Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 869K
2: EX-22.1 Published Report re: Matters Submitted to a Vote HTML 30K
of Security Holders
3: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
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6: EX-32.2 Certification -- §906 - SOA'02 HTML 20K
13: R1 Document And Entity Information HTML 74K
14: R2 Consolidated Balance Sheets HTML 86K
15: R3 Consolidated Balance Sheet (Parentheticals) HTML 25K
16: R4 Consolidated Statements of Operations HTML 66K
17: R5 Consolidated Statements of Changes in Member's HTML 57K
Equity
18: R6 Consolidated Statements of Cash Flows HTML 101K
19: R7 Organization and Basis of Presentation (Notes) HTML 27K
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(Notes)
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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
Atlantic Street/
iiStamford/
iiConnecticut/
ii06901/
(Address
of Principal Executive Offices)
(Zip Code)
(ii203/) ii905-7801/
(Registrant's telephone number, including area code)
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 registrants have 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 registrants were 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, 2020: ii1/
This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2020. 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 (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 the “Results of Operations”
and “Liquidity and Capital Resources” sections under 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” under 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,”“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:
•the impact of the COVID-19 pandemic on the economy, our customers, our vendors, local, state and federal governmental responses to the pandemic and our businesses
generally;
•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;
•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);
•our ability to develop and deploy new products and technologies including mobile products and any other 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 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;
•general
business conditions, economic uncertainty or downturn, including the impacts of the COVID-19 pandemic to unemployment levels and the level of activity in the housing sector;
•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 quarterly report.
Adjustments
to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization
i7,283
i7,453
Stock
compensation expense
i263
i238
Noncash
interest income, net
(i33)
(i89)
Other
pension (benefits) costs, net
i94
(i27)
Loss
on extinguishment of debt
i121
i—
Loss
on financial instruments, net
i185
i116
Deferred
income taxes
i—
i54
Other,
net
(i28)
i155
Changes
in operating assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable
i163
(i567)
Prepaid
expenses and other assets
(i228)
(i207)
Accounts
payable, accrued liabilities and other
i79
(i104)
Receivables
from and payables to related party
(i122)
(i23)
Net
cash flows from operating activities
i10,316
i8,347
CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(i5,352)
(i4,913)
Change
in accrued expenses related to capital expenditures
(i70)
(i449)
Other,
net
(i33)
i85
Net
cash flows from investing activities
(i5,455)
(i5,277)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt
i10,352
i13,157
Repayments
of long-term debt
(i9,711)
(i10,886)
Borrowings
of loans payable - related parties
i6
—
Payments for debt issuance costs
(i91)
(i48)
Contributions
from parent
i43
i54
Distributions
to parent
(i7,667)
(i5,222)
Distributions
to noncontrolling interest
(i1)
(i2)
Other,
net
(i26)
(i133)
Net
cash flows from financing activities
(i7,095)
(i3,080)
NET
DECREASE IN CASH AND CASH EQUIVALENTS
(i2,234)
(i10)
CASH
AND CASH EQUIVALENTS, beginning of period
i3,249
i300
CASH
AND CASH EQUIVALENTS, end of period
$
i1,015
$
i290
CASH
PAID FOR INTEREST
$
i3,020
$
i3,065
CASH
PAID FOR TAXES
$
i36
$
i27
The
accompanying notes are an integral part of these consolidated financial statements.
5
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, sports and high-quality original programming to its customers through Spectrum Networks and Spectrum Originals.
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 Chairman and 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, cable services.
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, impairments of franchises and goodwill, pension benefits and income taxes. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the 2020 presentation.
6
CCO
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
2. iFranchises, Goodwill and Other Intangible Assets
Amortization
expense related to customer relationships and other intangible assets for the three and nine months ended September 30, 2020 was $i445 million and $i1.4
billion, respectively, and $i516 million and $i1.6 billion for the three and nine months ended September 30,
2019, respectively.
i
The Company expects amortization expense on its finite-lived intangible assets will be as follows:
Actual
amortization expense in future periods will differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, impairments and other relevant factors.
3. iInvestments
The Company recorded impairments on equity investments of
approximately $i121 million during the nine months ended September 30, 2019 which were recorded in other expense, net in the consolidated statements of operations.
Operating
lease expenses were $i98 million and $i289 million for the three and nine months ended September 30, 2020, respectively, and $i92
million and $i281 million for the three and nine months ended September 30, 2019, respectively, inclusive of $i32
million and $ii94/
million for the three and nine months ended September 30, 2020, respectively, and $i31 million and $i92
million for the three and nine months ended September 30, 2019, respectively, of both short-term lease costs and variable lease costs that were not included in the measurement of operating lease liabilities.
Cash paid for amounts included in the measurement of operating lease liabilities, recorded as operating cash flows in the statements of cash flows, were $i189 million and $i185
million for the nine months ended September 30, 2020 and 2019, respectively. Operating lease right-of-use assets obtained in exchange for operating lease obligations were $i250 million and $i171
million for the nine months ended September 30, 2020 and 2019, respectively.
i
Supplemental balance sheet information related to leases is as follows.
Lease
liabilities on consolidated balance sheet as of September 30, 2020
$
i1,079
/
The Company has $i61
million and $i62 million of finance lease liabilities recognized in the consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively, included within accounts payable and accrued liabilities and other long-term liabilities.The related finance lease right-of-use assets are recorded in property, plant and equipment, net.The Company’s finance leases were not considered
material for further supplemental lease disclosures.
(a)Principal
amount includes £i625 million remeasured at $i806 million and $i828
million as of September 30, 2020 and December 31, 2019, respectively, using the exchange rate at the respective dates.
(b)Principal amount includes £i650 million remeasured at $i839
million and $i861 million as of September 30, 2020 and December 31, 2019, respectively, using the exchange rate at the respective dates.
The accreted values presented in the table above represent the principal amount of the debt adjusted for original issue discount or premium at the time of sale, deferred financing costs, and, in regards to debt assumed in acquisitions, 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.
10
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
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 8. The Company has availability under the Charter Communications Operating, LLC ("Charter Operating") credit facilities of approximately $i4.7 billion as of September 30, 2020.
In February 2020, CCO Holdings and CCO Holdings Capital Corp. jointly issued $i1.65 billion
aggregate principal amount of i4.500% senior unsecured notes due 2030 at par and in March 2020, an additional $i1.1 billion of the same series of notes were issued at a price
of i102.5% of the aggregate principal amount. Also in March 2020, CCO Holdings and CCO Holdings Capital Corp. issued $i1.4 billion aggregate principal amount of i4.500%
senior unsecured notes due 2032 at par. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including repaying certain indebtedness, including repayment of all of CCO Holdings' i5.250% senior notes due September 30, 2022, i5.125%
senior notes due February 15, 2023, i5.125% senior notes due May 1, 2023, i5.750%
senior notes due September 1, 2023 and i5.750% senior notes due January 15, 2024, as well as distributions to the Company's parent companies to fund buybacks of Charter Class A common stock and Charter Holdings common units. The Company recorded a loss on extinguishment of debt of $i63 million
during the nine months ended September 30, 2020 related to these transactions.
In July 2020, CCO Holdings and CCO Holdings Capital Corp. jointly issued $i1.5 billion aggregate principal amount of i4.250%
senior unsecured notes due 2031 at par and later in July 2020, an additional $i1.5 billion of the same series of notes were issued at a price of i102%. The net proceeds were used to pay related
fees and expenses and for general corporate purposes, including repaying certain indebtedness, including repayment of all of CCO Holdings' i5.875% senior notes due April 1, 2024, as well as distributions to the Company's parent companies to fund buybacks of Charter Class A common stock and Charter Holdings common units. The Company recorded a loss on extinguishment of debt of $i58 million
during the three and nine months ended September 30, 2020 related to these transactions.
In October 2020, CCO Holdings and CCO Holdings Capital Corp. jointly issued an additional $i1.5 billion of its i4.500%
senior unsecured notes due 2032 at i103.75% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including repaying certain indebtedness, including repayment of all of CCO Holdings' i5.375%
senior notes due May 1, 2025, as well as distributions to the Company's parent companies to fund potential buybacks of Charter Class A common stock and Charter Holdings common units.
The CCO Holdings notes 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. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings.
CCO Holdings may redeem some or all of the notes at any time at a premium. Beginning in 2028 and 2029, the optional redemption price declines to i100%
of the principal amount, plus accrued and unpaid interest, if any.
In addition, at any time prior to varying dates in 2023, CCO Holdings may redeem up to i40% of the aggregate principal amount of the notes 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 notes from the holders at a purchase price equal to i101% of the total principal amount of the notes, plus any accrued and unpaid interest.
In April 2020, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $i1.6 billion
aggregate principal amount of i2.800% senior secured notes due April 2031 at a price of i99.561% of the aggregate principal amount and $i1.4 billion
aggregate principal amount of i3.700% senior secured notes due April 2051 at a price of i99.217% of the aggregate principal amount. The net proceeds were used to pay related fees and
expenses and for general corporate purposes.
In June 2020, Charter Operating and Charter Communications Operating Capital Corp. redeemed all of their i3.579% senior secured notes due July 2020.
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
11
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
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.
7. iLoans
Payable - Related Party
Loans payable - related party as of September 30, 2020 and December 31, 2019 consists of loans from Charter Communications Holding Company, LLC (“Charter Holdco”) to the Company of $i727 million and $i699 million,
respectively, and loans from Charter to the Company of $i279 million and $i260 million, respectively. Interest accrued at LIBOR plus i1.25%
on the loans payable from Charter Holdco during the period ending September 30, 2020 and LIBOR plus ii1.50/%
during the period ending December 31, 2019. Interest accrued at LIBOR plus ii2.00/%
on the loans payable from Charter during both periods ending September 30, 2020 and December 31, 2019.
8. iAccounting for Derivative Instruments and Hedging Activities
iThe
Company uses derivative instruments to manage foreign exchange risk on the Sterling Notes, and does not hold or issue derivative instruments for speculative trading purposes.
Cross-currency derivative instruments are used to effectively convert £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 cross-currency swaps have
maturities of June 2031 and July 2042. The Company is required to post collateral on the cross-currency derivative instruments when the derivative contracts are in a liability position. In April 2019, the Company entered into a collateral holiday agreement for i60% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for ithree
years, as well as a ten year collateral cap on the remaining i40% of the cross-currency swaps which limits the required collateral posting on that i40% of the cross-currency swaps to $i150
million. The fair value of the Company's cross-currency derivatives was $i454 million and $i224 million and is included in other long-term liabilities on its consolidated balance sheets as of September 30,
2020 and December 31, 2019, respectively.
The Company’s derivative instruments are not designated as hedges and are marked to fair value each period, with the impact recorded as a gain or loss on financial instruments, net in the consolidated statements of operations. While these derivative instruments are not designated as hedges for accounting purposes, management continues to believe such instruments are closely correlated with the respective debt, thus managing associated risk.
i
The
effect of financial instruments on the consolidated statements of operations is presented in the table below.
Change in fair value of cross-currency derivative instruments
$
i135
$
(i86)
$
(i230)
$
(i172)
Foreign
currency remeasurement of Sterling Notes to U.S. dollars
(i66)
i52
i45
i56
$
i69
$
(i34)
$
(i185)
$
(i116)
/
12
CCO
HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
9. iFair Value Measurements
Accounting guidanceestablishes a three-level hierarchy for disclosure of fair value measurements,
based on 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 September 30, 2020 and December 31, 2019 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.
Financial instruments
accounted for at fair value on a recurring basis and classified within Level 2 of the valuation hierarchy include the Company's cross-currency derivative instruments and were valued at $i454 million and $i224
million as of September 30, 2020 and December 31, 2019, respectively.
The estimated fair value of the Company’s senior notes and debentures as of September 30, 2020 and December 31, 2019 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.
The Company’s nonfinancial 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 when there is evidence that an impairment may exist. When such impairments are recorded, fair values are generally classified within Level 3 of the valuation hierarchy.
13
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
10. iRevenues
i
The
Company’s revenues by product line are as follows:
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, digital, video on demand and pay-per-view programming. Regulatory, connectivity and produced content costs represent payments to franchise and regulatory authorities, costs directly related to providing Internet, video and voice 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 contract period. Costs to service customers include 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-party labor for the non-capitalizable portion of installations, service and repairs, maintenance, bad debt expense, billing and collection,
occupancy and vehicle costs. Marketing costs represent the costs of marketing to current and potential commercial and residential customers including labor costs. Mobile costs represent costs associated with the Company's mobile service such as device and service costs, marketing, sales and commissions, retail stores, personnel costs and taxes, among others. Other includes corporate overhead, 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
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
12. iOther Operating Expenses, Net
i
Other
operating expenses, net consist of the following for the periods presented:
Special charges, net primarily includes employee termination costs and net amounts of litigation settlements.
(Gain) loss on sale of assets, net
(Gain) loss on sale of assets, net represents the net (gain) loss recognized on the sales and disposals of fixed assets and cable systems. The nine months ended September 30, 2019 includes a $i41 million
impairment of non-strategic assets.
13.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.
i
Charter granted the following equity awards for the periods presented.
Charter
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, 2020, total unrecognized compensation remaining to be recognized in future periods totaled $i222 million for stock options, $i2
million for restricted stock and $i260 million for restricted stock units and the weighted average period over which they are expected to be recognized is itwo
years for stock options, iseven months for restricted stock and itwo
years for restricted stock units.
The Company recorded stock compensation expense of $i83 million and $i263
million for the three and nine months ended September 30, 2020, respectively, and $i71 million and $i238
million for the three and nine months ended September 30, 2019, respectively, which is included in operating costs and expenses.
15
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
14. iIncome
Taxes
CCO Holdings is a single member limited liability company not subject to income tax. CCO Holdings holds all operations through indirect subsidiaries. The majority of these indirect subsidiaries are limited liability companies that are not subject to income tax.Certain indirect subsidiaries that are required to file separate returns are subject to federal and state tax. CCO Holdings’ tax provision reflects the tax provision of the entities required to file separate returns.
Generally, the taxable income, gains, losses, deductions and credits of CCO Holdings are passed through to its indirect members, Charter and Advance/Newhouse Partnership (“A/N”). Charter is responsible for its share of taxable income or loss of CCO Holdings allocated
to it in accordance with the Charter Holdings Limited Liability Company Agreement and partnership tax rules and regulations. Charter also records financial statement deferred tax assets and liabilities related to its investment, and its underlying net assets, in CCO Holdings.
The Company recorded income tax expense of $i10 million and $i23
million for the three and nine months ended September 30, 2020, respectively, and $i10 million and $i86 million for the
three and nine months ended September 30, 2019, respectively. Income tax expense decreased during the nine months ended September 30, 2020 compared to the corresponding period in 2019 primarily as a result of an internal entity simplification that increased expense in 2019.
On March 18, 2020, the Families First Coronavirus Response Act ("FFCR Act"), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous tax provisions, such as deferring payroll tax payments, establishing a credit for the retention of certain employees, relaxing limitations
on the deductibility of interest, and updating the definition of qualified improvement property. This legislation currently has no material impact to income tax expense on the Company’s financial statements.
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. The Company has recorded unrecognized tax benefits totaling approximately $i103
million and $i110 million, excluding interest and penalties, as of September 30, 2020 and December 31, 2019, respectively. The Company does not currently anticipate that its reserve for uncertain tax positions will significantly increase or decrease during 2020; 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.
No tax years for Charter are currently under examination by the Internal Revenue Service ("IRS") for income tax purposes. Charter's 2016 through 2019 tax years remain open for examination and assessment. Charter’s short period return dated May 17, 2016 (prior to the Time Warner Cable Inc. ("TWC") and Bright House Networks, LLC ("Bright House") transactions) and prior years remain open solely for purposes of examination of Charter’s loss and credit carryforwards. The IRS is currently examining Charter Holdings’ income tax return for 2016. Charter Holdings’ 2017 through 2019 tax years remain open for examination and assessment. The IRS is currently examining TWC’s income tax returns for 2011 through 2014. TWC’s tax year 2015 remains subject to examination and assessment. Prior
to TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009, TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS has examined Time Warner’s 2008 through 2010 income tax returns and the results are under appeal. 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 three and nine months ended September 30, 2020, nor does the Company anticipate a material impact in the future.
15.iComprehensive
Income
Comprehensive income equaled net income attributable to CCO Holdings member for each of the three and nine months ended September 30, 2020 and 2019.
16
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where
indicated)
16.iRelated Party Transactions
The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved.
Liberty Broadband and A/N
Under
the terms of the Amended and Restated Stockholders Agreement with Liberty Broadband, A/N and Charter, dated May 23, 2015, the number of Charter’s directors is fixed at 13, and includes its CEO. Two designees selected by A/N are members of the board of directors of Charter and three designees selected by Liberty Broadband are members of the board of directors of Charter. The remaining eight directors are not affiliated with either A/N or Liberty Broadband. Each of A/N and Liberty Broadband is entitled to nominate at 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 each of A/N and Liberty Broadband, 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 Charter (referred to as the “unaffiliated directors”). Each of the Nominating 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. Mr. Thomas Rutledge, the Company’s CEO, is the chairman of the board of Charter.
In December 2017, Charter and A/N entered into an amendment to the 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.
Dr. John Malone, a director emeritus of Charter and Chairman of the board of directors and holder of i48.8% of voting interest
in Liberty Broadband, also serves on the board of directors of Qurate Retail, Inc. ("Qurate"). As reported in Qurate's SEC filings, Dr. Malone owns approximately i1.2 million shares of the Series A common stock and approximately i27.7 million
shares of the Series B common stock of Qurate and has a i40.9% voting interest in Qurate for the election of directors. Qurate wholly owns HSN, Inc. (“HSN”) and QVC, Inc. (“QVC”). The Company has programming relationships with HSN and QVC. For the three and nine months ended September 30, 2020, the Company recorded revenue in aggregate of approximately $i12 million
and $i36 million, respectively, and for three and nine months ended September 30, 2019, the Company recorded revenue in aggregate of approximately $i11
million and $i35 million, respectively, from HSN and QVC as part of channel carriage fees and revenue sharing arrangements for home shopping sales made to customers in the Company’s footprint.
Dr. Malone and Mr. Steven Miron, a member of Charter’s board of directors, also serve on the board of directors of Discovery, Inc. (“Discovery”). As reported in Discovery's SEC filings, Dr. Malone owns i1.2%
of the series A common stock, i93.6% of the series B common stock and i3.6%
of the series C common stock of Discovery and has a i27.9% voting interest in Discovery for the election of directors. As reported in Discovery's SEC filings, Advance/Newhouse Programming Partnership (“A/N PP”), an affiliate of A/N and of which Mr. Miron is the CEO, owns i100%
of the Series A-1 preferred stock of Discovery and i100% of the Series C-1 preferred stock of Discovery and has a i23.9%
voting interest for matters other than the election of directors. A/N PP also has the right to appoint three directors out of a total of twelve directors to Discovery’s board. The Company purchases programming from Discovery. Based on publicly available information, the Company does not believe that Discovery would currently be considered a related party. The amount paid in the aggregate to Discovery represents less than iiii2///%
of total operating costs and expenses for the three and nine months ended September 30, 2020 and 2019.
Equity Investments
The Company and its parent companies have agreements with certain equity investees pursuant to which the Company has made or received related party transaction payments. The Company and its parent companies recorded payments to equity investees totaling $i50
million and $i167 million during the three and nine months ended September 30, 2020, respectively, and $i78 million and $i245 million
during the three and nine months ended September 30, 2019, respectively.
17
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
17.iContingencies
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 involving Charter, TWC, A/N, and Liberty Broadband announced by Charter on May 26, 2015. The lawsuit, which named as defendants Charter and its board of directors, alleged that the transactions resulted from breaches of fiduciary duty by Charter’s directors and that Liberty Broadband improperly benefited from the challenged transactions at the expense of other Charter stockholders. The lawsuit has proceeded to the discovery phase. Charter denies any liability, believes that it has substantial defenses, and is vigorously defending this lawsuit. 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 California Attorney General and the Alameda County, California District Attorney are investigating whether certain of 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 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”) filed a complaint in the United States District Court for the District of Kansas alleging that TWC infringed certain U.S. patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. At the trial, the jury returned a verdict of $i140 million against TWC and further concluded that TWC had willfully infringed Sprint’s patents. The court subsequently declined to enhance the damage award as a result of the purported willful infringement and awarded Sprint an additional
$i6 million, representing pre-judgment interest on the damages award. The Company has now paid the verdict, interest and costs in full. The Company continues to pursue indemnity from its vendors and has brought a patent suit against Sprint (TC Tech, LLC v. Sprint) in the United States District Court for the District of Delaware implicating Sprint's LTE technology and a similar suit against T-Mobile USA, Inc. in the Western District of Texas. The ultimate outcomes of the pursuit of indemnity against the Company’s vendors and the TC Tech litigation cannot be
predicted. The Company does not expect the outcome of its indemnity claims nor the outcome of the TC Tech litigation will have a material adverse effect on its operations or financial condition.
Sprint filed a second patent suit against Charter and Bright House Networks, LLC on December 2, 2017 in the United States District Court for the District of Delaware. This suit alleges infringement of 11 patents related to the Company's provision of VoIP services (ten of which were asserted against Legacy TWC in the matter described above).
On February 18, 2020 Sprint filed a lawsuit against Charter, Bright House, and TWC in the District Court for Johnson County, Kansas. Sprint alleges that Charter misappropriated
trade secrets from Sprint years ago through employees hired by Bright House. Sprint asserts that the alleged trade secrets relate to the VoIP business of Charter and Bright House. Charter has removed this case to the United States District Court for the District of Kansas.
Sprint filed a third patent suit against Charter on May 17, 2018 in the United States District Court for the Eastern District of Virginia. This suit alleges infringement of two patents related to the Company's video on demand services. The court transferred this case to the United States District Court for the District of Delaware on December 20, 2018 pursuant to an agreement between the parties.
While the Company is vigorously defending
these suits and is unable to predict the outcome of the Sprint 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 Sprint litigation described above, the Company and its parent companies are defendants or co-defendants in several additional 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
18
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
can be given that any adverse outcome would not be material to the Company’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 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 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’s reputation.
18.iEmployee
Benefit Plans
The Company sponsors three qualified defined benefit pension plans and one nonqualified defined benefit pension plan that provide pension benefits to a majority of employees who were employed by TWC before the merger with TWC.
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. No
future compensation increases or future service will be credited to participants of the pension plans given the frozen nature of the plans.
i
The components of net periodic pension benefit (costs) for the three and nine months ended September 30, 2020 and 2019 are recorded in other pension benefits, net in the consolidated statements of operations and consisted of the following:
During
the three and nine months ended September 30, 2020, 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 as of September 30, 2020 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 $i125
million remeasurement loss recorded during the three and nine months ended September 30, 2020 was primarily driven by changes in the discount rate as well as net gains to record pension assets to fair value.
The Company made no cash contributions to the qualified pension plans during the three and nine months ended September 30, 2020 and 2019; 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
2020 to the extent benefits are paid.
19
CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
19.iRecently
Issued Accounting Standards
Recently Adopted Accounting Standards
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be assessed for impairment under the current expected credit loss model rather than an incurred loss model. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of
the reported amount. The primary financial assets of the Company in scope of ASU 2016-13 include accounts receivables and equipment installment plan notes receivables. The Company adopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact to the Company's consolidated financial statements.
ASU No. 2018-15, Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")
In August 2018, the FASB issued ASU 2018-15 which requires upfront implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement, beginning when the module or component
of the hosting arrangement is ready for its intended use. The Company adopted ASU 2018-15 on January 1, 2020. The adoption of ASU 2018-15 did not have a material impact to the Company's consolidated financial statements.
ASU No. 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials ("ASU 2019-02")
In March 2019, the FASB issued ASU 2019-02 which aligns the accounting for production costs of an episodic television series with the accounting for production costs of films regarding cost capitalization, amortization, impairment, presentation and disclosure. The Company adopted ASU 2019-02 on January 1, 2020. The adoption of ASU 2019-02 did not have a
material impact to the Company's consolidated financial statements.
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)
In December 2019, the FASB issued ASU 2019-12 which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted. The Company elected to early adopt ASU 2019-12 on January 1, 2020. The adoption of ASU 2019-12 did not have a material impact
on the Company's consolidated financial statements.
Amendments to the financial disclosures requirements for guarantors and issuers of guaranteed securities under SEC Regulation S-X
In March 2020, the SEC adopted amendments to the financial disclosure requirements of Regulation S-X for guarantors and issuers of guaranteed securities. The final rule streamlines disclosure obligations under the existing rules, including replacing condensed consolidating financial information with summarized financial information for the "obligor group" of issuers and guarantors to the extent material, no longer requiring subsidiary issuer and guarantor cash flow information, and no longer requiring financial information for non-guarantor subsidiaries. It also permits presentation of the required disclosures to
be included in the Management's Discussion and Analysis ("MD&A") section of quarterly and annual reports rather than the notes to the Company's consolidated financial statements. The Company is voluntarily complying with the new disclosure requirements beginning with its Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and has included summarized financial information in the MD&A.
20
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 (“CCH I”), 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 30 million customers in 41 states through its 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, sports and high-quality
original programming to our customers through Spectrum Networks and Spectrum Originals.
Overview
As the COVID-19 pandemic continues to significantly impact the United States, we have continued to deliver services uninterrupted by the pandemic. Because we have invested significantly in our network and through normal course capacity increases, we have been able to respond to the significant increase in network activity from the private and public response to COVID-19 as we do our part as a major provider of Internet services in the United States by, among other things, enabling social distancing through telecommuting and e-learning across our footprint of 41 states. We have invested significantly in our self-service infrastructure, and customers have accelerated the adoption of our self-installation and
digital self-service capabilities. Increased demand for our connectivity and the positive response to our Remote Education Offer ("REO") pursuant to which new customers with students or educators in the household were eligible to receive our Internet service for free for 60 days, and the Keep Americans Connected (“KAC”) Pledge which paused collection efforts and related disconnects for residential and small and medium business ("SMB") customers with COVID-19 related payment challenges through June 30, 2020, have positively impacted our results for the nine months ended September 30, 2020 with retention rates for these customers similar to our average customer base.
During the three and nine months ended September 30, 2020,
our results were negatively impacted by COVID-19, including recording $218 million of estimated customer credits to be provided to video customers offset by $173 million in-period recognition of estimated rebates from sports programming networks as a result of canceled sporting events and related costs. The difference between the $218 million estimated credit to customers which lowered video revenue and the $163 million reduction in programming expense and $10 million reduction in regulatory, connectivity and produced content costs relates to an expected reduction in sports rights content costs which is being amortized over the life of the contract, consistent with the deferral of expense in the three months ended June 30, 2020 when games were canceled. We intend to provide a credit on our customers’ invoices for all of the rebates provided by the sports programming networks when details are finalized with these networks.
We
have also seen declines in advertising revenues as a result of COVID-19 and lower revenues from seasonal plans offered to SMB and Enterprise hospitality customers that have requested a reduced level of service due to temporary business closure or because these customers have reduced their service offering to their own customers ("Seasonal Plan"). In addition, in an effort to assist COVID-19 impacted customers with overdue balances at the end of the KAC program, we waived approximately $85 million of receivables which was recorded as a reduction of revenue in the second quarter of 2020.
We cannot predict the ultimate impact of COVID-19 on our business, including the depth and duration of the economic impact to household formation and growth and our residential and business customers’ ability to pay for our products and services including the impact of extended unemployment benefits and
other stimulus packages. We expect that some of the COVID-19 programs discussed above may result in incremental churn and bad debt during the remainder of the year and into 2021. In addition, there is uncertainty regarding the impact of government emergency declarations, the ability of our suppliers and vendors to provide products and services to us, the pace of new housing construction, changes in business spend in our local
21
and national ad sales business, the effects to our employees’ health and safety and resulting reorientation of our work activities, and the risk of limitations on the deployment and maintenance of our services (including by limiting our customer support and on-site service repairs and installations).
Although
the ultimate impact of the COVID-19 pandemic cannot be predicted, we remain focused on driving customer relationship growth by deploying superior products and services packaged with attractive pricing. Further, we expect to continue to drive customer relationship growth through sales of bundled services and improving customer retention despite the expectation for continued losses of video and wireline voice customers.
Our Spectrum Mobile service is offered to customers subscribing to our Internet service and runs on Verizon's mobile network combined with Spectrum WiFi. In March 2020, we launched 5G service offerings and we expect that, along with broader availability of our Spectrum Mobile bring-your-own-device program, to contribute to the growth of our mobile business. We also continue to explore ways to drive even more mobile traffic to our network. We plan to use our WiFi network
in conjunction with additional unlicensed, and potentially licensed, spectrum to improve network performance and expand capacity to offer consumers a superior mobile service at a lower total cost to us. In October 2020, we purchased approximately $464 million of Citizens Broadband Radio Service ("CBRS") licenses from the Federal Communications Commission ("FCC") in our effort to support our wireless network. Further, we have experimental wireless licenses from the FCC that we are utilizing to test next generation mobile services in several service areas around the country.
We believe Spectrum-branded mobile services will drive higher sales of our core products, create longer customer lives and increase profitability and cash flow over time. As a result of growth costs associated with our new mobile product line, we cannot be certain that we will be able to grow revenues
or maintain our margins at recent historical rates. During the three and nine months ended September 30, 2020, our mobile product line increased revenues by $368 million and $936 million, respectively, reduced Adjusted EBITDA by approximately $88 million and $307 million, respectively, and reduced free cash flow by approximately $265 million and $758 million, respectively. During the three and nine months ended September 30, 2019, our mobile product line increased revenues by $192 million and $490 million, respectively, reduced Adjusted EBITDA by approximately $145 million and $384 million, respectively, and reduced free cash flow by approximately $256 million and $844 million, respectively. As we continue to grow our mobile service and scale the business, we expect continued negative impacts to Adjusted EBITDA, as well as negative working capital impacts from the timing
of device-related cash flows when we sell the handset or tablet to customers pursuant to equipment installment plans.
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, net interest expense, income taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, (gain) loss on financial instruments, net, other pension (benefits) costs, net, other (income) expense, 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 for the three and nine months ended September 30, 2020 compared to the corresponding prior periods was primarily due to growth in our residential Internet and mobile customers. Adjusted EBITDA and income from operations growth
was impacted by growth in revenue and increases in operating costs and expenses, primarily mobile, and for the nine months ended September 30, 2020, increases in costs to service customers offset by lower regulatory, connectivity and produced content costs. Income from operations was also affected by a decrease in depreciation and amortization expense and other operating expenses, net.
22
The following table summarizes our customer statistics for Internet, video, mobile and voice as of September 30, 2020 and 2019 (in thousands except per customer
data and footnotes).
Monthly Residential Revenue per Residential
Customer (c)
$
109.03
$
112.00
Monthly SMB Revenue per SMB Customer (d)
$
164.77
$
169.44
Internet
Residential
26,807
24,595
SMB
1,826
1,730
Total
Internet Customers
28,633
26,325
Video
Residential
15,705
15,725
SMB
530
520
Total
Video Customers
16,235
16,245
Voice
Residential
9,335
9,595
SMB
1,207
1,120
Total
Voice Customers
10,542
10,715
Mobile Lines
Residential
2,020
793
SMB
40
1
Total
Mobile Lines
2,060
794
Enterprise Primary Service Units ("PSUs") (e)
272
264
(a)We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of September 30, 2020 and 2019,
customers include approximately 181,700 and 148,000 customers, respectively, whose accounts were over 60 days past due, approximately 52,300 and 16,400 customers, respectively, whose accounts were over 90 days past due and approximately 26,000 and 14,100 customers, respectively, whose accounts were over 120 days past due. Included in the September 30, 2020 aging statistics are approximately 60,200 customers that would have been disconnected under our normal collection policies, but were not due to certain state mandates in place.
(b)Customer relationships include the number of customers that receive one or more levels of service, encompassing Internet, video and voice 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 revenue and 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 revenue and customers.
(e)Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering at each customer location
as an individual PSU.
23
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 2019 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)
7,509
7,450
22,283
21,950
Depreciation and amortization
2,366
2,411
7,283
7,453
Other
operating expenses, net
17
18
29
77
9,892
9,879
29,595
29,480
Income from operations
2,145
1,570
5,872
4,517
Other
Income (Expenses):
Interest expense, net
(947)
(973)
(2,904)
(2,865)
Loss on extinguishment of debt
(58)
—
(121)
—
Gain
(loss) on financial instruments, net
69
(34)
(185)
(116)
Other pension benefits (costs), net
(115)
9
(94)
27
Other
expense, net
(11)
(3)
(6)
(129)
(1,062)
(1,001)
(3,310)
(3,083)
Income
before income taxes
1,083
569
2,562
1,434
Income tax expense
(10)
(10)
(23)
(86)
Consolidated
net income
1,073
559
2,539
1,348
Less: Net income attributable to noncontrolling interests
—
—
(1)
(1)
Net
income attributable to CCO Holdings member
$
1,073
$
559
$
2,538
$
1,347
Revenues. Total revenues grew $588 million and $1.5 billion for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019 primarily due to increases
in the number of residential Internet and mobile customers, price adjustments and during the three months ended September 30, 2020, advertising sales offset by a decrease in video customers and $218 million of estimated customer credits to be issued to our video customers due to canceled sporting events. For the nine months ended September 30, 2020, total revenues also decreased as compared to the corresponding prior period due to $85 million of waived receivables related to the KAC program.
24
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
$
373
$
895
Increase related to rate, product mix and allocation changes
154
442
$
527
$
1,337
Residential
Internet customers grew by 2,212,000 customers from September 30, 2019 to September 30, 2020 due to higher demand for our services. The increase related to rate, product mix and allocation changes was primarily due to price adjustments including promotional roll-off. The increase during the nine months ended September 30, 2020 as compared to the corresponding prior period was also impacted by a $29 million reduction related to the KAC program credits.
Video revenues consist primarily of revenues from basic and digital 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):
Increase related to rate, product mix and allocation changes
118
392
$
(138)
$
(120)
25
We
recorded $218 million of estimated customer credits related to canceled sporting events during the three and nine months ended September 30, 2020 and $44 million of customer credits related to KAC program during the nine months ended September 30, 2020. The increase related to rate, product mix and allocation changes was primarily due to price adjustments including annual increases and promotional roll-off, partly offset by a higher mix of lower cost video packages within our video customer base. Residential video customers decreased by 20,000 from September 30, 2019 to September 30, 2020.
The decrease in voice revenues from our residential customers is attributable to the following (dollars
in millions):
Decrease related to rate, product mix and allocation changes
(12)
(36)
$
(28)
$
(113)
Residential
wireline voice customers decreased by 260,000 customers from September 30, 2019 to September 30, 2020. The decrease related to rate, product mix and allocation changes was primarily due to value-based pricing. The decrease during the nine months ended September 30, 2020 as compared to the corresponding prior period was also impacted by a $3 million reduction related to the KAC program credits.
The increase in small and medium business commercial revenues is attributable to the following (dollars in millions):
Small and medium business customers grew by 91,000 from September 30, 2019 to September 30, 2020. The decrease related to rate and product mix changes during the three and nine months ended September 30, 2020 as compared
to the corresponding prior periods included reductions of $11 million and $28 million, respectively, related to COVID-19 programs.
Enterprise revenues decreased $27 million and $94 million during the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019 primarily due to the sale of non-strategic assets in the third quarter of 2019. The decrease during the nine months ended September 30, 2020 as compared to the corresponding prior period was also impacted by a revenue reduction of $18 million related to the COVID-19 Enterprise hospitality seasonal program. Enterprise PSUs increased 8,000 from September 30, 2019 to September 30, 2020.
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 increased $66 million during the three months ended September 30, 2020 as compared to the corresponding period in 2019 primarily due to an increase in political revenue, partially offset by a decrease in local ad revenues due to COVID-19. Advertising sales revenues decreased $60 million during the nine months ended September 30, 2020 as compared to the corresponding period in 2019 due to lower local and national ad revenues due to COVID-19, partially offset by an increase in political revenue.
During
the three and nine months ended September 30, 2020, mobile revenues represented approximately $172 million and $461 million of device revenues, respectively, and approximately $196 million and $475 million of service revenues, respectively. During the three and nine months ended September 30, 2019, mobile revenues represented approximately $123 million and $348 million of device revenues, respectively, and approximately $69 million and $142 million of service revenues,
26
respectively. The revenue increases are attributable to an increase in mobile lines from 794,000 as of September 30, 2019
to 2,060,000 mobile lines as of September 30, 2020.
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. Other revenues decreased $2 million and $11 million during the three and nine months ended September 30, 2020 compared to the corresponding periods in 2019 primarily due to a decrease in late payment fees and home security revenue offset by an increase in the sale of video devices and regional sports and news revenue.
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 $2.7 billion and $8.5 billion for the three and nine months ended September 30, 2020, respectively, representing 36% and 38% of total operating costs and expenses, respectively, and $2.8 billion and $8.5 billion for the three and nine months ended September 30, 2019, respectively, representing 37% and 39% of total operating costs and expenses, respectively. Programming costs consist primarily of costs paid to programmers for basic, digital, premium, video on demand, and pay-per-view programming. Programming costs during the three and nine months ended September 30, 2020 were reduced by $163 million of estimated rebates from sports programming networks as a result of canceled sporting events due to COVID-19 and further benefited from a higher mix of lower cost video packages within our video customer
base and lower video customers. The decrease was offset by contractual rate adjustments, including renewals and increases in amounts paid for retransmission consent. We expect programming rates will 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 services. We have been unable to fully pass these increases on to our customers and do not expect to be able to do so in the future without a potential loss of customers.
Regulatory, connectivity and produced content remained constant and decreased $119 million during the three and nine months ended September 30,
2020, respectively, compared to the corresponding periods in 2019 primarily due to deferred sports rights costs associated with the shortened baseball season resulting from COVID-19.
Costs to service customers increased $8 million and $115 million during the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019 primarily due to higher labor costs resulting from COVID-19 related wage increases and flex time benefits along with 6.8% customer growth offset by a decrease in bad debt expense given the revenue write-off associated with the KAC program and better collections enhanced by government stimulus benefits.
Marketing costs decreased $5 million and $23 million during the three and nine
months ended September 30, 2020, respectively, compared to the corresponding periods in 2019 primarily due to timing of media spend and, during the nine months ended September 30, 2020, a payroll tax credit.
Mobile costs of $456 million and $1.2 billion for the three and nine months ended September 30, 2020, respectively, and $337 million and $874 million for the three and nine months ended 2019, respectively, were comprised of mobile device costs and mobile service, customer acquisition and operating costs. The increases are attributable to increases in the number of mobile lines.
27
The
increase in other expense is attributable to the following (dollars in millions):
Enterprise
costs decreased primarily due to the sale of non-strategic assets in the third quarter of 2019. Advertising sales expense decreased during the nine months ended September 30, 2020 compared to the corresponding prior period due to lower cost of sales fees driven by lower revenue.
Depreciation and amortization.Depreciation and amortization expense decreased by $45 million and $170 million during the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019 primarily due to a decrease in depreciation and amortization as certain assets acquired in acquisitions become fully depreciated offset by an increase in depreciation as a result of more recent capital expenditures.
Other
operating expenses, net. The change in other operating expenses, net is attributable to the following (dollars in millions):
See
Note 12 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information.
Interest expense, net. Net interest expense decreased by $26 million and increased by $39 million for the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. Changes in net interest expense is the result of reductions in weighted average interest rates as well as increases in weighted average debt outstanding which was approximately $5.6 billion and $5.7 billion during the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. The increases in weighted average debt outstanding is primarily due to
the issuance of notes throughout 2019 and 2020 for general corporate purposes including distributions to parent companies for stock buybacks and debt repayments.
Loss on extinguishment of debt. Loss on extinguishment of debt of $58 million and $121 million for the three and nine months ended September 30, 2020, respectively, represents losses recognized as a result of the redemption of CCO Holdings notes. For more information, see Note 6 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Gain (loss) on financial instruments, net. We recorded gains on financial instruments of $69 million and losses on financial instruments of $185 million during the
three and nine months ended September 30, 2020, respectively, and losses on financial
28
instruments of $34 million and $116 million during the three and nine months ended September 30, 2019, respectively. Gains and losses on financial instruments are primarily recognized due to changes in the fair value of 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 8 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Other
pension benefits (costs), net. Net other pension benefits (costs) increased by $124 million and $121 million during the three and nine months ended September 30, 2020, respectively, compared to the corresponding periods in 2019. The increase during the three and nine months ended September 30, 2020 compared to the corresponding prior periods was primarily due to a $125 million remeasurement loss in the third quarter of 2020 as a result of significant lump sum settlement payments to participants. For more information, see Note 18 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Other expense, net. Other expense, net primarily represents equity losses on our equity investments. Other
expense, net also includes an impairment on equity investments of approximately $121 million during the nine months ended September 30, 2019.
Income tax expense.We recognized income tax expense of $10 million and $23 million for the three and nine months ended September 30, 2020, respectively, and $10 million and $86 million for the three and nine months ended September 30, 2019, respectively. Income tax expense decreased during the nine months ended September 30, 2020 compared to the corresponding period in 2019 primarily as a result of an internal entity simplification that increased expense in 2019. For more information, see Note 14 to
the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
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 from $559 million and $1.3 billion for the three and nine months ended September 30, 2019, respectively, to $1.1 billion and $2.5 billion for the three and nine months ended September 30, 2020, 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 $308 million and $927 million for the three and nine months ended September 30, 2020, respectively, and
$317 million and $916 million for the three and nine months ended September 30, 2019, respectively.
Plus: Net
income attributable to noncontrolling interest
—
—
1
1
Interest expense, net
947
973
2,904
2,865
Income
tax expense
10
10
23
86
Depreciation and amortization
2,366
2,411
7,283
7,453
Stock compensation
expense
83
71
263
238
Loss on extinguishment of debt
58
—
121
—
(Gain) loss on financial
instruments, net
(69)
34
185
116
Other pension (benefits) costs, net
115
(9)
94
(27)
Other,
net
28
21
35
206
Adjusted EBITDA
$
4,611
$
4,070
$
13,447
$
12,285
Net
cash flows from operating activities
$
3,621
$
2,937
$
10,316
$
8,347
Less: Purchases of property, plant and equipment
(2,014)
(1,651)
(5,352)
(4,913)
Change
in accrued expenses related to capital expenditures
104
(21)
(70)
(449)
Free cash flow
$
1,711
$
1,265
$
4,894
$
2,985
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 2020, CCO Holdings and CCO Holdings Capital Corp. jointly issued $1.65 billion aggregate principal amount of 4.500% senior unsecured notes due 2030 at par and in March 2020, an additional $1.1 billion of the same series of notes were issued
at a price of 102.5% of the aggregate principal amount. Also in March 2020, CCO Holdings and CCO Holdings Capital Corp. issued $1.4 billion aggregate principal amount of 4.500% senior unsecured notes due 2032 at par. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including repaying certain indebtedness, including repayment of all of CCO Holdings' 5.250% senior notes due September 30, 2022, 5.125% senior notes due February 15, 2023, 5.125% senior notes due May 1, 2023, 5.750% senior notes due September 1, 2023 and 5.750% senior notes due January 15, 2024, as well as distributions to our parent companies to fund buybacks of Charter Class A common stock and Charter Holdings common
units.
In April 2020, Charter Communications Operating, LLC ("Charter Operating") and Charter Communications Operating Capital Corp. jointly issued $1.6 billion aggregate principal amount of 2.800% senior secured notes due April 2031 at a price of 99.561% of the aggregate principal amount and $1.4 billion aggregate principal amount of 3.700% senior secured notes due April 2051 at a price of 99.217% of the aggregate principal amount. The net proceeds were used to pay related fees and expenses and for general corporate purposes.
In June 2020, Charter Operating and Charter Communications Operating Capital Corp. redeemed all of their 3.579% senior secured notes due July 2020.
In July 2020, CCO Holdings and CCO Holdings
Capital Corp. jointly issued $1.5 billion aggregate principal amount of 4.250% senior unsecured notes due 2031 at par and later in July 2020, an additional $1.5 billion of the same series of notes were issued at a price of 102%. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including
30
repaying certain indebtedness, including repayment of all of CCO Holdings' 5.875% senior notes due April 1, 2024, as well as distributions to our parent companies to fund buybacks of Charter Class A common stock and Charter Holdings common units.
In October 2020, CCO Holdings
and CCO Holdings Capital Corp. jointly issued an additional $1.5 billion of its 4.500% senior unsecured notes due 2032 at 103.75% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including repaying certain indebtedness, including repayment of all of CCO Holdings' 5.375% senior notes due May 1, 2025, as well as distributions to our parent companies to fund potential buybacks of Charter Class A common stock and Charter Holdings common units.
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt. The principal amount of our debt as of September 30, 2020 was $79.1 billion, consisting of
$10.2 billion of credit facility debt, $45.3 billion of investment grade senior secured notes and $23.5 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 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 sell the handset or tablet to customers pursuant to equipment installment plans. Free cash flow was $1.7 billion and $4.9 billion for the three and nine months ended September 30, 2020, respectively, and $1.3 billion and $3.0 billion for the three
and nine months ended September 30, 2019, respectively. See table below for factors impacting free cash flow during the three and nine months ended September 30, 2020 compared to the corresponding prior periods. As of September 30, 2020, the amount available under our credit facilities was approximately $4.7 billion and cash on hand was approximately $1.0 billion. 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 mergers and acquisitions as well as distributions to our 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 level. Our leverage ratio was 4.3 times Adjusted EBITDA as of September 30,
2020. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. During the three and nine months ended September 30, 2020, Charter purchased approximately 5.5 million and 11.9 million of Charter Class A common stock for approximately $3.3 billion and $6.5 billion, respectively, and during the three and nine months ended September 30, 2019, Charter purchased approximately 6.9 million and 11.8 million shares, respectively, of Charter Class A common stock for approximately $2.7 billion and $4.5 billion, respectively.
In December 2017, Charter and A/N entered into an amendment to the 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. Charter Holdings purchased from A/N 0.6 million and 1.7 million Charter Holdings common units at an average price per unit of $568.19 and $514.10, or $366 million and $884 million, during the three and nine months ended September 30, 2020, respectively, and 0.9 million and 1.6 million Charter Holdings common units at
an average price per unit of $391.62 and $366.76, or $339 million and $593 million, during the three and nine months ended September 30, 2019, respectively.
As of September 30, 2020, Charter had remaining board authority to purchase an additional $1.6 billion of Charter’s Class A common stock and/or Charter Holdings common units. 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
31
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 increased $446 million and $1.9 billion during the three and nine months ended September 30, 2020 compared to the corresponding prior periods in 2019 due to the following (dollars in millions).
Changes in working capital, excluding change in accrued interest
$
267
$
1,184
Increase in Adjusted EBITDA
541
1,162
Decrease
in cash paid for interest, net
10
39
Increase in capital expenditures
(363)
(439)
Other, net
(9)
(37)
$
446
$
1,909
Free
cash flow was reduced by $265 million and $758 million during the three and nine months ended September 30, 2020, respectively, and $256 million and $844 million during the three and nine months ended September 30, 2019, respectively, due to mobile with impacts negatively affecting working capital, capital expenditures and Adjusted EBITDA.
Financial Information about Guarantors, Issuers of Guaranteed Securities and Consolidated Subsidiaries
Each of CCO Holdings, Charter Operating, Time Warner Cable, LLC and Time Warner Cable Enterprises LLC (collectively, the “Issuers”) and certain Charter Operating direct and indirect subsidiaries (collectively, the “Obligor Group”) 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 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. Certain Charter Operating subsidiaries that are regulated entities are only designated as guarantor subsidiaries upon approval by regulators. The guaranteed obligations of a guarantor may be released under certain circumstances permitted under the
documentation governing the Guaranteed Debt, including if a subsidiary guarantor no longer qualifies as a “Subsidiary” of Charter Operating under transactions not prohibited by the Charter Operating credit agreement.
The Guaranteed Debt and the subsidiary guarantees thereof 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 intercompany obligations owing to it by any of such entities. Such subsidiary guarantees are effectively senior to all unsecured debt or debt secured by a 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.
See Note 9 to the consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” in CCO Holdings' 2019 Annual Report on Form 10-K for further details about the terms, conditions and other factors that may
32
affect payments to holders of Guaranteed Debt. There have been no material changes from such disclosure described in our Form 10-K.
In March 2020, the SEC adopted amendments to the financial disclosure requirements of Regulation S-X for guarantors and issuers
of guaranteed securities. CCO Holdings is voluntarily complying with the new disclosure requirements beginning with its Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. 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 has been omitted pursuant to SEC Regulation S-X Rule 13-01, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. The information below is being presented to comply with the terms of the Charter Operating credit agreement. This information is not intended to present the financial position, results of operations and cash flow of the individual companies or groups of companies
in accordance with generally accepted accounting principles.
Distributions by us and our subsidiaries to a parent company for payment 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 September 30, 2020, there was no default under any of these indentures or credit facilities, and each subsidiary met its applicable leverage ratio tests based on September 30, 2020 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
33
interests of the borrower in an amount sufficient to make permitted tax payments.
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,
Cash Equivalents and Restricted Cash. We held $1.0 billion and $3.2 billion in cash and cash equivalents as of September 30, 2020 and December 31, 2019, respectively.
Operating Activities. Net cash provided by operating activities increased $2.0 billion during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to an increase in Adjusted EBITDA of $1.2 billion and changes in working capital, excluding the change in accrued interest and accrued expenses related to capital expenditures, that used $805 million less cash.
Investing
Activities.Net cash used in investing activities was $5.5 billion and $5.3 billion for the nine months ended September 30, 2020 and 2019, respectively. The increase in cash used was primarily due to an increase in capital expenditures.
Financing Activities.Net cash used in financing activities was $7.1 billion and $3.1 billion for the nine months ended September 30, 2020 and 2019, respectively. The increase in cash used was primarily due to an increase in distributions to parent companies and 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 $2.0 billion and $5.4 billion for the three and nine months ended September 30, 2020, respectively, and $1.7 billion and $4.9 billion for the three and nine months ended September 30, 2019, respectively. The increase was primarily due to higher support capital as a result of facility improvements and investments in back office systems and mobile store build-outs, higher line extensions driven by continued network expansion, including to rural areas and higher scalable infrastructure as a result of core network enhancements and node splits given growing customers and traffic and during the three months ended September
30, 2020, higher Internet customer premise equipment. See the table below for more details.
We currently expect 2020 cable capital expenditures to be consistent and possibly lower as a percentage of cable revenue versus 2019, despite the significant acceleration in customer growth and network utilization during COVID-19.The actual amount of our capital expenditures in 2020 will depend on a number of factors including further spend related to product development and growth rates of 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 decreased by $70 million and $449
million for the nine months ended September 30, 2020 and 2019, respectively.
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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, 2020 and 2019. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):
Capital expenditures included in total related to:
Mobile
$
139
$
100
$
351
$
281
Commercial
services
$
358
$
327
$
942
$
956
(a)Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including 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).
Recently
Issued Accounting Standards
See Note 19 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for a discussion of recently issued accounting standards.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
We use derivative instruments to manage 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 April 2019, we entered into a collateral holiday agreement for 60% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years, as well as a ten year collateral cap on the remaining 40% of the cross-currency swaps which limits the required collateral posting on that 40% of the cross-currency swaps to $150 million. For more information, see Note 8 to the accompanying consolidated financial statements contained in “Item 1. Financial
Statements.”
As of September 30, 2020 and December 31, 2019, the weighted average interest rate on credit facility debt was approximately 1.7% and 3.3%, respectively, and the weighted average interest rate on the senior notes was approximately 5.2% and 5.4%, respectively, resulting in a blended weighted average interest rate of 4.7% and 5.1%, respectively. The interest rate on approximately 86% of the total principal amount of our debt was effectively fixed as of September 30, 2020 and December 31, 2019.
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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 September 30, 2020 (dollars in millions).
2020
2021
2022
2023
2024
Thereafter
Total
Fair
Value
Debt:
Fixed-Rate
$
—
$
1,700
$
3,000
$
1,500
$
1,100
$
60,645
$
67,945
$
77,872
Average
Interest Rate
—
%
4.05
%
4.46
%
6.92
%
4.50
%
5.28
%
5.24
%
Variable
Rate
$
69
$
277
$
277
$
436
$
1,165
$
8,895
$
11,119
$
10,904
Average
Interest Rate
1.52
%
1.50
%
1.51
%
1.61
%
1.93
%
2.25
%
2.15
%
Interest
rates on variable-rate debt are estimated using the average implied forward LIBOR for the year of maturity based on the yield curve in effect at September 30, 2020 including applicable bank spread.
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, 2020, 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 17 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for Legal Proceedings.
Item 1A.Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2019 includes "Risk Factors" under Item 1A of Part I. There have been no material changes from the updated risk factors described in our Form 10-K except as indicated below.
The
ongoing COVID-19 pandemic could materially affect our financial condition and results of operations.
The ongoing COVID-19 pandemic has significantly increased economic and demand uncertainty. The current pandemic and continued spread of COVID-19 has caused a significant economic recession. At this time, we cannot predict the duration of any business disruption and the ultimate impact of COVID-19 on our business, including the depth and duration of the economic impact to household formation and growth and our residential and business customers’ ability to pay for our products and services including the impact of extended unemployment benefits and other stimulus packages. We expect that some of the COVID-19 programs may result in incremental churn and bad debt during the remainder of the year and into 2021. In addition, there is uncertainty regarding the impact of government emergency
declarations, the ability of our suppliers and vendors to provide products and services to us, the pace of new housing construction, changes in business spend in our local and national ad sales business, the effects to our employees’ health and safety and resulting reorientation of our work activities, and the risk of limitations on the deployment and maintenance of our services (including by limiting our customer support and on-site service repairs and installations). The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, CCO Holdings, LLC and CCO Holdings Capital Corp. has 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, 2020, filed with the Securities and Exchange Commission on November 2, 2020, 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
