respectively.
The Company also has $85$291 million in letters of credit, of which $137 million is secured under the Charter Operating credit facility, primarily to its various worker’s compensation, property and casualty and general liability carriers as collateral for reimbursement of workers' compensation, auto liability and general liability claims.
Minimum pension funding requirements have not been presented in the table above as such amounts have not been determined beyond 2017. The Company made no cash contributions to the qualified pension plans in 2017; however, the Company is permitted to make discretionary cash contributions to the qualified pension plans in 2018. For the nonqualified pension plan, the Company contributed $18 million during 2017 and will continue to make contributions in 2018 to the extent benefits are paid.
Legal Proceedings
In August 2015, a purported stockholder of Charter, Matthew Sciabacucchi, filed a lawsuit in the Delaware Court of Chancery, on behalf of a putative class of Charter stockholders, challenging the transactions between Charter, TWC, A/N, and Liberty Broadband announced by Charter on May 26, 2015. The lawsuit names as defendants Liberty Broadband, Legacy Charter, the board of directors of Charter, and Charter. Plaintiff alleges that the Liberty Transactions improperly benefit Liberty Broadband at
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
Litigationthe expense of other Charter shareholders. Charter filed a motion to dismiss this litigation. The Court of Chancery has not yet made a final ruling on the motion to dismiss. Charter denies any liability, believes that it has substantial defenses, and intends to vigorously defend this suit. Although Charter is unable to predict the outcome of this lawsuit, it does not expect the outcome will have a material effect on its operations, financial condition or cash flows.
The Montana DepartmentCalifornia Attorney General and the Alameda County, California District Attorney are investigating whether certain of Revenue ("Montana DOR"Legacy Charter’s waste disposal policies, procedures and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. That investigation was commenced in January 2014. A similar investigation involving Legacy TWC was initiated in February 2012. Charter is cooperating with these investigations. While the Company is unable to predict the outcome of these investigations, it does not expect that the outcome will have a material effect on its operations, financial condition, or cash flows.
On December 19, 2011, Sprint Communications Company L.P. (“Sprint”) generally assesses property taxesfiled a complaint in the U.S. District Court for the District of Kansas alleging that Legacy TWC infringed certain U.S. patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. A trial began on cable companies at 3%February 13, 2017. On March 3, 2017 the jury returned a verdict of $140 million against Legacy TWC and on telephone companies at 6%. Historically, Bresnan's cable and telephone operations have been taxed separately byfurther concluded that Legacy TWC had willfully infringed Sprint’s patents. The court subsequently declined to enhance the Montana DOR. In 2010, the Montana DOR assessed Bresnandamage award as a single telephone businessresult of the purported willful infringement and retroactively assessed itawarded Sprint an additional $6 million, representing pre-judgment interest on the damages award. The Company has appealed the case to the United States Court of Appeals for the Federal Circuit. In addition to its appeal, the Company continues to pursue indemnity from one of its vendors. The impact of the verdict was reflected in the measurement period adjustments to net current liabilities as such for 2007 through 2009. Bresnan fileddescribed in Note 3. The Company does not expect that the outcome of this litigation will have a declaratory judgment actionmaterial adverse effect on its operations or financial condition. The ultimate outcome of this litigation or the pursuit of indemnity against the Montana DORCompany’s vendor cannot be predicted.
Subsequently, on December 2, 2017, Sprint filed suit against Charter in Montana Statethe United States District Court challenging its property tax classifications for 2007 through 2010.the District of Delaware. The Montana State Court issued decisions in favornew suit alleges infringement of Bresnan. The Montana DOR filed a notice of appeal15 patents related to the MontanaCompany's provision of voice services (ten of which were already asserted against Legacy TWC in the matter described above). Charter is investigating the allegations and will vigorously defend this case. While the Company is unable to predict the outcome of its investigations, it does not expect that this litigation will have a material effect on its operations, financial condition, or cash flows.
On October 23, 2015, the New York Office of the Attorney General (the “NY AG”) began an investigation of Legacy TWC's advertised Internet speeds and other Internet product advertising. On February 1, 2017, the NY AG filed suit in the Supreme Court for the State of New York alleging that Legacy TWC's advertising of Internet speeds was false and misleading. The suit seeks restitution and injunctive relief. The Company has moved to dismiss the NY AG’s complaint and the Company intends to defend itself vigorously. Although no assurances can be made that such defenses would ultimately be successful, the Company does not expect that the outcome of this litigation will have a material adverse effect on September 20, 2012. On December 2, 2013, the Montana Supreme Court reversed the trial court’s decision. On June 19, 2014, the parties settled this dispute. For tax years 2007 through 2009, Charter reduced Bresnan acquisition liabilities by approximately $8 million with the offset to goodwill, and operating expenses were reduced by approximately $3 million for post-acquisition tax years.its operations, financial condition or cash flows.
The Company is a defendant or co-defendant in several additional lawsuits involving alleged infringement of various patents relating to various aspects of its businesses. Other industry participants are also defendants in certain of these cases. In the event that a court ultimately determines that the Company infringes on any intellectual property rights, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the patents at issue. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company'sCompany’s consolidated financial condition, results of operations, or liquidity. The Company cannot predict the outcome of any such claims nor can it reasonably estimate a range of possible loss.
The Company is party to lawsuits, claims and claimsregulatory inquiries that arise in the ordinary course of conducting its business, including lawsuits claiming violation of wage and hour laws.business. The ultimate outcome of these other legal matters pending against the Company cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. Whether or not the Company ultimately prevails in any particular lawsuit or claim, litigation can be time consuming and costly and injure the Company'sCompany’s reputation.
Regulation in the Cable Industry
The operation of a cable system is extensively regulated by the Federal Communications Commission (“FCC”), some state governments and most local governments. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. The Telecommunications Act of 1996 altered the regulatory structure governing the nation’s communications providers. It removed barriers to competition in both the cable television market and the telephone market. Among other things, it reduced the scope of cable rate regulation and encouraged additional competition in the video programming industry by allowing telephone companies to provide video programming in their own telephone service areas. Future legislative and regulatory changes could adversely affect the Company’s operations.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
19.21. Employee Benefit Plans
Pension Plans
The Company sponsors two qualified defined benefit pension plans, the TWC Pension Plan and the TWC Union Pension Plan, that provide pension benefits to a majority of Legacy TWC employees. The Company also provides a nonqualified defined benefit pension plan for certain employees under the TWC Excess Pension Plan.
Changes in the projected benefit obligation, fair value of plan assets and funded status of the pension plans from January 1 through December 31 are presented below:
|
| | | | | | | |
| | 2017 | | 2016 |
| Projected benefit obligation at beginning of year | $ | 3,260 |
| | $ | — |
|
| Benefit obligation assumed in the TWC Transaction | — |
| | 4,009 |
|
| Service cost | — |
| | 86 |
|
| Interest cost | 133 |
| | 87 |
|
| Curtailment amendment | — |
| | (675 | ) |
| Actuarial (gain) loss | 406 |
| | (149 | ) |
| Settlement | (185 | ) | | — |
|
| Benefits paid | (45 | ) | | (98 | ) |
| Projected benefit obligation at end of year | $ | 3,569 |
| | $ | 3,260 |
|
| | | | |
| Accumulated benefit obligation at end of year | $ | 3,569 |
| | $ | 3,260 |
|
| | | | |
| Fair value of plan assets at beginning of year | $ | 2,946 |
| | $ | — |
|
| Fair value of plan assets acquired in the TWC Transaction | — |
| | 2,877 |
|
| Actual return on plan assets | 539 |
| | 162 |
|
| Employer contributions | 18 |
| | 5 |
|
| Settlement | (185 | ) | | — |
|
| Benefits paid | (45 | ) | | (98 | ) |
| Fair value of plan assets at end of year | $ | 3,273 |
| | $ | 2,946 |
|
| | | | |
| Funded status | $ | (296 | ) | | $ | (314 | ) |
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the qualified pension plans and the nonqualified pension plan as of December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | | | | | | | | | |
| | Qualified Pension Plans | | Nonqualified Pension Plan |
| | December 31, | | December 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Projected benefit obligation | $ | 3,528 |
| | $ | 3,204 |
| | $ | 41 |
| | $ | 56 |
|
| Accumulated benefit obligation | $ | 3,528 |
| | $ | 3,204 |
| | $ | 41 |
| | $ | 56 |
|
| Fair value of plan assets | $ | 3,273 |
| | $ | 2,946 |
| | $ | — |
| | $ | — |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
Pretax amounts recognized in the consolidated balance sheet as of December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Noncurrent asset | $ | 1 |
| | $ | 1 |
|
| Current liability | (5 | ) | | (6 | ) |
| Long-term liability | (292 | ) | | (309 | ) |
| Net amounts recognized in consolidated balance sheet | $ | (296 | ) | | $ | (314 | ) |
The components of net periodic benefit costs for the years ended December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| Service cost | $ | — |
| | $ | 86 |
|
| Interest cost | 133 |
| | 87 |
|
| Expected return on plan assets | (189 | ) | | (116 | ) |
| Pension curtailment gain | — |
| | (675 | ) |
| Remeasurement (gain) loss | 55 |
| | (195 | ) |
| Net periodic pension (benefit) cost | $ | (1 | ) | | $ | (813 | ) |
During the year ended December 31, 2017, lump-sum distributions to qualified and nonqualified pension plan participants exceeded the estimated annual interest cost of the plans resulting in a settlement for accounting purposes. As a result, the pension liability and pension asset values were reassessed as of September 30, 2017 utilizing remeasurement date assumptions in accordance with the Company's mark-to-market pension accounting policy to record gains and losses in the period in which a remeasurement event occurs. The $55 million remeasurement loss recorded during the year ended December 31, 2017 was primarily driven by the adoption of the revised lump sum conversion mortality tables published by the IRS effective January 1, 2018 and the effects of a decrease of the discount rate from 4.20% at December 31, 2016 to 3.68% at December 31, 2017, partially offset by an actuarial gain on pension asset actual returns. Approximately $30 million of the remeasurement loss was recorded for the interim remeasurement event as of September 30, 2017 and $25 million was recorded for the annual remeasurement as of December 31, 2017.
The $195 million remeasurement gain recorded during the year ended December 31, 2016 was primarily driven by the effects of an increase of the discount rate from 3.99% at the closing date of the TWC Transaction to 4.20% at December 31, 2016 and a gain to record pension assets at December 31, 2016 fair values.
The discount rates used to determine benefit obligations as of December 31, 2017 and 2016 were 3.68% and 4.20%, respectively. The Company utilized the RP 2015/MP2015 mortality tables published by the Society of Actuaries to measure the benefit obligations as of December 31, 2017 and 2016.
Weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2017 and 2016 consisted of the following:
|
| | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 |
| Expected long-term rate of return on plan assets | 6.50 | % | | 6.50 | % |
Discount rate (a) | 3.88 | % | | 3.72 | % |
Rate of compensation increase (b) | — | % | | — | % |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
| |
(a) | The discount rate used to determine net periodic pension benefit was 4.20% from January 1, 2017 through remeasurement date (September 30, 2017), and was 3.88% from remeasurement date through December 31, 2017. The discount rate used to determine net periodic pension benefit was 3.99% from the closing date of the TWC Transaction through remeasurement date (June 30, 2016), and was 3.72% from remeasurement date through December 31, 2016. |
| |
(b) | The rate of compensation increase used to determine net periodic pension benefit was 4.25% from the closing date of the TWC Transaction through remeasurement date (June 30, 2016), and 0% thereafter. See “Pension Plan Curtailment Amendment” below for further discussion. |
In developing the expected long-term rate of return on plan assets, the Company considered the pension portfolio’s composition, past average rate of earnings and the Company’s future asset allocation targets. The weighted average expected long-term rate of return on plan assets and discount rate used to determine net periodic pension benefit for the year ended December 31, 2018 are expected to be 6.50% and 3.68%, respectively. The Company determined the discount rates used to determine benefit obligations and net periodic pension benefit based on the yield of a large population of high quality corporate bonds with cash flows sufficient in timing and amount to settle projected future defined benefit payments.
Pension Plan Curtailment Amendment
Following the closing of the TWC Transaction, Charter amended the pension plans to freeze future benefit accruals to current active plan participants as of August 31, 2016. Effective September 1, 2016, no future compensation increases or future service will be credited to participants of the pension plans and new hires are not eligible to participate in the plans. Upon announcement and approval of the plan amendment, the assumptions underlying the pension liability and pension asset values were reassessed utilizing remeasurement date assumptions in accordance with Charter’s mark-to-market pension accounting policy to record gains and losses in the period in which a remeasurement event occurs. The $675 million curtailment gain recorded during the year ended December 31, 2016 was primarily driven by the reduction of the compensation rate assumption to 0% in accordance with the terms of the plan amendment, reflecting the pension liability at its accumulated benefit obligation instead of its projected benefit obligation at the remeasurement date.
Pension Plan Assets
The assets of the qualified pension plans are held in a master trust in which the qualified pension plans are the only participating plans (the “Master Trust”). The investment policy for the qualified pension plans is to manage the assets of the Master Trust with the objective to provide for pension liabilities to be met, maintaining retirement income security for the participants of the plans and their beneficiaries. The investment portfolio is a mix of pooled funds invested in fixed income and equity securities with the objective of matching plan liability performance, diversifying risk and achieving a target investment return. The pension plan’s Investment Committee establishes risk mitigation policies and regularly monitors investment performance, investment allocation policies, and the execution of these strategies. The Investment Committee engages a third-party investment firm with responsibility of executing the directives of the Investment Committee, monitoring the performance of individual investment managers of the Master Trust, and making adjustments and changes within defined parameters when necessary. On a periodic basis, the Investment Committee conducts a broad strategic review of its portfolio construction and investment allocation policies. Neither the Company, the Investment Committee, nor the third-party investment firm manages any assets internally or directly utilizes derivative instruments or hedging; however, the investment mandate of some investment managers allows the use of derivatives as components of their standard portfolio management strategies. Pension assets are managed in a balanced portfolio comprised of two major components: a return-seeking portion and a liability-matching portion. The expected role of return-seeking investments is to achieve a reasonable long-term growth of pension assets with a prudent level of risk using asset diversity in order to balance return and volatility, while the role of liability-matching investments is to provide a partial economic hedge against liability performance associated with changes in interest rates.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
The Company adopted an investment strategy referred to as a de-risking glide path to increase the fixed income allocation as the funded status of the qualified pension plans improves. As the qualified pension plans reach set funded status milestones, the assets will be rebalanced to shift more assets from equity to fixed income. Based on the progress with this strategy, the target investment allocation for pension fund assets is permitted to vary within specified ranges subject to Investment Committee approval for return-seeking securities and liability-matching securities. The target and actual investment allocation of the qualified pension plans by asset category as of December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | | |
| | | | Actual Allocation |
| | Target | | December 31, |
| | Allocation | | 2017 | | 2016 |
| Return-seeking securities | 75.0 | % | | 73.1 | % | | 64.4 | % |
| Liability-matching securities | 25.0 | % | | 26.7 | % | | 35.4 | % |
| Other investments | — | % | | 0.2 | % | | 0.2 | % |
The following table sets forth the investment assets of the qualified pension plans, which exclude accrued investment income and investments with a fair value measured at net asset value per share as a practical expedient, by level within the fair value hierarchy as of December 31, 2017:
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Cash | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
|
Commingled equity funds(a) | 2,368 |
| | — |
| | 2,368 |
| | — |
|
Corporate debt securities(b) | 1 |
| | — |
| | 1 |
| | — |
|
Commingled bond funds(a) | 795 |
| | — |
| | 795 |
| | — |
|
Collective trust funds(c) | 68 |
| | — |
| | 68 |
| | — |
|
| Total investment assets | 3,235 |
| | $ | 3 |
| | $ | 3,232 |
| | $ | — |
|
Accrued investment income and other receivables(d) | 34 |
| | | | | | |
Investments measured at net asset value (e) | 4 |
| | | | | | |
| Fair value of plan assets | $ | 3,273 |
| | | | | | |
| |
(a) | Commingled funds primarily include global equity index, corporate bond, and U.S. treasury securities. The funds are valued using the net asset value provided by the administrator of the fund. The fair value of each fund is based on the fair value of securities in the portfolio, which represents the amount that the fund might reasonably expect to receive for the securities upon a sale, less liabilities, and then divided by the number of units outstanding. These funds are valued using observable inputs on either a daily or weekly basis and the resulting value serves as a basis for current transactions. |
| |
(b) | Corporate debt securities are valued based on observable prices from the new issue market, benchmark quotes, secondary trading and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features and final spreads are added to the U.S. Treasury curve. |
| |
(c) | Collective trust funds primarily consist of short-term investment strategies comprised of instruments issued or fully guaranteed by the U.S. government and/or its agencies and are valued using the net asset value provided by the administrator of the fund. The net asset value is based on the readily determinable value of the underlying assets owned by the fund, less liabilities, and then divided by the number of units outstanding. |
| |
(d) | Accrued investment income includes dividends and interest receivable. |
| |
(e) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. These investments primarily consist of hedge funds, which includes hard to value or illiquid securities. The fair value of each fund is based on the fair value of assets in the portfolio, which represents the amount that the fund might reasonably expect to receive for the assets upon a sale, less liabilities, and then divided by the number of units outstanding. Certain hedge funds report net asset value per share on a quarter lag. Shares of the funds are not redeemable and the underlying assets are anticipated to be liquidated and distributed to investors in the near term. There are |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
no material unfunded commitments with respect to these investments. The fair value amounts presented in this table are intended to permit the reconciliation of the fair value hierarchy to the total fair value of plan assets discussed throughout this footnote.
The following table sets forth the investment assets of the qualified pension plans, which exclude accrued investment income and other receivables, accrued liabilities, and investments with a fair value measured at net asset value per share as a practical expedient, by level within the fair value hierarchy as of December 31, 2016:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Cash | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
| Common stocks: | | | | | | | — |
|
Domestic(a) | 1,065 |
| | 1,065 |
| | — |
| | — |
|
International(a) | 391 |
| | 391 |
| | — |
| | — |
|
Commingled equity funds(b) | 348 |
| | — |
| | 348 |
| | — |
|
Other equity securities(c) | 3 |
| | 3 |
| | — |
| | — |
|
Corporate debt securities(d) | 394 |
| | — |
| | 394 |
| | — |
|
Commingled bond funds(b) | 273 |
| | — |
| | 273 |
| | — |
|
U.S. Treasury debt securities(a) | 260 |
| | 260 |
| | — |
| | — |
|
Collective trust funds(e) | 75 |
| | — |
| | 75 |
| | — |
|
U.S. government agency asset-backed debt securities(f) | 53 |
| | — |
| | 53 |
| | — |
|
Corporate asset-backed debt securities(g) | 2 |
| | — |
| | 2 |
| | — |
|
Other fixed-income securities(h) | 89 |
| | — |
| | 89 |
| | — |
|
| Total investment assets | 2,955 |
| | $ | 1,721 |
| | $ | 1,234 |
| | $ | — |
|
Accrued investment income and other receivables(i) | 107 |
| | | | | | |
Accrued liabilities(i) | (120 | ) | | | | | | |
Investments measured at net asset value (j) | 4 |
| | | | | | |
| Fair value of plan assets | $ | 2,946 |
| | | | | | |
| |
(a) | Common stocks, mutual funds and U.S. Treasury debt securities are valued at the closing price reported on the active market on which the individual securities are traded. No single industry comprised a significant portion of common stock held by the qualified pension plan as of December 31, 2016. |
| |
(b) | Commingled equity funds and commingled bond funds are valued using the net asset value provided by the administrator of the fund. The fair value of each fund is based on the fair value of securities in the portfolio, which represents the amount that the fund might reasonably expect to receive for the securities upon a sale, less liabilities, and then divided by the number of units outstanding. These funds are valued using observable inputs on either a daily or weekly basis and the resulting value serves as a basis for current transactions. |
| |
(c) | Other equity securities consist of preferred stocks, which are valued at the closing price reported on the active market on which the individual securities are traded. |
| |
(d) | Corporate debt securities are valued based on observable prices from the new issue market, benchmark quotes, secondary trading and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features and final spreads are added to the U.S. Treasury curve. |
| |
(e) | Collective trust funds primarily consist of short-term investment strategies comprised of instruments issued or fully guaranteed by the U.S. government and/or its agencies and are valued using the net asset value provided by the administrator of the fund. The net asset value is based on the readily determinable value of the underlying assets owned by the fund, less liabilities, and then divided by the number of units outstanding. |
| |
(f) | U.S. government agency asset-backed debt securities consist of pass-through mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association valued using available trade information, dealer quotes, market indices and research reports, spreads, bids and offers. |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
| |
(g) | Corporate asset-backed debt securities primarily consist of pass-through mortgage-backed securities issued by U.S. and foreign corporations valued using available trade information, dealer quotes, market indices and research reports, spreads, bids and offers. |
| |
(h) | Other fixed-income securities consist of foreign government debt securities, municipal bonds and U.S. government agency debt securities, which are valued based on observable prices from the new issue market, benchmark quotes, secondary trading and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features and final spreads are added to the U.S. Treasury curve. |
| |
(i) | Accrued investment income and other receivables includes amounts receivable under foreign exchange contracts of $70 million as of December 31, 2016. Accrued liabilities includes amounts accrued under foreign exchange contracts of $71 million as of December 31, 2016. The fair value of the assets and liabilities associated with these foreign exchange contracts are presented on a gross basis and are valued using the exchange rates in effect for the applicable currencies as of the valuation date (a Level 1 fair value measurement). |
| |
(j) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. These investments primarily consist of hedge funds valued utilizing net asset value provided by the administrator of the fund, which is based on the value of the underlying assets owned by the fund, less liabilities, and then divided by the number of units outstanding. Shares of the fund are not redeemable and the underlying assets are anticipated to be liquidated and distributed to investors in the near term. There are no material unfunded commitments with respect to these investments. The fair value amounts presented in this table are intended to permit the reconciliation of the fair value hierarchy to the total fair value of plan assets discussed throughout this footnote. |
Pension Plan Contributions
The Company made no cash contributions to the qualified pension plans during the years ended December 31, 2017 and 2016; however, the Company may make discretionary cash contributions to the qualified pension plans in the future. Such contributions will be dependent on a variety of factors, including current and expected interest rates, asset performance, the funded status of the qualified pension plans and management’s judgment. For the nonqualified unfunded pension plan, the Company will continue to make contributions during 2018 to the extent benefits are paid.
Benefit payments for the pension plans are expected to be $186 million in 2018, $188 million in 2019, $191 million in 2020, $192 million in 2021, $193 million in 2022 and $944 million in 2023 to 2027.
Multiemployer Plans
The Company contributes to a number of multiemployer plans under the terms of collective-bargaining agreements that cover its union-represented employees. Such multiemployer plans provide medical, pension and retirement savings benefits to active employees and retirees. The Company made contributions to multiemployer plans of $18 million and $31 million for the years ended December 31, 2017 and 2016, respectively.
The risks of participating in multiemployer pension plans are different from single-employer pension plans in the following aspects: (a) assets contributed to a multiemployer pension plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the multiemployer pension plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (c) if the Company chooses to stop participating in any of the multiemployer pension plans, it may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. The Company records withdrawal liabilities as other long-term liabilities in the consolidated balance sheets. As of December 31, 2017, other long-term liabilities includes approximately $83 million related to the Company's withdrawal from a multiemployer pension plan.
The multiemployer pension plans to which the Company has contributed each received a Pension Protection Act “green” zone status in 2016. The zone status is based on the most recent information the Company received from the plan and is certified by the plan’s actuary. Among other factors, plans in the green zone are at least 80% funded.
Defined Contribution Benefit Plans
The Company’s employees may participate in the Charter Communications, Inc. 401(k) Plan.Plan (the “401(k) Plan”). Employees that qualify for participation can contribute up to 50% of their salary, on a pre-tax basis, subject to a maximum contribution limit as
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
determined by the Internal Revenue Service. Each payroll period, the Company will contribute to the 401(k) Plan the total amount of the salary contribution the employee elects to defer between 1% and 50%. The Company’s matching contribution is discretionary and is equal to 50%100% of the amount of the salary reduction the participant elects to defer (up to 6% of the participant’s eligible compensation), excluding any catch-up contributions and is paid by the Company on a per pay period basis. The Company made contributions to the 401(k) plan totaling $19$274 million,, $16 $147 million and $8$23 million for the years ended December 31, 20142017, 20132016 and 2012,2015, respectively.
For employees who are not eligible to participate in the Company’s long-term incentive plan and who are not covered by a collective bargaining agreement, the Company offers a contribution to the new Retirement Accumulation Plan ("RAP"), equal to 3% of eligible pay. The Company made contributions to the RAP totaling $139 million and $48 million for the years ended December 31, 2017 and 2016, respectively.
20.22. Recently Issued Accounting Standards
Accounting Standards Adopted January 1, 2017
In April 2014,March 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU")ASU No. 2014-08,2016-09, Improvements to Employee Share-Based Payment Accounting, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The new standard (1) requires all excess tax benefits and deficiencies to be recognized as income tax expense or benefit in the income statement in the period in which they occur regardless of whether the benefit reduces taxes payable in the current period, (2) requires classification of excess tax benefits as an operating activity on the statements of cash flows, (3) allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur and (4) causes the threshold under which employee share-based awards partially settled in cash can qualify for equity classification to increase to the maximum statutory tax rates in the applicable jurisdiction. The new standard generally requires a modified retrospective transition through a cumulative-effect adjustment as of the beginning of the period of adoption, with certain provisions requiring either a prospective or retrospective transition. The Company adopted ASU 2016-09 on January 1, 2017. Upon adoption of ASU 2016-09, the Company recognized excess tax benefits in deferred tax assets that were previously not recognized in a cumulative-effect adjustment to retained earnings. The Company will prospectively record a deferred tax benefit or expense associated with the difference between book and tax for stock compensation expense. On January 1, 2017, the Company also established an accounting policy election to assume zero forfeitures for stock award grants and account for forfeitures when they occur which prospectively impacts stock compensation expense. The total impact to shareholders' equity was a $131 million increase to retained earnings, a $9 million increase to additional paid-in capital and a $140 million decrease to net deferred tax liabilities.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Financial StatementsNet Periodic Pension Cost and Property, Plant, and Equipment: Reporting Discontinued Operations and DisclosuresNet Periodic Postretirement Benefit Cost ("ASU 2017-07"), which requires employers to report the service cost component of Disposals ofnet periodic pension cost in the same line item as other compensation costs arising from services rendered during the period. The standard also requires the other components of an Entity ("net periodic cost be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. ASU 2014-08"). ASU 2014-08 changes the criteria2017-07 will be effective for reporting a discontinued operation. Under the new guidance, a disposed component of an organization that represents a strategic shift that has (or will have) a major effect on its operations and financial results is a discontinued operation. For disposals of individually significant components that do not qualify for discontinued operations presentation, an entity must disclose pre-tax profit or loss of the disposed component. ASU 2014-08 requires prospective application to all disposals that are classified as held for sale and that occur within annual and interim periods beginning on or after December 15, 2014, with earlier2017, and early adoption is permitted. The new standard requires retrospective application permittedand allows a practical expedient that permits an employer to use the amounts disclosed in its pension plan footnote for disposals that have not been reportedthe prior comparative periods as the estimation basis for applying the retrospective presentation. The Company early adopted ASU 2017-07 on January 1, 2017 and utilized the practical expedient to estimate the impact on the prior comparative period information presented in previously issuedinterim and annual financial statements. The Company adoptedpreviously recorded service cost with other compensation costs in operating costs and expenses in the consolidated statements of operations, and recorded other pension costs (benefits), in other operating expenses, net. Adoption of the standard results in the reclassification of other pension costs (benefits) to other expenses, net (non-operating). Adopting the standard reduced 2016 income from operations presented for comparative purposes in the 2017 annual financial statements by $899 million with a corresponding decrease to other expenses of $899 million, with no impact to net income. ASU 2014-08 on2017-07 does not impact the consolidated balance sheets or statements of cash flows.
Accounting Standards Adopted January 1, 2015. The adoption of ASU 2014-8 did not have a material impact on its consolidated financial statements.2018
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (" (“ASU 2014-09"2014-09”), which requires an entity to recognize the amount ofis a comprehensive revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASUrecognition standard that will replace mostsupersede nearly all existing revenue recognition guidance under U.S. GAAP. The new standard provides a single principles-based, five-step model to be applied to all contracts with customers, which steps are to (1) identify the contract(s) with the customer, (2) identify the performance obligations in U.S. GAAPthe contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when it becomes effective.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
each performance obligation is satisfied. Charter adopted ASU 2014-09 as of the January 1, 2018 using the modified retrospective transition method with a cumulative-effect adjustment to equity as will be fully presented in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018. The effective dateadoption of the new standard did not have a material impact on the Company’s financial position or results of operation. Previously reported results will not be restated under this transition method. The Company has implemented new processes and internal controls to enable the preparation of financial information on adoption. The adoption results in the deferral of residential installation revenues and enterprise commission expenses over a period of time instead of recognized immediately and the reclassification to operating costs and expenses the amortization of up-front fees paid to market and serve customers who reside in residential MDUs instead of amortized as an intangible to depreciation and amortization expense. The adoption of ASU 2014-09 will also result in additional disclosures around nature and timing of the Company’s performance obligations, deferred revenue contract liabilities, deferred contract cost assets, as well as significant judgments and practical expedients used by the Company in applying the five-step revenue model.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies how entities should classify cash receipts and cash payments related to eight specific cash flow matters on the statement of cash flows, with the objective of reducing existing diversity in practice. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact to the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) which requires that amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 on January 1, 2018. The new guidance will only be applicable to amounts described by the Company as restricted cash. The Company currently does not have amounts described as restricted cash; however, the Company's consolidated statement of cash flows for the year ended December 31, 2016 will be recast to present $22.3 billion of restricted cash as beginning of period cash and cash equivalents.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting ("ASU 2017-09"), which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is fiscal yearsapplied prospectively to awards modified on or after the effective date. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact to the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. ASU 2016-02 will be effective for interim and annual periods beginning after December 15, 2016, and interim periods within those years, with earlier adoption prohibited. Companies can2018 (January 1, 2019 for the Company). The new standard currently requires a modified retrospective transition to the standard either retrospectively or asthrough a cumulative-effect adjustment as of the datebeginning of the earliest period presented in the financial statements, although an option for transition relief to not restate or make required disclosures under the new standard in comparative periods in the period of adoption was recently exposed by the FASB for public comment. The Company is currently in the process of evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements including identifying the population of leases, evaluating technology solutions and collecting lease data. The Company expects its leases designated as operating leases in Note 20 will be reported on the consolidated balance sheets upon adoption. The Company hasis currently evaluating the impact to its consolidated financial statements as it relates to other embedded lease arrangements of the business.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates step two from the goodwill impairment test. Under the new standard, to the extent the carrying amount of a reporting unit exceeds the fair value, the Company will record an impairment charge equal to the difference. The impairment charge recognized should not yet selected a transition method nor has it determinedexceed the effecttotal amount of goodwill allocated to the reporting unit. ASU 2017-04 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). Early adoption is permitted for interim or
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
annual goodwill impairment tests performed after January 1, 2017. The Company is currently in the process of evaluating the impact that the adoption of ASU 2014-09 to2017-04 will have on its consolidated financial statements.
21.23. Unaudited Quarterly Financial Data
The following table presents quarterly data for the periods presented onin the consolidated statement of operations:
|
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2014 |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | | | | | | | | |
| Revenues | | $ | 2,202 |
| | $ | 2,259 |
| | $ | 2,287 |
| | $ | 2,360 |
|
| Income from operations | | $ | 240 |
| | $ | 236 |
| | $ | 218 |
| | $ | 277 |
|
| Net loss | | $ | (37 | ) | | $ | (45 | ) | | $ | (53 | ) | | $ | (48 | ) |
| | | | | | | | | |
| Loss per common share, basic and diluted | | $ | (0.35 | ) | | $ | (0.42 | ) | | $ | (0.49 | ) | | $ | (0.44 | ) |
| | | | | | | | | |
Weighted average common shares
outstanding, basic and diluted | | 106,439,198 |
| | 107,975,937 |
| | 108,792,605 |
| | 110,242,507 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenues | $ | 10,164 |
| | $ | 10,357 |
| | $ | 10,458 |
| | $ | 10,602 |
|
| Income from operations | $ | 941 |
| | $ | 1,052 |
| | $ | 909 |
| | $ | 1,204 |
|
| Net income attributable to Charter shareholders | $ | 155 |
| | $ | 139 |
| | $ | 48 |
| | $ | 9,553 |
|
| | | | | | | | |
| Earnings per common share attributable to Charter shareholders: | | | | | | | |
| Basic | $ | 0.58 |
| | $ | 0.53 |
| | $ | 0.19 |
| | $ | 39.66 |
|
| Diluted | $ | 0.57 |
| | $ | 0.52 |
| | $ | 0.19 |
| | $ | 34.56 |
|
| | | | | | | | |
| Weighted average common share outstanding: | | | | | | | |
| Basic | 269,004,817 |
| | 263,460,911 |
| | 253,923,805 |
| | 240,833,636 |
|
| Diluted | 273,199,509 |
| | 267,309,261 |
| | 258,341,851 |
| | 278,257,245 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 AND 2012
(dollars in millions, except share or per share data or where indicated)
| | | | | Year Ended December 31, 2013 | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | Year Ended December 31, 2016 |
| | | | | | | | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenues | | $ | 1,917 |
| | $ | 1,972 |
| | $ | 2,118 |
| | $ | 2,148 |
| $ | 2,530 |
| | $ | 6,161 |
| | $ | 10,037 |
| | $ | 10,275 |
|
| Income from operations | | $ | 222 |
| | $ | 234 |
| | $ | 209 |
| | $ | 244 |
| $ | 302 |
| | $ | 170 |
| | $ | 911 |
| | $ | 1,073 |
|
| Net income (loss) | | $ | (42 | ) | | $ | (96 | ) | | $ | (70 | ) | | $ | 39 |
| |
| Net income (loss) attributable to Charter shareholders | | $ | (188 | ) | | $ | 3,067 |
| | $ | 189 |
| | $ | 454 |
|
| | | | | | | | | | | | | | | | |
| Loss per common share: | | | | | | | | | |
| Earnings (loss) per common share attributable to Charter shareholders: | | | | | | | | |
| Basic | | $ | (0.42 | ) | | $ | (0.96 | ) | | $ | (0.68 | ) | | $ | 0.38 |
| $ | (1.86 | ) | | $ | 16.73 |
| | $ | 0.70 |
| | $ | 1.69 |
|
| Diluted | | (0.42 | ) | | (0.96 | ) | | (0.68 | ) | | 0.35 |
| $ | (1.86 | ) | | $ | 15.17 |
| | $ | 0.69 |
| | $ | 1.67 |
|
| | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Weighted average common share outstanding: | | | | | | | | |
| Basic | | 100,327,418 |
| | 100,600,678 |
| | 102,924,443 |
| | 103,836,535 |
| 101,552,093 |
| | 183,362,776 |
| | 271,263,259 |
| | 268,584,368 |
|
| Diluted | | 100,327,418 |
| | 100,600,678 |
| | 102,924,443 |
| | 111,415,982 |
| 101,552,093 |
| | 205,214,266 |
| | 275,373,202 |
| | 272,624,270 |
|
22.24. Consolidating Schedules
The CCOH Safari notes are obligationsEach of CCOH Safari. However, substantially concurrently with the release of the proceeds to fund a portion of the purchase of certain assets pursuant to the Transactions, the CCOH Safari notes will become obligations ofCharter Operating, TWC, LLC, TWCE, CCO Holdings and CCO Holdings Capital Corp. and CCOH Safari will merge into CCO Holdings. The CCO Holdings notes are obligations of CCO Holdings. See Notes 3 and 8. However, the CCO Holdings notes and CCOH Safari notes are alsocertain subsidiaries jointly, severally, fully and unconditionally guaranteedguarantee the outstanding debt securities of the others (other than the CCO Holdings notes) on an unsecured senior basis by Charter. The Charter Operating and Restricted Subsidiaries column is presented as a requirement pursuant to the terms of the Charter Operating credit agreement. The Unrestricted Subsidiary - CCO Safari column is a Non-Recourse Subsidiary under the Charter Operating credit agreement. In September 2014, Charter Operating entered into a term loan G facility and assigned all of its obligations with respect to the term loan G and transferred all of the proceeds from the term loan G to CCO Safari. See Note 8.
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Affiliates WhoseIssuers of Guaranteed Securities Collateralize an Issue Registered or Being Registered. Certain Charter Operating subsidiaries that are regulated telephone entities only become guarantor subsidiaries upon approval by regulators. This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.
The "Intermediate Holding Companies" column includes the assets and liabilities of the captive insurance company, a company wholly-owned by Charter outside of Charter Holdings and not one of the holding companies that directly or indirectly own Charter
Condensed consolidating financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 follow.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Balance Sheet |
| As of December 31, 2014 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| ASSETS | | | | | | | | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Accounts receivable, net | 4 |
| | 6 |
| | — |
| | — |
| | 275 |
| | — |
| | — |
| | 285 |
|
| Receivables from related party | 55 |
| | 221 |
| | — |
| | 11 |
| | — |
| | — |
| | (287 | ) | | — |
|
| Prepaid expenses and other current assets | 23 |
| | 10 |
| | — |
| | — |
| | 50 |
| | — |
| | — |
| | 83 |
|
| Total current assets | 85 |
| | 237 |
| | — |
| | 11 |
| | 325 |
| | — |
| | (287 | ) | | 371 |
|
| | | | | | | | | | | | | | | | |
| RESTRICTED CASH AND CASH EQUIVALENTS | — |
| | — |
| | 3,597 |
| | — |
| | — |
| | 3,514 |
| | — |
| | 7,111 |
|
| | | | | | | | | | | | | | | | |
| INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | | | | | |
| Property, plant and equipment, net | — |
| | 29 |
| | — |
| | — |
| | 8,344 |
| | — |
| | — |
| | 8,373 |
|
| Franchises | — |
| | — |
| | — |
| | — |
| | 6,006 |
| | — |
| | — |
| | 6,006 |
|
| Customer relationships, net | — |
| | — |
| | — |
| | — |
| | 1,105 |
| | — |
| | — |
| | 1,105 |
|
| Goodwill | — |
| | — |
| | — |
| | — |
| | 1,168 |
| | — |
| | — |
| | 1,168 |
|
| Total investment in cable properties, net | — |
| | 29 |
| | — |
| | — |
| | 16,623 |
| | — |
| | — |
| | 16,652 |
|
| | | | | | | | | | | | | | | | |
| CC VIII PREFERRED INTEREST | — |
| | 436 |
| | — |
| | — |
| | — |
| | — |
| | (436 | ) | | — |
|
| INVESTMENT IN SUBSIDIARIES | 1,509 |
| | 482 |
| | — |
| | 10,331 |
| | 27 |
| | — |
| | (12,349 | ) | | — |
|
| LOANS RECEIVABLE – RELATED PARTY | — |
| | 326 |
| | — |
| | 584 |
| | — |
| | — |
| | (910 | ) | | — |
|
| OTHER NONCURRENT ASSETS | — |
| | 166 |
| | 3 |
| | 104 |
| | 139 |
| | 4 |
| | — |
| | 416 |
|
| | | | | | | | | | | | | | | | |
| Total assets | $ | 1,594 |
| | $ | 1,676 |
| | $ | 3,600 |
| | $ | 11,030 |
| | $ | 17,114 |
| | $ | 3,518 |
| | $ | (13,982 | ) | | $ | 24,550 |
|
| | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 11 |
| | $ | 152 |
| | $ | 18 |
| | $ | 187 |
| | $ | 1,259 |
| | $ | 8 |
| | $ | — |
| | $ | 1,635 |
|
| Payables to related party | — |
| | — |
| | — |
| | — |
| | 287 |
| | — |
| | (287 | ) | | — |
|
| Total current liabilities | 11 |
| | 152 |
| | 18 |
| | 187 |
| | 1,546 |
| | 8 |
| | (287 | ) | | 1,635 |
|
| | | | | | | | | | | | | | | | |
| LONG-TERM DEBT | — |
| | — |
| | 3,500 |
| | 10,331 |
| | 3,709 |
| | 3,483 |
| | — |
| | 21,023 |
|
| LOANS PAYABLE – RELATED PARTY | — |
| | — |
| | 112 |
| | — |
| | 798 |
| | — |
| | (910 | ) | | — |
|
| DEFERRED INCOME TAXES | 1,437 |
| | — |
| | — |
| | — |
| | 237 |
| | — |
| | — |
| | 1,674 |
|
| OTHER LONG-TERM LIABILITIES | — |
| | 15 |
| | — |
| | — |
| | 57 |
| | — |
| | — |
| | 72 |
|
| | | | | | | | | | | | | | | | |
| Shareholders’/Member’s equity | 146 |
| | 1,509 |
| | (30 | ) | | 512 |
| | 10,331 |
| | 27 |
| | (12,349 | ) | | 146 |
|
| Non-controlling interest | — |
| | — |
| | — |
| | — |
| | 436 |
| | — |
| | (436 | ) | | — |
|
| Total shareholders’/member’s equity | 146 |
| | 1,509 |
| | (30 | ) | | 512 |
| | 10,767 |
| | 27 |
| | (12,785 | ) | | 146 |
|
| | | | | | | | | | | | | | | | |
| Total liabilities and shareholders’/member’s equity | $ | 1,594 |
| | $ | 1,676 |
| | $ | 3,600 |
| | $ | 11,030 |
| | $ | 17,114 |
| | $ | 3,518 |
| | $ | (13,982 | ) | | $ | 24,550 |
|
The “Safari Escrow Entities” column included in the condensed consolidating financial statements for the year ended December 31, 2015 consists of CCOH Safari, CCO Safari II and CCO Safari III. CCOH Safari, CCO Safari II and CCO Safari III issued the CCOH Safari notes, CCO Safari II notes and the CCO Safari III credit facilities, respectively. Upon closing of the TWC Transaction, the CCOH Safari notes became obligations of CCO Holdings and CCO Holdings Capital and the CCO Safari II notes and CCO Safari III credit facilities became obligations of Charter Operating and Charter Communications Operating Capital Corp. CCOH Safari merged into CCO Holdings and CCO Safari II and CCO Safari III merged into Charter Operating.
The “Unrestricted Subsidiary” column included in the condensed consolidating financial statements for the year ended December 31, 2015 consists of CCO Safari which was a non-recourse subsidiary under the Credit Agreement and held the CCO Safari Term G Loans that were repaid in April 2015.
Condensed consolidating financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 follow.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
| | Charter Communications, Inc. | Condensed Consolidating Balance Sheet | | As of December 31, 2013 | |
| As of December 31, 2017 | | As of December 31, 2017 |
| | | | | | | | | | | | | |
| | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated | Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | 21 |
| $ | — |
| | $ | 291 |
| | $ | — |
| | $ | 330 |
| | $ | — |
| | $ | 621 |
|
| Accounts receivable, net | 4 |
| | 4 |
| | — |
| | — |
| | 226 |
| | — |
| | — |
| | 234 |
| — |
| | 24 |
| | — |
| | 1,611 |
| | — |
| | 1,635 |
|
| Receivables from related party | 54 |
| | 170 |
| | — |
| | 11 |
| | — |
| | — |
| | (235 | ) | | — |
| 22 |
| | 613 |
| | 55 |
| | — |
| | (690 | ) | | — |
|
| Prepaid expenses and other current assets | 14 |
| | 10 |
| | — |
| | — |
| | 43 |
| | — |
| | — |
| | 67 |
| 22 |
| | 34 |
| | — |
| | 243 |
| | — |
| | 299 |
|
| Total current assets | 72 |
| | 189 |
| | — |
| | 11 |
| | 285 |
| | — |
| | (235 | ) | | 322 |
| 44 |
| | 962 |
| | 55 |
| | 2,184 |
| | (690 | ) | | 2,555 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| INVESTMENT IN CABLE PROPERTIES: | INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | | | | | | INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | |
| Property, plant and equipment, net | — |
| | 30 |
| | — |
| | — |
| | 7,951 |
| | — |
| | — |
| | 7,981 |
| — |
| | 336 |
| | — |
| | 33,552 |
| | — |
| | 33,888 |
|
| Customer relationships, net | | — |
| | — |
| | — |
| | 11,951 |
| | — |
| | 11,951 |
|
| Franchises | — |
| | — |
| | — |
| | — |
| | 6,009 |
| | — |
| | — |
| | 6,009 |
| — |
| | — |
| | — |
| | 67,319 |
| | — |
| | 67,319 |
|
| Customer relationships, net | — |
| | — |
| | — |
| | — |
| | 1,389 |
| | — |
| | — |
| | 1,389 |
| |
| Goodwill | — |
| | — |
| | — |
| | — |
| | 1,177 |
| | — |
| | — |
| | 1,177 |
| — |
| | — |
| | — |
| | 29,554 |
| | — |
| | 29,554 |
|
| Total investment in cable properties, net | — |
| | 30 |
| | — |
| | — |
| | 16,526 |
| | — |
| | — |
| | 16,556 |
| — |
| | 336 |
| | — |
| | 142,376 |
| | — |
| | 142,712 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CC VIII PREFERRED INTEREST | — |
| | 392 |
| | — |
| | — |
| | — |
| | — |
| | (392 | ) | | — |
| |
| INVESTMENT IN SUBSIDIARIES | 1,295 |
| | 325 |
| | — |
| | 10,592 |
| | — |
| | — |
| | (12,212 | ) | | — |
| 56,263 |
| | 63,558 |
| | 81,980 |
| | — |
| | (201,801 | ) | | — |
|
| LOANS RECEIVABLE – RELATED PARTY | — |
| | 318 |
| | — |
| | 461 |
| | — |
| | — |
| | (779 | ) | | — |
| 233 |
| | 655 |
| | 511 |
| | — |
| | (1,399 | ) | | — |
|
| OTHER NONCURRENT ASSETS | — |
| | 160 |
| | — |
| | 119 |
| | 138 |
| | — |
| | — |
| | 417 |
| — |
| | 223 |
| | — |
| | 1,133 |
| | — |
| | 1,356 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 1,367 |
| | $ | 1,414 |
| | $ | — |
| | $ | 11,183 |
| | $ | 16,949 |
| | $ | — |
| | $ | (13,618 | ) | | $ | 17,295 |
| $ | 56,540 |
| | $ | 65,734 |
| | $ | 82,546 |
| | $ | 145,693 |
| | $ | (203,890 | ) | | $ | 146,623 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 12 |
| | $ | 113 |
| | $ | — |
| | $ | 187 |
| | $ | 1,155 |
| | $ | — |
| | $ | — |
| | $ | 1,467 |
| $ | 4 |
| | $ | 900 |
| | $ | 280 |
| | $ | 7,861 |
| | $ | — |
| | $ | 9,045 |
|
| Payables to related party | — |
| | — |
| | — |
| | — |
| | 235 |
| | — |
| | (235 | ) | | — |
| — |
| | — |
| | — |
| | 690 |
| | (690 | ) | | — |
|
| Current portion of long-term debt | | — |
| | — |
| | — |
| | 2,045 |
| | — |
| | 2,045 |
|
| Total current liabilities | 12 |
| | 113 |
| | — |
| | 187 |
| | 1,390 |
| | — |
| | (235 | ) | | 1,467 |
| 4 |
| | 900 |
| | 280 |
| | 10,596 |
| | (690 | ) | | 11,090 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LONG-TERM DEBT | — |
| | — |
| | — |
| | 10,671 |
| | 3,510 |
| | — |
| | — |
| | 14,181 |
| — |
| | — |
| | 18,708 |
| | 49,478 |
| | — |
| | 68,186 |
|
| LOANS PAYABLE – RELATED PARTY | — |
| | — |
| | — |
| | — |
| | 779 |
| | — |
| | (779 | ) | | — |
| — |
| | — |
| | — |
| | 1,399 |
| | (1,399 | ) | | — |
|
| DEFERRED INCOME TAXES | 1,204 |
| | — |
| | — |
| | — |
| | 227 |
| | — |
| | — |
| | 1,431 |
| 17,268 |
| | 14 |
| | — |
| | 32 |
| | — |
| | 17,314 |
|
| OTHER LONG-TERM LIABILITIES | — |
| | 6 |
| | — |
| | — |
| | 59 |
| | — |
| | — |
| | 65 |
| 184 |
| | 134 |
| | — |
| | 2,184 |
| | — |
| | 2,502 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’/Member’s equity | 151 |
| | 1,295 |
| | — |
| | 325 |
| | 10,592 |
| | — |
| | (12,212 | ) | | 151 |
| |
| Non-controlling interest | — |
| | — |
| | — |
| | — |
| | 392 |
| | — |
| | (392 | ) | | — |
| |
| SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | | |
| Controlling interest | | 39,084 |
| | 56,263 |
| | 63,558 |
| | 81,980 |
| | (201,801 | ) | | 39,084 |
|
| Noncontrolling interests | | — |
| | 8,423 |
| | — |
| | 24 |
| | — |
| | 8,447 |
|
| Total shareholders’/member’s equity | 151 |
| | 1,295 |
| | — |
| | 325 |
| | 10,984 |
| | — |
| | (12,604 | ) | | 151 |
| 39,084 |
| | 64,686 |
| | 63,558 |
| | 82,004 |
| | (201,801 | ) | | 47,531 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders’/member’s equity | $ | 1,367 |
| | $ | 1,414 |
| | $ | — |
| | $ | 11,183 |
| | $ | 16,949 |
| | $ | — |
| | $ | (13,618 | ) | | $ | 17,295 |
| $ | 56,540 |
| | $ | 65,734 |
| | $ | 82,546 |
| | $ | 145,693 |
| | $ | (203,890 | ) | | $ | 146,623 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Operations |
| For the year ended December 31, 2014 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| REVENUES | $ | 22 |
| | $ | 235 |
| | $ | — |
| | $ | — |
| | $ | 9,108 |
| | $ | — |
| | $ | (257 | ) | | $ | 9,108 |
|
| | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | |
| Operating costs and expenses (excluding depreciation and amortization) | 22 |
| | 235 |
| | — |
| | — |
| | 5,973 |
| | — |
| | (257 | ) | | 5,973 |
|
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 2,102 |
| | — |
| | — |
| | 2,102 |
|
| Other operating expenses, net | — |
| | — |
| | — |
| | — |
| �� | 62 |
| | — |
| | — |
| | 62 |
|
| | | | | | | | | | | | | | | | |
| | 22 |
| | 235 |
| | — |
| | — |
| | 8,137 |
| | — |
| | (257 | ) | | 8,137 |
|
| | | | | | | | | | | | | | | | |
| Income from operations | — |
| | — |
| | — |
| | — |
| | 971 |
| | — |
| | — |
| | 971 |
|
| | | | | | | | | | | | | | | | |
| OTHER INCOME AND (EXPENSES): | | | | | | | | | | | | | | | |
| Interest expense, net | — |
| | 8 |
| | (30 | ) | | (679 | ) | | (165 | ) | | (45 | ) | | — |
| | (911 | ) |
| Loss on derivative instruments, net | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) |
| Equity in income (loss) of subsidiaries | 40 |
| | (12 | ) | | — |
| | 697 |
| | (45 | ) | | — |
| | (680 | ) | | — |
|
| | | | | | | | | | | | | | | | |
| | 40 |
| | (4 | ) | | (30 | ) | | 18 |
| | (217 | ) | | (45 | ) | | (680 | ) | | (918 | ) |
| | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | 40 |
| | (4 | ) | | (30 | ) | | 18 |
| | 754 |
| | (45 | ) | | (680 | ) | | 53 |
|
| | | | | | | | | | | | | | | | |
| INCOME TAX EXPENSE | (223 | ) | | — |
| | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (236 | ) |
| | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | (183 | ) | | (4 | ) | | (30 | ) | | 18 |
| | 741 |
| | (45 | ) | | (680 | ) | | (183 | ) |
| | | | | | | | | | | | | | | | |
| Less: Net (income) loss – non-controlling interest | — |
| | 44 |
| | — |
| | — |
| | (44 | ) | | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (183 | ) | | $ | 40 |
| | $ | (30 | ) | | $ | 18 |
| | $ | 697 |
| | $ | (45 | ) | | $ | (680 | ) | | $ | (183 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Balance Sheet |
| As of December 31, 2016 |
| |
| | Non-Guarantor Subsidiaries | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| ASSETS | | | | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | |
| Cash and cash equivalents | $ | 57 |
| | $ | 154 |
| | $ | — |
| | $ | 1,324 |
| | $ | — |
| | $ | 1,535 |
|
| Accounts receivable, net | 34 |
| | 11 |
| | — |
| | 1,387 |
| | — |
| | 1,432 |
|
| Receivables from related party | 170 |
| | 451 |
| | 62 |
| | — |
| | (683 | ) | | — |
|
| Prepaid expenses and other current assets | — |
| | 33 |
| | — |
| | 300 |
| | — |
| | 333 |
|
| Total current assets | 261 |
| | 649 |
| | 62 |
| | 3,011 |
| | (683 | ) | | 3,300 |
|
| | | | | | | | | | | | |
| INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | |
| Property, plant and equipment, net | — |
| | 245 |
| | — |
| | 32,718 |
| | — |
| | 32,963 |
|
| Customer relationships, net | — |
| | — |
| | — |
| | 14,608 |
| | — |
| | 14,608 |
|
| Franchises | — |
| | — |
| | — |
| | 67,316 |
| | — |
| | 67,316 |
|
| Goodwill | — |
| | — |
| | — |
| | 29,509 |
| | — |
| | 29,509 |
|
| Total investment in cable properties, net | — |
| | 245 |
| | — |
| | 144,151 |
| | — |
| | 144,396 |
|
| | | | | | | | | | | | |
| INVESTMENT IN SUBSIDIARIES | 66,692 |
| | 75,838 |
| | 88,760 |
| | — |
| | (231,290 | ) | | — |
|
| LOANS RECEIVABLE – RELATED PARTY | — |
| | 640 |
| | 494 |
| | — |
| | (1,134 | ) | | — |
|
| OTHER NONCURRENT ASSETS | — |
| | 214 |
| | — |
| | 1,157 |
| | — |
| | 1,371 |
|
| | | | | | | | | | | | |
| Total assets | $ | 66,953 |
| | $ | 77,586 |
| | $ | 89,316 |
| | $ | 148,319 |
| | $ | (233,107 | ) | | $ | 149,067 |
|
| | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | |
| | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 22 |
| | $ | 625 |
| | $ | 219 |
| | $ | 6,678 |
| | $ | — |
| | $ | 7,544 |
|
| Payables to related party | — |
| | — |
| | — |
| | 683 |
| | (683 | ) | | — |
|
| Current portion of long-term debt | — |
| | — |
| | — |
| | 2,028 |
| | — |
| | 2,028 |
|
| Total current liabilities | 22 |
| | 625 |
| | 219 |
| | 9,389 |
| | (683 | ) | | 9,572 |
|
| | | | | | | | | | | | |
| LONG-TERM DEBT | — |
| | — |
| | 13,259 |
| | 46,460 |
| | — |
| | 59,719 |
|
| LOANS PAYABLE – RELATED PARTY | — |
| | — |
| | — |
| | 1,134 |
| | (1,134 | ) | | — |
|
| DEFERRED INCOME TAXES | 26,637 |
| | 3 |
| | — |
| | 25 |
| | — |
| | 26,665 |
|
| OTHER LONG-TERM LIABILITIES | 155 |
| | 64 |
| | — |
| | 2,526 |
| | — |
| | 2,745 |
|
| | | | | | | | | | | | |
| SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
| Controlling interest | 40,139 |
| | 66,692 |
| | 75,838 |
| | 88,760 |
| | (231,290 | ) | | 40,139 |
|
| Noncontrolling interests | — |
| | 10,202 |
| | — |
| | 25 |
| | — |
| | 10,227 |
|
| Total shareholders’/member’s equity | 40,139 |
| | 76,894 |
| | 75,838 |
| | 88,785 |
| | (231,290 | ) | | 50,366 |
|
| | | | | | | | | | | | |
| Total liabilities and shareholders’/member’s equity | $ | 66,953 |
| | $ | 77,586 |
| | $ | 89,316 |
| | $ | 148,319 |
| | $ | (233,107 | ) | | $ | 149,067 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Operations |
| For the year ended December 31, 2013 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| REVENUES | $ | 22 |
| | $ | 188 |
| | $ | — |
| | $ | — |
| | $ | 8,155 |
| | $ | — |
| | $ | (210 | ) | | $ | 8,155 |
|
| | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | |
| Operating costs and expenses (excluding depreciation and amortization) | 22 |
| | 188 |
| | — |
| | — |
| | 5,345 |
| | — |
| | (210 | ) | | 5,345 |
|
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 1,854 |
| | — |
| | — |
| | 1,854 |
|
| Other operating expenses, net | — |
| | — |
| | — |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
| | | | | | | | | | | | | | | | |
| | 22 |
| | 188 |
| | — |
| | — |
| | 7,246 |
| | — |
| | (210 | ) | | 7,246 |
|
| | | | | | | | | | | | | | | | |
| Income from operations | — |
| | — |
| | — |
| | — |
| | 909 |
| | — |
| | — |
| | 909 |
|
| | | | | | | | | | | | | | | | |
| OTHER INCOME AND (EXPENSES): | | | | | | | | | | | | | | | |
| Interest expense, net | — |
| | 8 |
| | — |
| | (681 | ) | | (173 | ) | | — |
| | — |
| | (846 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | — |
| | (65 | ) | | (58 | ) | | — |
| | — |
| | (123 | ) |
| Gain on derivative instruments, net | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Equity in income (loss) of subsidiaries | (75 | ) | | (114 | ) | | — |
| | 632 |
| | — |
| | — |
| | (443 | ) | | — |
|
| | | | | | | | | | | | | | | | |
| | (75 | ) | | (106 | ) | | — |
| | (114 | ) | | (220 | ) | | — |
| | (443 | ) | | (958 | ) |
| | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | (75 | ) | | (106 | ) | | — |
| | (114 | ) | | 689 |
| | — |
| | (443 | ) | | (49 | ) |
| | | | | | | | | | | | | | | | |
| INCOME TAX EXPENSE | (108 | ) | | (1 | ) | | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (120 | ) |
| | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | (183 | ) | | (107 | ) | | — |
| | (114 | ) | | 678 |
| | — |
| | (443 | ) | | (169 | ) |
| | | | | | | | | | | | | | | | |
| Less: Net (income) loss – non-controlling interest | 14 |
| | 32 |
| | — |
| | — |
| | (46 | ) | | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (169 | ) | | $ | (75 | ) | | $ | — |
| | $ | (114 | ) | | $ | 632 |
| | $ | — |
| | $ | (443 | ) | | $ | (169 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Operations |
| For the year ended December 31, 2017 |
| | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| REVENUES | $ | 90 |
| | $ | 1,186 |
| | $ | — |
| | $ | 41,578 |
| | $ | (1,273 | ) | | $ | 41,581 |
|
| | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | |
| Operating costs and expenses (exclusive of items shown separately below) | 90 |
| | 1,164 |
| | — |
| | 26,560 |
| | (1,273 | ) | | 26,541 |
|
| Depreciation and amortization | — |
| | 9 |
| | — |
| | 10,579 |
| | — |
| | 10,588 |
|
| Other operating (income) expenses, net | (101 | ) | | 3 |
| | — |
| | 444 |
| | — |
| | 346 |
|
| | (11 | ) | | 1,176 |
| | — |
| | 37,583 |
| | (1,273 | ) | | 37,475 |
|
| Income from operations | 101 |
| | 10 |
| | — |
| | 3,995 |
| | — |
| | 4,106 |
|
| | | | | | | | | | | | |
| OTHER INCOME (EXPENSES): | | | | | | | | | | | |
| Interest income (expense), net | 5 |
| | 20 |
| | (883 | ) | | (2,232 | ) | | — |
| | (3,090 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | (34 | ) | | (6 | ) | | — |
| | (40 | ) |
| Gain on financial instruments, net | — |
| | — |
| | — |
| | 69 |
| | — |
| | 69 |
|
| Other pension benefits | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Other expense, net | — |
| | (14 | ) | | — |
| | (4 | ) | | — |
| | (18 | ) |
| Equity in income of subsidiaries | 680 |
| | 882 |
| | 1,799 |
| | — |
| | (3,361 | ) | | — |
|
| | 685 |
| | 888 |
| | 882 |
| | (2,172 | ) | | (3,361 | ) | | (3,078 | ) |
| | | | | | | | | | | | |
| Income before income taxes | 786 |
| | 898 |
| | 882 |
| | 1,823 |
| | (3,361 | ) | | 1,028 |
|
| INCOME TAX BENEFIT (EXPENSE) | 9,109 |
| | 1 |
| | — |
| | (23 | ) | | — |
| | 9,087 |
|
| Consolidated net income | 9,895 |
| | 899 |
| | 882 |
| | 1,800 |
| | (3,361 | ) | | 10,115 |
|
| Less: Net income – noncontrolling interests | — |
| | (219 | ) | | — |
| | (1 | ) | | — |
| | (220 | ) |
| Net income | $ | 9,895 |
| | $ | 680 |
| | $ | 882 |
| | $ | 1,799 |
| | $ | (3,361 | ) | | $ | 9,895 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
| | Charter Communications, Inc. | Condensed Consolidating Statement of Operations | | For the year ended December 31, 2012 | |
| For the year ended December 31, 2016 | | For the year ended December 31, 2016 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated | Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | |
| | | | | | | | | | | | | | | | | Charter | | Intermediate Holding Companies | | Safari Escrow Entities | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| REVENUES | $ | 24 |
| | $ | 159 |
| | $ | — |
| | $ | — |
| | $ | 7,504 |
| | $ | — |
| | $ | (183 | ) | | $ | 7,504 |
| $ | 251 |
| | $ | 1,004 |
| | $ | — |
| | $ | — |
| | $ | 29,003 |
| | $ | (1,255 | ) | | $ | 29,003 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating costs and expenses (excluding depreciation and amortization) | 24 |
| | 159 |
| | — |
| | — |
| | 4,860 |
| | — |
| | (183 | ) | | 4,860 |
| |
| Operating costs and expenses (exclusive of items shown separately below) | | 251 |
| | 989 |
| | — |
| | — |
| | 18,670 |
| | (1,255 | ) | | 18,655 |
|
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 1,713 |
| | — |
| | — |
| | 1,713 |
| — |
| | 5 |
| | — |
| | — |
| | 6,902 |
| | — |
| | 6,907 |
|
| Other operating expenses, net | — |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
| 262 |
| | 1 |
| | — |
| | — |
| | 722 |
| | — |
| | 985 |
|
| | | | | | | | | | | | | | | | | 513 |
| | 995 |
| | — |
| | — |
| | 26,294 |
| | (1,255 | ) | | 26,547 |
|
| Income (loss) from operations | | (262 | ) | | 9 |
| | — |
| | — |
| | 2,709 |
| | — |
| | 2,456 |
|
| | 24 |
| | 159 |
| | — |
| | — |
| | 6,589 |
| | — |
| | (183 | ) | | 6,589 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Income from operations | — |
| | — |
| | — |
| | — |
| | 915 |
| | — |
| | — |
| | 915 |
| |
| | | | | | | | | | | | | | | | | |
| OTHER INCOME AND (EXPENSES): | | | | | | | | | | | | | | | | |
| Interest expense, net | — |
| | (103 | ) | | — |
| | (541 | ) | | (263 | ) | | — |
| | — |
| | (907 | ) | |
| Gain (loss) on extinguishment of debt | — |
| | 46 |
| | — |
| | — |
| | (101 | ) | | — |
| | — |
| | (55 | ) | |
| Equity in income (loss) of subsidiaries | (63 | ) | | (35 | ) | | — |
| | 506 |
| | — |
| | — |
| | (408 | ) | | — |
| |
| | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSES): | | | | | | | | | | | | | | |
| Interest income (expense), net | | — |
| | 14 |
| | (390 | ) | | (727 | ) | | (1,396 | ) | | — |
| | (2,499 | ) |
| Loss on extinguishment of debt | | — |
| | — |
| | — |
| | (110 | ) | | (1 | ) | | — |
| | (111 | ) |
| Gain on financial instruments, net | | — |
| | — |
| | — |
| | — |
| | 89 |
| | — |
| | 89 |
|
| Other pension benefits | | — |
| | — |
| | — |
| | — |
| | 899 |
| | — |
| | 899 |
|
| Other expense, net | | — |
| | (11 | ) | | — |
| | — |
| | (3 | ) | | — |
| | (14 | ) |
| Equity in income of subsidiaries | | 851 |
| | 1,066 |
| | — |
| | 2,293 |
| | — |
| | (4,210 | ) | | — |
|
| | (63 | ) | | (92 | ) | | — |
| | (35 | ) | | (364 | ) | | — |
| | (408 | ) | | (962 | ) | 851 |
| | 1,069 |
| | (390 | ) | | 1,456 |
| | (412 | ) | | (4,210 | ) | | (1,636 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | (63 | ) | | (92 | ) | | — |
| | (35 | ) | | 551 |
| | — |
| | (408 | ) | | (47 | ) | 589 |
| | 1,078 |
| | (390 | ) | | 1,456 |
| | 2,297 |
| | (4,210 | ) | | 820 |
|
| | | | | | | | | | | | | | | | | |
| INCOME TAX EXPENSE | (254 | ) | | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (257 | ) | |
| | | | | | | | | | | | | | | | | |
| INCOME TAX BENEFIT (EXPENSE) | | 2,933 |
| | (5 | ) | | — |
| | — |
| | (3 | ) | | — |
| | 2,925 |
|
| Consolidated net income (loss) | (317 | ) | | (92 | ) | | — |
| | (35 | ) | | 548 |
| | — |
| | (408 | ) | | (304 | ) | 3,522 |
| | 1,073 |
| | (390 | ) | | 1,456 |
| | 2,294 |
| | (4,210 | ) | | 3,745 |
|
| | | | | | | | | | | | | | | | | |
| Less: Net (income) loss – non-controlling interest | 13 |
| | 29 |
| | — |
| | — |
| | (42 | ) | | — |
| | — |
| | — |
| |
| | | | | | | | | | | | | | | | | |
| Less: Net income – noncontrolling interest | | — |
| | (222 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (223 | ) |
| Net income (loss) | $ | (304 | ) | | $ | (63 | ) | | $ | — |
| | $ | (35 | ) | | $ | 506 |
| | $ | — |
| | $ | (408 | ) | | $ | (304 | ) | $ | 3,522 |
| | $ | 851 |
| | $ | (390 | ) | | $ | 1,456 |
| | $ | 2,293 |
| | $ | (4,210 | ) | | $ | 3,522 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Comprehensive Income (Loss) |
| For the year ended December 31, 2014 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | $ | (183 | ) | | $ | (4 | ) | | $ | (30 | ) | | $ | 18 |
| | $ | 741 |
| | $ | (45 | ) | | $ | (680 | ) | | $ | (183 | ) |
| Net impact of interest rate derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
| | | | | | | | | | | | | | | | |
| Comprehensive income (loss) | $ | (183 | ) | | $ | (4 | ) | | $ | (30 | ) | | $ | 18 |
| | $ | 760 |
| | $ | (45 | ) | | $ | (680 | ) | | $ | (164 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Operations |
| For the year ended December 31, 2015 |
| | | | | | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| | Charter | | Intermediate Holding Companies | | Safari Escrow Entities | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary | | Eliminations | | Charter Consolidated |
| REVENUES | $ | 25 |
| | $ | 299 |
| | $ | — |
| | $ | — |
| | $ | 9,754 |
| | $ | — |
| | $ | (324 | ) | | $ | 9,754 |
|
| | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | |
| Operating costs and expenses (exclusive of items shown separately below) | 25 |
| | 299 |
| | — |
| | — |
| | 6,426 |
| | — |
| | (324 | ) | | 6,426 |
|
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 2,125 |
| | — |
| | — |
| | 2,125 |
|
| Other operating expenses, net | — |
| | — |
| | — |
| | — |
| | 89 |
| | — |
| | — |
| | 89 |
|
| | 25 |
| | 299 |
| | — |
| | — |
| | 8,640 |
| | — |
| | (324 | ) | | 8,640 |
|
| Income from operations | — |
| | — |
| | — |
| | — |
| | 1,114 |
| | — |
| | — |
| | 1,114 |
|
| | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSES): | | | | | | | | | | | | | | | |
| Interest income (expense), net | — |
| | 8 |
| | (474 | ) | | (642 | ) | | (151 | ) | | (47 | ) | | — |
| | (1,306 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | (2 | ) | | (123 | ) | | — |
| | (3 | ) | | — |
| | (128 | ) |
| Loss on financial instruments, net | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
| Other expense, net | — |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) |
| Equity in income (loss) of subsidiaries | (121 | ) | | (168 | ) | | — |
| | 1,073 |
| | (50 | ) | | — |
| | (734 | ) | | — |
|
| | (121 | ) | | (167 | ) | | (476 | ) | | 308 |
| | (205 | ) | | (50 | ) | | (734 | ) | | (1,445 | ) |
| | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | (121 | ) | | (167 | ) | | (476 | ) | | 308 |
| | 909 |
| | (50 | ) | | (734 | ) | | (331 | ) |
| INCOME TAX BENEFIT (EXPENSE) | (150 | ) | | — |
| | — |
| | — |
| | 210 |
| | — |
| | — |
| | 60 |
|
| Consolidated net income (loss) | (271 | ) | | (167 | ) | | (476 | ) | | 308 |
| | 1,119 |
| | (50 | ) | | (734 | ) | | (271 | ) |
| Less: Net (income) loss – noncontrolling interest | — |
| | 46 |
| | — |
| | — |
| | (46 | ) | | — |
| | — |
| | — |
|
| Net income (loss) | $ | (271 | ) | | $ | (121 | ) | | $ | (476 | ) | | $ | 308 |
| | $ | 1,073 |
| | $ | (50 | ) | | $ | (734 | ) | | $ | (271 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Comprehensive Income (Loss) |
| For the year ended December 31, 2013 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | $ | (183 | ) | | $ | (107 | ) | | $ | — |
| | $ | (114 | ) | | $ | 678 |
| | $ | — |
| | $ | (443 | ) | | $ | (169 | ) |
| Net impact of interest rate derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | 34 |
| | — |
| | — |
| | 34 |
|
| | | | | | | | | | | | | | | | |
| Comprehensive income (loss) | $ | (183 | ) | | $ | (107 | ) | | $ | — |
| | $ | (114 | ) | | $ | 712 |
| | $ | — |
| | $ | (443 | ) | | $ | (135 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Comprehensive Income (Loss) |
| For the year ended December 31, 2012 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | $ | (317 | ) | | $ | (92 | ) | | $ | — |
| | $ | (35 | ) | | $ | 548 |
| | $ | — |
| | $ | (408 | ) | | $ | (304 | ) |
| Net impact of interest rate derivative instruments, net of tax | — |
| | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
| | | | | | | | | | | | | | | | |
| Comprehensive income (loss) | $ | (317 | ) | | $ | (92 | ) | | $ | — |
| | $ | (35 | ) | | $ | 538 |
| | $ | — |
| | $ | (408 | ) | | $ | (314 | ) |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Cash Flows |
| For the year ended December 31, 2014 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | $ | (183 | ) | | $ | (4 | ) | | $ | (30 | ) | | $ | 18 |
| | $ | 741 |
| | $ | (45 | ) | | $ | (680 | ) | | $ | (183 | ) |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | | | | | | | | | | | | |
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 2,102 |
| | — |
| | — |
| | 2,102 |
|
| Noncash interest expense | — |
| | — |
| | — |
| | 25 |
| | 12 |
| | — |
| | — |
| | 37 |
|
| Loss on derivative instruments, net | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
| Deferred income taxes | 223 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 233 |
|
| Equity in (income) losses of subsidiaries | (40 | ) | | 12 |
| | — |
| | (697 | ) | | 45 |
| | — |
| | 680 |
| | — |
|
| Other, net | — |
| | (2 | ) | | — |
| | — |
| | 67 |
| | — |
| | — |
| | 65 |
|
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | | | | | | | | | | | |
| Accounts receivable | — |
| | (2 | ) | | — |
| | — |
| | (49 | ) | | — |
| | — |
| | (51 | ) |
| Prepaid expenses and other assets | — |
| | (1 | ) | | — |
| | — |
| | (8 | ) | | — |
| | — |
| | (9 | ) |
| Accounts payable, accrued liabilities and other | — |
| | 41 |
| | 18 |
| | — |
| | 91 |
| | 8 |
| | — |
| | 158 |
|
| Receivables from and payables to related party | — |
| | (57 | ) | | — |
| | (11 | ) | | 68 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | |
| Net cash flows from operating activities | — |
| | (13 | ) | | (12 | ) | | (665 | ) | | 3,086 |
| | (37 | ) | | — |
| | 2,359 |
|
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | — |
| | — |
| | — |
| | — |
| | (2,221 | ) | | — |
| | — |
| | (2,221 | ) |
| Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | — |
| | 33 |
| | — |
| | — |
| | 33 |
|
| Purchases of cable systems, net | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Contribution to subsidiary | (106 | ) | | (600 | ) | | — |
| | (100 | ) | | (71 | ) | | — |
| | 877 |
| | — |
|
| Distributions from subsidiary | 5 |
| | 30 |
| | — |
| | 1,132 |
| | — |
| | — |
| | (1,167 | ) | | — |
|
| Restricted cash in escrow | — |
| | — |
| | (3,598 | ) | | — |
| | — |
| | (3,513 | ) | | — |
| | (7,111 | ) |
| Other, net | — |
| | (5 | ) | | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (16 | ) |
| | | | | | | | | | | | | | | | |
| Net cash flows from investing activities | (101 | ) | | (575 | ) | | (3,598 | ) | | 1,032 |
| | (2,259 | ) | | (3,513 | ) | | (290 | ) | | (9,304 | ) |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | |
| Borrowings of long-term debt | — |
| | — |
| | 3,500 |
| | — |
| | 1,823 |
| | 3,483 |
| | — |
| | 8,806 |
|
| Repayments of long-term debt | — |
| | — |
| | — |
| | (350 | ) | | (1,630 | ) | | — |
| | — |
| | (1,980 | ) |
| Borrowings (payments) loans payable - related parties | — |
| | — |
| | 112 |
| | (112 | ) | | — |
| | — |
| | — |
| | — |
|
| Payment for debt issuance costs | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (4 | ) | | — |
| | (6 | ) |
| Purchase of treasury stock | (19 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (19 | ) |
| Proceeds from exercise of options and warrants | 123 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 123 |
|
| Contributions from parent | — |
| | 606 |
| | — |
| | 100 |
| | 100 |
| | 71 |
| | (877 | ) | | — |
|
| Distributions to parent | — |
| | (30 | ) | | — |
| | (5 | ) | | (1,132 | ) | | — |
| | 1,167 |
| | — |
|
| Other, net | — |
| | 7 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | 3 |
|
| | | | | | | | | | | | | | | | |
| Net cash flows from financing activities | 104 |
| | 583 |
| | 3,610 |
| | (367 | ) | | (843 | ) | | 3,550 |
| | 290 |
| | 6,927 |
|
| | | | | | | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 3 |
| | (5 | ) | | — |
| | — |
| | (16 | ) | | — |
| | — |
| | (18 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period | — |
| | 5 |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | 21 |
|
| | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Comprehensive Income |
| For the year ended December 31, 2017 |
| | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| Consolidated net income | $ | 9,895 |
| | $ | 899 |
| | $ | 882 |
| | $ | 1,800 |
| | $ | (3,361 | ) | | $ | 10,115 |
|
| Net impact of interest rate derivative instruments | 5 |
| | 5 |
| | 5 |
| | 5 |
| | (15 | ) | | 5 |
|
| Foreign currency translation adjustment | 1 |
| | 1 |
| | 1 |
| | 1 |
| | (3 | ) | | 1 |
|
| Consolidated comprehensive income | 9,901 |
| | 905 |
| | 888 |
| | 1,806 |
| | (3,379 | ) | | 10,121 |
|
| Less: Comprehensive income attributable to noncontrolling interests | — |
| | (219 | ) | | — |
| | (1 | ) | | — |
| | (220 | ) |
| Comprehensive income | $ | 9,901 |
| | $ | 686 |
| | $ | 888 |
| | $ | 1,805 |
| | $ | (3,379 | ) | | $ | 9,901 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Comprehensive Income (Loss) |
| For the year ended December 31, 2016 |
| | | | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | Safari Escrow Entities | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| Consolidated net income (loss) | $ | 3,522 |
| | $ | 1,073 |
| | $ | (390 | ) | | $ | 1,456 |
| | $ | 2,294 |
| | $ | (4,210 | ) | | $ | 3,745 |
|
| Net impact of interest rate derivative instruments | 8 |
| | 8 |
| | — |
| | 8 |
| | 8 |
| | (24 | ) | | 8 |
|
| Foreign currency translation adjustment | (2 | ) | | (2 | ) | | — |
| | (2 | ) | | (2 | ) | | 6 |
| | (2 | ) |
| Consolidated comprehensive income (loss) | 3,528 |
| | 1,079 |
| | (390 | ) | | 1,462 |
| | 2,300 |
| | (4,228 | ) | | 3,751 |
|
| Less: Comprehensive income attributable to noncontrolling interests | — |
| | (222 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (223 | ) |
| Comprehensive income (loss) | $ | 3,528 |
| | $ | 857 |
| | $ | (390 | ) | | $ | 1,462 |
| | $ | 2,299 |
| | $ | (4,228 | ) | | $ | 3,528 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Comprehensive Income (Loss) |
| For the year ended December 31, 2015 |
| | | | | | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| | Charter | | Intermediate Holding Companies | | Safari Escrow Entities | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary | | Eliminations | | Charter Consolidated |
| Consolidated net income (loss) | $ | (271 | ) | | $ | (167 | ) | | $ | (476 | ) | | $ | 308 |
| | $ | 1,119 |
| | $ | (50 | ) | | $ | (734 | ) | | $ | (271 | ) |
| Net impact of interest rate derivative instruments | 9 |
| | 9 |
| | — |
| | 9 |
| | 9 |
| | — |
| | (27 | ) | | 9 |
|
| Consolidated comprehensive income (loss) | (262 | ) | | (158 | ) | | (476 | ) | | 317 |
| | 1,128 |
| | (50 | ) | | (761 | ) | | (262 | ) |
| Less: Comprehensive (income) loss attributable to noncontrolling interests | — |
| | 46 |
| | — |
| | — |
| | (46 | ) | | — |
| | — |
| | — |
|
| Comprehensive income (loss) | $ | (262 | ) | | $ | (112 | ) | | $ | (476 | ) | | $ | 317 |
| | $ | 1,082 |
| | $ | (50 | ) | | $ | (761 | ) | | $ | (262 | ) |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
| | Charter Communications, Inc. | Condensed Consolidating Statement of Cash Flows | | For the year ended December 31, 2013 | |
| For the year ended December 31, 2017 | | For the year ended December 31, 2017 |
| + | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated | Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | $ | (183 | ) | | $ | (107 | ) | | $ | — |
| | $ | (114 | ) | | $ | 678 |
| | $ | — |
| | $ | (443 | ) | | $ | (169 | ) | |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 1,854 |
| | — |
| | — |
| | 1,854 |
| |
| Noncash interest expense | — |
| | — |
| | — |
| | 27 |
| | 16 |
| | — |
| | — |
| | 43 |
| |
| Loss on extinguishment of debt | — |
| | — |
| | — |
| | 65 |
| | 58 |
| | — |
| | — |
| | 123 |
| |
| Gain on derivative instruments, net | — |
| | — |
| | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) | |
| Deferred income taxes | 105 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 112 |
| |
| Equity in (income) losses of subsidiaries | 75 |
| | 114 |
| | — |
| | (632 | ) | | — |
| | — |
| | 443 |
| | — |
| |
| Other, net | — |
| | — |
| | — |
| | — |
| | 82 |
| | — |
| | — |
| | 82 |
| |
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | | | | | | | | | | | | |
| Accounts receivable | (3 | ) | | (1 | ) | | — |
| | — |
| | 14 |
| | — |
| | — |
| | 10 |
| |
| Prepaid expenses and other assets | — |
| | 1 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| |
| Accounts payable, accrued liabilities and other | — |
| | (3 | ) | | — |
| | 41 |
| | 76 |
| | — |
| | — |
| | 114 |
| |
| Receivables from and payables to related party | 5 |
| | (1 | ) | | — |
| | (10 | ) | | 6 |
| | — |
| | — |
| | — |
| |
| | | | | | | | | | | | | | | | | |
| Net cash flows from operating activities | (1 | ) | | 3 |
| | — |
| | (623 | ) | | 2,779 |
| | — |
| | — |
| | 2,158 |
| |
| NET CASH FLOWS FROM OPERATING ACTIVITIES | | $ | 159 |
| | $ | 187 |
| | $ | (814 | ) | | $ | 12,422 |
| | $ | — |
| | $ | 11,954 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | — |
| | — |
| | — |
| | — |
| | (1,825 | ) | | — |
| | — |
| | (1,825 | ) | — |
| | — |
| | — |
| | (8,681 | ) | | — |
| | (8,681 | ) |
| Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | — |
| | 76 |
| | — |
| | — |
| | 76 |
| — |
| | — |
| | — |
| | 820 |
| | — |
| | 820 |
|
| Purchases of cable systems, net | — |
| | — |
| | — |
| | — |
| | (676 | ) | | — |
| | — |
| | (676 | ) | — |
| | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
| Contribution to subsidiary | (89 | ) | | (534 | ) | | — |
| | (1,022 | ) | | — |
| | — |
| | 1,645 |
| | — |
| |
| Distributions from subsidiary | — |
| | 6 |
| | — |
| | 630 |
| | — |
| | — |
| | (636 | ) | | — |
| |
| Real estate investments through variable interest entities | | — |
| | (105 | ) | | — |
| | — |
| | — |
| | (105 | ) |
| Contribution to subsidiaries | | (115 | ) | | — |
| | (693 | ) | | — |
| | 808 |
| | — |
|
| Distributions from subsidiaries | | 11,732 |
| | 13,488 |
| | 9,598 |
| | — |
| | (34,818 | ) | | — |
|
| Other, net | — |
| | 1 |
| | — |
| | — |
| | (19 | ) | | — |
| | — |
| | (18 | ) | — |
| | — |
| | — |
| | (123 | ) | | — |
| | (123 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash flows from investing activities | (89 | ) | | (527 | ) | | — |
| | (392 | ) | | (2,444 | ) | | — |
| | 1,009 |
| | (2,443 | ) | 11,617 |
| | 13,383 |
| | 8,905 |
| | (7,993 | ) | | (34,010 | ) | | (8,098 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Borrowings of long-term debt | — |
| | — |
| | — |
| | 2,000 |
| | 4,782 |
| | — |
| | — |
| | 6,782 |
| — |
| | — |
| | 6,231 |
| | 19,045 |
| | — |
| | 25,276 |
|
| Repayments of long-term debt | — |
| | — |
| | — |
| | (955 | ) | | (5,565 | ) | | — |
| | — |
| | (6,520 | ) | — |
| | — |
| | (775 | ) | | (15,732 | ) | | — |
| | (16,507 | ) |
| Borrowings (payments) loans payable - related parties | — |
| | — |
| | — |
| | (93 | ) | | 93 |
| | — |
| | — |
| | — |
| |
| Borrowings (repayments) loans payable - related parties | | (234 | ) | | — |
| | — |
| | 234 |
| | — |
| | — |
|
| Payment for debt issuance costs | — |
| | — |
| | — |
| | (25 | ) | | (25 | ) | | — |
| | — |
| | (50 | ) | — |
| | — |
| | (59 | ) | | (52 | ) | | — |
| | (111 | ) |
| Purchase of treasury stock | (15 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (15 | ) | (11,715 | ) | | — |
| | — |
| | — |
| | — |
| | (11,715 | ) |
| Proceeds from exercise of options and warrants | 104 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 104 |
| |
| Proceeds from exercise of stock options | | 116 |
| | — |
| | — |
| | — |
| | — |
| | 116 |
|
| Purchase of noncontrolling interest | | — |
| | (1,665 | ) | | — |
| | — |
| | — |
| | (1,665 | ) |
| Distributions to noncontrolling interest | | — |
| | (151 | ) | | — |
| | (2 | ) | | — |
| | (153 | ) |
| Contributions from parent | — |
| | 534 |
| | — |
| | 89 |
| | 1,022 |
| | — |
| | (1,645 | ) | | — |
| — |
| | 115 |
| | — |
| | 693 |
| | (808 | ) | | — |
|
| Distributions to parent | — |
| | (5 | ) | | — |
| | (1 | ) | | (630 | ) | | — |
| | 636 |
| | — |
| — |
| | (11,732 | ) | | (13,488 | ) | | (9,598 | ) | | 34,818 |
| | — |
|
| Other, net | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash flows from financing activities | 89 |
| | 529 |
| | — |
| | 1,015 |
| | (325 | ) | | — |
| | (1,009 | ) | | 299 |
| (11,833 | ) | | (13,433 | ) | | (8,091 | ) | | (5,423 | ) | | 34,010 |
| | (4,770 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1 | ) | | 5 |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 14 |
| (57 | ) | | 137 |
| | — |
| | (994 | ) | | — |
| | (914 | ) |
| CASH AND CASH EQUIVALENTS, beginning of period | 1 |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | 7 |
| 57 |
| | 154 |
| | — |
| | 1,324 |
| | — |
| | 1,535 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | 21 |
| $ | — |
| | $ | 291 |
| | $ | — |
| | $ | 330 |
| | $ | — |
| | $ | 621 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 20132017, 2016 AND 20122015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Cash Flows |
| For the year ended December 31, 2012 |
| | | | | | | | | | | | | | | | |
| | Charter | | Intermediate Holding Companies | | CCOH Safari | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary - CCO Safari | | Eliminations | | Charter Consolidated |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | |
| Consolidated net income (loss) | $ | (317 | ) | | $ | (92 | ) | | $ | — |
| | $ | (35 | ) | | $ | 548 |
| | $ | — |
| | $ | (408 | ) | | $ | (304 | ) |
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | | | | | | | | | | | | |
| Depreciation and amortization | — |
| | — |
| | — |
| | — |
| | 1,713 |
| | — |
| | — |
| | 1,713 |
|
| Noncash interest expense | — |
| | (23 | ) | | — |
| | 18 |
| | 50 |
| | — |
| | — |
| | 45 |
|
| (Gain) loss on extinguishment of debt | — |
| | (46 | ) | | — |
| | — |
| | 101 |
| | — |
| | — |
| | 55 |
|
| Deferred income taxes | 252 |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | 250 |
|
| Equity in (income) losses of subsidiaries | 63 |
| | 35 |
| | — |
| | (506 | ) | | — |
| | — |
| | 408 |
| | — |
|
| Other, net | — |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| | — |
| | 45 |
|
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | | | | | | | | | | | |
| Accounts receivable | (1 | ) | | 1 |
| | — |
| | — |
| | 34 |
| | — |
| | — |
| | 34 |
|
| Prepaid expenses and other assets | 2 |
| | 8 |
| | — |
| | — |
| | (18 | ) | | — |
| | — |
| | (8 | ) |
| Accounts payable, accrued liabilities and other | — |
| | (87 | ) | | — |
| | 47 |
| | 86 |
| | — |
| | — |
| | 46 |
|
| Receivables from and payables to related party | (1 | ) | | (1 | ) | | — |
| | (11 | ) | | 13 |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | |
| Net cash flows from operating activities | (2 | ) | | (205 | ) | | — |
| | (487 | ) | | 2,570 |
| | — |
| | — |
| | 1,876 |
|
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | — |
| | — |
| | — |
| | — |
| | (1,745 | ) | | — |
| | — |
| | (1,745 | ) |
| Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | — |
| | 13 |
|
| Sales of cable systems, net | — |
| | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
| Contribution to subsidiary | (14 | ) | | (71 | ) | | — |
| | (2,330 | ) | | — |
| | — |
| | 2,415 |
| | — |
|
| Distributions from subsidiary | 12 |
| | 1,891 |
| | — |
| | 2,014 |
| | — |
| | — |
| | (3,917 | ) | | — |
|
| Other, net | — |
| | — |
| | — |
| | — |
| | (24 | ) | | — |
| | — |
| | (24 | ) |
| | | | | | | | | | | | | | | | |
| Net cash flows from investing activities | (2 | ) | | 1,820 |
| | — |
| | (316 | ) | | (1,737 | ) | | — |
| | (1,502 | ) | | (1,737 | ) |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | |
| Borrowings of long-term debt | — |
| | — |
| | — |
| | 2,984 |
| | 2,846 |
| | — |
| | — |
| | 5,830 |
|
| Repayments of long-term debt | — |
| | (1,621 | ) | | — |
| | — |
| | (4,280 | ) | | — |
| | — |
| | (5,901 | ) |
| Borrowings (payments) loans payable - related parties | — |
| | — |
| | — |
| | (314 | ) | | 314 |
| | — |
| | — |
| | — |
|
| Payment for debt issuance costs | — |
| | — |
| | — |
| | (39 | ) | | (14 | ) | | — |
| | — |
| | (53 | ) |
| Purchase of treasury stock | (11 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) |
| Proceeds from exercise of options | 15 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
|
| Contributions from parent | — |
| | 84 |
| | — |
| | 1 |
| | 2,330 |
| | — |
| | (2,415 | ) | | — |
|
| Distributions to parent | — |
| | (72 | ) | | — |
| | (1,831 | ) | | (2,014 | ) | | — |
| | 3,917 |
| | — |
|
| Other, net | 1 |
| | (6 | ) | | — |
| | — |
| | (9 | ) | | — |
| | — |
| | (14 | ) |
| | | | | | | | | | | | | | | | |
| Net cash flows from financing activities | 5 |
| | (1,615 | ) | | — |
| | 801 |
| | (827 | ) | | — |
| | 1,502 |
| | (134 | ) |
| | | | | | | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1 |
| | — |
| | — |
| | (2 | ) | | 6 |
| | — |
| | — |
| | 5 |
|
| CASH AND CASH EQUIVALENTS, beginning of period | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Cash Flows |
| For the year ended December 31, 2016 |
| | | | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | |
| | Charter | | Intermediate Holding Companies | | Safari Escrow Entities | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
| NET CASH FLOWS FROM OPERATING ACTIVITIES | $ | (225 | ) | | $ | (36 | ) | | $ | (463 | ) | | $ | (711 | ) | | $ | 9,476 |
| | $ | — |
| | $ | 8,041 |
|
| | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | — |
| | — |
| | — |
| | — |
| | (5,325 | ) | | — |
| | (5,325 | ) |
| Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | — |
| | 603 |
| | — |
| | 603 |
|
| Purchases of cable systems, net | (26,781 | ) | | (2,022 | ) | | — |
| | — |
| | (7 | ) | | — |
| | (28,810 | ) |
| Contribution to subsidiaries | (1,013 | ) | | (478 | ) | | — |
| | (437 | ) | | — |
| | 1,928 |
| | — |
|
| Distributions from subsidiaries | 24,552 |
| | 26,899 |
| | — |
| | 5,096 |
| | — |
| | (56,547 | ) | | — |
|
| Change in restricted cash and cash equivalents | — |
| | — |
| | 22,264 |
| | — |
| | — |
| | — |
| | 22,264 |
|
| Other, net | — |
| | — |
| | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Net cash flows from investing activities | (3,242 | ) | | 24,399 |
| | 22,264 |
| | 4,659 |
| | (4,751 | ) | | (54,619 | ) | | (11,290 | ) |
| | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | |
| Borrowings of long-term debt | — |
| | — |
| | — |
| | 3,201 |
| | 9,143 |
| | — |
| | 12,344 |
|
| Repayments of long-term debt | — |
| | — |
| | — |
| | (2,937 | ) | | (7,584 | ) | | — |
| | (10,521 | ) |
| Borrowings (repayments) loans payable - related parties | — |
| | (300 | ) | | 553 |
| | (71 | ) | | (182 | ) | | — |
| | — |
|
| Payment for debt issuance costs | — |
| | — |
| | — |
| | (73 | ) | | (211 | ) | | — |
| | (284 | ) |
| Issuance of equity | 5,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,000 |
|
| Purchase of treasury stock | (1,562 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,562 | ) |
| Proceeds from exercise of stock options | 86 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 86 |
|
| Settlement of restricted stock units | — |
| | (59 | ) | | — |
| | — |
| | — |
| | — |
| | (59 | ) |
| Purchase of noncontrolling interest | — |
| | (218 | ) | | — |
| | — |
| | — |
| | — |
| | (218 | ) |
| Distributions to noncontrolling interest | — |
| | (96 | ) | | — |
| | — |
| | — |
| | — |
| | (96 | ) |
| Proceeds from termination of interest rate derivatives | — |
| | — |
| | — |
| | — |
| | 88 |
| | — |
| | 88 |
|
| Contributions from parent | — |
| | 1,013 |
| | — |
| | 478 |
| | 437 |
| | (1,928 | ) | | — |
|
| Distributions to parent | — |
| | (24,552 | ) | | (22,353 | ) | | (4,546 | ) | | (5,096 | ) | | 56,547 |
| | — |
|
| Other, net | — |
| | 3 |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | 1 |
|
| Net cash flows from financing activities | 3,524 |
| | (24,209 | ) | | (21,801 | ) | | (3,948 | ) | | (3,406 | ) | | 54,619 |
| | 4,779 |
|
| | | | | | | | | | | | | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 57 |
| | 154 |
| | — |
| | — |
| | 1,319 |
| | — |
| | 1,530 |
|
| CASH AND CASH EQUIVALENTS, beginning of period | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | 57 |
| | $ | 154 |
| | $ | — |
| | $ | — |
| | $ | 1,324 |
| | $ | — |
| | $ | 1,535 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 AND 2015
(dollars in millions, except share or per share data or where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Charter Communications, Inc. |
| Condensed Consolidating Statement of Cash Flows |
| For the year ended December 31, 2015 |
| | | | | | | | | | | | | | | | |
| | Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| | Charter | | Intermediate Holding Companies | | Safari Escrow Entities | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Unrestricted Subsidiary | | Eliminations | | Charter Consolidated |
| NET CASH FLOWS FROM OPERATING ACTIVITIES: | $ | (1 | ) | | $ | (5 | ) | | $ | (192 | ) | | $ | (663 | ) | | $ | 3,275 |
| | $ | (55 | ) | | $ | — |
| | $ | 2,359 |
|
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | |
| Purchases of property, plant and equipment | — |
| | — |
| | — |
| | — |
| | (1,840 | ) | | — |
| | — |
| | (1,840 | ) |
| Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
| Contribution to subsidiaries | (20 | ) | | (90 | ) | | — |
| | (46 | ) | | (24 | ) | | — |
| | 180 |
| | — |
|
| Distributions from subsidiaries | 26 |
| | 376 |
| | — |
| | 715 |
| | — |
| | — |
| | (1,117 | ) | | — |
|
| Change in restricted cash and cash equivalents | — |
| | — |
| | (18,667 | ) | | — |
| | — |
| | 3,514 |
| | — |
| | (15,153 | ) |
| Other, net | — |
| | (55 | ) | | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (67 | ) |
| Net cash flows from investing activities | 6 |
| | 231 |
| | (18,667 | ) | | 669 |
| | (1,848 | ) | | 3,514 |
| | (937 | ) | | (17,032 | ) |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | |
| Borrowings of long-term debt | — |
| | — |
| | 21,790 |
| | 2,700 |
| | 1,555 |
| | — |
| | — |
| | 26,045 |
|
| Repayments of long-term debt | — |
| | — |
| | (3,500 | ) | | (2,598 | ) | | (1,745 | ) | | (3,483 | ) | | — |
| | (11,326 | ) |
| Borrowings (repayments) loans payable - related parties | — |
| | — |
| | 581 |
| | (18 | ) | | (563 | ) | | — |
| | — |
| | — |
|
| Payment for debt issuance costs | — |
| | — |
| | (12 | ) | | (24 | ) | | — |
| | — |
| | — |
| | (36 | ) |
| Purchase of treasury stock | (38 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38 | ) |
| Proceeds from exercise of options and warrants | 30 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
|
| Contributions from parent | — |
| | 95 |
| | — |
| | 15 |
| | 46 |
| | 24 |
| | (180 | ) | | — |
|
| Distributions to parent | — |
| | (321 | ) | | — |
| | (81 | ) | | (715 | ) | | — |
| | 1,117 |
| | — |
|
| Net cash flows from financing activities | (8 | ) | | (226 | ) | | 18,859 |
| | (6 | ) | | (1,422 | ) | | (3,459 | ) | | 937 |
| | 14,675 |
|
| | | | | | | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (3 | ) | | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 2 |
|
| CASH AND CASH EQUIVALENTS, beginning of period | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, end of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
