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Equity
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(Exact name of registrant as specified in its charter)
iDelaware
i86-1067239
iDelaware
i20-0257904
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
ii400 Washington Blvd./
iiStamford/
iiConnecticut/
ii06902/
(Address
of Principal Executive Offices)
(Zip Code)
(ii203/) ii905-7801/
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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. iiYes/x No o
Indicate by check mark whether the registrant has submitted electronically 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 registrant was required to submit and post such files). iiYes/x No 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 “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer oiiNon-accelerated
filer/xSmaller reporting company ii☐/Emerging
growth company ii☐/
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 ii☐/No x
All of the issued and outstanding shares of capital stock of CCO Holdings Capital Corp. are held by CCO Holdings, LLC. All of the limited liability company membership interests of CCO Holdings, LLC are held by CCH I Holdings, LLC (a subsidiary of Charter Communications, Inc., a reporting company under the Exchange Act). There is no public trading market for any of the aforementioned limited liability company membership interests or shares of capital stock.
CCO Holdings, LLC and CCO Holdings Capital Corp. meet the conditions set forth in General Instruction I(1)(a) and (b) to Form 10-K and are therefore filing with the reduced disclosure format.
Number of shares of
common stock of CCO Holdings Capital Corporation outstanding as of September 30, 2023: ii1/
This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2023. 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. In this quarterly report, “CCO Holdings,”“we,”“us” and “our” refer to CCO Holdings, LLC and its subsidiaries.
This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 2. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in this quarterly report. Although we believe that our plans, intentions and expectations as 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 under “Risk Factors” in Part I, Item 1A of our most recent Form 10-K filed with the SEC. Many of the forward-looking statements contained in this quarterly 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,”“grow,”“focused on” and “potential,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in this quarterly report on Form 10-Q, in our annual report on Form 10-K, and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
•our ability to sustain and grow revenues and cash flow from operations by offering Internet, video, voice, mobile, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our service areas 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 ("DBS") operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, fiber to the home providers and providers of video content over broadband Internet connections;
•general business conditions, unemployment levels and the level of activity in the housing sector and economic uncertainty or downturn;
•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 and distribution requirements);
•our ability to develop and deploy new products and technologies including consumer services and service platforms;
•any events that disrupt our networks, information systems or properties and impair our operating activities or our reputation;
•the effects of governmental regulation on our business including subsidies to consumers, subsidies and incentives for competitors, costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply with, regulatory conditions applicable to us;
•the ability to hire and retain key personnel;
•our
ability to procure necessary services and equipment from our vendors in a timely manner and at reasonable costs including in connection with our network evolution and rural construction initiatives;
•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 quarterly report.
Adjustments
to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization
i6,486
i6,688
Stock
compensation expense
i540
i360
Noncash interest, net
(i1)
(i25)
Other,
net
i200
(i56)
Changes in operating assets and liabilities, net of effects from acquisitions
and dispositions:
Accounts receivable
(i15)
(i256)
Prepaid
expenses and other assets
(i521)
(i79)
Accounts
payable, accrued liabilities and other
(i146)
(i258)
Receivables
from and payables to related party
(i33)
(i8)
Net
cash flows from operating activities
i11,576
i11,886
CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(i8,259)
(i6,456)
Change
in accrued expenses related to capital expenditures
i110
i284
Other,
net
(i327)
(i232)
Net
cash flows from investing activities
(i8,476)
(i6,404)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt
i14,591
i21,528
Repayments
of long-term debt
(i14,385)
(i15,659)
Payments
for debt issuance costs
(i18)
(i71)
Repayments of loans payable - related parties, net
(i3)
(i290)
Distributions
to parent
(i3,426)
(i11,134)
Contributions
from parent
i73
i86
Distributions to noncontrolling interest
(i2)
(i1)
Other,
net
i30
(i21)
Net
cash flows from financing activities
(i3,140)
(i5,562)
NET
DECREASE IN CASH AND CASH EQUIVALENTS
(i40)
(i80)
CASH
AND CASH EQUIVALENTS, beginning of period
i392
i321
CASH
AND CASH EQUIVALENTS, end of period
$
i352
$
i241
CASH
PAID FOR INTEREST
$
i3,645
$
i3,230
CASH
PAID FOR TAXES
$
i25
$
i37
The
accompanying notes are an integral part of these consolidated financial statements.
4
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
1. iOrganization
and Basis of Presentation
Organization
CCO Holdings, LLC (together with its subsidiaries, “CCO Holdings,” or the “Company”) is a leading broadband connectivity company and cable operator. Over an advanced communications network, the Company offers a full range of state-of-the-art residential and business services including Spectrum Internet®, TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business® delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise®
provides highly customized, fiber-based solutions. Spectrum Reach® delivers tailored advertising and production for the modern media landscape. The Company also distributes award-winning news coverage and sports programming to its customers through Spectrum Networks.
CCO Holdings is a holding company whose principal assets are the equity interests in its operating subsidiaries. CCO Holdings is a direct subsidiary of CCH I Holdings, LLC, which is an indirect subsidiary of Charter Communications, Inc. (“Charter”), Charter Communications Holdings, LLC (“Charter Holdings”) and Spectrum Management Holding Company, LLC (“Spectrum Management”). All of the outstanding capital stock of CCO Holdings Capital Corp. is owned by CCO Holdings. The consolidated financial statements include the accounts of CCO Holdings and all of
its subsidiaries where the underlying operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated. Charter, Charter Holdings and Spectrum Management have performed financing, cash management, treasury and other services for CCO Holdings on a centralized basis. Changes in member’s equity in the consolidated balance sheets related to these activities have been considered cash receipts (contributions) and payments (distributions) for purposes of the consolidated statements of cash flows and are reflected in financing activities.
The Company’s operations are managed and reported to its Chief Executive Officer (“CEO”), the Company’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 ione reportable segment.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures typically included in the Company's Annual Report on Form 10-K have been condensed or
omitted for this quarterly report. The accompanying consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.
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, pension benefits and income taxes. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform with the 2023 presentation.
Comprehensive income equaled net income attributable to CCO Holdings member for the three and nine months ended September 30, 2023 and 2022.
(a)Includes
the Company's £i625 million fixed-rate British pound sterling denominated notes (the “Sterling Notes”) (remeasured at $i762 million and $i755
million as of September 30, 2023 and December 31, 2022, respectively, using the exchange rate at the respective dates) and the Company's £i650 million aggregate principal amount of Sterling Notes (remeasured at $i793
million and $i786 million as of September 30, 2023 and December 31, 2022, respectively, using the exchange rate at the respective dates).
/
(b)The Company has availability under the Charter Communications Operating, LLC ("Charter Operating") credit facilities of approximately $i3.3
billion as of September 30, 2023.
The estimated fair value of the Company’s senior unsecured and secured notes and debentures as of September 30, 2023 and December 31, 2022 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’s credit facilities is based on quoted market prices in inactive markets and is classified within Level 2.
In February 2023, CCO Holdings and CCO Holdings Capital Corp. jointly issued $i1.1
billion of i7.375% senior unsecured notes due March 2031 at par. The net proceeds were used for general corporate purposes, including repaying certain indebtedness, distributions to the Company's parent companies to fund buybacks of Charter Class A common stock and Charter Holdings common units and to pay related fees and expenses.
In February 2023, Charter Operating entered into an amendment to its credit agreement to replace London Interbank Offering Rate ("LIBOR") as the benchmark rate applicable to the Term B loans with
Secured Overnight Financing Rate ("SOFR") and in March 2023, Charter Operating entered into another amendment to its credit agreement to incur a new Term B-3 loan with an
6
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
aggregate principal amount of $i750 million
maturing in 2030 concurrently with the cancelation of certain of Charter Operating's existing Term B-1 and B-2 loans, among other amendments. Pricing on the new Term B-3 loan is SOFR plus i2.25%. After giving effect to the amendments, the aggregate principal amount of Term B-1 loans is $i2.3 billion
with pricing unchanged at SOFR plus i1.75% and the aggregate principal amount of Term B-2 loans is $i3.1 billion with pricing unchanged at SOFR plus i1.75%.
As of July 1, 2023, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, ceased publishing remaining U.S. Dollar LIBOR rates. The Charter Operating senior secured floating rate notes due 2024 (the "Floating Rate Notes") used LIBOR as a benchmark for establishing the interest rate of the Floating Rate Notes. As of July 1, 2023, SOFR is being used as the benchmark replacement for calculations of the amount of interest payable on the Floating Rate Notes with respect to interest periods with interest determination dates occurring after June 30, 2023.
Losses on extinguishment of debt are recorded in other income (expenses), net
in the consolidated statements of operations and for the nine months ended September 30, 2022 was $i3 million as a result of the Charter Operating credit facility refinancing and Charter Operating notes redemption.
4. iAccounting
for Derivative Instruments and Hedging Activities
Cross-currency derivative instruments are used to manage foreign exchange risk on the Sterling Notes by effectively converting £i1.275 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 fair value of the Company's cross-currency derivatives, which are classified within Level 2 of the valuation hierarchy, was $i516
million and $i570 million and is included in other long-term liabilities on its consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively.
i
The
effect of financial instruments are recorded in other income (expenses), net in the consolidated statements of operations and consisted of the following.
As
of September 30, 2023 and December 31, 2022, accounts receivable, net on the consolidated balance sheets includes approximately $i651 million and $i577 million
of current equipment installment plan receivables, respectively, and other noncurrent assets includes approximately $i547 million and $i261 million of noncurrent equipment installment plan receivables, respectively.
6.
iOperating Costs and Expenses
i
Operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, consist of the following for the periods presented:
Programming
costs consist primarily of costs paid to programmers for basic, premium, video on demand and pay-per-view programming. Other costs of revenue include costs directly related to providing Internet, video, voice and mobile services including mobile device costs, payments to franchise and regulatory authorities, payments for sports, local and news content produced by the Company and direct costs associated with selling advertising. Also included in other costs of revenue are 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 contract period. Costs to service customers include costs related to field operations, network operations and customer operations for the Company’s products, including mobile, sold to non-bulk residential and small and medium business ("SMB") customers including internal and third-party labor for the non-capitalizable portion of installations,
service and repairs, maintenance, bad debt expense, billing and collection, occupancy and vehicle costs. Sales and
8
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
marketing costs represent the costs of selling and marketing our Internet, video, voice and mobile services to current and potential non-bulk residential and SMB customers, including labor cost. Other expense includes indirect costs associated with the Company’s Spectrum
Enterprise, Spectrum Reach and Spectrum Networks businesses, including sales and marketing and bad debt expenses as well as costs associated with selling to and servicing bulk properties. Other expense also includes corporate overhead and stock compensation expense, among others.
7. iOther Operating Expense, Net
i
Other
operating expense, net consist of the following for the periods presented:
Gain
(loss) on financial instruments, net (see Note 4)
i70
(i193)
i40
(i178)
Net
periodic pension benefits
i2
i207
i5
i241
Gain
(loss) on equity investments, net
(i87)
(i50)
(i237)
(i53)
$
(i15)
$
(i36)
$
(i192)
$
i7
/
During
the three and nine months ended September 30, 2022, settlements for lump-sum distributions to pension plan participants exceeded the estimated annual interest cost of the plans. As a result, the pension liability and pension asset values were reassessed 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. Therefore, net periodic pension benefits includes a $ii189/ million
remeasurement gain recorded during the three and nine months ended September 30, 2022 which was primarily driven by changes in the discount rate offset by losses to record assets to fair value.
Loss on equity investments, net for the three and nine months ended September 30, 2023 is primarily related to our joint venture in Xumo, a next generation streaming platform jointly owned with Comcast Corporation.
9.iStock
Compensation Plans
Charter’s stock incentive plans provide for grants of nonqualified 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 stock incentive plans.
9
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
i
Charter granted the following equity awards for the periods presented.
Stock
options and restricted stock units generally cliff vest iithree years/
from the date of grant. Certain stock options and restricted stock units vest based on achievement of stock price hurdles. Stock options generally expire iten years from the grant date and restricted stock units have no voting rights. Restricted stock generally vests ione
year from the date of grant.
As of September 30, 2023, total unrecognized compensation remaining to be recognized in future periods totaled $i472 million for stock options, $i2
million for restricted stock and $i524 million for restricted stock units and the weighted average period over which they are expected to be recognized is ithree
years for stock options, iseven months for restricted stock and itwo
years for restricted stock units.
The Company recorded stock compensation expense of $i164 million and $i540 million
for the three and nine months ended September 30, 2023, respectively, and $i109 million and $i360 million for the three and nine months ended September 30,
2022, respectively, which is included in operating costs and expenses.
10. iContingencies
On April 27, 2022, Entropic Communications, LLC (“Entropic”) filed a complaint in the United States District Court for the Eastern District of Texas alleging that Charter infringed six patents relating to the deployment of certain set-top boxes, cable modems and cable
modem termination systems. Entropic seeks monetary damages, including future license fees. Trial is scheduled for December 4, 2023. On February 10, 2023, Entropic filed a separate lawsuit against Charter in the United States District Court for the Eastern District of Texas. The lawsuit alleges infringement of two patents that also relate to the deployment of certain set-top boxes and cable modems. Entropic seeks monetary damages. Trial is scheduled for October 7, 2024. On February 10, 2023, Entropic filed two more lawsuits against Charter in the United States District Court for the Eastern District of Texas. The two lawsuits allege infringement of a total of twelve patents that relate to certain set-top boxes. Entropic seeks monetary damages, including future license
fees. The two cases have been consolidated for pre-trial purposes. The first trial is scheduled for December 9, 2024. While the Company is vigorously defending these suits and is unable to predict the outcome of the Entropic lawsuits, the Company does not expect that the litigation will have a material effect on its operations, financial condition, or cash flows.
In addition to the Entropic litigation described above, the Company and its parent companies are defendants or co-defendants in several lawsuits involving alleged infringement of various intellectual property relating to various aspects of their businesses. Other industry participants are also defendants in certain of these cases or related cases. In the event that a court ultimately determines that the Company infringes on any intellectual property, 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 intellectual property 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’s operations, 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 and its parent companies are party to other lawsuits, claims and regulatory inquiries that arise in the ordinary course of conducting their 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 operations, consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s operations, consolidated financial condition, results of operations or
10
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
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’s reputation.
11
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
CCO Holdings, LLC (“CCO Holdings”) is a holding company whose principal assets are the equity
interests in its operating subsidiaries. CCO Holdings is a direct subsidiary of CCH I Holdings, LLC, which is an indirect subsidiary of Charter Communications, Inc. (“Charter”), Charter Communications Holdings, LLC (“Charter Holdings”) and Spectrum Management Holding Company, LLC. All of the outstanding capital stock of CCO Holdings Capital Corp. is owned by CCO Holdings. The consolidated financial statements include the accounts of CCO Holdings and all of its subsidiaries where the underlying operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.
We are a leading broadband connectivity company and cable operator serving more than 32 million customers in 41 states through our Spectrum brand. Over an advanced communications network, we offer a full range of state-of-the-art residential and business services
including Spectrum Internet, TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise provides highly customized, fiber-based solutions. Spectrum Reach delivers tailored advertising and production for the modern media landscape. We also distribute award-winning news coverage and sports programming to our customers through Spectrum Networks.
Overview
During the third quarter of 2023, we added 594,000 mobile lines, 63,000 Internet customers and 8,000 residential and small and medium business ("SMB") customer relationships, which excludes mobile-only customer relationships. We
spent $512 million and $1.4 billion on our subsidized rural construction initiative during the three and nine months ended September 30, 2023, respectively, and activated approximately 78,000 and 190,000 subsidized rural passings, respectively. Our mobile line and Internet customer additions in the third quarter were supported by our Spectrum One offering, which brings together Spectrum Internet, Advanced WiFi and Unlimited Spectrum Mobile to offer consumers fast, reliable and secure online connections on their favorite devices at home and on-the-go in a high-value package and was further supported by growth in our legacy and new subsidized rural markets.
We continue to upgrade our network to provide higher Internet speeds and reliability and invest in our products and customer service platforms. We currently offer Spectrum Internet
products with speeds up to 1 Gbps across our entire footprint and we plan to upgrade our network to provide multi-gigabit speeds. Our Advanced WiFi, a managed WiFi service that provides customers an optimized home network while providing greater control of their connected devices with enhanced security and privacy, is available to all Internet customers. We continue to invest in our ability to provide a differentiated Internet connectivity experience for our mobile and fixed Internet customers with increasing availability of out-of-home WiFi access points across our footprint. In addition, we continue to work towards the construction of our own 5G mobile data-only network in targeted areas of our footprint leveraging our Citizen Broadband Radio Service ("CBRS") Priority Access Licenses.
We also continue to evolve our video product. In September 2023, we entered into a new affiliation
agreement with Disney which provides a template for a new programming affiliation approach where we partner with content providers to provide access to both linear and app-based direct-to-consumer content. In October 2023, we began deploying Xumo Stream Boxes to new video customers. The Xumo Stream Box combines a live TV experience with access to hundreds of direct-to-consumer TV apps and features unified search and discovery along with a curated content offering based on the customer's interests and subscriptions. By continually improving our product set and offering consumers the opportunity to save money by switching to our services, we believe we can continue to penetrate our expanding footprint and sell additional products to our existing customers. We are also beginning to see benefits from the targeted investments we are making in employee wages and benefits inside of our operations to build employee skill sets and tenure, as well as the continued investments
in digitization of our customer service platforms and proactive maintenance, all with the goal of improving the customer experience, reducing transactions and driving customer growth and retention.
12
We realized revenue, Adjusted EBITDA and income from operations during the periods presented as follows (in millions; all percentages are calculated using whole numbers; minor differences may exist due to rounding):
Adjusted
EBITDA is defined as net income attributable to CCO Holdings member plus net income attributable to noncontrolling interest, interest expense, net, income taxes, depreciation and amortization, stock compensation expense, other income (expenses), net and other operating (income) expenses, net, such as special charges and (gain) loss on sale or retirement of assets. See “Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow.
Growth in total revenue was primarily due to growth in residential Internet customers and residential mobile lines partly offset by lower residential video and advertising sales revenues. Adjusted EBITDA growth and changes in income from operations were impacted by growth in revenue and increases in operating costs and expenses, primarily other costs of revenue and costs to service customers partly offset
by a decrease in programming expense.
13
The following table summarizes our customer statistics for Internet, video, voice and mobile as of September 30, 2023 and 2022 (in thousands except per customer data and footnotes).
Monthly Residential Revenue per Residential Customer (c)
$
119.28
$
120.00
Monthly SMB Revenue per SMB Customer (d)
$
162.94
$
166.84
Internet
Residential
28,606
28,320
SMB
2,043
2,008
Total Internet Customers
30,649
30,328
Video
Residential
13,751
14,642
SMB
628
649
Total
Video Customers
14,379
15,291
Voice
Residential
6,960
7,929
SMB
1,296
1,287
Total
Voice Customers
8,256
9,216
Mobile Lines (e)
Residential
6,987
4,516
SMB
233
161
Total
Mobile Lines
7,220
4,677
Enterprise Primary Service Units ("PSUs") (f)
298
282
(a)We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of September 30, 2023 and 2022,
customers include approximately 143,300 and 151,700 customers, respectively, whose accounts were over 60 days past due, approximately 53,400 and 55,500 customers, respectively, whose accounts were over 90 days past due and approximately 261,700 and 149,300 customers, respectively, whose accounts were over 120 days past due. Bad debt expense associated with these past due accounts has been reflected in our consolidated statements of operations. The increase in accounts past due more than 120 days is predominately due to pre-existing and incremental unsubsidized amounts of customers’ bills for those customers participating in government assistance programs, including video services. These customers are downgraded to a subsidized Internet-only service.
(b)Customer relationships include the number of customers that receive one or more levels of service, encompassing Internet, video, voice and mobile
services, without regard to which service(s) such customers receive. Customers who reside in 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 exclude enterprise and mobile-only customer relationships.
(c)Monthly residential revenue per residential customer is calculated as total residential quarterly revenue divided by three divided by average residential customer relationships during the respective quarter and excludes mobile-only customers.
(d)Monthly SMB revenue per SMB customer is calculated as total SMB quarterly revenue divided by three divided by average SMB customer relationships during the respective quarter and excludes mobile-only customers.
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(e)Mobile
lines include phones and tablets which require one of our standard rate plans (e.g., "Unlimited" or "By the Gig"). Mobile lines exclude wearables and other devices that do not require standard phone rate plans.
(f)Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering at each customer location as an individual PSU.
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K. There have been no material
changes from the critical accounting policies described in our Form 10-K.
Results of Operations
The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions):
Operating costs and expenses (exclusive of items shown separately below)
8,324
8,277
25,220
24,650
Depreciation and amortization
2,123
2,169
6,486
6,688
Other
operating expense, net
90
204
46
146
10,537
10,650
31,752
31,484
Income from operations
3,047
2,900
9,144
8,862
Other
Income (Expenses):
Interest expense, net
(1,297)
(1,157)
(3,843)
(3,313)
Other income (expenses), net
(15)
(36)
(192)
7
(1,312)
(1,193)
(4,035)
(3,306)
Income
before income taxes
1,735
1,707
5,109
5,556
Income tax expense
(14)
(11)
(43)
(36)
Consolidated
net income
1,721
1,696
5,066
5,520
Less: Net income attributable to noncontrolling interests
—
—
(1)
(1)
Net
income attributable to CCO Holdings member
$
1,721
$
1,696
$
5,065
$
5,519
Revenues. Total revenues grew $34 million and $550 million for the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022 primarily due to growth
in residential Internet customers and residential mobile lines partly offset by lower residential video and advertising sales revenues as well as $68 million of total customer credits related to the temporary loss of Disney programming during the third quarter of 2023.
15
Revenues by service offering were as follows (dollars in millions; all percentages are calculated using whole numbers; minor differences may exist due to rounding):
Increase in average residential Internet customers
59
143
$
205
$
642
The
increase related to rate and product mix was primarily due to promotional rate step-ups and rate adjustments, partly offset by lower bundled revenue allocation. Residential Internet customers grew by 286,000 customers from September 30, 2022 to September 30, 2023.
Video revenues consist primarily of revenues from video services provided to our residential customers, as well as franchise fees, equipment service fees and video installation revenue. The decrease in video revenues is attributable to the following (dollars in millions):
Residential video customers decreased by 891,000 from September 30,
2022 to September 30, 2023. The change related to rate and product mix was affected by a higher mix of lower cost video packages within our video customer base and $63 million of customer credits related to the temporary loss of Disney programming in the third quarter of 2023, offset by the pass-through of programming cost increases and promotional rate step-ups.
16
The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions):
Residential mobile
lines increased by 2,471,000 mobile lines from September 30, 2022 to September 30, 2023. The decrease related to rate is primarily related to the Spectrum One offering and is partly offset by higher bundled revenue allocation.
The change in SMB revenues is attributable to the following (dollars in millions):
SMB
customers grew by 29,000 from September 30, 2022 to September 30, 2023. The decrease related to rate and product mix changes were primarily due to a higher mix of lower priced video packages and a lower number of voice lines per SMB customer relationship.
Enterprise revenues increased $25 million and $67 million during the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022 primarily due to an increase in Internet PSUs partly offset by lower wholesale PSUs. Enterprise PSUs increased 16,000 from September 30, 2022 to September 30, 2023.
Advertising
sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues decreased $97 million and $201 million during the three and nine months ended September 30, 2023, respectively, as compared to the corresponding periods in 2022 primarily due to a decrease in political ad revenue.
Other revenues consist of revenue from mobile and video device sales, processing fees, regional sports and news channels (excluding intercompany charges or advertising sales on those channels), subsidy revenue, home shopping, wire maintenance fees and other miscellaneous revenues. Other revenues increased $152 million and $475 million during the three and nine
17
months
ended September 30, 2023, respectively, compared to the corresponding periods in 2022 primarily due to higher mobile device sales partially offset by lower processing fees.
Operating costs and expenses. The increase 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):
Programming
costs were approximately $2.6 billion and $2.9 billion for the three months ended September 30, 2023 and 2022, representing 31% and 35% of total operating costs and expenses, respectively, and $8.1 billion and $8.8 billion for the nine months ended September 30, 2023 and 2022, representing 32% and 36% of total operating costs and expenses, respectively. Programming costs consist primarily of costs paid to programmers for basic, premium, video on demand, and pay-per-view programming. Programming costs decreased as a result of fewer customers, a higher mix of lower cost video packages within our video customer base and a $61 million benefit related to the temporary loss of Disney programming during the third quarter of 2023, partly offset by contractual rate adjustments,
including renewals and increases in amounts paid for retransmission consent.
Other costs of revenue increased $183 million and $585 million during the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022 primarily due to higher mobile device sales and higher other mobile direct costs due to an increase in mobile lines, partially offset by lower regulatory pass-through fees and original content costs.
Costs to service customers increased $76 million and $284 million during the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022 primarily due to adjustments to job structure, pay and benefits to
build a more skilled and longer tenured workforce resulting in lower frontline employee attrition compared to 2022, and additional activity to support the accelerated growth of Spectrum Mobile.
Sales and marketing costs decreased $13 million and increased $84 million during the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022. The increase during the nine months ended September 30, 2023 compared to the prior year period is primarily due to higher staffing across sales channels and the accelerated growth of Spectrum Mobile.
18
The
increase in other expense is attributable to the following (dollars in millions):
Stock compensation expense increased during the three and nine months ended September 30, 2023 compared to the corresponding prior periods primarily due to an increase in equity awards granted. Corporate and enterprise costs increased during the three and nine months ended September 30, 2023 compared
to the corresponding prior periods in 2022 primarily due to higher labor costs.
Depreciation and amortization.Depreciation and amortization expense decreased by $46 million and $202 million during the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022 primarily due to certain assets acquired in acquisitions becoming fully depreciated partly offset by an increase in depreciation as a result of more recent capital expenditures.
Other operating expense, net. The change in other operating expense, net is attributable to the following (dollars in millions):
See
Note 7 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information.
Interest expense, net. Net interest expense increased by $140 million and $530 million for the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022. The increase in net interest expense is the result of an increase in weighted average interest rates as well as an increase in weighted average debt outstanding of approximately $1.2 billion and $2.7 billion during the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022. The increase in weighted average debt outstanding is primarily due to an increase
in the Charter Operating credit facilities.
19
Other income (expenses), net. The change in other income (expenses), net is attributable to the following (dollars in millions):
Gain (loss) on financial instruments, net (see Note 4)
263
218
Net
periodic pension benefits
(205)
(236)
Gain (loss) on equity investments, net
(37)
(184)
$
21
$
(199)
See Note 8 and the Notes referenced above to the accompanying consolidated financial
statements contained in “Item 1. Financial Statements” for more information.
Income tax expense.We recognized income tax expense of $14 million and $43 million for the three and nine months ended September 30, 2023, respectively, and $11 million and $36 million for the three and nine months ended September 30, 2022, respectively.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest relates to our third-party interest in CV of Viera, LLP, a consolidated joint venture in a small cable system in Florida.
Net
income attributable to CCO Holdings member. Net income attributable to CCO Holdings member increased $25 million and decreased $454 million during the three and nine months ended September 30, 2023 compared to the corresponding periods in 2022, respectively, primarily as a result of the factors described above.
Use of Adjusted EBITDAand Free Cash Flow
We use certain measures that are not defined by U.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, net income attributable to CCO Holdings member 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 net income attributable to CCO Holdings member and net cash flows from operating activities, respectively, below.
Adjusted EBITDA 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. 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. These 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.
Management and Charter’s board of directors use Adjusted EBITDA and free cash flow to assess 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 Securities and Exchange Commission (the “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 were $345 million and $1.1 billion for the three and nine months ended September 30, 2023, respectively, and $342 million and $1.0 billion for the three and nine months ended September 30, 2022, respectively.
20
A reconciliation of Adjusted EBITDA and free cash flow to net income attributable to CCO Holdings member and net cash flows from operating activities, respectively, is as follows (dollars in millions):
Plus: Net
income attributable to noncontrolling interest
—
—
1
1
Interest expense, net
1,297
1,157
3,843
3,313
Income
tax expense
14
11
43
36
Depreciation and amortization
2,123
2,169
6,486
6,688
Stock compensation
expense
164
109
540
360
Other, net
105
240
238
139
Adjusted EBITDA
$
5,424
$
5,382
$
16,216
$
16,056
Net
cash flows from operating activities
$
4,085
$
4,141
$
11,576
$
11,886
Less: Purchases of property, plant and equipment
(2,961)
(2,406)
(8,259)
(6,456)
Change
in accrued expenses related to capital expenditures
114
156
110
284
Free cash flow
$
1,238
$
1,891
$
3,427
$
5,714
Liquidity
and Capital Resources
Introduction
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.
Recent Events
In February 2023, CCO Holdings and CCO Holdings Capital Corp. jointly issued $1.1 billion of 7.375% senior unsecured notes due March 2031 at par. The net proceeds were used for general corporate purposes, including repaying certain indebtedness, distributions
to our parent companies to fund buybacks of Charter Class A common stock and Charter Holdings common units and to pay related fees and expenses.
In February 2023, Charter Communications Operating, LLC ("Charter Operating") entered into an amendment to its credit agreement to replace London Interbank Offering Rate (“LIBOR”) as the benchmark rate applicable to the Term B loans with Secured Overnight Financing Rate (“SOFR”) and in March 2023, Charter Operating entered into another amendment to its credit agreement to incur a new Term B-3 loan with an aggregate principal amount of $750 million maturing in 2030 concurrently with the cancelation of certain of Charter Operating's existing Term B-1 and B-2 loans, among other amendments. Pricing on the new Term B-3 loan is SOFR plus 2.25%. After giving effect to the amendments, the aggregate principal amount of Term B-1
loans is $2.3 billion with pricing unchanged at SOFR plus 1.75% and the aggregate principal amount of Term B-2 loans is $3.1 billion with pricing unchanged at SOFR plus 1.75%.
As of July 1, 2023, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, ceased publishing remaining U.S. Dollar LIBOR rates. The Charter Operating senior secured floating rate notes due 2024 (the "Floating Rate Notes") used LIBOR as a benchmark for establishing the interest rate of the Floating Rate Notes. As of July 1, 2023, SOFR is being used as the benchmark replacement for calculations of the amount of interest payable on the Floating Rate Notes with respect to interest periods with interest determination dates occurring after June 30,
2023.
21
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt. The principal amount of our debt as of September 30, 2023 was $97.6 billion, consisting of $14.5 billion of credit facility debt, $55.9 billion of investment grade senior secured notes and $27.3 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt.
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 continue to grow our market penetration of our mobile product, we will continue to experience negative working capital impacts from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans. Further, in 2022, Charter became a meaningful federal cash tax payer as the majority of their net operating losses have been utilized, which will be funded by distributions from us. Free cash flow was $1.2 billion and $3.4 billion for the three and nine months ended September 30, 2023, respectively, and $1.9 billion and $5.7 billion for the three and nine months ended September 30, 2022, respectively. See the table below for factors impacting free cash flow during the three and nine months ended September 30,
2023 compared to the corresponding prior periods. As of September 30, 2023, the amount available under our credit facilities was approximately $3.3 billion and cash on hand was approximately $352 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 our obligations. The timing and terms of any refinancing transactions will be subject to market 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’s revolving credit
facility as well as access to the capital markets to fund our projected cash needs.
We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including our network evolution and expansion initiatives, the build-out and deployment of our CBRS spectrum, and mergers and acquisitions as well as distributions to parent companies for stock repurchases and dividends. Charter's target leverage of net debt to the last twelve months Adjusted EBITDA remains at 4 to 4.5 times Adjusted EBITDA, and up to 3.5 times Adjusted EBITDA at the Charter Operating first lien level. Our leverage ratio was 4.5 times Adjusted EBITDA as of September 30, 2023. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain
leverage within Charter's target leverage range. Excluding purchases from Liberty Broadband Corporation (“Liberty Broadband”) discussed below, during the three and nine months ended September 30, 2023, Charter purchased in the public market approximately 1.8 million and 5.0 million shares of Charter Class A common stock, respectively, for approximately $776 million and $1.9 billion, respectively, and during the three and nine months ended September 30, 2022, Charter purchased in the public market approximately 3.3 million and 12.6 million shares of Charter Class A common stock, respectively, for approximately $1.4 billion and $6.5 billion, respectively. Since the beginning of its buyback program in September 2016 through September 30, 2023, Charter has purchased approximately 155.1 million shares of Class A common
stock and Charter Holdings common units for approximately $70.7 billion, including purchases from Liberty Broadband and Advance/Newhouse Partnership ("A/N") discussed below.
In February 2021, Charter and Liberty Broadband entered into a letter agreement (the “LBB Letter Agreement”). The LBB Letter Agreement implements Liberty Broadband’s obligations under the Amended and Restated Stockholders Agreement among Charter, Liberty Broadband and A/N, dated as of May 23, 2015 (as amended, the “Stockholders Agreement”) to participate in share repurchases by Charter. Under the LBB Letter Agreement, Liberty Broadband will sell to Charter, generally on a monthly basis, a number of shares of Charter Class A common stock representing an amount sufficient for Liberty Broadband’s ownership of Charter to be reduced such that it
does not exceed the ownership cap then applicable to Liberty Broadband under the Stockholders Agreement at a purchase price per share equal to the volume weighted average price per share paid by Charter for shares repurchased during such immediately preceding calendar month other than (i) purchases from A/N, (ii) purchases in privately negotiated transactions or (iii) purchases for the withholding of shares of Charter Class A common stock pursuant to equity compensation programs of Charter. Charter purchased from Liberty Broadband 0.1 million shares of Charter Class A common stock for approximately $42 million during the nine months ended September 30, 2023, and 1.7 million and 5.0 million shares of Charter Class A common stock for approximately $796 million and $2.6 billion during the three and nine months ended September 30, 2022, respectively.
In
December 2016, Charter and A/N entered into a letter agreement, as amended in December 2017 (the “A/N 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
22
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. During the three and nine months ended September 30, 2023, Charter Holdings purchased from A/N 0.2 million and 0.7 million Charter Holdings common units for approximately $78 million and $254 million, respectively, and during the three and nine months ended September 30, 2022, Charter Holdings purchased from A/N 0.8 million and 2.6 million Charter Holdings common units for approximately $385 million and $1.4 billion, respectively.
As of September 30, 2023, Charter had remaining board authority to purchase an additional $672 million of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. Although Charter expects to continue
to buy back its common stock consistent with its leverage target range, 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. To the extent such purchases occur, CCO Holdings and its subsidiaries are the primary source for funding such purchases through distributions to their parent companies.
As possible acquisitions, swaps or dispositions arise, we actively review them against our objectives including, among other considerations, improving the operational efficiency, geographic clustering of assets, 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 acquisitions, dispositions or system swaps, or that any such transactions will be material to our operations or results.
Free Cash Flow
Free cash flow decreased $653 million and $2.3 billion during the three and nine months ended September 30, 2023 compared to the corresponding prior periods in 2022 due to the following (dollars in millions):
Changes in working capital,
excluding mobile devices
(133)
(464)
Increase in cash paid for interest, net
(132)
(411)
Changes in working capital, mobile devices
4
(170)
Increase in Adjusted EBITDA
42
160
Other,
net
121
401
$
(653)
$
(2,287)
Financial Information about Guarantors, Issuers of Guaranteed Securities, Affiliates Whose Securities Collateralize a Registrant’s Securities and Consolidated Subsidiaries
Each of CCO Holdings, Charter Operating, Time Warner Cable, LLC and Time Warner Cable Enterprises LLC (collectively, the “Issuers”) and substantially
all of Charter Operating’s direct and indirect subsidiaries (the “Obligor Subsidiaries” and together with the Issuers, collectively, the “Obligor Group” and each an “Obligor”) jointly, severally, fully and unconditionally guarantee the outstanding debt securities of the respective Issuers (other than the CCO Holdings unsecured notes) and Charter Operating’s credit facilities on a senior basis (collectively, the “Guaranteed and Secured Debt”). Such guarantees are pari passu in right of payment with all senior indebtedness of the guarantors and senior in right of payment to subordinated obligations of the guarantors. Each guarantee will be limited to the maximum amount that can be guaranteed by the relevant guarantor without rendering the relevant guarantee, as it relates to that guarantor, voidable or otherwise ineffective or limited under applicable law, and enforcement of each guarantee would be subject to certain generally available defenses. The
Guaranteed and Secured Debt is structurally subordinated to the creditors (including trade creditors) and preference shareholders (if any) of Charter Operating’s non-guarantor subsidiaries.
23
The Guaranteed and Secured Debt and the subsidiary guarantees thereof are also secured by (i) a lien on substantially all of the assets of Charter Operating and the Obligor 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 of substantially all of the equity interests of subsidiaries owned by Charter Operating or the Obligor Subsidiaries (the “Pledged Equity Interests”), as well as intercompany obligations
owing to it by any of such entities ((i) and (ii) collectively, the “Collateral”). In addition, payments of a mortgage note, currently outstanding for approximately $299 million, incurred by a single-asset special purpose entity to finance construction of the first building of the new Charter headquarters in Stamford, Connecticut are guaranteed by the Obligor Group and rank equally with the liens on the Collateral securing the Guaranteed and Secured Debt. No assets of any of Charter Operating’s non-guarantor subsidiaries (including any capital stock owned by any such subsidiary) will constitute Collateral. The subsidiary guarantees are effectively senior to all unsecured debt or debt secured by junior liens of the subsidiary guarantors, in each case to the extent of the value of the collateral securing the guarantee obligations of the subsidiary guarantors. Upon the occurrence and during the continuance of an event of default under the Guaranteed and Secured
Debt, subject to the terms of an intercreditor agreement, the security documents governing the Guaranteed and Secured Debt provide for (among other available remedies) the foreclosure upon and sale of the Collateral by the collateral agent(s) of the respective Guaranteed and Secured Debt and the distribution of the net proceeds of any such sale to the holders and/or the lenders of the Guaranteed and Secured Debt on a pro rata basis, subject to any prior liens on the Collateral. We believe there is no separate trading market for the Pledged Equity Interests.
Certain Charter Operating subsidiaries that are regulated entities are only designated as guarantor subsidiaries, and certain related assets (including the capital stock of such regulated entities) are only required to be pledged as Collateral, upon approval by regulators. The guaranteed obligations and collateral of an Obligor
Subsidiary (including Pledged Equity Interests) may be released under certain circumstances permitted under the documentation governing the Guaranteed and Secured Debt, including if an Obligor Subsidiary no longer qualifies as a “Subsidiary” of Charter Operating under transactions not prohibited by the Charter Operating credit agreement.
See Note 8 to the consolidated financial statements contained in our 2022 Annual Report on Form 10-K for further details about the terms, conditions and other factors that may affect payments to holders and the collateral arrangements of the Guaranteed and Secured Debt.
Because the assets, liabilities and results of operations of the combined Obligor Group are not materially different than corresponding amounts presented in the consolidated financial statements
of CCO Holdings, summarized financial information of the Obligor Group have been omitted pursuant to SEC Regulation S-X Rule 13-01, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered and S-X Rule 13-02, Affiliates Whose Securities Collateralize Securities Registered Or Being Registered.
Limitations on Distributions
Distributions by us and our subsidiaries to a parent company for payment of principal on parent company notes are restricted under CCO Holdings indentures governing CCO Holdings' indebtedness, unless there is no default under the applicable indenture, and unless CCO Holdings' leverage ratio test is met at the time of such distribution. As of September 30,
2023, there was no default under any of these indentures, and CCO Holdings met its leverage ratio test based on September 30, 2023 financial results. There can be no assurance that CCO Holdings will satisfy its leverage ratio test at the time of the contemplated distribution.
In addition to the limitation on distributions under the various indentures, 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.
Historical Operating, Investing, and Financing Activities
Cash
and Cash Equivalents. We held $352 million and $392 million in cash and cash equivalents as of September 30, 2023 and December 31, 2022, respectively.
Operating Activities. Net cash provided by operating activities decreased $310 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to an increase in negative changes in working capital and cash paid for interest, partly offset by an increase in Adjusted EBITDA of $160 million and the payment of litigation settlements in 2022.
24
Investing
Activities.Net cash used in investing activities was $8.5 billion and $6.4 billion for the nine months ended September 30, 2023 and 2022, respectively. The increase in cash used was primarily due to an increase in capital expenditures and changes in accrued expenses related to capital expenditures.
Financing Activities.Net cash used in financing activities decreased $2.4 billion during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to a decrease in the distributions to parent companies partly offset by a decrease in the amount by
which borrowings of long-term debt exceeded repayments.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were $3.0 billion and $8.3 billion for the three and nine months ended September 30, 2023, respectively, and $2.4 billion and $6.5 billion for the three and nine months ended September 30, 2022, respectively. The increase was primarily due to an increase in line extensions in connection with our subsidized rural construction initiative and continued residential and commercial network expansion. The increase in capital expenditures excluding line extensions was primarily driven by higher spend on network evolution, support capital
and customer premise equipment, particularly Xumo Stream boxes. See the table below for more details.
We currently expect full year 2023 capital expenditures, excluding line extensions, to be approximately $7.2 billion. We continue to expect 2023 line extensions capital expenditures to total approximately $4 billion. The actual amount of capital expenditures in 2023 will depend on a number of factors including, but not limited to, the pace of our network evolution and expansion initiatives, supply chain timing and growth rates in 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 $110 million and
$284 million for the nine months ended September 30, 2023 and 2022, respectively.
The following tables present our major capital expenditures categories in accordance with National Cable and Telecommunications Association (“NCTA”) disclosure guidelines for the three and nine months ended September 30, 2023 and 2022. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):
(a)Customer
premise equipment includes equipment and devices located at the customer's premise used to deliver our Internet, video and voice services (e.g., modems, routers and set-top boxes), as well as installation costs.
(b)Scalable infrastructure includes costs, not related to customer premise equipment or our network, to secure growth of new customers or provide service enhancements (e.g., headend equipment).
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(c)Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including our network evolution initiative which started in 2022.
(d)Support capital
includes costs associated with the replacement or enhancement of non-network assets (e.g., back-office systems, non-network equipment, land and buildings, vehicles, tools and test equipment).
(e)Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
(f)The subsidized rural construction initiative subcategory includes projects for which we are receiving subsidies from federal, state and local governments (for which separate reporting was initiated in 2022), excluding customer premise equipment and installation.
Recently Issued Accounting Standards
See
Note 20 to the Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of recently issued accounting standards. There have been no material changes from the recently issued accounting standards described in our Form 10-K.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to the interest rate risk as previously disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022. See Note 3 to the accompanying
consolidated financial statements contained in “Item 1. Financial Statements” for a discussion of notes issued during the nine months ended September 30, 2023.
Item 4.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 our design and operation of disclosure controls and procedures with respect to the information generated for use in this quarterly report. The evaluation
was based upon reports and certifications provided by a number of executives. Based 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 evaluation, we believe that our controls provide such reasonable assurances.
During the quarter ended September 30, 2023, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.Legal
Proceedings.
See Note 18 to our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of legal proceedings, as updated by Note 10 to the consolidated financial statements contained in “Item 1. Financial Statements” of our quarterly report on Form 10-Q for the quarter ended June 30, 2023 and as further updated by Note 10 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” of this quarterly report.
Item 1A.Risk
Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2022 includes "Risk Factors" under Item 1A of Part I. There have been no material changes from the risk factors described in our Form 10-K.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, CCO Holdings, LLC and CCO Holdings Capital Corp. have duly caused this quarterly report to be signed on their behalf by the undersigned, thereunto duly authorized.
The following financial information from CCO Holdings, LLC’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023, filed with the Securities and Exchange Commission on October 27, 2023, formatted in iXBRL (inline eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Member's Equity; (iv) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.
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Cover
Page, formatted in iXBRL and contained in Exhibit 101.
E-1
Dates Referenced Herein and Documents Incorporated by Reference
