View:
Download DOC
Download PDF
Download XLS
8-K


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

______________
FORM 8-K
______________


Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 5, 2015


Charter Communications, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

001-33664
 
43-1857213
(Commission File Number)
 
(I.R.S. Employer Identification Number)

400 Atlantic Street
Stamford, Connecticut 06901
(Address of principal executive offices including zip code)

(203) 905-7801
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

x Written communications pursuant Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




ITEM 8.01. OTHER EVENTS.

As previously announced, on May 23, 2015, Charter Communications, Inc. ("Charter" or the "Company") entered into an Agreement and Plan of Mergers (the “Merger Agreement”) with Time Warner Cable Inc. ("TWC"), CCH I, LLC (“New Charter”), a wholly owned subsidiary of the Company; Nina Corporation I, Inc., Nina Company II, LLC, a wholly owned subsidiary of New Charter; and Nina Company III, LLC, a wholly owned subsidiary of New Charter, pursuant to which the parties will engage in a series of transactions that will result in Charter and TWC becoming wholly owned subsidiaries of New Charter (the “TWC transactions”), on the terms and subject to the conditions set forth in the Merger Agreement. After giving effect to the TWC transactions, New Charter will be the new public company parent that will hold the operations of the combined companies.

Also as previously announced, on March 31, 2015, the Company entered into a definitive Contribution Agreement, which was amended on May 23, 2015 in connection with the execution of the Merger Agreement, with Advance/Newhouse Partnership, A/NPC Holdings LLC, New Charter and Charter Communications Holdings, LLC, the Company's wholly owned subsidiary, pursuant to which Charter would become the owner of the membership interests in Bright House Networks, LLC (“Bright House”) and any other assets (other than certain excluded assets and liabilities and non-operating cash) primarily related to Bright House (the “BHN transactions”).

In connection with the TWC transactions, Charter and Liberty Broadband Corporation ("Liberty") entered into an investment agreement, pursuant to which Liberty agreed to invest $4.3 billion in New Charter Class A common stock at the closing of the TWC transactions to partially finance the cash portion of the TWC transactions consideration. In connection with the BHN transactions, Liberty agreed to purchase at the closing of the BHN transactions $700 million of New Charter Class A common stock (or, if the mergers are not consummated prior to the completion of the BHN transactions, Charter Class A common stock) (collectively with the TWC transactions and BHN transactions, the "Transactions").

In connection with the Company's offering of $2.5 billion CCOH Safari, LLC notes to be used to partially fund the Transactions, the Company is filing this Current Report on Form 8-K in order to make available (i) the unaudited pro forma financial information of Charter as of September 30, 2015 and for the nine months ended September 30, 2015 and the year ended December 31, 2014, which give effect to the Transactions on the basis described therein and (ii) the condensed consolidated unaudited financial statements of Bright House Networks, LLC and its subsidiaries as of and for the three and nine month periods ended September 30, 2015. The foregoing are attached hereto as Exhibits 99.1 and 99.2, respectively.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
 
Exhibit
Number
 
Description
 
 
 
99.1 *
 
Unaudited Pro Forma Consolidated Financial Statements.
99.2 *
 
Unaudited Condensed Consolidated Financial Statements of Bright House Networks, LLC and Subsidiaries as of and for the three and nine month periods ended September 30, 2015 and 2014.
 
___________

* filed herewith





Important Information For Investors And Shareholders

This Current Report does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. In connection with the proposed transaction between Time Warner Cable Inc. (“Time Warner Cable” or “TWC”) and Charter Communications, Inc. (“Charter”), Charter’s subsidiary, CCH I, LLC (“New Charter”), filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 that includes a joint proxy statement of Charter and Time Warner Cable that also constitutes a prospectus of New Charter (the “Joint Proxy Statement/Prospectus”). The registration statement was declared effective by the SEC on August 20, 2015, and Charter and Time Warner Cable commenced mailing the definitive Joint Proxy Statement/Prospectus to their respective stockholders on or about August 20, 2015. This Current Report is not a substitute for the Joint Proxy Statement/Prospectus or registration statement or for any other document that Charter or Time Warner Cable may file with the SEC or send to Charter’s and/or Time Warner Cable’s stockholders in connection with the proposed transactions. On September 21, 2015, Charter's and Time Warner Cable's respective stockholders each approved the merger agreement at their respective special meetings. INVESTORS AND SECURITY HOLDERS OF CHARTER AND TIME WARNER CABLE ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders are able to obtain free copies of the registration statement and the definitive Joint Proxy Statement/Prospectus and other documents filed with the SEC by Charter, New Charter or Time Warner Cable through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by Charter or New Charter are or will be available free of charge on Charter’s website at http://charter.com, in the “Investor and News Center” near the bottom of the page, or by contacting Charter’s Investor Relations Department at 203-905-7955. Copies of the documents filed with the SEC by Time Warner Cable are or will be available free of charge on Time Warner Cable’s website at http://ir.timewarnercable.com or by contacting Time Warner Cable’s Investor Relations Department at 877-446-3689.
 
Charter and Time Warner Cable and their respective directors and certain of their respective executive officers may be considered participants in the solicitation of proxies with respect to the proposed transactions under the rules of the SEC. Information about the directors and executive officers of Charter is set forth in the definitive Joint Proxy Statement/Prospectus and in its Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 24, 2015, and its proxy statement for its 2015 annual meeting of stockholders, which was filed with the SEC on March 18, 2015. Information about the directors and executive officers of Time Warner Cable is set forth in the definitive Joint Proxy Statement/Prospectus and its Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 13, 2015, as amended April 27, 2015, its proxy statement for its 2015 annual meeting of stockholders, which was filed with the SEC on May 18, 2015 and its Current Reports on Form 8-K, which were filed with the SEC on June 1, 2015 and August 6, 2015. These documents can be obtained free of charge from the sources indicated above.





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Current Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial.  Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations.  Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Risk Factors” from time to time in our filings with the SEC.  Many of the forward-looking statements contained in this Current 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”, “seek”, “would”, “could”, “continue”, “ongoing”, “upside”, “increases” and “potential”, among others.  Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Current Report are set forth in our Annual Report on Form 10-K and other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

Risks Related to the Time Warner Cable Inc. ("TWC") Transaction and Bright House Networks, LLC ("Bright House") Transaction (collectively, the "Transactions")

•
delays in the completion of the Transactions;

•
the risk that a condition to completion of the Transactions may not be satisfied;

•
the risk that regulatory or other approvals that may be required for the Transactions is delayed, is not obtained or is obtained subject to conditions that are not anticipated;

•
New Charter’s ability to achieve the synergies and value creation contemplated by the TWC transactions and/or the BHN transactions;

•
New Charter’s ability to promptly, efficiently and effectively integrate acquired operations into its own operations;

•
managing a significantly larger company than before the completion of the Transactions;

•
diversion of management time on issues related to the Transactions;

•
changes in Charter’s, TWC’s or Bright House’s businesses, future cash requirements, capital requirements, results of operations, revenues, financial condition and/or cash flows;

•
disruption in the existing business relationships of Charter, TWC and Bright House as a result of the TWC transactions and/or the BHN transactions;

•
the increase in indebtedness as a result of the Transactions, which will increase interest expense and may decrease Charter’s operating flexibility;

•
changes in transaction costs, the amount of fees paid to financial advisors, potential termination fees and the potential payments to TWC’s and Bright House's executive officers in connection with the Transactions;

•
operating costs and business disruption that may be greater than expected;

•
the ability to retain and hire key personnel and maintain relationships with providers or other business partners pending completion of the Transactions; and

•
the impact of competition.

Risks Related to Our Business

•
our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;





•
the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, video provided over the Internet and providers of advertising over the Internet;

•
general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;

•
our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents);

•
the development and deployment of new products and technologies including our cloud-based user interface, Spectrum Guide®, and downloadable security for set-top boxes;

•
the effects of governmental regulation on our business or potential business combination transactions;

•
any events that disrupt our networks, information systems or properties and impair our operating activities and negatively impact our reputation;

•
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 Current Report.







SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Charter Communications, Inc. has duly caused this Current Report to be signed on its behalf by the undersigned hereunto duly authorized.
 


 
 
CHARTER COMMUNICATIONS, INC.,
 
 
Registrant
 
 
 
 
 
 
 
By:
 
/s/ Kevin D. Howard
 
 
 
 
Kevin D. Howard
Date: November 5, 2015
 
 
 
Senior Vice President - Finance, Controller and
 
 
 
 
Chief Accounting Officer





EXHIBIT INDEX

Exhibit
Number
 
Description
 
 
 
99.1 *
 
Unaudited Pro Forma Consolidated Financial Statements.
99.2 *
 
Unaudited Condensed Consolidated Financial Statements of Bright House Networks, LLC and Subsidiaries as of and for the three and nine month periods ended September 30, 2015 and 2014.
 
___________

* filed herewith



Exhibit
EXHIBIT 99.1

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited pro forma financial statements as of and for the nine months ended September 30, 2015 and for the year ended December 31, 2014 are intended to reflect the impacts of the TWC transactions, the BHN transactions and the Liberty transactions on Charter’s consolidated financial statements as if the TWC transactions, BHN transactions and Liberty transactions had occurred as of September 30, 2015 for the unaudited pro forma consolidated balance sheet and as of January 1, 2014 for the unaudited pro forma consolidated statements of operations. The accompanying unaudited pro forma financial statements present the pro forma consolidated financial position and results of operations of Charter based on the historical financial statements and accounting records of Charter, TWC and Bright House and the related pro forma adjustments as described in the accompanying notes. The pro forma adjustments are included only to the extent they are (i) directly attributable to the TWC transactions, the BHN transactions and/or the Liberty transactions, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results.

TWC Transactions
 
On May 23, 2015, Charter Communications, Inc. ("Charter") entered into an Agreement and Plan of Mergers (the “Merger Agreement”) with Time Warner Cable Inc. ("TWC"), CCH I, LLC (“New Charter”), a wholly owned subsidiary of Charter; Nina Corporation I, Inc., Nina Company II, LLC, a wholly owned subsidiary of New Charter; and Nina Company III, LLC, a wholly owned subsidiary of New Charter, pursuant to which the parties will engage in a series of transactions that will result in Charter and TWC becoming wholly owned subsidiaries of New Charter (the “TWC transactions”), on the terms and subject to the conditions set forth in the Merger Agreement. After giving effect to the TWC Transaction, New Charter will be the new public company parent that will hold the operations of the combined companies.

In the TWC transactions, TWC stockholders, excluding Liberty Broadband Corporation ("Liberty Broadband") and Liberty Interactive Corporation ("Liberty Interactive") pursuant to the terms of the Liberty contribution agreement, will have the right to elect to receive either $100 in cash and shares of New Charter Class A common stock equivalent to 0.5409 shares of Charter Class A common stock for each share of TWC common stock outstanding (the “Option A Election”) or $115 in cash and shares of New Charter Class A common stock equivalent to 0.4562 shares of Charter Class A common stock (the “Option B Election”). The unaudited pro forma financial statements provided herein assume all of the TWC stockholders elect the Option A Election. Liberty Broadband and Liberty Interactive will not receive cash as part of the TWC transactions, but will have the right to receive shares of New Charter Class A common stock equivalent to 1.106 shares of Charter Class A common stock for each share of TWC common stock owned by them. For purposes of these unaudited pro forma financial statements, the TWC preliminary purchase price is assumed to be $58.4 billion. Based on a per share price of $190.94, the closing share price of Charter Class A common stock on October 30, 2015, and approximately 283.2 million shares of TWC common stock outstanding as of October 30, 2015, Charter expects to issue shares of New Charter Class A common stock equivalent to 157.6 million shares of Charter Class A common stock valued at approximately $30.1 billion. Additionally, Charter expects to pay $27.5 billion in cash to TWC stockholders, which is expected to be financed with new indebtedness of New Charter, the issuance of equity to Liberty Broadband pursuant to the Liberty transactions and cash on hand from TWC. The preliminary purchase price also includes New Charter replacement equity awards with an estimated pre-combination vesting period fair value of $676 million that will be issued in respect of equity awards held by employees of TWC and $89 million that will be paid in cash to TWC former employees and non-employee directors who hold equity awards, whether vested or not vested. The fair value of the equity portion of the TWC transactions consideration for accounting purposes will be based on the fair value of Charter Class A common stock at the date of close of the mergers and will be different from the assumed value presented in these unaudited pro forma financial statements. A 5% change in the per share price of Charter Class A common stock will result in a $1.5 billion change in the fair value of the equity issued and total consideration for accounting purposes. In addition, the amount of equity and cash consideration will vary based on the number of TWC stockholders that elect the Option B Election. A 5% decrease in the number of shares held by TWC stockholders electing the Option A Election, who instead elect the Option B Election, will result in a $223 million reduction in the fair value of equity issued and a $207 million increase in the cash consideration paid which will be financed by additional debt.

The actual number of shares of New Charter Class A common stock that TWC stockholders, excluding Liberty Broadband and Liberty Interactive, will be entitled to receive will be calculated by multiplying the exchange ratios of 0.5409 or 0.4562 specified above by 0.9042 (the "Parent Merger Exchange Ratio"), which will also be the exchange ratio that will be used to determine the number of shares of New Charter Class A common stock that Charter stockholders will be entitled to receive per share of Charter Class A common stock. Such exchange ratio is not intended to impact the aggregate value represented by the shares of New Charter Class A common stock issued in the TWC transactions; however, it will impact the actual number of shares issued in the TWC transactions. Such impact is reflected in the weighted average common shares outstanding included in the accompanying unaudited pro forma consolidated statements of operations.


1

BHN Transactions

On March 31, 2015, Charter entered into a definitive Contribution Agreement (the “Contribution Agreement”), which was amended on May 23, 2015 in connection with the execution of the Merger Agreement, with Advance/Newhouse Partnership (“A/N”), A/NPC Holdings LLC, New Charter and Charter Communications Holdings, LLC (“Charter Holdings”), Charter's wholly owned subsidiary, pursuant to which Charter would become the owner of the membership interests in Bright House Networks, LLC (“Bright House”) and any other assets (other than certain excluded assets and liabilities and non-operating cash) primarily related to Bright House (the “BHN transactions,” and collectively with the TWC transactions (the "Transactions")).

In the BHN transactions, A/N will receive approximately 34.3 million Charter Holdings common units, approximately 10.3 million Charter Holdings convertible preferred units, both subject to application of the Parent Merger Exchange Ratio, and approximately $2.0 billion in cash. For purposes of these unaudited pro forma financial statements, the Bright House preliminary purchase price is assumed to be $11.1 billion. Based on a per share price of $190.94, the closing share price of Charter Class A common stock on October 30, 2015, the Charter Holdings common units are valued at approximately $6.5 billion. The issuance of Charter Holdings convertible preferred units are valued for pro forma purposes based on their $2.5 billion aggregate liquidation preference. The approximately $2.0 billion cash portion of the BHN transactions will be financed with new indebtedness of New Charter. The BHN transactions exclude certain assets and liabilities such as cash, marketable securities and pension-related assets and liabilities, among others. The fair value of the BHN transactions for accounting purposes will be based on the fair value of the Charter Holdings common units and the Charter Holdings convertible preferred units at the date of close and will be different from the assumed value presented in these unaudited pro forma financial statements. A 5% change in the fair value of the Charter Holdings common units and convertible preferred units will result in a $452 million change in the fair value of the total consideration for accounting purposes.

Liberty Transactions and Committed Financing

In connection with the TWC transactions, Charter and Liberty Broadband entered into an investment agreement, pursuant to which Liberty Broadband agreed to invest $4.3 billion in New Charter at the closing of the TWC transactions to partially finance the cash portion of the TWC transactions consideration. New Charter will issue shares to Liberty Broadband equivalent to approximately 24.3 million shares of Charter Class A common stock. In connection with the BHN transactions, Liberty Broadband agreed to purchase at the closing of the BHN transactions $700 million of New Charter Class A common stock (or, if the mergers are not consummated prior to the completion of the BHN transactions, Charter Class A common stock). New Charter (or, if applicable, Charter) will issue shares to Liberty Broadband equivalent to approximately 4.0 million shares of Charter Class A common stock in connection with such $700 million investment (the foregoing transactions are referred to as the "Liberty transactions").

Charter expects to finance the remaining cash portion of the purchase price of the Transactions with additional indebtedness and cash on the companies' balance sheets. In July 2015, Charter issued $15.5 billion CCO Safari II, LLC senior secured notes and in August 2015, CCO Safari III, LLC closed on $3.8 billion of senior secured bank loans.  To fund the remaining cash portions of the Transactions, Charter has remaining commitments of approximately $5.2 billion from banks to provide incremental senior secured term loan facilities and senior unsecured notes, as well as an incremental $1.7 billion revolving facility. In addition, the bank commitments provide for a $4.3 billion bridge facility if all TWC stockholders (other than the Liberty Parties) elect the Option B Election, in the event Charter is unable to issue senior unsecured notes in advance of the closing of the TWC transactions. For purposes of these unaudited pro forma financial statements, Charter has assumed acquisition financing of approximately 90% in new and recently issued first lien debt (including bank debt and senior secured notes) and approximately 10% in unsecured notes at current market interest rates. The indebtedness assumptions used herein are for illustrative purposes only and may not reflect the actual financing when completed.

Basis of Presentation

The unaudited pro forma financial statements are based on (i) the unaudited condensed consolidated financial statements of Charter Communications, Inc. and its subsidiaries as of and for the nine months ended September 30, 2015 contained in Charter’s Quarterly Report on Form 10-Q filed with the SEC on October 29, 2015, (ii) the unaudited consolidated financial statements of Time Warner Cable Inc. as of and for the nine months ended September 30, 2015 contained in TWC’s Quarterly Report on Form 10-Q filed with the SEC on October 29, 2015, (iii) the condensed consolidated unaudited financial statements of Bright House Networks, LLC and its subsidiaries as of and for the nine month period ended September 30, 2015 contained in this Current Report on Form 8-K, (iv) the audited consolidated financial statements of Charter Communications, Inc. and its subsidiaries for the year ended December 31, 2014 contained in Charter’s Annual Report on Form 10-K filed with the SEC on February 23, 2015, (v) the audited consolidated financial statements of Time Warner Cable Inc. for the year ended December 31, 2014 contained in TWC’s Annual Report on Form 10-K filed with the SEC on February 13, 2015, and (vi) the audited consolidated financial statements of Bright

2

House Networks, LLC and its subsidiaries for the year ended December 31, 2014 contained in Charter's definitive proxy statement filed with the SEC on August 20, 2015.

The Transactions will be accounted for using the acquisition method of accounting with Charter as the accounting acquirer. The unaudited pro forma financial statements reflect the preliminary assessment of fair values and useful lives assigned to the assets acquired and liabilities assumed. The fair values assigned in the unaudited pro forma financial statements are preliminary and represent Charter’s current best estimate of fair values and are subject to revision. The detailed valuation studies necessary to arrive at the required estimates of the fair values for the assets acquired and liabilities assumed have only recently commenced. Significant assets and liabilities that are subject to preparation of valuation studies to determine appropriate fair value adjustments include property, plant and equipment and identifiable intangible assets, including franchises and customer relationships. Changes to the fair values of these assets and liabilities will also result in changes to goodwill and deferred tax liabilities.

The unaudited pro forma financial statements are provided for illustrative purposes only and are based on available information and assumptions that Charter believes are reasonable and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of Charter would have been had the Transactions occurred on the dates indicated, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results following the date of the pro forma financial statements.

Items Not Adjusted in the Unaudited Pro Forma Financial Information

The unaudited pro forma financial statements do not reflect all reclassifications or adjustments to conform the TWC or Bright House financial statement presentation or accounting policies to those adopted by Charter. At this time, Charter is not aware of any intercompany transactions that would have a material impact on the unaudited pro forma financial statements that are not reflected in the pro forma adjustments. Further review may identify additional intercompany transactions, reclassifications or differences between the accounting policies of the companies that, when conformed, could have a material impact on the unaudited pro forma financial statements of the combined company. 

The unaudited pro forma financial statements do not include any adjustment for liabilities or related costs that may result from integration activities, since management has not completed the process of making these assessments. Significant liabilities and related costs may ultimately be recorded for employee severance or relocation, costs of vacating some facilities and costs associated with other exit and integration activities. The unaudited pro forma statements of operations do not include any revenue or expense synergies or dis-synergies resulting from the Transactions, including programming costs or shared functions and other administrative and overhead allocations, as these adjustments are not factually supportable. The unaudited pro forma statements of operations also do not include an estimated $425 million and $30 million of non-recurring costs to be incurred directly attributable to the TWC transactions and the BHN transactions, respectively, such as escrow interest, investment banking fees and legal fees.

Charter intends to review the synergies of the combined businesses in advance of and subsequent to the completion of the Transactions, which may result in a plan to reorganize certain of TWC’s, Bright House’s or Charter’s products, network, service operations and organizational structure. The costs of implementing such a plan, if it were to occur, and any resulting future changes in revenue or cost savings have not been reflected in the unaudited pro forma financial statements.
 
In connection with the BHN transactions, New Charter and A/N will enter into a tax receivable agreement which will apply to an exchange or sale of the Charter Holdings common and convertible preferred units between the parties. The tax receivable agreement will provide for a payment by New Charter to A/N of 50% of the tax benefit when realized by New Charter from the step-up in tax basis resulting from the future exchange or sale. Charter has not recorded a pro forma adjustment for this contingent consideration obligation in the preliminary purchase price allocation as it is impractical to estimate its fair value since the tax benefit is dependent on uncertain future events that are outside New Charter’s control. A future exchange or sale is not based on a fixed and determinable date and the exchange or sale is not certain to occur. If and when an exchange or sale occurs in the future, the undiscounted value of the obligation is estimated to be in the range of zero to $2 billion depending on measurement of the tax step-up in the future and New Charter’s ability to realize the tax benefit in the subsequent periods following the exchange or sale.

The unaudited pro forma financial statements do not reflect adjustments related to the impact of the termination of the transactions Charter entered into with Comcast Corporation in April 2014 as such adjustments are not directly related to the Transactions or Liberty transactions. The transactions Charter entered into with Comcast were terminated in April 2015 and the CCOH Safari, LLC notes and CCO Safari, LLC Term G Loans were subsequently repaid in April 2015. The unaudited pro forma consolidated statements of operations are not adjusted to eliminate approximately $112 million and $75 million of interest expense associated with the escrowed debt for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively. The

3

unaudited pro forma consolidated statements of operations are also not adjusted to eliminate approximately $16 million and $38 million of transaction costs incurred by Charter and $37 million and $195 million of transaction costs incurred by TWC directly related to the transactions with Comcast for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2015
(IN MILLIONS)

 
 
 
 
 
 
 
 
 
 
 
Bright
 
 
 
 
 
 
 
TWC
 
 
 
 
 
House
 
Charter
 
Charter
 
 
 
Pro Forma
 
Charter
 
Bright
 
Pro Forma
 
Pro Forma
 
Historical
 
TWC
 
Adjustments
 
Pro Forma
 
House
 
Adjustments
 
As Adjusted
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
485

 
$
(485
)
1a 
$
—

 
$
43

 
$
(43
)
2a 
$
—

Accounts receivable, net
292

 
935

 
—

 
1,227

 
160

 
—

 
1,387

Prepaid expenses and other current assets
114

 
469

 
(10
)
1a 
573

 
31

 
—

 
604

Total current assets
406

 
1,889

 
(495
)
 
1,800

 
234

 
(43
)
 
1,991

 
 
 
 
 
 
 
 
 
 
 
 
 
 
RESTRICTED CASH AND CASH EQUIVALENTS
19,626

 
—

 
(19,626
)
1e 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
8,281

 
16,746

 
4,187

1b 
29,214

 
2,169

 
542

2b 
31,925

Franchises
6,006

 
26,014

 
22,450

1b 
54,470

 
802

 
4,000

2b 
59,272

Customer relationships, net
916

 
268

 
17,547

1b 
18,731

 
—

 
1,752

2b 
20,483

Goodwill
1,168

 
3,139

 
23,099

1b 
27,406

 
13

 
1,865

2b 
29,284

Total investment in cable properties, net
16,371

 
46,167

 
67,283

 
129,821

 
2,984

 
8,159

 
140,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER NONCURRENT ASSETS
470

 
665

 
615

1c 
1,750

 
77

 
60

2c 
1,887

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
36,873

 
$
48,721

 
$
47,777

 
$
133,371

 
$
3,295

 
$
8,176

 
$
144,842

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
1,829

 
$
3,757

 
$
(34
)
1d 
$
5,552

 
$
393

 
$
(9
)
2d 
$
5,936

Current portion of long-term debt
—

 
6

 
(6
)
1e 
—

 
343

 
(343
)
2d 
—

Total current liabilities
1,829

 
3,763

 
(40
)
 
5,552

 
736

 
(352
)
 
5,936

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT
33,281

 
22,689

 
5,040

1e 
61,010

 
128

 
1,244

2e 
62,382

DEFERRED INCOME TAXES
1,616

 
12,688

 
14,058

1f 
28,362

 
—

 
—

2f 
28,362

OTHER LONG-TERM LIABILITIES
87

 
832

 
(388
)
1g 
531

 
471

 
(471
)
2g 
531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest
—

 
4

 
(2
)
1h 
2

 
—

 
9,045

2h 
9,047

Controlling interest
60

 
8,745

 
29,109

1i 
37,914

 
1,960

 
(1,290
)
2i 
38,584

Total shareholders’ equity
60

 
8,749

 
29,107

 
37,916

 
1,960

 
7,755

 
47,631

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
36,873

 
$
48,721

 
$
47,777

 
$
133,371

 
$
3,295

 
$
8,176

 
$
144,842


4

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2015
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
 
 
 
 
 
 
 
 
 
 
 
Bright
 
 
 
 
 
 
 
TWC
 
 
 
 
 
House
 
Charter
 
Charter
 
 
 
Pro Forma
 
Charter
 
Bright
 
Pro Forma
 
Pro Forma
 
Historical
 
TWC
 
Adjustments
 
Pro Forma
 
House
 
Adjustments
 
As Adjusted
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Video
$
3,420

 
$
7,436

 
$
—

 
$
10,856

 
$
1,234

 
$
—

 
$
12,090

Internet
2,222

 
5,210

 
—

 
7,432

 
932

 
—

 
8,364

Voice
404

 
1,434

 
—

 
1,838

 
285

 
—

 
2,123

Commercial
833

 
2,420

 
—

 
3,253

 
344

 
—

 
3,597

Advertising sales
222

 
744

 
(17
)
3a 
949

 
126

 
—

 
1,075

Other
141

 
381

 
163

3a 
685

 
10

 
(67
)
4a 
628

Total revenues
7,242

 
17,625

 
146

 
25,013

 
2,931

 
(67
)
 
27,877

 
 
 
 
 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
4,802

 
11,619

 
212

3a 
16,633

 
1,999

 
(215
)
4a 
18,417

Depreciation and amortization
1,580

 
2,740

 
2,252

3b 
6,572

 
340

 
232

4b 
7,144

Other operating (income) expenses, net
69

 
152

 
(107
)
3c 
114

 
(24
)
 
(9
)
4c 
81

 
6,451

 
14,511

 
2,357

 
23,319

 
2,315

 
8

 
25,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
791

 
3,114

 
(2,211
)
 
1,694

 
616

 
(75
)
 
2,235

 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(871
)
 
(1,049
)
 
(520
)
3d 
(2,440
)
 
(25
)
 
(2
)
4d 
(2,467
)
Loss on extinguishment of debt
(128
)
 
—

 
—

 
(128
)
 
—

 
—

 
(128
)
Loss on derivatives instruments, net
(10
)
 
—

 
—

 
(10
)
 
—

 
—

 
(10
)
Other income (expense), net
(3
)
 
147

 
—

 
144

 
1

 
—

 
145

 
(1,012
)
 
(902
)
 
(520
)
 
(2,434
)
 
(24
)
 
(2
)
 
(2,460
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before taxes
(221
)
 
2,212

 
(2,731
)
 
(740
)
 
592

 
(77
)
 
(225
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit (expense)
72

 
(854
)
 
1,070

3e 
288

 
—

 
(170
)
4e 
118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
(149
)
 
1,358

 
(1,661
)
 
(452
)
 
592

 
(247
)
 
(107
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: Noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(79
)
4f 
(79
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) before non-recurring charges directly attributable to the Transactions
$
(149
)
 
$
1,358

 
$
(1,661
)
 
$
(452
)
 
$
592

 
$
(326
)
 
$
(186
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(1.33
)
 
 
 
 
 
$
(1.70
)
 
 
 
 
 
$
(0.69
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
111,790,076

 
 
 
153,722,779

3f 
265,512,855

 
 
 
3,658,691

4g 
269,171,546



5

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2014
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
 
 
 
 
 
 
 
 
 
 
 
Bright
 
 
 
 
 
 
 
TWC
 
 
 
 
 
House
 
Charter
 
Charter
 
 
 
Pro Forma
 
Charter
 
Bright
 
Pro Forma
 
Pro Forma
 
Historical
 
TWC
 
Adjustments
 
Pro Forma
 
House
 
Adjustments
 
As Adjusted
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Video
$
4,443

 
$
10,002

 
$
—

 
$
14,445

 
$
1,545

 
$
—

 
$
15,990

Internet
2,576

 
6,428

 
—

 
9,004

 
1,164

 
—

 
10,168

Voice
575

 
1,932

 
—

 
2,507

 
392

 
—

 
2,899

Commercial
993

 
2,838

 
—

 
3,831

 
405

 
—

 
4,236

Advertising sales
341

 
1,127

 
(28
)
3a 
1,440

 
170

 
—

 
1,610

Other
180

 
485

 
201

3a 
866

 
28

 
(88
)
4a 
806

Total revenues
9,108

 
22,812

 
173

 
32,093

 
3,704

 
(88
)
 
35,709

 
 
 
 
 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
5,973

 
14,584

 
335

3a 
20,892

 
2,503

 
(257
)
4a 
23,138

Depreciation and amortization
2,102

 
3,371

 
3,681

3b 
9,154

 
416

 
386

4b 
9,956

Other operating (income) expenses, net
62

 
225

 
(56
)
3c 
231

 
(5
)
 
—

 
226

 
8,137

 
18,180

 
3,960

 
30,277

 
2,914

 
129

 
33,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
971

 
4,632

 
(3,787
)
 
1,816

 
790

 
(217
)
 
2,389

 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
(911
)
 
(1,419
)
 
(887
)
3d 
(3,217
)
 
(38
)
 
3

4d 
(3,252
)
Loss on derivatives instruments, net
(7
)
 
—

 
—

 
(7
)
 
—

 
—

 
(7
)
Other income, net
—

 
35

 
—

 
35

 
—

 
—

 
35

 
(918
)
 
(1,384
)
 
(887
)
 
(3,189
)
 
(38
)
 
3

 
(3,224
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before taxes
53

 
3,248

 
(4,674
)
 
(1,373
)
 
752

 
(214
)
 
(835
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit (expense)
(236
)
 
(1,217
)
 
1,988

3e 
535

 
—

 
(190
)
4e 
345

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
(183
)
 
2,031

 
(2,686
)
 
(838
)
 
752

 
(404
)
 
(490
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: Noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(51
)
4f 
(51
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) before non-recurring charges directly attributable to the Transactions
$
(183
)
 
$
2,031

 
$
(2,686
)
 
$
(838
)
 
$
752

 
$
(455
)
 
$
(541
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(1.70
)
 
 
 
 
 
$
(3.19
)
 
 
 
 
 
$
(2.03
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
108,374,160

 
 
 
154,050,023

3f 
262,424,183

 
 
 
3,658,691

4g 
266,082,874


6

Notes to Unaudited Pro Forma Financial Statements

Note 1. TWC Transactions Pro Forma Balance Sheet Adjustments

The unaudited pro forma consolidated balance sheet has been adjusted to reflect the estimated fair values of the identifiable assets acquired and liabilities assumed in the TWC transactions. The preliminary purchase price is estimated to be approximately $58.4 billion for purposes of the unaudited pro forma financial statements. The fair value of the equity portion of the TWC transactions consideration for accounting purposes will be based on the fair value of Charter Class A common stock at the date of closing and will be different from the assumed value presented in the unaudited pro forma financial statements. The table below presents the preliminary purchase price for pro forma purposes based on the October 30, 2015 outstanding shares of TWC common stock and equity awards and October 30, 2015 Charter Class A common stock closing price. For purposes of these notes, Liberty means Liberty Broadband and Liberty Interactive.

Preliminary Purchase Price (in millions, except per share data)

Outstanding shares of TWC common stock (excluding Liberty)
275.5

Share exchange ratio
0.5409

Equivalent shares of Charter Class A common stock to be issued (excluding Liberty)
149.0

Charter Class A common stock closing price per share
$
190.94

Estimated fair value of Charter Class A common stock to be issued (excluding Liberty)
$
28,452

 
 
Outstanding shares of TWC common stock held by Liberty
7.7

Share exchange ratio
1.1060

Equivalent shares of Charter Class A common stock to be issued to Liberty
8.5

Charter Class A common stock closing price per share
$
190.94

Estimated fair value of Charter Class A common stock to be issued to Liberty
$
1,631

 
 
Total estimated fair value of Charter Class A common stock to be issued
$
30,083

 
 
Outstanding shares of TWC common stock (excluding Liberty)
275.5

$100 cash portion per share
$
100.00

Cash paid to TWC stockholders (excluding Liberty)
$
27,549

 
 
Pre-combination vesting period fair value of New Charter replacement equity awards issued to TWC employees in exchange for TWC equity awards
$
676

Cash paid for TWC non-employee equity awards
$
89

Total preliminary purchase price
$
58,397



7

The table below presents a preliminary allocation of purchase price to the assets acquired and liabilities assumed as if the TWC transactions had closed on September 30, 2015.

Preliminary Allocation of Purchase Price (in millions)

Current assets
$
1,879

Property, plant and equipment, net
20,933

Franchises
48,464

Customer relationships, net
17,815

Goodwill
26,238

Other noncurrent assets
1,010

Current liabilities
(3,723
)
Long-term debt assumed
(23,807
)
Deferred income taxes
(29,966
)
Other long-term liabilities
(444
)
Noncontrolling interest
(2
)
 
$
58,397


The preliminary estimates are based upon currently available information and prior valuation history. As such, additional assets and liabilities may be identified and reflected in the final purchase price allocation.

Upon completion of the fair value assessment following the closing of the TWC transactions, Charter anticipates the finalized fair values of the net assets acquired will differ from the preliminary assessment outlined above. Generally, changes to the initial estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. If upon completion of the valuations, the fair values are 10% greater or less than the amounts included in the preliminary purchase price allocation above, such a change would not likely have a material impact on the financial position or results of operations of New Charter.

The following summarizes the pro forma balance sheet adjustments relating to the TWC transactions.

(a)
Adjustment of $485 million to cash and cash equivalents represents the use of TWC’s cash and cash equivalents to reduce the amount of debt issued to fund the TWC transactions. No fair value adjustments are reflected in accounts receivable, net as they are estimated to be at fair value. Adjustment of $10 million to prepaid expenses and other current assets represents eliminating the current portion of TWC deferred financing fees as a result of adjusting TWC’s long-term debt to fair value.

(b)
For purposes of the preliminary purchase price allocation, Charter assumed a 25% increase to the net book value of TWC’s property, plant and equipment. This assumption is based on increases to net book values reflected in valuations previously performed on Charter assets and taking into consideration the recent capital expenditure history of TWC relative to Charter and the status of its all-digital rollout among other factors. The fair values of TWC’s franchises and customer relationships were based on previous valuations of Charter assets performed for general business purposes that were allocated to the TWC cable systems by applying a relative percentage of purchase price allocated to the intangible assets. The valuations previously performed on Charter assets represent valuations performed in 2013 for general business purposes and for a significant business combination. Pro forma valuation metrics derived from previous valuations of Charter assets were used as a basis for determining fair value of TWC assets as such metrics take into consideration market participant assumptions and Charter management’s historical valuation methods. Goodwill represents the residual of the purchase price over the fair values of the identified assets acquired and liabilities assumed.


8

(c)
Other noncurrent assets reflect the following adjustments (in millions).

Adjust TWC’s equity investments to estimated fair value
$
431

Deferred financing fees associated with newly issued debt
270

Elimination of TWC deferred financing fees relating to assumed TWC debt
(84
)
Elimination of Charter’s cost investment in a TWC subsidiary
(2
)
 
$
615


The estimated fair value of TWC’s equity investments was based on applying implied multiples to estimated cash flows. The implied multiples were estimated based on precedent transactions and comparable companies. Acquisition accounting rules require that the increase in the carrying value of the TWC equity investments be allocated to the underlying net assets of the investees. This allocation has not yet been performed, and for pro forma purposes, is allocated to non-amortizing goodwill of the investees and thus no pro forma adjustment related to these investments is reflected in the unaudited pro forma consolidated statements of operations.

(d)
Adjustment of $34 million to accounts payable and accrued liabilities represents the elimination of current deferred revenue as it is assumed to have no fair value as there are no associated payment obligations or substantive performance obligations.

(e)
The TWC long-term debt assumed was adjusted to fair value using quoted market values as of October 30, 2015. This adjustment resulted in an increase in long-term debt of $1.1 billion. The fair value adjustment to long-term debt is a result of quoted market values of TWC’s debt being higher than the face amount of the related debt. The quoted market value of a debt instrument is higher than the face amount of the debt when the market interest rates are lower than the stated interest rate of the debt. In acquisition accounting, this results in an increase in debt and a reduction in interest expense to reflect the lower market interest rate.

The pro forma adjustment to reclassify $6 million of TWC’s current portion of long-term debt to long-term debt is a result of conforming to Charter’s balance sheet classification. When Charter has availability to repay debt maturing in the next twelve months with its existing revolving credit facility, which is anticipated to be the case following the TWC transactions, those current maturities are classified as long-term debt.

Long-term debt was also adjusted to reflect new debt raised to fund the TWC transactions and the release of cash and cash equivalents from escrow for debt already incurred as of September 30, 2015.

The following table presents pro forma cash sources and uses as a result of the TWC transactions.

Pro Forma Cash Sources and Uses (in millions)

Sources:
 
Restricted cash and cash equivalents
$
19,626

Proceeds from issuance of long-term debt
3,922

Proceeds from issuance of Charter Class A common stock to Liberty
4,300

TWC cash and cash equivalents assumed
485

 
$
28,333

Uses:
 
Cash portion of purchase price
$
27,638

Advisor fees and other expenses directly related to the TWC transactions
425

Deferred financing fees
270

 
$
28,333



9

(f)
Pro forma adjustments to deferred tax liabilities reflect the following (in millions):

Deferred tax liabilities from TWC acquisition accounting adjustments
$
17,278

Reduction in valuation allowance on Charter’s preexisting deferred tax assets
(3,041
)
Other deferred taxes recorded directly to equity
(179
)
 
$
14,058


The TWC transactions are assumed to be a non-taxable business combination for pro forma purposes. A pro forma adjustment was recorded for the deferred tax impact of acquisition accounting adjustments primarily related to property, plant and equipment, franchises, customer relationships and assumed TWC long-term debt. The incremental deferred tax liabilities of $17.3 billion were calculated based on the tax effect of an approximate $44.3 billion step-up in book basis of net assets of TWC excluding the amount attributable to goodwill. This deferred tax pro forma adjustment was determined by applying an estimated tax rate of 39%.

In contemplation of the TWC transactions, Charter has performed a preliminary analysis of the valuation allowance recorded on Charter’s preexisting deferred tax assets. Based on this analysis, certain of the deferred tax liabilities recognized in connection with the TWC transactions are expected to reverse and provide a source of future taxable income, resulting in a $3.0 billion reduction of substantially all of Charter’s preexisting valuation allowance associated with its deferred tax assets. Such reduction in Charter’s valuation allowance is reflected as a reduction to deferred tax liabilities in the pro forma balance sheet as a result of the TWC transactions and was determined by applying an estimated tax rate of 39%. The impact of the reduction in the valuation allowance is not reflected in the unaudited pro forma consolidated statements of operations as it is non-recurring.

Other deferred taxes recorded directly to equity include $119 million of estimated tax benefit on advisor fees and other transaction expenses, $35 million of excess tax benefit relating to cash paid for TWC non-employee equity awards and $25 million of tax benefit upon remeasuring Charter’s legacy deferred taxes at a 39.0% New Charter estimated tax rate compared to a 39.4% legacy Charter tax rate due to estimated changes in apportionment factors related to state income taxes. The adjustment to legacy Charter’s deferred taxes as a result of the tax rate remeasurement is not reflected in the unaudited pro forma consolidated statements of operations as it is non-recurring.

Deferred taxes recognized in connection with the TWC transactions reflect currently available information as well as estimates and assumptions made in accordance with the basis of presentation of the unaudited pro forma financial statements. The final deferred tax liability recognized in connection with the TWC transactions could be significantly different.

(g)
Adjustment of $388 million to other long-term liabilities represents the elimination of deferred liabilities assumed to have no fair value as there are no associated payment obligations or substantive performance obligations.

(h)
Represents the elimination of Charter’s noncontrolling interest in a TWC subsidiary.

(i)
Pro forma adjustments to controlling interest of shareholders’ equity reflects the following (in millions).

Elimination of TWC’s historical shareholders’ equity and accumulated other comprehensive loss
$
(8,745
)
Exchange of New Charter Class A common stock to TWC stockholders (including Liberty)
30,083

Issuance of New Charter Class A common stock to Liberty
4,300

Reduction in valuation allowance on Charter’s existing deferred tax assets (see Note 1(f))
3,041

Advisor fees and other expenses directly related to the TWC transactions
(425
)
Pre-combination vesting period fair value of New Charter replacement equity awards issued to TWC employees in exchange for TWC equity awards
676

Other deferred taxes recorded directly to equity (see Note 1(f))
179

 
$
29,109


Advisor fees and other expenses directly related to the TWC transactions of $425 million are not reflected in the unaudited pro forma statements of operations and consist primarily of escrow interest, investment banking fees and legal fees.


10

At closing, TWC employee equity awards will be converted into replacement equity awards with respect to New Charter Class A common stock with an estimated pre-combination vesting period fair value of $676 million. The estimated fair value of the post-combination portion of the awards totaling $671 million will be amortized to stock compensation expense over the remaining vesting period of the awards.

Note 2. BHN Transactions Pro Forma Balance Sheet Adjustments

The unaudited pro forma consolidated balance sheet has been adjusted to reflect the estimated fair values of the identifiable assets acquired and liabilities assumed in the BHN transactions. The preliminary purchase price of Bright House is assumed to be approximately $11.1 billion for purposes of the unaudited pro forma financial statements. The BHN transactions exclude certain assets and liabilities such as cash, marketable securities, pension-related assets and liabilities, and debt, among others. The fair value of the BHN transactions for accounting purposes will be based on the fair value of the Charter Holdings common units and the Charter Holdings convertible preferred units at the date of close and will be different from the assumed value presented in these unaudited pro forma financial statements. The table below presents the preliminary purchase price for pro forma purposes based on the October 30, 2015 Charter Class A common stock closing share price.

Preliminary Purchase Price (in millions, except per share data)

Charter Holdings common units issued to A/N (before the Parent Merger Exchange Ratio)
34.3

Charter Class A common stock closing price per share
$
190.94

Estimated fair value of Charter Holdings common units issued to A/N based on Charter share price
$
6,545

 
 
Estimated fair value of convertible preferred units based on $2.5 billion aggregate liquidation preference
$
2,500

Cash paid to A/N
$
2,014

Total preliminary purchase price
$
11,059

  
The table below presents the preliminary allocation of purchase price to the assets acquired and liabilities assumed for the Bright House cable systems as if the BHN transactions had closed on September 30, 2015.

Preliminary Allocation of Purchase Price (in millions)

Current assets
$
191

Property, plant and equipment, net
2,711

Franchises
4,802

Customer relationships, net
1,752

Goodwill
1,878

Other noncurrent assets
109

Current liabilities
(384
)
 
$
11,059


The preliminary estimates are based upon currently available information and prior valuation history. As such, additional assets and liabilities may be identified and reflected in the final purchase price allocation.

Upon completion of the fair value assessment following the closing of the BHN transactions, Charter anticipates the finalized fair values of the net assets acquired will differ from the preliminary assessment outlined above. Generally, changes to the initial estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. If upon completion of the valuations, the fair values are 10% greater or less than the amounts included in the preliminary purchase price allocation above, such a change would not likely have a material impact on the financial position or results of operations of New Charter.


11

The following summarizes the pro forma balance sheet adjustments relating to the BHN transactions.

(a)
Adjustment to current assets represents the elimination of cash and cash equivalents not assumed in the BHN transactions of $43 million. No fair value adjustments are reflected in accounts receivable, net or prepaid expenses and other current assets as carrying value is estimated to approximate fair value.

(b)
For purposes of the preliminary purchase price allocation, Charter assumed a 25% increase to the net book value of Bright House’s property, plant and equipment. This assumption is based on increases to net book values reflected in valuations previously performed on Charter assets and taking into consideration differences in capitalization policies, recent capital expenditure history of Bright House relative to Charter and the status of its all-digital rollout, among other factors. The fair values of Bright House’s franchises and customer relationships were based on previous valuations of Charter assets that were allocated to the Bright House cable systems by applying a relative percentage of the purchase price allocated to the intangible assets. The valuations previously performed on Charter assets represent valuations performed in 2013 for general business purposes and for a significant business combination. Pro forma valuation metrics derived from previous valuations of Charter assets were used as a basis for determining the fair value of Bright House assets as such metrics take into consideration market participant assumptions and Charter management’s historical valuation methods. Goodwill represents the residual of the purchase price over the fair values of the identified assets acquired and liabilities assumed.

(c)
Adjustment to other noncurrent assets represents an increase of $33 million to adjust Bright House’s equity investments to fair value and $28 million of deferred financing fees associated with the issuance of new debt as noted below, partially offset by the elimination of BHN deferred financing fees of $1 million.

(d)
Adjustment to total current liabilities represents the elimination of liabilities not assumed in the BHN transactions consisting of $3 million of current pension obligation, $6 million of accrued interest and $343 million of current portion of long-term debt.

(e)
Adjustment to long-term debt represents the elimination of Bright House’s long-term debt not assumed in the BHN transactions and the issuance of new debt to partially fund the BHN transactions. The table below represents the following pro forma cash sources and uses as a result of the BHN transactions.

Pro Forma Cash Sources and Uses (in millions)

Sources:
 
Proceeds from the issuance of long-term debt
$
2,000

Issuance of New Charter Class A common stock to Liberty
700

 
$
2,700

Uses:
 
Cash portion of purchase price paid to A/N
$
2,014

Repayment of Charter Operating revolving credit facility
628

Advisor fees and other expenses directly related to the BHN transactions
30

Deferred financing fees
28

 
$
2,700


(f)
The BHN transaction is assumed to be a non-taxable business combination for pro forma purposes. No pro forma adjustment was recorded to net deferred tax liabilities directly attributable to the BHN transactions in the unaudited pro forma consolidated balance sheet. New Charter’s difference between book and tax basis in its investment in the Charter Holdings partnership, and underlying net assets, is not anticipated to change following A/N’s contribution of the Bright House assets and liabilities. New Charter will record net deferred tax liabilities related to its investment, and its underlying net assets, in Charter Holdings following the BHN transactions based on future differences that arise between book and tax.
    
(g)
Represents the elimination of $445 million of pension and other benefits related to long-term liabilities not assumed and the elimination of $26 million of other long-term deferred liabilities assumed to have no fair value as there are no associated payment obligations or substantive performance obligations.


12

(h)
Adjustment to noncontrolling interest reflects the following adjustments (in millions).

Issuance of Charter Holdings common units to A/N
$
6,545

Issuance of Charter Holdings convertible preferred units to A/N
2,500

 
$
9,045


Charter Holdings will issue approximately 34.3 million common units, subject to application of the Parent Merger Exchange Ratio, that are exchangeable into New Charter Class A common stock on a one-for-one basis, which are valued at approximately $6.5 billion for pro forma purposes, based on Charter Class A common stock closing stock price on October 30, 2015 of $190.94. These units are recorded in noncontrolling interest as permanent equity on the unaudited pro forma consolidated balance sheet. The actual value of the Charter Holdings common units for accounting purposes will be based on the closing price of Charter Class A common stock on the date of closing of the BHN transactions and will be different from the assumed value presented in the unaudited pro forma financial statements.

Charter Holdings will issue approximately 10.3 million convertible preferred units, subject to application of the Parent Merger Exchange Ratio, that are valued for pro forma purposes based on their $2.5 billion aggregate liquidation preference. These units are recorded in noncontrolling interest as permanent equity on the unaudited pro forma consolidated balance sheet. The preferred units are convertible into Charter Holdings common units based on a conversion feature as defined in the BHN contribution agreement and further exchangeable into New Charter Class A common stock on a one-for-one basis. The actual value of the Charter Holdings preferred units for accounting purposes will be recorded at fair value at the date of closing and will be different from the assumed value presented in the unaudited pro forma financial statements.

(i)
Pro forma adjustment to controlling interest of shareholders’ equity reflects the following (in millions).

Elimination of Bright House’s historical shareholders’ equity and accumulated other comprehensive loss
$
(1,960
)
Issuance of New Charter Class A common stock to Liberty
700

Advisor fees and other expenses directly related to the BHN transactions
(30
)
 
$
(1,290
)

Advisor fees and other expenses directly related to the BHN transactions of $30 million are not reflected in the unaudited pro forma statements of operations and consist primarily of investment banking fees and legal fees.

Note 3. TWC Transactions Pro Forma Statement of Operations Adjustments

(a)
Adjustment to revenues and operating costs and expenses reflect the following adjustments for the nine months ended September 30, 2015 and year ended December 31, 2014 (in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Reclassification to conform to Charter’s financial statement classification for processing fees revenue
$
163

 
$
201

Elimination of advertising revenue/expense between Charter and TWC
(17
)
 
(28
)
Adjustment to both revenues and operating costs and expenses
146

 
173

 
 
 
 
Incremental replacement stock award compensation expense
97

 
159

Elimination of amortization of actuarial gains (losses) and prior service credits for TWC’s pension plans
(31
)
 
3

Total adjustment to operating costs and expenses
$
212

 
$
335


TWC presents processing fees as a reduction to bad debt expense within operating costs and expenses in the statement of operations. Charter reports such fees as other revenue. As such, a pro forma reclassification was made to conform to Charter’s financial statement classification for processing fee revenues.


13

Incremental replacement stock award compensation expense represents additional expense related to converted TWC equity awards associated with the post-combination vesting period. Compensation expense, following the closing of the TWC transactions, will reflect the $671 million fair value of the awards as of the closing date and will be recognized over the remaining vesting period. At closing, TWC employee equity awards will be converted into equity awards with respect to New Charter Class A common stock, after giving effect to the Stock Award Exchange Ratio (as defined under “The Merger Agreement—Treatment of TWC Equity Awards” in CCH I, LLC's prospectus filed with the SEC on August 20, 2015).

Net actuarial gains (losses) and prior service credits are included in TWC’s accumulated other comprehensive loss component of equity and reclassified into the results of operations based on service period assumptions. Because TWC’s equity, including accumulated other comprehensive loss, is eliminated in the opening balance sheet pursuant to acquisition accounting, the results for the periods following the TWC transactions will not include any impact from the amortization of these deferred net actuarial gains (losses) and prior service credits.

(b)
Charter increased depreciation and amortization by $2.3 billion and $3.7 billion for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively, as follows (in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
 
Depreciation
 
Amortization
 
Total
 
Depreciation
 
Amortization
 
Total
TWC pro forma expense based on fair value
$
2,617

 
$
2,375

 
$
4,992

 
$
3,489

 
$
3,563

 
$
7,052

TWC historical expense
 
 
 
 
(2,740
)
 
 
 
 
 
(3,371
)
Total pro forma depreciation and amortization adjustment
 
 
 
 
$
2,252

 
 
 
 
 
$
3,681


The increase was estimated using a preliminary average useful life of 6 years for property, plant and equipment and 9 years for customer relationships. Customer relationships are amortized using an accelerated method (sum of the years’ digits) to reflect the period over which the relationships are expected to generate cash flows. Following the acquisition, TWC’s pro forma customer relationships of $17.8 billion would result in amortization expense under the accelerated method of $3.6 billion for year 1, $3.2 billion for year 2, $2.8 billion for year 3, $2.4 billion for year 4, $2.0 billion for year 5 and $3.8 billion thereafter. The effect of a one-year decrease in the weighted average useful lives of property, plant and equipment and customer relationships would be an increase to depreciation and amortization expense of approximately $746 million and $1.1 billion for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively, while the effect of a one-year increase would result in a decrease of approximately $563 million and $822 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively. The pro forma adjustments are based on current estimates and may not reflect actual depreciation and amortization once the purchase price allocation is finalized and final determination of useful lives are made.

(c)
For the nine months ended September 30, 2015 and year ended December 31, 2014, other operating (income) expenses, net decreased by $107 million and $56 million, respectively, as follows (in millions).
 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Elimination of TWC stock compensation expense classified by TWC as merger-related in other operating expense (see Note 3(a))
$
(32
)
 
$
(56
)
Elimination of Charter transaction costs directly related to the TWC transactions
(24
)
 
—

Elimination of TWC transaction costs directly related to the TWC transactions
(51
)
 
—

 
$
(107
)
 
$
(56
)


14

(d)
For the nine months ended September 30, 2015 and year ended December 31, 2014, interest expense, net increased by $520 million and $887 million, respectively, as follows (in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Additional interest expense on new debt issued
$
(695
)
 
$
(1,122
)
Amortization of deferred financing fees and original issue discount
(19
)
 
(25
)
Amortization of net premium as a result of adjusting assumed TWC long-term debt to fair value
180

 
240

Elimination of amortization related to TWC’s previously deferred financing fees and debt discounts
14

 
20

 
$
(520
)
 
$
(887
)

In July 2015, Charter issued $15.5 billion CCO Safari II, LLC senior secured notes and in August 2015, CCO Safari III, LLC closed on $3.8 billion of senior secured bank loans. Although the nature of the remaining debt financing may be secured through various combinations of bank debt, unsecured notes and secured notes, for pro forma purposes, Charter has assumed issuing unsecured notes at current market rates and borrowings under the Charter Operating revolving credit facility to fund the remaining $3.9 billion cash portion of the TWC transactions. A 0.125% change in interest rates would increase (decrease) interest expense by $2 million and $3 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.

As noted in Note 1(e) above, TWC long-term debt was adjusted to fair value. The difference between the fair value and the face amount of each borrowing is amortized as an offset to interest expense over the remaining term of each borrowing based on its maturity date. This adjustment results in interest expense that effectively reflects current market interest rates rather than the stated interest rates.

(e)
As discussed in Note 1(f) above, Charter determined that TWC’s reversing deferred tax liabilities provide a source of future taxable income in the combined entity, resulting in a reduction of substantially all of Charter’s preexisting valuation allowance. The pro forma adjustment to income taxes includes the incremental pro forma tax benefit relating to the legacy Charter operations under the assumption the Charter tax calculation no longer reflects the effects of the preexisting valuation allowance. Thus, the income tax benefit impact of the pro forma adjustments was determined by applying an estimated New Charter tax rate of 39% to the pro forma loss before taxes of New Charter following the TWC transactions, resulting in a $288 million and $535 million income tax benefit in the unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively. The pro forma income tax benefit does not reflect the effects of any special partnership tax allocations as these effects are currently not estimable.
 
(f)
Completion of the TWC transactions includes a conversion of all of Charter’s existing Class A common stock into 0.9042 shares of New Charter Class A common stock. This Parent Merger Exchange Ratio is applied to all legacy Charter Class A common stock and to stock issued to TWC stockholders and Liberty. This will result in the following adjustment to weighted average common shares outstanding.

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Equivalent Charter shares issued to TWC stockholders
157,553,219

 
157,553,219

Equivalent Charter shares purchased by Liberty
24,300,650

 
24,300,650

 
181,853,869

 
181,853,869

Parent Merger Exchange Ratio
0.9042

 
0.9042

New Charter shares issued in TWC transactions
164,432,268

 
164,432,268

Reduction of legacy Charter shares outstanding upon conversion from Charter Class A common stock to New Charter Class A common stock
10,709,489

 
10,382,245

 
153,722,779

 
154,050,023



15

The amount of shares issued will vary based on the number of TWC stockholders that elect the Option B Election. A 5% decrease in the number of shares held by TWC stockholders electing the Option A Election, who instead elect the Option B Election, will result in a decrease in the number of shares issued of approximately 1.2 million shares.

The replacement stock awards, including restricted stock units and stock options, in New Charter were not included for purposes of the computation of pro forma diluted earnings per share because the effect would have been anti-dilutive given the pro forma net loss resulting from the TWC transactions.

Note 4. BHN Transactions Pro Forma Statement of Operations Adjustments

(a)
Adjustment to revenues and operating costs and expenses reflect the following adjustments for the nine months ended September 30, 2015 and year ended December 31, 2014 (in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Reclassification to conform to Charter’s financial statement classification for processing fees revenue
$
43

 
$
55

Elimination of TWC management fee incurred by Bright House
(110
)
 
(143
)
Adjustment to both revenues and operating costs and expenses
(67
)
 
(88
)
 
 
 
 
Adjustment to capitalize residential installation labor and other labor costs to conform to Charter’s capitalization accounting policy
(75
)
 
(112
)
Elimination of pension plans and costs related to parent company obligations not assumed by Charter in the BHN transactions
(71
)
 
(54
)
Reclassification to conform to Charter’s financial statement classification for other operating expense
(2
)
 
(3
)
Total adjustment to operating costs and expenses
$
(215
)
 
$
(257
)

Bright House presents processing fees as a reduction to bad debt expense within operating costs and expenses in the statement of operations. Charter reports such fees as other revenue. As such, a pro forma reclassification was made to conform to Charter’s financial statement classification for processing fee revenues.

(b)
Charter increased depreciation and amortization by $232 million and $386 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively, as follows (in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
 
Depreciation
 
Amortization
 
Total
 
Depreciation
 
Amortization
 
Total
Bright House pro forma expense based on fair value
$
338

 
$
234

 
$
572

 
$
452

 
$
350

 
$
802

Bright House historical expense
 
 
 
 
(340
)
 
 
 
 
 
(416
)
Total pro forma depreciation and amortization adjustment
 
 
 
 
$
232

 
 
 
 
 
$
386


The increase was estimated using a preliminary average useful life of 6 years for property, plant and equipment and 9 years for customer relationships. Customer relationships are amortized using an accelerated method (sum of the years’ digits) to reflect the period over which the relationships are expected to generate cash flows. Following the acquisition, Bright House’s pro forma customer relationships of $1.8 billion would result in amortization expense under the accelerated method of $350 million for year 1, $311 million for year 2, $273 million for year 3, $234 million for year 4, $195 million for year 5 and $389 million thereafter. The effect of a one-year decrease in the weighted average useful lives of property, plant and equipment and customer relationships would be an increase to depreciation and amortization expense of approximately $90 million and $129 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively, while the effect of a one-year increase would result in a decrease of approximately $67 million and $96 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively. The pro forma adjustments are based on current estimates and may not reflect actual depreciation and amortization once the purchase price allocation is finalized and final determination of useful lives are made.

16


(c)
For the nine months ended September 30, 2015 and year ended December 31, 2014, other operating (income) expenses, net decreased by $9 million and $0, respectively, as follows (in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Elimination of Charter transaction costs directly related to the BHN transactions
$
(11
)
 
$
(3
)
Reclassification to conform to Charter’s financial statement classification for other operating expense
2

 
3

 
$
(9
)
 
$
—


(d)
For the nine months ended September 30, 2015 and year ended December 31, 2014, interest expense, net, increased by $2 million and decreased by $3 million, respectively, representing the expected change in interest expense on new debt to be incurred to fund the BHN transactions and related amortization of deferred financing fees offset by the elimination of historical interest expense incurred by Bright House as debt is not assumed in the BHN transactions and repayment of Charter Operating’s revolving credit facility. For pro forma purposes the $2.0 billion of debt issued for the BHN transactions was assumed to be based on current market interest rates on bank debt. A 0.125% change in interest rates would increase (decrease) interest expense by $2 million and $3 million for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.

(e)
The $170 million and $190 million income tax benefit for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively, was determined by applying an estimated New Charter tax rate of 39% to pro forma loss before income taxes of New Charter following the TWC transactions and BHN transactions, less the impact on the tax rate as a result of the noncontrolling interest allocation of the Charter Holdings partnership which is treated as a permanent item for tax purposes in the combined entities’ pro forma tax benefit calculation. The resulting income tax benefit of $118 million and $345 million is reflected in the unaudited consolidated statements of operations for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively. The resulting effective tax rate of 52% and 41% for the respective periods is a result of the permanent treatment of the noncontrolling interest expense. The pro forma income tax benefit does not reflect the effects of any special partnership tax allocations as these effects are currently not estimable.

(f)
Reflects the following noncontrolling interest adjustment for the nine months ended September 30, 2015 and year ended December 31, 2014 as follows (dollars in millions).

 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
Charter Holdings pro forma net loss for the TWC transactions and BHN transactions
$
(225
)
 
$
(835
)
Charter Holdings 6% cash dividend to preferred unit holders
(113
)
 
(150
)
Charter Holdings pro forma net loss available for allocation to common unit holders
(338
)
 
(985
)
A/N pro forma noncontrolling interest in Charter Holdings excluding preferred units
10
%
 
10
%
Noncontrolling interest - Charter Holdings common units
(34
)
 
$
(99
)
Noncontrolling interest - Charter Holdings convertible preferred units
113

 
150

 
$
79

 
$
51


The allocation of Charter Holdings’ net income to noncontrolling interest for financial reporting purposes is first allocated to the convertible preferred units for their stated dividend following their aggregate liquidation preference. The residual Charter Holdings net income (loss) is allocated to the common unit holders in Charter Holdings based on the relative economic common ownership interests in Charter Holdings. A/N’s relative economic common ownership interest in Charter Holdings used for pro forma purposes is 10%.


17

(g)
Completion of the TWC transactions includes a conversion of all of Charter’s existing Class A common stock into 0.9042 shares of New Charter Class A common stock. This Parent Merger Exchange Ratio is applied to all legacy Charter Class A common stock and to stock issued to Liberty and A/N. This will result in the following adjustment to weighted average common shares outstanding for both the nine months ended September 30, 2015 and year ended December 31, 2014.

Equivalent Charter shares purchased by Liberty
4,046,329

Parent Merger Exchange Ratio
0.9042

New Charter shares issued to Liberty
3,658,691


The Charter Holdings common units of 34.3 million (31.0 million units applying the Parent Merger Exchange Ratio of 0.9042) and Charter Holdings convertible preferred units of 10.3 million (9.3 million units applying the Parent Merger Exchange Ratio of 0.9042) to be issued to A/N were not included on an if-converted, if-exchanged basis for purposes of the computation of pro forma diluted earnings per share because the effect would have been anti-dilutive given the pro forma net loss resulting from the TWC transactions and BHN transactions.


18
Exhibit
EXHIBIT 99.2


BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Financial Statements
Three and Nine‑Month Periods ended September 30, 2015 and 2014




BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Table of Contents
 
Page(s)
Condensed Consolidated Financial Statements:
 
Condensed Consolidated Balance Sheets
2
Condensed Consolidated Statements of Income
3
Condensed Consolidated Statements of Comprehensive Income
4
Condensed Consolidated Statements of Cash Flows
5
Notes to Condensed Consolidated Financial Statements
6-12


1

BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands of dollars)

 
September 30,
2015
 
December 31,
 
(unaudited)
 
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
43,093

 
653,714

Short-term marketable securities (note 3)
—

 
112,397

Accounts receivable-trade, net of allowances of $20,956 and $19,250 as
 
 
 
of September 30, 2015 and December 31, 2014, respectively
159,912

 
179,383

Other current assets
30,524

 
55,564

Total current assets
233,529

 
1,001,058

 
 
 
 
Property, plant and equipment, net
2,169,495

 
2,130,642

Long-term marketable securities (note 3)
—

 
362,940

Investments
12,279

 
12,006

Goodwill
12,746

 
12,746

Intangible assets, net (note 4)
854,941

 
851,484

Other assets
12,169

 
50,241

Total assets
$
3,295,159

 
4,421,117

 
 
 
 
Liabilities and Member's Equity
 
 
 
Accounts payable and other current liabilities (note 5)
$
330,201

 
348,342

Current maturities of long-term debt (note 6)
342,857

 
42,857

Deferred revenue
63,084

 
62,946

Total current liabilities
736,142

 
454,145

 
 
 
 
Long-term debt (note 6)
128,571

 
471,429

Other liabilities (note 7)
470,639

 
479,722

Total liabilities
1,335,352

 
1,405,296

 
 
 
 
Commitments and contingencies (note 11)
 
 
 
Member's equity
1,959,807

 
3,015,821

Total liabilities and member's equity
$
3,295,159

 
4,421,117



See accompanying notes to condensed consolidated financial statements.

2

BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands of dollars)
(unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Subscriber
$
916,217

 
866,519

 
2,785,186

 
2,616,778

Advertising and other
47,910

 
55,800

 
146,280

 
144,093

Total revenues
964,127

 
922,319

 
2,931,466

 
2,760,871

 
 
 
 
 
 
 
 
Costs, expenses and other:
 
 
 
 
 
 
 
Operating expenses
666,843

 
629,397

 
1,999,271

 
1,879,333

Depreciation and amortization
116,070

 
105,663

 
339,948

 
305,142

Gain from disposal of assets, net and other income
(1,745
)
 
(1,437
)
 
(23,677
)
 
(3,269
)
Income from equity investments
(494
)
 
(560
)
 
(1,313
)
 
(1,616
)
Interest, net
8,497

 
8,926

 
24,969

 
28,931

Total costs and expenses
789,171

 
741,989

 
2,339,198

 
2,208,521

 
 
 
 
 
 
 
 
Net income
$
174,956

 
180,330

 
592,268

 
552,350


See accompanying notes to condensed consolidated financial statements.


3

BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands of dollars)
(unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
174,956

 
180,330

 
592,268

 
552,350

Change in unrecognized amounts included in
 
 
 
 
 
 
 
pension and postretirement obligations
3,175

 
932

 
9,525

 
2,796

Comprehensive income
$
178,131

 
181,262

 
601,793

 
555,146


See accompanying notes to condensed consolidated financial statements.


4

BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)
(unaudited)
 
 
Nine months ended
 
 
September 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
592,268

 
552,350

Adjustments to reconcile net income to cash flows from
 
 
 
 
operating activities:

 
 
 
 
Depreciation and amortization
 
339,948

 
305,142

Income from equity investments
 
(1,313
)
 
(1,616
)
Gain on disposal of assets, net
 
(3,236
)
 
(3,269
)
Change in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
19,471

 
(10,669
)
Other current assets
 
22,579

 
(2,337
)
Other assets
 
6,374

 
1,853

Accounts payable and other liabilities
 
(17,699
)
 
(7,773
)
Deferred revenue
 
138

 
9,030

Net cash provided by operating activities
 
958,530

 
842,711

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(371,639
)
 
(398,248
)
Franchise expenditures
 
(10,984
)
 
(7,573
)
Purchases of marketable securities
 
(205,932
)
 
(541,157
)
Proceeds from sale and maturities of marketable securities
 
192,005

 
81,949

Acquisitions of investments and other assets
 
(424
)
 
(530
)
Transfer from (to) restricted cash
 
35,807

 
(31,282
)
Proceeds from sale of other assets
 
3,236

 
3,269

Net cash used in investing activities
 
(357,931
)
 
(893,572
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Member distributions
 
(1,168,363
)
 
(298,800
)
Repayment of senior note
 
(42,857
)
 
(42,857
)
Net cash used in financing activities
 
(1,211,220
)
 
(341,657
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(610,621
)
 
(392,518
)
Cash and cash equivalents at beginning of period
 
653,714

 
1,001,774

Cash and cash equivalents at end of period
 
$
43,093

 
609,256

 
 
 
 
 
Interest paid
 
$
37,821

 
41,036

 
 
 
 
 
Noncash financing activities:
 
 
 
 
Member distributions of marketable securities
 
$
489,444

 
—


See accompanying notes to condensed consolidated financial statements.


5
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)




(1)
Organization and Summary of Significant Accounting Policies

(a)
Description of Business

Bright House Networks, LLC and subsidiaries (BHN or the Company) is a cable operator with its primary markets in Florida, Michigan, Alabama, Indiana and California. The Company provides its subscribers with video, high‑speed data and digital phone services. The Company also sells advertising on its cable systems to local and national advertisers.

The Company is a wholly owned subsidiary of Time Warner Entertainment‑Advance/Newhouse (TWE‑A/N). TWE‑A/N is a partnership between Advance/Newhouse Partnership (A/N) and a subsidiary of Time Warner Cable Inc. (TWC). A/N is the manager of the Company and is entitled to 100% of its economic benefits.

(b)
Interim Financial Statements

The condensed consolidated financial statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly, in all material respects, the financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America (GAAP) applicable to interim periods. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2014, which report was dated March 27, 2015.

(c)
Basis of Consolidation

The accompanying condensed consolidated financial statements include all of the accounts and all entities that are majority‑owned by the Company and are required to be consolidated in accordance with GAAP. The Company has eliminated intercompany accounts and transactions among consolidated entities.

(d)
Revenues and Costs

The Company pays for programming provided to its subscribers under joint contracts with TWC. Amounts paid to TWC for programming and other services were $258.6 million and $782.6 million for the three and nine months ended September 30, 2015, respectively, and $241.6 and $728.7 for the three and nine months ended September 30, 2014, respectively. At September 30, 2015 and December 31, 2014, unpaid balances due to TWC were $159.7 million and $154.4 million, respectively. Such amounts are included in accounts payable and other current liabilities in the accompanying condensed consolidated balance sheets.

In the normal course of business, the Company is assessed nonincome related taxes by governmental authorities, including franchising authorities, and collects such taxes from its subscribers. The Company’s policy is that, in instances where the tax is being assessed directly on the Company, amounts paid to governmental authorities and amounts received from subscribers are recorded on a gross basis. That is, amounts paid to governmental authorities are recorded as operating expenses and amounts received from subscribers are recorded as revenues. The amount of such fees included as a component of revenues was

6
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)


$22.9 million and $70.3 million for the three and nine months ended September 30, 2015 and $22.1 and $67.8 for the three and nine months ended September 30, 2014, respectively.

The Company recorded income of $20.4 million in the nine months ended September 30, 2015, for minimum payments due under its agreement with Verizon, which is included in Gain from disposal of assets, net and other income in the condensed consolidated statements of income in 2015. The amount was paid in full in July 2015.

(e)
Fair Value Disclosures

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Level 1 -
Defined as observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities

Level 2 -
Defined as observable inputs other than Level 1 inputs. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 -
Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying value of accounts receivable, accounts payable, and other current liabilities approximates fair value because of the relatively short maturity of these items.

The Company’s marketable securities, which included U.S. Treasury securities, corporate debt securities, U.S. government agency securities, municipal securities, certificates of deposit and commercial paper, were recorded at fair value (note 3). The Company classified these investments as Level 2 since the fair value estimates were based on market observable inputs for investments with similar terms and maturities.

(f)
Use of Estimates

The accompanying condensed consolidated financial statements are prepared in accordance with GAAP, which requires that management make estimates and assumptions that affect the reported amounts. Actual results could differ from these estimates.

Significant estimates inherent in the preparation of the accompanying condensed consolidated financial statements include accounting for asset impairments, allowances for doubtful accounts, investments, depreciation and amortization, pension benefits, and contingencies. Allocation methodologies used to prepare the accompanying condensed consolidated financial statements are based on estimates and are described in the notes, where appropriate.

(2)
Charter Agreement

On March 31, 2015, A/N entered into an agreement (the Agreement) with Charter Communications, Inc. (Charter) whereby Charter will acquire the BHN business (with the exception of certain excluded assets and liabilities). On May 26, 2015, Charter and TWC announced that they had entered into an agreement to merge, following

7
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)


which Charter and A/N amended their Agreement. Following the closing of the merger between Charter and TWC and the acquisition of BHN by Charter (which transactions are expected to close contemporaneously), A/N is expected to own between 14% and 13% of the combined Charter‑TWC‑BHN business (depending on final elections of cash versus stock available to shareholders of TWC), on an as‑converted, as‑exchanged basis.

The Agreement, as amended, between Charter and A/N is subject to several conditions, including, the completion of the merger between Charter and TWC (subject to certain exceptions if TWC enters into another sale transaction), Charter shareholder approval, TWC shareholder approval and regulatory approvals.

(3)
Marketable Securities

Our marketable debt securities consisted of the following at:
 
 
September 30,
 
December 31,
 
 
2015
 
2014
 
 
(In thousands)
Short-term marketable securities:
 
 
 
 
U.S. Treasury securities
 
$
—

 
27,782

Corporate debt securities
 
—

 
3,103

U.S. agency securities
 
—

 
17,491

Municipal securities
 
—

 
13,552

Certificates of deposit
 
—

 
18,998

Commercial paper
 
—

 
31,471

 
 
 
 
 
Total short-term marketable securities
 
$
—

 
112,397

 
 
 
 
 
Long-term marketable securities:
 
 
 
 
Corporate debt securities
 
—

 
73,424

U.S. agency securities
 
—

 
129,782

Municipal securities
 
—

 
159,734

 
 
 
 
 
Total long-term marketable securities
 
$
—

 
362,940


On July 1, 2015, the Company distributed all marketable securities to A/N.


8
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)


(4)
Intangible Assets

Intangible assets and related accumulated amortization consist of the following at:

 
 
September 30, 2015
 
December 31, 2014
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Total
 
Gross Carrying Amount
 
Accumulated Amortization
 
Total
 
 
(In thousands)
Indefinite-lived cable
 
 
 
 
 
 
 
 
 
 
 
 
franchise rights
 
$
801,760

 
—

 
801,760

 
801,760

 
—

 
801,760

Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Renewal of cable franchise rights
 
90,137

 
(82,886
)
 
7,251

 
85,246

 
(82,177
)
 
3,069

Deferred right-of-way costs
 
90,392

 
(47,153
)
 
43,239

 
84,297

 
(40,923
)
 
43,374

Trade names and subscriber lists
 
1,564

 
(861
)
 
703

 
1,564

 
(625
)
 
939

Other
 
5,530

 
(3,542
)
 
1,988

 
5,530

 
(3,188
)
 
2,342

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
187,623

 
(134,442
)
 
53,181

 
176,637

 
(126,913
)
 
49,724

Total intangible
 
 
 
 
 
 
 
 
 
 
 
 
assets, net
 
$
989,383

 
(134,442
)
 
854,941

 
978,397

 
(126,913
)
 
851,484


(5)
Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consist of the following at:

 
 
September 30,
 
December 31,
 
 
2015
 
2014
 
 
(In thousands)
 
 
 
 
 
Accounts payable
 
$
62,431

 
77,638

Amount owed to TWC
 
159,725

 
154,367

Other
 
108,045

 
116,337

 
 
 
 
 
 
 
$
330,201

 
348,342



9
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)


(6)
Long‑Term Debt

The following table summarizes the Company’s debt arrangements:

 
 
 
 
 
 
Balance outstanding
 
 
 
 
Principal
 
September 30,
 
December 31,
Type
 
Maturity
 
Amount
 
2015
 
2014
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Senior notes
 
2016
 
$
300,000

 
300,000

 
300,000

Senior notes
 
2019
 
300,000

 
171,428

 
214,286

Revolving credit
 
2018
 
500,000

 
—

 
—

 
 
 
 
 
 
 
 
 
Total
 
 
 
$
1,100,000

 
471,428

 
514,286

Less current portion
 
 
 
 
 
342,857

 
42,857

 
 
 
 
 
 
 
 
 
Total long-term debt
 
 
 
 
 
$
128,571

 
471,429


The Company’s debt had an estimated fair value of $540.0 million and $564.0 million as of September 30, 2015 and December 31, 2014, respectively. The estimated fair value of the Company’s privately held debt was based on available interest rates for debt issuances with similar terms and remaining maturities. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and are not recognized for financial reporting purposes unless the debt is retired prior to its maturity.

The Company is required to maintain certain financial covenants and was in compliance with those covenants as of September 30, 2015. In the event of a change in control, the Company is required to give written notice to each holder containing an offer to prepay the senior notes at a price of 100% of the principal amount of the senior notes plus accrued and unpaid interest, accrued to such date of prepayment, plus a make‑whole amount.

Interest expense for the instruments above, including amortization of deferred financing fees and other fees of $0.4 million and $1.2 million for the three and nine months ended September 30, 2015 and $0.5 million and $1.2 million for the three and nine months ended September 30, 2014, respectively, was $9.3 million and $29.0 million for the three and nine months ended September 30, 2015 and $10.1 million and $31.4 million for the three and nine months ended September 30, 2014, respectively.

(7)
Other Liabilities

Other liabilities consist of the following:

 
 
September 30,
 
December 31,
 
 
2015
 
2014
 
 
(In thousands)
 
 
 
 
 
Accrued pension benefits
 
$
420,658

 
420,648

Other
 
49,981

 
59,074

 
 
 
 
 
 
 
$
470,639

 
479,722


10
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)



(8)
Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following at December 31:

 
 
September 30,
 
December 31,
 
 
2015
 
2014
 
 
(In thousands)
 
 
 
 
 
Cumulative net unrecognized loss on pension and other
 
 
 
 
postretirement employee benefits
 
$
214,393

 
223,918


(9)
Pension and Other Postretirement Benefits

The Company sponsors a funded pension plan, the Bright House Networks Pension Plan (the Plan). The Plan provides employees with retirement benefits in accordance with benefit provision formulas based on years of service and compensation. Additionally, the Company sponsors unfunded supplemental pension benefit plans for a select group of management and highly compensated employees and provides postretirement healthcare to retirees and eligible dependents.

A summary of the components of the net periodic benefit costs for the Company’s pension and postretirement benefit plans are as follows:

 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
10,850

 
8,389

 
32,550

 
25,167

Interest cost
7,599

 
6,313

 
22,797

 
18,939

Expected return on plan assets
(5,425
)
 
(6,998
)
 
(16,275
)
 
(20,994
)
Amortization of net loss
3,175

 
932

 
9,525

 
2,796

 
 
 
 
 
 
 
 
Net period benefit cost
$
16,199

 
8,636

 
48,597

 
25,908

 
 
 
 
 
 
 
 
Contributions to the Plan
$
16,618

 
23,000

 
36,962

 
45,000




11
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and Nine-Month Periods ended September 30, 2015 and 2014
(Unaudited)


(10)
Related Party Transactions

Advance Publications, Inc. and its wholly owned subsidiaries (Advance) is a related party to the Company due to its ownership of A/N (note 1). Amounts due from Advance (included within other current assets in the accompanying condensed consolidated balance sheets at September 30, 2015 and December 31, 2014) are as follows:

 
 
September 30,
 
December 31,
 
 
2015
 
2014
 
 
(In thousands)
 
 
 
 
 
Total due from Advance, net
 
$
579

 
24,247


The accompanying condensed consolidated statements of income include allocations from Advance for certain corporate administrative expenses. Total allocated corporate expense was $18.3 million and $54.8 million for the three and nine months ended September 30, 2015 and $12.0 million and $36.0 million for the three and nine months ended September 30, 2014, respectively, which is recorded by the Company as a component of operating expense within the accompanying condensed consolidated statements of income. Additionally, the Company recognized interest income of $0.5 million and $1.4 million for the three and nine months ended September 30, 2015 and $0.5 million and $1.4 million for the three and nine months ended September 30, 2014 pursuant to its revolving credit agreement with Advance. The aforementioned interest income is recorded as a component of interest, net within the accompanying condensed consolidated statements of income.

(11)
Commitments and Contingencies

The Company has certain pending lawsuits, which, in the opinion of management, will not have a material adverse effect upon the financial condition of the Company.

(12)
Subsequent Events

The Company has evaluated subsequent events that have occurred through November 4, 2015, the date which the accompanying consolidated financial statements were available to be issued, and has determined there were no material events since the balance sheet date of this report requiring disclosure or adjustment to the accompanying consolidated financial statements.


12