Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2018
or
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From             to             
Commission File Number:
 001-37789
 
333-112593-01
CCO Holdings, LLC
CCO Holdings Capital Corp.
(Exact name of registrant as specified in its charter)
Delaware
 
86-1067239
Delaware
 
20-0257904
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
400 Atlantic Street
Stamford, Connecticut 06901
 
(203) 905-7801
(Address of principal executive offices including zip code)
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o    Accelerated filer o    Non-accelerated filer x    Smaller reporting company o    Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

All of the issued and outstanding shares of capital stock of CCO Holdings Capital Corp. are held by CCO Holdings, LLC. All of the limited liability company membership interests of CCO Holdings, LLC are held by CCH I Holdings, LLC (a subsidiary of Charter Communications, Inc., a reporting company under the Exchange Act). There is no public trading market for any of the aforementioned limited liability company membership interests or shares of capital stock.

CCO Holdings, LLC and CCO Holdings Capital Corp. meet the conditions set forth in General Instruction I(1)(a) and (b) to Form 10-K and are therefore filing with the reduced disclosure format.

Number of shares of common stock of CCO Holdings Capital Corporation outstanding as of September 30, 2018: 1








CCO HOLDINGS, LLC
CCO HOLDINGS CAPITAL CORP.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 2018

TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2018. The United States Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference” information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. In this quarterly report, “CCO Holdings,” “we,” “us” and “our” refer to CCO Holdings, LLC and its subsidiaries.


i



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the “Results of Operations” and “Liquidity and Capital Resources” sections under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report. Although we believe that our plans, intentions and expectations as reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Risk Factors” under Part I, Item 1A of our most recent Form 10-K filed with the SEC. Many of the forward-looking statements contained in this quarterly report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” “intend,” “estimated,” “aim,” “on track,” “target,” “opportunity,” “tentative,” “positioning,” “designed,” “create,” “predict,” “project,” “initiatives,” “seek,” “would,” “could,” “continue,” “ongoing,” “upside,” “increases” and “potential,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in this quarterly report on Form 10-Q, in our annual report on Form 10-K, and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

our ability to efficiently and effectively integrate acquired operations;
our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, mobile, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;
the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, fiber to the home providers, video provided over the Internet by (i) market participants that have not historically competed in the multichannel video business, (ii) traditional multichannel video distributors, and (iii) content providers that have historically licensed cable networks to multichannel video distributors, and providers of advertising over the Internet;
general business conditions, economic uncertainty or downturn, 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);
our ability to develop and deploy new products and technologies including mobile products, our cloud-based user interface, Spectrum Guide®, and downloadable security for set-top boxes, and any other cloud-based consumer services and service platforms;
the effects of governmental regulation on our business including costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply with, regulatory conditions applicable to us as a result of the Time Warner Cable Inc. and Bright House Networks, LLC transactions;
any events that disrupt our networks, information systems or properties and impair our operating activities or our reputation;
the ability to retain and hire key personnel;
the availability and access, in general, of funds to meet our debt obligations prior to or when they become due and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; and
our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions.

All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.


ii



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

CCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
351

 
$
330

Accounts receivable, less allowance for doubtful accounts of
 
 
 
$125 and $113, respectively
1,707

 
1,611

Prepaid expenses and other current assets
335

 
243

Total current assets
2,393

 
2,184

 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
Property, plant and equipment, net of accumulated
 
 
 
depreciation of $21,475 and $18,049, respectively
34,293

 
33,552

Customer relationships, net
10,136

 
11,951

Franchises
67,319

 
67,319

Goodwill
29,554

 
29,554

Total investment in cable properties, net
141,302

 
142,376

 
 
 
 
OTHER NONCURRENT ASSETS
1,347

 
1,133

 
 
 
 
Total assets
$
145,042

 
$
145,693

 
 
 
 
LIABILITIES AND MEMBER’S EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
7,646

 
$
8,141

Payables to related party
523

 
635

Current portion of long-term debt
3,339

 
2,045

Total current liabilities
11,508

 
10,821

 
 
 
 
LONG-TERM DEBT
69,135

 
68,186

LOANS PAYABLE - RELATED PARTY
920

 
888

DEFERRED INCOME TAXES

 
32

OTHER LONG-TERM LIABILITIES
1,942

 
2,184

 
 
 
 
MEMBER’S EQUITY:
 
 
 
Member's equity
61,515

 
63,559

Accumulated other comprehensive loss
(2
)
 
(1
)
Total CCO Holdings member's equity
61,513

 
63,558

Noncontrolling interests
24

 
24

Total member’s equity
61,537

 
63,582

 
 
 
 
Total liabilities and member’s equity
$
145,042

 
$
145,693


The accompanying notes are an integral part of these consolidated financial statements.
1



CCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions)
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
REVENUES
$
10,887

 
$
10,458

 
$
32,390

 
$
30,979

 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
7,018

 
6,705

 
20,742

 
19,871

Depreciation and amortization
2,479

 
2,699

 
7,776

 
7,839

Other operating expenses, net
18

 
145

 
112

 
374

 
9,515

 
9,549

 
28,630

 
28,084

Income from operations
1,372

 
909

 
3,760

 
2,895

 
 
 
 
 
 
 
 
OTHER EXPENSES:
 
 
 
 
 
 
 
Interest expense, net
(912
)
 
(795
)
 
(2,658
)
 
(2,268
)
Loss on extinguishment of debt

 

 

 
(35
)
Gain (loss) on financial instruments, net
12

 
17

 

 
(15
)
Other pension benefits (costs)
207

 
(17
)
 
247

 
9

Other expense, net
(4
)
 
(2
)
 
(49
)
 
(2
)
 
(697
)
 
(797
)
 
(2,460
)
 
(2,311
)
 
 
 
 
 
 
 
 
Income before income taxes
675

 
112

 
1,300

 
584

Income tax expense
(8
)
 
(6
)
 
(13
)
 
(35
)
Consolidated net income
667

 
106

 
1,287

 
549

Less: Net income attributable to noncontrolling interests

 

 
(1
)
 
(1
)
Net income attributable to CCO Holdings member
$
667

 
$
106

 
$
1,286

 
$
548



The accompanying notes are an integral part of these consolidated financial statements.
2



CCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Consolidated net income
$
667

 
$
106

 
$
1,287

 
$
549

Foreign currency translation adjustment

 
1

 
(1
)
 
1

Net impact of interest rate derivative instruments

 
1

 

 
4

Consolidated comprehensive income
667

 
108

 
1,286

 
554

Less: Comprehensive income attributable to noncontrolling interests

 

 
(1
)
 
(1
)
Comprehensive income attributable to CCO Holdings member
$
667

 
$
108

 
$
1,285

 
$
553


The accompanying notes are an integral part of these consolidated financial statements.
3



CCO HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Unaudited
 
Nine Months Ended September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
1,287

 
$
549

Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
7,776

 
7,839

Stock compensation expense
213

 
198

Accelerated vesting of equity awards
5

 
43

Noncash interest income, net
(243
)
 
(284
)
Other pension benefits
(247
)
 
(9
)
Loss on extinguishment of debt

 
35

Loss on financial instruments, net

 
15

Deferred income taxes
4

 
14

Other, net
54

 
82

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
(96
)
 
(77
)
Prepaid expenses and other assets
(101
)
 
64

Accounts payable, accrued liabilities and other
(60
)
 
6

Receivables from and payables to related party, including deferred management fees
(88
)
 
46

Net cash flows from operating activities
8,504

 
8,521

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(6,692
)
 
(6,096
)
Change in accrued expenses related to capital expenditures
(620
)
 
276

Other, net
(93
)
 
(63
)
Net cash flows from investing activities
(7,405
)
 
(5,883
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings of long-term debt
11,552

 
12,115

Repayments of long-term debt
(8,964
)
 
(5,534
)
Borrowings of loans payable - related parties
7

 
163

Payments for debt issuance costs
(29
)
 
(83
)
Contributions from parent
127

 

Distributions to parent
(3,763
)
 
(8,641
)
Distributions to noncontrolling interest
(1
)
 

Other, net
(7
)
 
(8
)
Net cash flows from financing activities
(1,078
)
 
(1,988
)
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
21

 
650

CASH AND CASH EQUIVALENTS, beginning of period
330

 
1,324

CASH AND CASH EQUIVALENTS, end of period
$
351

 
$
1,974

 
 
 
 
CASH PAID FOR INTEREST
$
2,920

 
$
2,544

CASH PAID FOR TAXES
$
19

 
$
21



The accompanying notes are an integral part of these consolidated financial statements.
4


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)



1.    Organization and Basis of Presentation

Organization

CCO Holdings, LLC (together with its subsidiaries, “CCO Holdings,” or the “Company”) is the second largest cable operator in the United States and a leading broadband communications company providing video, Internet and voice services to residential and business customers. The Company also recently launched its mobile service to residential customers. In addition, the Company sells video and online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology solutions to larger enterprise customers. The Company also owns and operates regional sports networks and local sports, news and lifestyle channels and sells security and home management services to the residential marketplace.

CCO Holdings is a holding company whose principal assets are the equity interests in its operating subsidiaries. CCO Holdings is a direct subsidiary of CCH I Holdings, LLC (“CCH I”), which is an indirect subsidiary of Charter Communications, Inc. (“Charter”), Charter Communications Holdings, LLC (“Charter Holdings”) and Spectrum Management Holding Company, LLC (“Spectrum Management”). The consolidated financial statements include the accounts of CCO Holdings and all of its subsidiaries where the underlying operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated. Charter, Charter Holdings and Spectrum Management have performed financing, cash management, treasury and other services for CCO Holdings on a centralized basis. Changes in member’s equity in the consolidated balance sheets related to these activities have been considered cash receipts (contributions) and payments (distributions) for purposes of the consolidated statements of cash flows and are reflected in financing activities.

The Company’s operations are managed and reported to its Chairman and Chief Executive Officer (“CEO”), the Company’s chief operating decision maker, on a consolidated basis. The CEO assesses performance and allocates resources based on the consolidated results of operations. Under this organizational and reporting structure, the Company has one reportable segment, cable services.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures typically included in CCO Holdings' Annual Report on Form 10-K have been condensed or omitted for this quarterly report. The accompanying consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs; depreciation and amortization costs; impairments of property, plant and equipment, intangibles and goodwill; pension benefits; income taxes; contingencies and programming expense. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform with the 2018 presentation.



5


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


2.    Franchises, Goodwill and Other Intangible Assets

Indefinite-lived and finite-lived intangible assets consist of the following as of September 30, 2018 and December 31, 2017:

 
 
September 30, 2018
 
December 31, 2017
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Franchises
 
$
67,319

 
$

 
$
67,319

 
$
67,319

 
$

 
$
67,319

Goodwill
 
29,554

 

 
29,554

 
29,554

 

 
29,554

 
 
$
96,873

 
$

 
$
96,873

 
$
96,873

 
$

 
$
96,873

 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
18,229

 
$
(8,093
)
 
$
10,136

 
$
18,229

 
$
(6,278
)
 
$
11,951

Other intangible assets
 
397

 
(82
)
 
315

 
731

 
(201
)
 
530

 
 
$
18,626

 
$
(8,175
)
 
$
10,451

 
$
18,960

 
$
(6,479
)
 
$
12,481


Amortization expense related to customer relationships and other intangible assets for the three and nine months ended September 30, 2018 was $583 million and $1.8 billion, respectively, and $664 million and $2.1 billion for the three and nine months ended September 30, 2017, respectively. Effective January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) 2014-09, up-front fees paid to market and serve customers who reside in residential multiple dwelling units (“MDUs”) are no longer recorded as intangibles and amortized to depreciation and amortization expense, but are now being recorded as noncurrent assets and are amortized to operating costs and expenses. See Note 15.
    
The Company expects amortization expense on its finite-lived intangible assets will be as follows:

Three months ended December 31, 2018
 
$
582

2019
 
2,153

2020
 
1,871

2021
 
1,596

2022
 
1,326

Thereafter
 
2,923

 
 
$
10,451


Actual amortization expense in future periods will differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, impairments and other relevant factors.



6


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


3.    Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following as of September 30, 2018 and December 31, 2017:

 
September 30, 2018
 
December 31, 2017
Accounts payable – trade
$
551

 
$
673

Deferred revenue
498

 
395

Accrued liabilities:
 
 
 
Programming costs
2,055

 
1,907

Labor
712

 
747

Capital expenditures
1,318

 
1,935

Interest
1,011

 
1,054

Taxes and regulatory fees
563

 
548

Other
938

 
882

 
$
7,646

 
$
8,141


4.    Long-Term Debt

Long-term debt consists of the following as of September 30, 2018 and December 31, 2017:

 
September 30, 2018
 
December 31, 2017
 
Principal Amount
 
Accreted Value
 
Principal Amount
 
Accreted Value
CCO Holdings, LLC:
 
 
 
 
 
 
 
5.250% senior notes due March 15, 2021
$
500

 
$
498

 
$
500

 
$
497

5.250% senior notes due September 30, 2022
1,250

 
1,237

 
1,250

 
1,235

5.125% senior notes due February 15, 2023
1,000

 
993

 
1,000

 
993

4.000% senior notes due March 1, 2023
500

 
496

 
500

 
495

5.125% senior notes due May 1, 2023
1,150

 
1,143

 
1,150

 
1,143

5.750% senior notes due September 1, 2023
500

 
497

 
500

 
496

5.750% senior notes due January 15, 2024
1,000

 
993

 
1,000

 
992

5.875% senior notes due April 1, 2024
1,700

 
1,688

 
1,700

 
1,687

5.375% senior notes due May 1, 2025
750

 
745

 
750

 
745

5.750% senior notes due February 15, 2026
2,500

 
2,466

 
2,500

 
2,464

5.500% senior notes due May 1, 2026
1,500

 
1,490

 
1,500

 
1,489

5.875% senior notes due May 1, 2027
800

 
795

 
800

 
794

5.125% senior notes due May 1, 2027
3,250

 
3,218

 
3,250

 
3,216

5.000% senior notes due February 1, 2028
2,500

 
2,465

 
2,500

 
2,462

Charter Communications Operating, LLC:
 
 
 
 
 
 
 
3.579% senior notes due July 23, 2020
2,000

 
1,991

 
2,000

 
1,988

4.464% senior notes due July 23, 2022
3,000

 
2,981

 
3,000

 
2,977

Senior floating rate notes due February 1, 2024
900

 
903

 

 

4.500% senior notes due February 1, 2024
1,100

 
1,091

 

 

4.908% senior notes due July 23, 2025
4,500

 
4,465

 
4,500

 
4,462

3.750% senior notes due February 15, 2028
1,000

 
986

 
1,000

 
985

4.200% senior notes due March 15, 2028
1,250

 
1,239

 
1,250

 
1,238

6.384% senior notes due October 23, 2035
2,000

 
1,982

 
2,000

 
1,981

5.375% senior notes due April 1, 2038
800

 
785

 

 



7


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


6.484% senior notes due October 23, 2045
3,500

 
3,466

 
3,500

 
3,466

5.375% senior notes due May 1, 2047
2,500

 
2,506

 
2,500

 
2,506

5.750% senior notes due April 1, 2048
1,700

 
1,683

 

 

6.834% senior notes due October 23, 2055
500

 
495

 
500

 
495

Credit facilities
9,576

 
9,493

 
9,479

 
9,387

Time Warner Cable, LLC:
 
 
 
 
 
 
 
6.750% senior notes due July 1, 2018

 

 
2,000

 
2,045

8.750% senior notes due February 14, 2019
1,250

 
1,279

 
1,250

 
1,337

8.250% senior notes due April 1, 2019
2,000

 
2,060

 
2,000

 
2,148

5.000% senior notes due February 1, 2020
1,500

 
1,551

 
1,500

 
1,579

4.125% senior notes due February 15, 2021
700

 
723

 
700

 
730

4.000% senior notes due September 1, 2021
1,000

 
1,036

 
1,000

 
1,045

5.750% sterling senior notes due June 2, 2031 (a)
815

 
876

 
845

 
912

6.550% senior debentures due May 1, 2037
1,500

 
1,682

 
1,500

 
1,686

7.300% senior debentures due July 1, 2038
1,500

 
1,782

 
1,500

 
1,788

6.750% senior debentures due June 15, 2039
1,500

 
1,720

 
1,500

 
1,724

5.875% senior debentures due November 15, 2040
1,200

 
1,257

 
1,200

 
1,258

5.500% senior debentures due September 1, 2041
1,250

 
1,258

 
1,250

 
1,258

5.250% sterling senior notes due July 15, 2042 (b)
847

 
817

 
879

 
847

4.500% senior debentures due September 15, 2042
1,250

 
1,139

 
1,250

 
1,137

Time Warner Cable Enterprises LLC:
 
 
 
 
 
 
 
8.375% senior debentures due March 15, 2023
1,000

 
1,202

 
1,000

 
1,232

8.375% senior debentures due July 15, 2033
1,000

 
1,302

 
1,000

 
1,312

Total debt
71,538

 
72,474

 
69,003

 
70,231

Less current portion:
 
 
 
 
 
 
 
6.750% senior notes due July 1, 2018

 

 
(2,000
)
 
(2,045
)
8.750% senior notes due February 14, 2019
(1,250
)
 
(1,279
)
 

 

8.250% senior notes due April 1, 2019
(2,000
)
 
(2,060
)
 

 

Long-term debt
$
68,288

 
$
69,135

 
$
67,003

 
$
68,186


(a) 
Principal amount includes £625 million remeasured at $815 million and $845 million as of September 30, 2018 and December 31, 2017, respectively, using the exchange rate at the respective dates.
(b) 
Principal amount includes £650 million remeasured at $847 million and $879 million as of September 30, 2018 and December 31, 2017, respectively, using the exchange rate at the respective dates.

The accreted values presented in the table above represent the principal amount of the debt less the original issue discount at the time of sale, deferred financing costs, and, in regards to Time Warner Cable, LLC and Time Warner Cable Enterprises LLC debt assumed, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the fixed-rate British pound sterling denominated notes (the “Sterling Notes”), the principal amount of the debt and any premium or discount is remeasured into U.S. dollars as of each balance sheet date. See Note 6. The Company has availability under the Charter Operating credit facilities of approximately $3.4 billion as of September 30, 2018.

In April 2018, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $800 million aggregate principal amount of 5.375% senior notes due April 1, 2038 at a price of 98.846% of the aggregate principal amount and $1.7 billion aggregate principal amount of 5.750% senior notes due April 1, 2048 at a price of 99.706% of the aggregate principal amount. The net proceeds, together with cash on hand, were used to repay certain existing indebtedness, including the redemption of all of the outstanding $2.0 billion in aggregate principal amount of Time Warner Cable, LLC’s 6.750% notes due July 1, 2018, to pay related fees and expenses and for general corporate purposes, including distributions to the Company's parent companies for funding buybacks of Charter Class A common stock and Charter Holdings common units.


8


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)



In July 2018, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $400 million aggregate principal amount of senior floating rate notes due February 1, 2024 at par and $1.1 billion aggregate principal amount of 4.500% senior notes due February 1, 2024 at a price of 99.893% of the aggregate principal amount. In August 2018, Charter Operating and Charter Communications Operating Capital Corp. jointly issued an additional $500 million aggregate principal amount of senior floating rate notes due February 1, 2024 at a price of 101.479% of the aggregate principal amount. Interest on the floating rate notes accrues at LIBOR plus 1.650%. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including distributions to the Company's parent companies for funding buybacks of Charter Class A common stock and Charter Holdings common units.

The Charter Operating notes are guaranteed by CCO Holdings and substantially all of the operating subsidiaries of Charter Operating. In addition, the Charter Operating notes are secured by a perfected first priority security interest in substantially all of the assets of Charter Operating to the extent such liens can be perfected under the Uniform Commercial Code by the filing of a financing statement and the liens rank equally with the liens on the collateral securing obligations under the Charter Operating credit facilities. Charter Operating may redeem some or all of the Charter Operating notes at any time at a premium.

The Charter Operating notes are subject to the terms and conditions of the indenture governing the Charter Operating notes. The Charter Operating notes contain customary representations and warranties and affirmative covenants with limited negative covenants. The Charter Operating indenture also contains customary events of default.

Loss on extinguishment of debt consisted of the following for the nine months ended September 30, 2017.

 
Nine Months Ended September 30,
 
2017
CCO Holdings notes redemption
$
(33
)
Time Warner Cable, LLC notes redemption
(1
)
Charter Operating credit facility refinancing
(1
)
 
$
(35
)

5.    Loans Payable - Related Party

Loans payable - related party as of September 30, 2018 and December 31, 2017 consists of loans from Charter Communications Holdings Company, LLC (“Charter Holdco”) to the Company of $674 million and $655 million, respectively, and loans from Charter to the Company of $246 million and $233 million, respectively. Interest accrued on loans payable - related party at LIBOR plus 1.50% and 1.75% during the periods ending September 30, 2018 and December 31, 2017, respectively.

6.     Accounting for Derivative Instruments and Hedging Activities

The Company uses derivative instruments to manage foreign exchange risk on the Sterling Notes, and does not hold or issue derivative instruments for speculative trading purposes.

Cross-currency derivative instruments are used to effectively convert £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency swaps have maturities of June 2031 and July 2042. The Company is required to post collateral on the cross-currency derivative instruments when the derivative contracts are in a liability position. In May 2016, the Company entered into a collateral holiday agreement for 80% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years. The fair value of the Company's cross-currency derivatives on its consolidated balance sheets was $88 million and $25 million included in other long-term liabilities as of September 30, 2018 and December 31, 2017, respectively.

The Company’s derivative instruments are not designated as hedges and are marked to fair value each period, with the impact recorded as a gain or loss on financial instruments, net in the consolidated statements of operations. While these derivative


9


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


instruments are not designated as hedges for accounting purposes, management continues to believe such instruments are closely correlated with the respective debt, thus managing associated risk.

The effect of financial instruments on the consolidated statements of operations is presented in the table below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Gain (Loss) on Financial Instruments, Net:
 
 
 
 
 
 
 
Change in fair value of cross-currency derivative instruments
(10
)
 
68

 
$
(63
)
 
$
126

Foreign currency remeasurement of Sterling Notes to U.S. dollars
22

 
(50
)
 
63

 
(141
)
Other, net

 
(1
)
 

 

 
$
12

 
$
17

 
$

 
$
(15
)

7.    Fair Value Measurements

Accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based on the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Financial Assets and Liabilities

The Company has estimated the fair value of its financial instruments as of September 30, 2018 and December 31, 2017 using available market information or other appropriate valuation methodologies. Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented in the accompanying consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.

The carrying amounts of cash and cash equivalents, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments. As of September 30, 2018 and December 31, 2017, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.

Financial instruments accounted for at fair value on a recurring basis are presented in the table below.

 
September 30, 2018
December 31, 2017
 
Level 1
 
Level 2
 
Level 1
 
Level 2
Liabilities
 
 
 
 
 
 
 
Cross-currency derivative instruments
$

 
$
88

 
$

 
$
25




10


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


A summary of the carrying value and fair value of debt as of September 30, 2018 and December 31, 2017 is as follows:

 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Senior notes and debentures
 
$
62,981

 
$
62,966

 
$
60,844

 
$
63,443

Credit facilities
 
$
9,493

 
$
9,577

 
$
9,387

 
$
9,440


The estimated fair value of the Company’s senior notes and debentures as of September 30, 2018 and December 31, 2017 is based on quoted market prices in active markets and is classified within Level 1 of the valuation hierarchy, while the estimated fair value of the Company’s credit facilities is based on quoted market prices in inactive markets and is classified within Level 2.

Nonfinancial Assets and Liabilities

The Company’s nonfinancial assets such as equity-method investments, franchises, property, plant, and equipment, and other intangible assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist.  No material impairments were recorded during the three and nine months ended September 30, 2018 and 2017.

8.     Operating Costs and Expenses

Operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, consist of the following for the periods presented:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Programming
$
2,778

 
$
2,699

 
$
8,333

 
$
7,952

Regulatory, connectivity and produced content
546

 
523

 
1,639

 
1,553

Costs to service customers
1,854

 
1,823

 
5,492

 
5,385

Marketing
790

 
761

 
2,310

 
2,286

Mobile
94

 

 
135

 

Other
956

 
899

 
2,833

 
2,695

 
$
7,018

 
$
6,705

 
$
20,742

 
$
19,871


Programming costs consist primarily of costs paid to programmers for basic, premium, digital, video on demand and pay-per-view programming. Regulatory, connectivity and produced content costs represent payments to franchise and regulatory authorities, costs directly related to providing video, Internet and voice services as well as payments for sports, local and news content produced by the Company. Included in regulatory, connectivity and produced content costs is content acquisition costs for the Los Angeles Lakers’ basketball games and Los Angeles Dodgers’ baseball games, which are recorded as games are exhibited over the applicable season. Costs to service customers include costs related to field operations, network operations and customer care for the Company’s residential and small and medium business customers, including internal and third-party labor for the non-capitalizable portion of installations, service and repairs, maintenance, bad debt expense, billing and collection, occupancy and vehicle costs. Marketing costs represent the costs of marketing to current and potential commercial and residential customers including labor costs. Mobile costs represent costs associated with the Company's mobile service such as device and service costs, marketing, sales and commissions, retail stores, personnel costs and taxes, among others. Other includes corporate overhead, advertising sales expenses, indirect costs associated with the Company’s enterprise business customers and regional sports and news networks, property tax and insurance expense and stock compensation expense, among others.
 


11


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


9.     Other Operating Expenses, Net

Other operating expenses, net consist of the following for the periods presented:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Merger and restructuring costs
$
14

 
$
67

 
$
90

 
$
293

Special charges, net

 
80

 
31

 
86

(Gain) loss on sale of assets, net
4

 
(2
)
 
(9
)
 
(5
)
 
$
18

 
$
145

 
$
112

 
$
374


Merger and restructuring costs

Merger and restructuring costs represent costs incurred in connection with merger and acquisition transactions and related restructuring, such as advisory, legal and accounting fees, employee retention costs, employee termination costs related to the acquisition in 2016 of Time Warner Cable Inc. ("TWC") and Bright House Networks, LLC ("Bright House") and other exit costs. Changes in accruals for merger and restructuring costs are presented below:

 
Employee Retention Costs
 
Employee Termination Costs
 
Transaction and Advisory Costs
 
Other Costs
 
Total
Liability, December 31, 2016
$
7

 
$
244

 
$
25

 
$

 
$
276

Costs incurred
4

 
226

 
4

 
68

 
302

Cash paid
(10
)
 
(298
)
 
(12
)
 
(60
)
 
(380
)
Remaining liability, December 31, 2017
1

 
172

 
17

 
8

 
198

Costs incurred

 
59

 
1

 
25

 
85

Cash paid

 
(155
)
 

 
(23
)
 
(178
)
Remaining liability, September 30, 2018
$
1

 
$
76

 
$
18

 
$
10

 
$
105


In addition to the costs incurred indicated above, the Company recorded $5 million of expense related to accelerated vesting of equity awards of terminated employees during the nine months ended September 30, 2018, and $6 million and $43 million during the three and nine months ended September 30, 2017, respectively.

Special charges, net

Special charges, net primarily includes employee termination costs not related to the acquisition of TWC and Bright House and net amounts of litigation settlements. The nine months ended September 30, 2018 includes a $22 million charge related to the Company's withdrawal liability from a multiemployer pension plan while the three and nine months ended September 30, 2017 includes an $83 million charge related to the Company's withdrawal liability from a multiemployer pension plan.

(Gain) loss on sale of assets, net

(Gain) loss on sale of assets, net represents the net (gain) loss recognized on the sales and disposals of fixed assets and cable systems.

10.    Income Taxes

CCO Holdings is a single member limited liability company not subject to income tax. CCO Holdings holds all operations through indirect subsidiaries. The majority of these indirect subsidiaries are limited liability companies that are not subject to income tax. Certain indirect subsidiaries that are required to file separate returns are subject to federal and state tax. CCO Holdings’ tax provision reflects the tax provision of the entities required to file separate returns.


12


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)



Generally, the taxable income, gains, losses, deductions and credits of CCO Holdings are passed through to its indirect members, Charter and Advance/Newhouse Partnership (“A/N”). Charter is responsible for its share of taxable income or loss of CCO Holdings allocated to it in accordance with the Charter Holdings Limited Liability Company Agreement (“LLC Agreement”) and partnership tax rules and regulations. Charter also records financial statement deferred tax assets and liabilities related to its investment, and its underlying net assets, in CCO Holdings.

The Company recorded income tax expense of $8 million and $13 million for the three and nine months ended September 30, 2018, respectively, and $6 million and $35 million for the three and nine months ended September 30, 2017, respectively. Income tax expense decreased during the nine months ended September 30, 2018 compared to the corresponding prior period primarily due to audit settlements previously recorded as uncertain tax positions offset by state income tax accruals.

The Company has reported provisional amounts for the income tax effects of Tax Cuts & Jobs Act (“Tax Reform”) for which the accounting is incomplete but a reasonable estimate could be determined. There were no specific impacts of Tax Reform that could not be reasonably estimated which the Company accounted for under prior tax law. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period.

In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon examination, based on their technical merits. There is considerable judgment involved in making such a determination. The Company has recorded unrecognized tax benefits totaling approximately $124 million and $134 million, excluding interest and penalties, as of September 30, 2018 and December 31, 2017, respectively. The Company does not currently anticipate that its reserve for uncertain tax positions will significantly increase or decrease during 2018; however, various events could cause the Company’s current expectations to change in the future. These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision.

No tax years for Charter or Charter Holdco, the Company's indirect parent companies, for income tax purposes, are currently under examination by the Internal Revenue Service ("IRS"). Charter's 2016 and 2017 tax years remain open for examination and assessment. Charter’s tax years ending 2015 through the short period return dated May 17, 2016 (prior to the acquisition of TWC and Bright House) remain subject to examination and assessment. Years prior to 2015 remain open solely for purposes of examination of Charter’s loss and credit carryforwards. The IRS is currently examining Charter Holdings’ income tax return for 2016. Charter Holdings’ 2017 tax year remains open for examination. The IRS is currently examining TWC’s income tax returns for 2011 through 2014. TWC’s tax year 2015 remains subject to examination and assessment. Prior to TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009 (the “Separation”), TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS is currently examining Time Warner’s 2008 through 2010 income tax returns. The Company does not anticipate that these examinations will have a material impact on the Company’s consolidated financial position or results of operations. In addition, the Company is also subject to ongoing examinations of the Company’s tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s consolidated financial position or results of operations during the three and nine months ended September 30, 2018, nor does the Company anticipate a material impact in the future.

11.     Related Party Transactions

The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved.

Liberty Broadband and A/N

Under the terms of the Amended and Restated Stockholders Agreement with Liberty Broadband Corporation (“Liberty Broadband”), A/N and Charter, dated May 23, 2015, the number of Charter’s directors is fixed at 13, and includes its CEO. Two designees selected by A/N are members of the board of directors of Charter and three designees selected by Liberty Broadband are members of the board of directors of Charter. The remaining eight directors are not affiliated with either A/N or Liberty Broadband. Each of A/N and Liberty Broadband is entitled to nominate at least one director to each of the committees of Charter’s board of directors, subject to applicable stock exchange listing rules and certain specified voting or equity ownership thresholds


13


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


for each of A/N and Liberty Broadband, and provided that the Nominating and Corporate Governance Committee and the Compensation and Benefit Committee each have at least a majority of directors independent from A/N, Liberty Broadband and Charter (referred to as the “unaffiliated directors”). Each of the Nominating and Corporate Governance Committee and the Compensation and Benefits Committee is currently comprised of three unaffiliated directors and one designee of each of A/N and Liberty Broadband. A/N and Liberty Broadband also have certain other committee designation and other governance rights. Mr. Thomas Rutledge, the Company’s CEO, is the chairman of the board of Charter.

In December 2017, Charter and A/N entered into an amendment to the letter agreement (the “Letter Agreement”) that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis once Charter or Charter Holdings have repurchased shares of Class A common stock or Charter Holdings common units from A/N and its affiliates for an aggregate purchase price of $400 million which threshold has been reached.

The Company is aware that Dr. John Malone, a director emeritus of Charter and Chairman of the board of directors and holder of 47.1% of voting interest in Liberty Broadband, may be deemed to have a 37.5% voting interest in Qurate Retail, Inc. ("Qurate," formerly known as Liberty Interactive Corporation) and is on the board of directors of Qurate. Qurate wholly owns HSN, Inc. (“HSN”) and QVC, Inc. (“QVC”). The Company has programming relationships with HSN and QVC. For the three and nine months ended September 30, 2018, the Company recorded revenue in aggregate of approximately $18 million and $51 million, respectively, and for the three and nine months ended September 30, 2017, the Company recorded revenue in aggregate of approximately $17 million and $50 million, respectively, from HSN and QVC as part of channel carriage fees and revenue sharing arrangements for home shopping sales made to customers in the Company’s footprint.

Dr. Malone and Mr. Steven Miron, a member of Charter’s board of directors, also serve on the board of directors of Discovery Communications, Inc., (“Discovery”). The Company is aware that Dr. Malone owns 93.6% of the series B common stock of Discovery, 6% of the series C common stock of Discovery and has a 28% voting interest in Discovery for the election of directors. The Company is aware that Advance/Newhouse Programming Partnership (“A/N PP”), an affiliate of A/N and of which Mr. Miron is the CEO, owns 100% of the Series A-1 preferred stock of Discovery and 100% of the Series C-1 preferred stock of Discovery and has a 24.2% voting interest for the election of directors. A/N PP has the right to appoint three directors out of a total of eleven directors to Discovery’s board to be elected by the holders of Discovery’s Series A-1 preferred stock. The Company purchases programming from Discovery pursuant to agreements entered into prior to Dr. Malone and Mr. Miron joining Charter’s board of directors. Based on publicly available information, the Company does not believe that Discovery would currently be considered a related party. The amount paid in the aggregate to Discovery represents less than 3% of total operating costs and expenses for the three and nine months ended September 30, 2018 and 2017.

Equity Investments

The Company and its parent companies have agreements with certain equity-method investees pursuant to which the Company has made or received related party transaction payments. The Company and its parent companies recorded payments to equity-method investees totaling $99 million and $248 million during the three and nine months ended September 30, 2018, respectively, and $62 million and $208 million during the three and nine months ended September 30, 2017, respectively.

12.     Contingencies

In August 2015, a purported stockholder of Charter, Matthew Sciabacucchi, filed a lawsuit in the Delaware Court of Chancery, on behalf of a putative class of Charter stockholders, challenging the transactions involving Charter, TWC, A/N, and Liberty Broadband announced by Charter on May 26, 2015. The lawsuit, which named as defendants Charter and its board of directors, alleged that the transactions resulted from breaches of fiduciary duty by Charter’s directors and that Liberty Broadband improperly benefited from the challenged transactions at the expense of other Charter stockholders. The lawsuit has proceeded to the discovery phase. Charter denies any liability, believes that it has substantial defenses, and intends to vigorously defend this lawsuit. Although Charter is unable to predict the outcome of this lawsuit, it does not expect the outcome will have a material effect on its operations, financial condition or cash flows.


14


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)



The California Attorney General and the Alameda County, California District Attorney are investigating whether certain of Charter’s waste disposal policies, procedures and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. That investigation was commenced in January 2014. A similar investigation involving TWC was initiated in February 2012. Charter is cooperating with these investigations. While the Company is unable to predict the outcome of these investigations, it does not expect that the outcome will have a material effect on its operations, financial condition, or cash flows.

On December 19, 2011, Sprint Communications Company L.P. (“Sprint”) filed a complaint in the U.S. District Court for the District of Kansas alleging that TWC infringed certain U.S. patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. A trial began on February 13, 2017.  On March 3, 2017 the jury returned a verdict of $140 million against TWC and further concluded that TWC had willfully infringed Sprint’s patents. The court subsequently declined to enhance the damage award as a result of the purported willful infringement and awarded Sprint an additional $6 million, representing pre-judgment interest on the damages award. The Company has appealed the case to the United States Court of Appeals for the Federal Circuit. In addition to its appeal, the Company continues to pursue indemnity from one of its vendors and has brought a patent suit against Sprint (TC Tech, LLC v. Sprint) in the U.S. District Court for the District of Delaware implicating Sprint's LTE technology.  The impact of the Sprint verdict was reflected in the measurement period adjustments to net current liabilities. The Company does not expect that the outcome of this litigation will have a material adverse effect on its operations or financial condition.  The ultimate outcome of this litigation or the pursuit of indemnity against the Company’s vendor cannot be predicted.
 
Sprint filed a second suit against Charter on December 2, 2017 in the United States District Court for the District of Delaware. This suit alleges infringement of 15 patents related to the Company's provision of VoIP services (ten of which were already asserted against Legacy TWC in the matter described above). Charter will vigorously defend this case. While the Company is unable to predict the outcome of this Sprint suit, it does not expect that this litigation will have a material effect on its operations, financial condition, or cash flows.

Sprint filed a third suit against Charter on May 17, 2018 in the United States District Court for the Eastern District of Virginia. This suit alleges infringement of three patents related to the Company's video on demand services. The Company will vigorously defend this case. While the Company is unable to predict the outcome of this litigation, it does not expect that this litigation will have a material effect on its operations, financial condition, or cash flows.

The New York Public Service Commission (the “PSC”) has issued multiple orders against Charter including two orders on July 27, 2018 relating to the agreement by which the PSC approved Charter’s merger with TWC. One order finds that Charter had failed to satisfy one of its merger conditions by not extending its high speed broadband network according to the PSC’s recent interpretation of which homes and businesses Charter built to should count, and it directs the initiation of a court action to impose financial and other penalties on Charter. The second order, rescinds the PSC’s January 2016 approval of Charter’s acquisition of TWC’s New York operations and directs Charter to submit a plan to effect an orderly transition to a successor provider or providers for Charter to cease operations in New York within six months of the order.  As the PSC and Charter have entered into discussions with the possibility of resolving the PSC related matters, the PSC has extended such deadline on three occasions with the last extension requiring submission of an exit plan by December 24, 2018. On July 30, 2018, the PSC filed a petition for penalties and injunctive relief in the Supreme Court of the State of New York seeking penalties of $100,000 per day from June 18, 2018 and until Charter complies with the PSC order and also seeks injunctive relief from the court to enjoin failure to comply with the New York Public Service Laws or any regulation or order of the PSC. While the Company believes the actions by the PSC are without merit and intends to defend the actions vigorously and does not believe the results of the proceedings will have a material adverse effect on Charter, no assurance can be given that, should an adverse outcome result, it would not be material to its consolidated financial condition, results of operations or liquidity. The Company cannot predict the outcome of the PSC claims, including any negotiations, nor can it reasonably estimate a range of possible loss in the event of an adverse result.

On October 23, 2015, the New York Office of the Attorney General (the “NY AG”) began an investigation of TWC's advertised Internet speeds and other Internet product advertising. On February 1, 2017, the NY AG filed suit in the Supreme Court for the State of New York alleging that TWC's advertising of Internet speeds was false and misleading. The suit seeks restitution and injunctive relief. The Company continues to defend itself vigorously. Although no assurances can be made that such defenses would ultimately be successful, the Company does not expect that the outcome of this litigation will have a material adverse effect on its operations, financial condition or cash flows.



15


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


In addition to the Sprint litigation described above, the Company and its parent companies are defendants or co-defendants in several additional lawsuits involving alleged infringement of various patents relating to various aspects of their businesses. Other industry participants are also defendants in certain of these cases. In the event that a court ultimately determines that the Company infringes on any intellectual property rights, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the patents at issue. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company’s consolidated financial condition, results of operations, or liquidity. The Company cannot predict the outcome of any such claims nor can it reasonably estimate a range of possible loss.

The Company and its parent companies are parties to other lawsuits, claims and regulatory inquiries that arise in the ordinary course of conducting their business. The ultimate outcome of these other legal matters pending against the Company cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. Whether or not the Company ultimately prevails in any particular lawsuit or claim, litigation can be time consuming and costly and injure the Company’s reputation.

13.     Stock Compensation Plans

Charter’s 2009 Stock Incentive Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock, restricted stock units and restricted stock.  Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting services for the Company, are eligible for grants under the 2009 Stock Incentive Plan.

Charter granted the following equity awards for the periods presented.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
24,200

 
20,900

 
1,490,700

 
1,167,100

Restricted stock
500

 

 
10,200

 
9,500

Restricted stock units
13,500

 
5,100

 
518,900

 
283,000


Charter stock options and restricted stock units generally cliff vest upon the three year anniversary of each grant. Certain stock options and restricted stock units vest based on achievement of stock price hurdles. Stock options generally expire ten years from the grant date and restricted stock units have no voting rights. Restricted stock generally vests one year from the date of grant. TWC restricted stock units that were converted into Charter restricted stock units generally vest 50% on each of the third and fourth anniversary of the grant date.

As of September 30, 2018, total unrecognized compensation remaining to be recognized in future periods totaled $235 million for stock options, $2 million for restricted stock and $224 million for restricted stock units and the weighted average period over which they are expected to be recognized is two years for stock options, one year for restricted stock and two years for restricted stock units.

The Company recorded $71 million and $213 million of stock compensation expense for the three and nine months ended September 30, 2018, respectively, and $64 million and $198 million or the three and nine months ended and September 30, 2017, respectively, which is included in operating costs and expenses. The Company also recorded $5 million for the nine months ended September 30, 2018, and $6 million and $43 million for the three and nine months ended September 30, 2017, respectively, of expense related to accelerated vesting of equity awards of terminated employees, which is recorded in merger and restructuring costs in other operating expenses, net in the consolidated statements of operations.



16


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


14.     Employee Benefit Plans

The Company sponsors two qualified defined benefit pension plans, the TWC Pension Plan and the TWC Union Pension Plan, that provide pension benefits to a majority of employees who were employed by TWC before the acquisition of TWC. The Company also provides a nonqualified defined benefit pension plan for certain employees under the TWC Excess Pension Plan.
 
Pension benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. The Company has elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period. No future compensation increases or future service will be credited to participants of the pension plans given the frozen nature of the plans.

The components of net periodic pension benefit (costs) for the three and nine months ended September 30, 2018 and 2017 are recorded in other pension benefits (costs) in the consolidated statements of operations and consisted of the following:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest cost
$
(32
)
 
$
(33
)
 
$
(96
)
 
$
(101
)
Expected return on plan assets
52

 
46

 
156

 
140

Remeasurement gain (loss), net
187

 
(30
)
 
187

 
(30
)
Net periodic pension benefit (costs)
$
207

 
$
(17
)
 
$
247

 
$
9


During the three and nine months ended September 30, 2018 and 2017, settlements for lump-sum distributions to qualified and nonqualified pension plan participants exceeded the estimated annual interest cost of the plans. As a result, the pension liability and pension asset values were reassessed as of September 30, 2018 and 2017 utilizing remeasurement date assumptions in accordance with the Company's mark-to-market pension accounting policy to record gains and losses in the period in which a remeasurement event occurs. The $187 million remeasurement gain recorded during the three and nine months ended September 30, 2018 was primarily driven by the effects of an increase of the discount rate from 3.68% at December 31, 2017 to 4.24% at September 30, 2018. This was partially offset by a loss to record pension assets to fair value at September 30, 2018. The $30 million remeasurement loss recorded during the three and nine months ended September 30, 2017 was primarily driven by the adoption of the revised lump sum conversion mortality tables published by the Internal Revenue Service effective January 1, 2018, and the effects of a decrease of the discount rate from 4.20% at December 31, 2016 to 3.88% at September 30, 2017. The effects of these changes were partially offset by a gain to record pension assets to fair value at September 30, 2017. The expected long-term rate of return on plan assets has decreased from 6.50% at December 31, 2017 to 5.75% at September 30, 2018 reflecting changes in the mix of plan assets.

The Company made no cash contributions to the qualified pension plans during the three and nine months ended September 30, 2018 and 2017; however, the Company may make discretionary cash contributions to the qualified pension plans in the future. Such contributions will be dependent on a variety of factors, including current and expected interest rates, asset performance, the funded status of the qualified pension plans and management’s judgment. For the nonqualified unfunded pension plan, the Company will continue to make contributions during 2018 to the extent benefits are paid.

15.     Recently Issued Accounting Standards

Accounting Standards Adopted January 1, 2018

ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”)

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 which is a comprehensive revenue recognition standard that superseded nearly all revenue recognition guidance under U.S. GAAP. ASU 2014-09 provides a single principles-based, five step model to be applied to all contracts with customers, which steps are to (1) identify the contract(s) with


17


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when each performance obligation is satisfied.

The Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method with a cumulative-effect adjustment to equity. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial position or results of operation. Previously reported results will not be restated under this transition method. The adoption results in the deferral of residential and small and medium business installation revenues and enterprise commission expenses over a period of time instead of recognized immediately. The adoption also results in the reclassification of the amortization of up-front fees paid to market and serve customers who reside in residential MDUs to operating costs and expenses instead of amortized as an intangible to depreciation and amortization expense.

The January 1, 2018 adoption cumulative-effect adjustment consisted of an increase to other noncurrent assets of $120 million, an increase to accounts payable and accrued liabilities of $71 million, an increase to deferred income tax liabilities of $11 million and an increase to total shareholders’ equity of $38 million. The Company applied the cumulative-effect adjustment to all contracts as of January 1, 2018. Operating results for the three and nine months ended September 30, 2018 are not materially different than results that would have been reported under guidance in effect before application of ASU 2014-09.

Nature of Services

Residential Services

Residential customers are offered video, Internet and voice services primarily on a subscription basis. Residential customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over a one month service period as the subscription services are delivered. Each optional service purchased is generally accounted for as a distinct performance obligation when purchased and revenue is recognized when the service is provided.

Residential video customers have the option to purchase additional tiers of services, as well as video-on-demand (“VOD”) programming and pay-per-view programming on a per-event basis. Video revenues consist primarily of revenues from the selected programming service tier, as well as VOD fees, pay-per-view fees, retransmission fees, regulatory fees, equipment service fees and video installation fees.

Residential Internet customers receive data download and upload services with speeds dependent on the selected tier of service. Customers are also offered a security suite, an in-home WiFi product, and an out-of-home WiFi service. Internet revenues consist primarily of data services, WiFi service fees and Internet installation fees.

Residential voice customers receive unlimited local and long distance calling to United States, Canada, Mexico, and Puerto Rico, voicemail, call waiting, caller ID, call forward and other features. Customers may also purchase international calling either by the minute, or through packages of minutes per month. Voice revenues consist primarily of voice services and regulatory fees.

Small and Medium Business

Small and medium business customers are offered video, Internet and voice services similar to those provided to residential customers. Small and medium business customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over a one month service period as the subscription services are delivered.

Enterprise Solutions

Enterprise Solutions include fiber-delivered communications and managed information technology solutions to larger businesses, as well as high-capacity last-mile data connectivity services to mobile and wireline carriers, Internet service providers, and other competitive carriers on a wholesale basis. Services are primarily offered on a subscription basis with a contractually specified and non-cancelable service period. The non-cancelable contract terms for enterprise services generally range from two to seven years. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over the contract period as the subscription services are delivered. Enterprise subscription services are billed as monthly recurring


18


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


charges to customers and related installation services, if applicable, are billed upon completion of the customer installation. Installation services are not accounted for as distinct performance obligations, but rather a component of the connectivity services, and therefore upfront installation fees are deferred and recognized as revenue over the related contract period.

Advertising Services

The Company offers local, regional and national businesses the opportunity to advertise in individual and multiple markets on cable television networks and digital outlets. Placement of advertising is accounted for as a distinct performance obligation and revenue is recognized at the point in time when the advertising is distributed. In some markets, the Company has formed advertising interconnects or entered into representation agreements with other video distributors, under which the Company sells advertising on behalf of those distributors. In other markets, the Company has entered into representation agreements under which another operator in the area will sell advertising on the Company’s behalf. For representation arrangements in which the Company controls the sale of advertising and acts as the principal to the transaction, the Company recognizes revenue earned from the advertising customer on a gross basis and the amount remitted to the distributor as an operating expense. For other representation arrangements in which the Company does not control the sale of advertising and acts as an agent to the transaction, the Company recognizes revenue net of any fee remitted to the distributor.

Mobile

At the end of the second quarter of 2018, the Company launched its mobile product which is available to residential customers subscribing to its Internet service. Mobile services are sold under an unlimited data plan or a by-the-gig data usage plan and revenue is recognized as the services are provided. Customers can purchase mobile devices and accessory products and have the option to pay for devices under an installment plan. Revenue is recognized from the sale of devices at the time of shipment.

The Company’s revenues by product line are as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Video
$
4,332

 
$
4,208

 
$
12,987

 
$
12,401

Internet
3,809

 
3,555

 
11,286

 
10,464

Voice
512

 
611

 
1,599

 
1,955

Residential revenue
8,653

 
8,374

 
25,872

 
24,820

 
 
 
 
 
 
 
 
Small and medium business
922

 
896

 
2,737

 
2,652

Enterprise
632

 
594

 
1,881

 
1,761

Commercial revenue
1,554

 
1,490

 
4,618

 
4,413

 
 
 
 
 
 
 
 
Advertising sales
440

 
373

 
1,223

 
1,091

Mobile
17

 

 
17

 

Other
223

 
221

 
660

 
655

 
$
10,887

 
$
10,458

 
$
32,390

 
$
30,979


Fees imposed on the Company by various governmental authorities are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. Fees of $239 million and $730 million for the three and nine months ended September 30, 2018, respectively, and $244 million and $717 million for the three and nine months ended September 30, 2017, respectively, are reported in video, voice, mobile and commercial revenues, on a gross basis with a corresponding operating expense because the Company is acting as a principal. Certain taxes, such as sales taxes imposed on the Company’s customers, collected and remitted to state and local authorities, are recorded on a net basis because the Company is acting as an agent in such situation.

A significant portion of our revenue is derived from customers who may generally cancel their subscriptions at any time without penalty. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from our existing customer base. Revenue from customers with a contractually specified term and non-


19


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


cancelable service period will be recognized over the term of such contracts, which is generally two to seven years for our enterprise contracts.

Significant Judgments

The Company often provides multiple services to a customer. Provision of customer premise equipment, installation services, and additional service tiers may have a significant level of integration and interdependency with the subscription video, Internet, voice, or connectivity services provided. Judgment is required to determine whether provision of customer premise equipment, installation services, and additional service tiers are considered distinct and accounted for separately, or not distinct and accounted for together with the subscription services.

Allocation of the transaction price to the distinct performance obligations in bundled residential service subscriptions requires judgment. The transaction price for a bundle of residential services is frequently less than the sum of the standalone selling prices of each individual service. The Company allocates the residential services bundle discount among the services to which the discount relates based on the relative standalone selling prices of those services. Standalone selling prices for the Company’s residential video and Internet services are directly observable, while standalone selling price for the Company’s residential voice service is estimated using the adjusted market assessment approach which relies upon information from peers and competitors who sell residential voice services individually.

The Company believes residential and small and medium business non-refundable upfront installation fees charged to customers result in a material right to renew the contract as such fees are not required to be paid upon subsequent renewals. The residential and small and medium business upfront fee is deferred over the period the fee remains material to the customer, which the Company has estimated to be approximately six months. Estimation of the period the fee remains material to the customer requires consideration of both quantitative and qualitative factors including average installation fee, average revenue per customer, and customer behavior, among others.

Contract Liabilities

Timing of revenue recognition may differ from the timing of invoicing to customers. Residential, small and medium business, and enterprise customers are invoiced for subscription services in advance of the service period. Deferred revenue liabilities, or contract liabilities, are recorded when the Company collects payments in advance of performing the services. Deferred revenue liabilities, or contract liabilities, are also recorded when the Company invoices customers upfront for installation services that are recognized as revenue over time. Residential and small and medium business installation revenues are deferred over the period the fee remains material to the customer. Enterprise installation revenues are deferred using a portfolio approach over the average contract life of each enterprise service category. As of September 30, 2018, current deferred revenue liabilities consisting of refundable customer prepayments of $410 million and upfront installation fees of $88 million were included in accounts payable and accrued liabilities. As of September 30, 2018, long-term deferred revenue liabilities consisting of enterprise upfront installation fees of $34 million were included in other long-term liabilities.

Contract Costs

The Company recognizes an asset for incremental costs of obtaining a contract with a customer if the amortization period of those costs is expected to be longer than one year and the costs are expected to be recovered. Enterprise sales commission costs meet the requirements to be deferred and, as a result, are recognized using a portfolio approach over a commission expense weighted-average enterprise contract period. Deferred enterprise commission costs are included in other noncurrent assets in the consolidated balance sheet and totaled $138 million as of September 30, 2018. As the amortization period of residential and small and medium business commissions costs is less than one year, the Company applies the practical expedient that allows such costs to be expensed as incurred. The Company has determined that the amortization period associated with residential and small and medium business commission costs is less than one year based on qualitative and quantitative factors.

The Company recognizes an asset for costs incurred to fulfill a contract when those costs are directly related to services provided under the contract, generate or enhance resources of the entity that will be used in performing service obligations under the contract, and are expected to be recovered. Up-front fees paid to MDUs, such as apartment building owners, in order to gain access to market and serve tenants who reside within the MDU meet the requirements to be deferred and, as a result, are recognized over the term of the MDU contract. Deferred upfront MDU fees are amortized on a straight-line basis and are included in other noncurrent


20


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


assets in the consolidated balance sheet and totaled $266 million as of September 30, 2018. Amortization expense of $16 million and $46 million was included in regulatory, connectivity and produced content within operating expenses in the consolidated statements of operations for the three and nine months ended September 30, 2018, respectively. Residential and small and medium business installation costs not capitalized into property, plant and equipment are expensed as incurred under cable industry-specific guidance.

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”)

In August 2016, the FASB issued ASU 2016-15 which clarifies how entities should classify cash receipts and cash payments related to eight specific cash flow matters on the statement of cash flows, with the objective of reducing existing diversity in practice. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact to the Company’s consolidated financial statements.

ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16")

In October 2016, the FASB issued ASU 2016-16 which requires both the selling entity and the buying entity in an intra-entity asset transfer (other than the transfer of inventory) to immediately recognize the current and deferred income tax consequences of the transaction.  Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party.  The Company adopted the standard on January 1, 2018, using a modified retrospective approach, with the cumulative-effect adjustment recognized directly to shareholders equity for the income tax effects of intra-entity asset transfers (other than transfers of inventory) that happened before the adoption date.   The Company identified a $39 million increase to total shareholders' equity and corresponding increase to deferred tax assets related to the adoption, which was recorded during the three months ended September 30, 2018.

ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”)

In November 2016, the FASB issued ASU 2016-18 which requires that amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 on January 1, 2018. The new guidance will only be applicable to amounts described by the Company as restricted cash. The adoption of ASU 2016-18 did not have a material impact to the Company’s consolidated financial statements.

ASU No. 2017-09, Scope of Modification Accounting (“ASU 2017-09”)

In May 2017, the FASB issued ASU 2017-09 which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is applied prospectively to awards modified on or after the effective date. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact to the Company’s consolidated financial statements.

Accounting Standards Not Yet Adopted

ASU No. 2016-02, Leases (“ASU 2016-02”)

In February 2016, the FASB issued ASU 2016-02 which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability.  Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting.  For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.  

The Company plans to adopt ASU 2016-02 using the modified retrospective approach with a cumulative-effect adjustment recorded at the beginning of the period of adoption (January 1, 2019). Therefore, upon adoption, the Company will recognize and measure operating leases on the consolidated balance sheet without revising comparative period information or disclosure. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Company anticipates


21


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


electing the transition package practical expedient which would eliminate the reassessment of past leases, classification and initial direct costs. The Company anticipates adopting the land easements practical expedient which allows adopters the ability not to retrospectively treat land easements as leases; however, must apply lease accounting prospectively to land easements if they meet the definition of a lease.

The Company’s adoption process of ASU 2016-02 is ongoing, including evaluating and quantifying the impact on its consolidated financial statements, identifying the population of leases (and embedded leases), implementing a selected technology solution and collecting and validating lease data. Although the Company has not yet completed the evaluation of the new standard, or quantified its impact, the Company expects its lease obligations designated as operating leases (as disclosed in Note 18 to the audited consolidated financial statements in its most recent Annual Report on Form 10-K) will be reported on the consolidated balance sheet upon adoption.

ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”)

In January 2017, the FASB issued ASU 2017-04 which eliminates step two from the goodwill impairment test. Under the new standard, to the extent the carrying amount of a reporting unit exceeds the fair value, the Company will record an impairment charge equal to the difference. The impairment charge recognized should not exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently in the process of evaluating the impact that the adoption of ASU 2017-04 will have on its consolidated financial statements.

ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13")

In August 2018, the FASB issued ASU 2018-13 which amends fair value measurement disclosure requirements aiming to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. ASU 2018-13 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). Early adoption is permitted. The Company does not expect the adoption of ASU 2017-13 to have a material impact on its consolidated financial statements.

ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14")

In August 2018, the FASB issued ASU 2018-14 which amends Accounting Standards Codification 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 will be effective for interim and annual periods beginning after December 15, 2021 (January 1, 2022 for the Company). Early adoption is permitted. The Company does not expect the adoption of ASU 2017-14 to have a material impact on its consolidated financial statements.

ASU No. 2018-15, Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")

In August 2018, the FASB issued ASU 2018-15 which requires upfront implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-15 will be effective for annual and interim periods beginning after December 15, 2019 (January 1, 2020 for the Company). Early adoption is permitted. The Company is currently in the process of evaluating the impact that the adoption of ASU 2018-15 will have on its consolidated financial statements.

16.     Consolidating Schedules

Each of Charter Operating, TWC, LLC, TWCE, CCO Holdings and certain subsidiaries jointly, severally, fully and unconditionally guarantee the outstanding debt securities of the others (other than the CCO Holdings notes) on an unsecured senior basis and the condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Certain Charter Operating subsidiaries that are regulated telephone entities only become guarantor subsidiaries upon approval by regulators. This information is not intended


22


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.
 
The “Charter Operating and Restricted Subsidiaries” column is presented to comply with the terms of the Credit Agreement.

Condensed consolidating financial statements as of September 30, 2018 and December 31, 2017 and for the nine months ended September 30, 2018 and 2017 follow.

CCO Holdings, LLC and Subsidiaries
Condensed Consolidating Balance Sheets
As of September 30, 2018
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
 
 
 
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
CCO Holdings Consolidated
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
351

 
$

 
$
351

Accounts receivable, net

 
1,707

 

 
1,707

Receivables from related party
53

 

 
(53
)
 

Prepaid expenses and other current assets

 
335

 

 
335

Total current assets
53

 
2,393

 
(53
)
 
2,393

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

 
34,293

 

 
34,293

Customer relationships, net

 
10,136

 

 
10,136

Franchises

 
67,319

 

 
67,319

Goodwill

 
29,554

 

 
29,554

Total investment in cable properties, net

 
141,302

 

 
141,302

 
 
 
 
 
 
 
 
INVESTMENT IN SUBSIDIARIES
79,969

 

 
(79,969
)
 

LOANS RECEIVABLE – RELATED PARTY
526

 

 
(526
)
 

OTHER NONCURRENT ASSETS

 
1,347

 

 
1,347

 
 
 
 
 
 
 
 
Total assets
$
80,548

 
$
145,042

 
$
(80,548
)
 
$
145,042

 
 
 
 
 
 
 
 
LIABILITIES AND MEMBER’S EQUITY
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
311

 
$
7,335

 
$

 
$
7,646

Payables to related party

 
576

 
(53
)
 
523

Current portion of long-term debt

 
3,339

 

 
3,339

Total current liabilities
311

 
11,250

 
(53
)
 
11,508

 
 
 
 
 
 
 
 
LONG-TERM DEBT
18,724

 
50,411

 

 
69,135

LOANS PAYABLE – RELATED PARTY

 
1,446

 
(526
)
 
920

OTHER LONG-TERM LIABILITIES

 
1,942

 

 
1,942

 
 
 
 
 
 
 
 
MEMBER’S EQUITY
 
 
 
 
 
 
 
Controlling interest
61,513

 
79,969

 
(79,969
)
 
61,513

Noncontrolling interests

 
24

 

 
24

Total member’s equity
61,513

 
79,993

 
(79,969
)
 
61,537

 
 
 
 
 
 
 
 
Total liabilities and member’s equity
$
80,548

 
$
145,042

 
$
(80,548
)
 
$
145,042




23


CCO HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


CCO Holdings, LLC and Subsidiaries
Condensed Consolidating Balance Sheets
As of December 31, 2017
 
 
 
 
 
 
 
 
 
Guarantor Subsidiaries
 
 
 
 
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
CCO Holdings Consolidated
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
330

 
$

 
$
330

Accounts receivable, net

 
1,611

 

 
1,611

Receivables from related party
55

 

 
(55
)
 

Prepaid expenses and other current assets

 
243

 

 
243

Total current assets
55

 
2,184

 
(55
)
 
2,184

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

 
33,552

 

 
33,552

Customer relationships, net

 
11,951

 

 
11,951

Franchises

 
67,319

 

 
67,319

Goodwill

 
29,554

 

 
29,554

Total investment in cable properties, net

 
142,376

 

 
142,376

 
 
 
 
 
 
 
 
INVESTMENT IN SUBSIDIARIES
81,980

 

 
(81,980
)
 

LOANS RECEIVABLE – RELATED PARTY
511

 

 
(511
)
 

OTHER NONCURRENT ASSETS

 
1,133

 

 
1,133

 
 
 
 
 
 
 
 
Total assets
$
82,546

 
$
145,693

 
$
(82,546
)
 
$
145,693

 
 
 
 
 
 
 
 
LIABILITIES AND MEMBER’S EQUITY
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
280

 
$
7,861

 
$

 
$
8,141

Payables to related party

 
690

 
(55
)
 
635

Current portion of long-term debt

 
2,045

 

 
2,045

Total current liabilities
280

 
10,596

 
(55
)
 
10,821

 
 
 
 
 
 
 
 
LONG-TERM DEBT
18,708

 
49,478

 

 
68,186

LOANS PAYABLE – RELATED PARTY

 
1,399

 
(511
)
 
888

DEFERRED INCOME TAXES

 
32

 

 
32

OTHER LONG-TERM LIABILITIES

 
2,184

 

 
2,184

 
 
 
 
 
 
 
 
MEMBER’S EQUITY
 
 
 
 
 
 
 
Controlling interest
63,558

 
81,980

 
(81,980
)
 
63,558

Noncontrolling interests

 
24

 

 
24

Total member’s equity
63,558

 
82,004

 
(81,980
)
 
63,582