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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From             to             
Commission File Number: 001-33664
https://cdn.kscope.io/a9d88f9205a179e910c1a9711e00908c-a2014charterlogoa01a02a25.jpg
Charter Communications, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
84-1496755
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
400 Atlantic Street
Stamford
Connecticut
06901
(Address of Principal Executive Offices)
(Zip Code)
(203) 905-7801
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock $.001 Par Value
CHTR
NASDAQ Global Select Market

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

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   No x

Number of shares of Class A common stock outstanding as of September 30, 2019: 214,780,119

Number of shares of Class B common stock outstanding as of September 30, 2019: 1





https://cdn.kscope.io/a9d88f9205a179e910c1a9711e00908c-a2014charterlogoa01a02a25.jpg
CHARTER COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 2019

TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2019. 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, “Charter,” “we,” “us” and “our” refer to Charter Communications, Inc. 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 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 service areas and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;
the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite ("DBS") operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, fiber to the home providers, 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;
our ability to efficiently and effectively integrate acquired operations;
the effects of governmental regulation on our business including costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply with, regulatory conditions applicable to us as a result of the Time Warner Cable Inc. and Bright House Networks, LLC Transactions;
general business conditions, economic uncertainty or downturn, 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 and any other consumer services and service platforms;
any events that disrupt our networks, information systems or properties and impair our operating activities or our reputation;
the 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.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
 
September 30,
2019
 
December 31,
2018
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
508

 
$
551

Accounts receivable, less allowance for doubtful accounts of $170 and $129, respectively
2,284

 
1,733

Prepaid expenses and other current assets
596

 
446

Total current assets
3,388

 
2,730

 
 
 
 
RESTRICTED CASH
89

 
214

 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
Property, plant and equipment, net of accumulated depreciation of $26,365 and $23,075, respectively
34,218

 
35,126

Customer relationships, net
7,956

 
9,565

Franchises
67,322

 
67,319

Goodwill
29,554

 
29,554

Total investment in cable properties, net
139,050

 
141,564

 
 
 
 
OPERATING LEASE RIGHT-OF-USE ASSETS
1,103

 

OTHER NONCURRENT ASSETS
1,637

 
1,622

 
 
 
 
Total assets
$
145,267

 
$
146,130

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
8,263

 
$
8,805

Operating lease liabilities
210

 

Current portion of long-term debt
3,509

 
3,290

Total current liabilities
11,982

 
12,095

 
 
 
 
LONG-TERM DEBT
71,390

 
69,537

DEFERRED INCOME TAXES
17,609

 
17,389

LONG-TERM OPERATING LEASE LIABILITIES
991

 

OTHER LONG-TERM LIABILITIES
2,773

 
2,837

 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
Class A common stock; $.001 par value; 900 million shares authorized;
 
 
 
227,123,254 and 225,353,807 shares issued, respectively

 

Class B common stock; $.001 par value; 1,000 shares authorized;
 
 
 
1 share issued and outstanding

 

Preferred stock; $.001 par value; 250 million shares authorized;
no shares issued and outstanding

 

Additional paid-in capital
33,810

 
33,507

Retained earnings
3,734

 
2,780

Treasury stock at cost; 12,343,135 and no shares, respectively
(4,568
)
 

Accumulated other comprehensive loss
(2
)
 
(2
)
Total Charter shareholders’ equity
32,974

 
36,285

Noncontrolling interests
7,548

 
7,987

Total shareholders’ equity
40,522

 
44,272

 
 
 
 
Total liabilities and shareholders’ equity
$
145,267

 
$
146,130


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



CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share data)
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
REVENUES
$
11,450

 
$
10,892

 
$
34,003

 
$
32,403

 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
7,435

 
7,012

 
21,915

 
20,721

Depreciation and amortization
2,415

 
2,482

 
7,465

 
7,784

Other operating expenses, net
14

 
18

 
71

 
116

 
9,864

 
9,512

 
29,451

 
28,621

Income from operations
1,586

 
1,380

 
4,552

 
3,782

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
Interest expense, net
(963
)
 
(901
)
 
(2,833
)
 
(2,630
)
Gain (loss) on financial instruments, net
(34
)
 
12

 
(116
)
 

Other pension benefits, net
9

 
207

 
27

 
247

Other expense, net
(5
)
 
(5
)
 
(131
)
 
(75
)
 
(993
)
 
(687
)
 
(3,053
)
 
(2,458
)
 
 
 
 
 
 
 
 
Income before income taxes
593

 
693

 
1,499

 
1,324

Income tax expense
(126
)
 
(109
)
 
(329
)
 
(178
)
Consolidated net income
467

 
584

 
1,170

 
1,146

Less: Net income attributable to noncontrolling interests
(80
)
 
(91
)
 
(216
)
 
(212
)
Net income attributable to Charter shareholders
$
387

 
$
493

 
$
954

 
$
934

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS:
 
 
 
 
 
 
 
Basic
$
1.77

 
$
2.14

 
$
4.30

 
$
3.99

Diluted
$
1.74

 
$
2.11

 
$
4.23

 
$
3.93

 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
218,499,213

 
230,554,633

 
221,818,079

 
234,159,830

Weighted average common shares outstanding, diluted
222,355,867

 
233,607,414

 
225,337,984

 
237,343,924




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



CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars in millions)
Unaudited
 
Class A Common Stock
Class B Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss
Total Charter Shareholders’ Equity
Non-controlling Interests
Total Shareholders’ Equity
BALANCE, December 31, 2018
$

$

$
33,507

$
2,780

$

$
(2
)
$
36,285

$
7,987

$
44,272

Consolidated net income



253



253

64

317

Stock compensation expense


85




85


85

Exercise of stock options


44




44


44

Purchases of treasury stock




(940
)

(940
)

(940
)
Purchase of noncontrolling interest, net of tax


(15
)



(15
)
(74
)
(89
)
Change in noncontrolling interest ownership, net of tax


22




22

(29
)
(7
)
Distributions to noncontrolling interest







(39
)
(39
)
BALANCE, March 31, 2019


33,643

3,033

(940
)
(2
)
35,734

7,909

43,643

Consolidated net income



314



314

72

386

Stock compensation expense


82




82


82

Exercise of stock options


37




37


37

Purchases of treasury stock




(861
)

(861
)

(861
)
Purchase of noncontrolling interest, net of tax


(37
)



(37
)
(111
)
(148
)
Change in noncontrolling interest ownership, net of tax


17




17

(23
)
(6
)
Distributions to noncontrolling interest







(39
)
(39
)
BALANCE, June 30, 2019


33,742

3,347

(1,801
)
(2
)
35,286

7,808

43,094

Consolidated net income



387



387

80

467

Stock compensation expense


71




71


71

Exercise of stock options


25




25


25

Purchases of treasury stock




(2,767
)

(2,767
)

(2,767
)
Purchase of noncontrolling interest, net of tax


(93
)



(93
)
(215
)
(308
)
Change in noncontrolling interest ownership, net of tax


65




65

(87
)
(22
)
Distributions to noncontrolling interest







(38
)
(38
)
BALANCE, September 30, 2019
$

$

$
33,810

$
3,734

$
(4,568
)
$
(2
)
$
32,974

$
7,548

$
40,522


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



CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars in millions)
Unaudited
 
Class A Common Stock
Class B Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Loss
Total Charter Shareholders’ Equity
Non-controlling Interests
Total Shareholders’ Equity
BALANCE, December 31, 2017
$

$

$
35,253

$
3,832

$

$
(1
)
$
39,084

$
8,447

$
47,531

Consolidated net income



168



168

55

223

Stock compensation expense


72




72


72

Accelerated vesting of equity awards


5




5


5

Exercise of stock options


36




36


36

Cumulative effect of accounting change



34



34

4

38

Purchases of treasury stock




(617
)

(617
)

(617
)
Purchase of noncontrolling interest, net of tax


(28
)



(28
)
(90
)
(118
)
Change in noncontrolling interest ownership, net of tax


14




14

(20
)
(6
)
Distributions to noncontrolling interest







(39
)
(39
)
BALANCE, March 31, 2018


35,352

4,034

(617
)
(1
)
38,768

8,357

47,125

Consolidated net income



273



273

66

339

Stock compensation expense


70




70


70

Exercise of stock options


7




7


7

Changes in accumulated other comprehensive loss





(1
)
(1
)

(1
)
Purchases of treasury stock




(1,664
)

(1,664
)

(1,664
)
Purchase of noncontrolling interest, net of tax


(28
)



(28
)
(164
)
(192
)
Change in noncontrolling interest ownership, net of tax


18




18

(23
)
(5
)
Distributions to noncontrolling interest







(37
)
(37
)
BALANCE, June 30, 2018


35,419

4,307

(2,281
)
(2
)
37,443

8,199

45,642

Consolidated net income



493



493

91

584

Stock compensation expense


71




71


71

Exercise of stock options


13




13


13

Cumulative effect of accounting change



28



28

3

31

Purchases of treasury stock




(933
)

(933
)

(933
)
Purchase of noncontrolling interest, net of tax


(17
)



(17
)
(122
)
(139
)
Change in noncontrolling interest ownership, net of tax


7




7

(10
)
(3
)
Distributions to noncontrolling interest







(38
)
(38
)
BALANCE, September 30, 2018
$

$

$
35,493

$
4,828

$
(3,214
)
$
(2
)
$
37,105

$
8,123

$
45,228


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



CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Unaudited
 
Nine Months Ended September 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Consolidated net income
$
1,170

 
$
1,146

Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
7,465

 
7,784

Stock compensation expense
238

 
213

Accelerated vesting of equity awards

 
5

Noncash interest income, net
(89
)
 
(242
)
Other pension benefits, net
(27
)
 
(247
)
Loss on financial instruments, net
116

 

Deferred income taxes
233

 
137

Other, net
148

 
81

Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Accounts receivable
(564
)
 
(101
)
Prepaid expenses and other assets
(225
)
 
(97
)
Accounts payable, accrued liabilities and other
(75
)
 
(80
)
Net cash flows from operating activities
8,390

 
8,599

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(4,913
)
 
(6,692
)
Change in accrued expenses related to capital expenditures
(449
)
 
(620
)
Real estate investments through variable interest entities
(125
)
 
(15
)
Other, net
10

 
(103
)
Net cash flows from investing activities
(5,477
)
 
(7,430
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings of long-term debt
13,157

 
11,552

Repayments of long-term debt
(10,886
)
 
(8,964
)
Payments for debt issuance costs
(48
)
 
(29
)
Purchase of treasury stock
(4,568
)
 
(3,214
)
Proceeds from exercise of stock options
106

 
56

Purchase of noncontrolling interest
(593
)
 
(473
)
Distributions to noncontrolling interest
(116
)
 
(114
)
Borrowings for real estate investments through variable interest entities

 
170

Distributions to variable interest entities noncontrolling interest

 
(107
)
Other, net
(133
)
 
(7
)
Net cash flows from financing activities
(3,081
)
 
(1,130
)
 
 
 
 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(168
)
 
39

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
765

 
621

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
597

 
$
660

 
 
 
 
CASH PAID FOR INTEREST
$
3,065

 
$
2,920

CASH PAID FOR TAXES
$
55

 
$
27



The accompanying notes are an integral part of these consolidated financial statements.
5


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



1.    Organization and Basis of Presentation

Organization

Charter Communications, Inc. (together with its controlled subsidiaries, “Charter,” or the “Company”) is the second largest cable operator in the United States and a leading broadband communications company providing video, Internet and voice services to residential and business customers. The Company also offers mobile service to residential customers and recently launched mobile service to a select number of small and medium business customers. In addition, the Company sells video and online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology solutions to larger enterprise customers. The Company also owns and operates regional sports networks and local sports, news and community channels.

Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.

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 Charter’s Annual Report on Form 10-K have been condensed or omitted for this quarterly report. The accompanying consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs; 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.



6


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


2.    Franchises, Goodwill and Other Intangible Assets

Indefinite-lived and finite-lived intangible assets consist of the following as of September 30, 2019 and December 31, 2018:

 
 
September 30, 2019
 
December 31, 2018
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Franchises
 
$
67,322

 
$

 
$
67,322

 
$
67,319

 
$

 
$
67,319

Goodwill
 
29,554

 

 
29,554

 
29,554

 

 
29,554

Trademarks
 
159

 

 
159

 
159

 

 
159

 
 
$
97,035

 
$

 
$
97,035

 
$
97,032

 
$

 
$
97,032

 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
18,230

 
$
(10,274
)
 
$
7,956

 
$
18,229

 
$
(8,664
)
 
$
9,565

Other intangible assets
 
405

 
(111
)
 
294

 
409

 
(92
)
 
317

 
 
$
18,635

 
$
(10,385
)
 
$
8,250

 
$
18,638

 
$
(8,756
)
 
$
9,882



Amortization expense related to customer relationships and other intangible assets for the three and nine months ended September 30, 2019 was $516 million and $1.6 billion, respectively, and $583 million and $1.8 billion for the three and nine months ended September 30, 2018, respectively.
    
The Company expects amortization expense on its finite-lived intangible assets will be as follows:

Three months ended December 31, 2019
 
$
514

2020
 
1,875

2021
 
1,599

2022
 
1,329

2023
 
1,072

Thereafter
 
1,861

 
 
$
8,250



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.



7


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


3.    Investments

Real Estate Investments through Variable Interest Entities

In July 2018, the Company's build-to-suit lease arrangement with a single-asset special purpose entity ("SPE") to build a new Charter headquarters in Stamford, Connecticut obtained all approvals and was made effective. The SPE obtained a first-lien mortgage note to finance the construction with fixed monthly payments through July 15, 2035 with a 5.612% coupon interest rate. All payments of the mortgage note are guaranteed by Charter. The initial term of the lease is 15 years commencing August 1, 2020, with no termination options. At the end of the lease term there is a mirrored put option for the SPE to sell the property to Charter and call option for Charter to purchase the property for a fixed purchase price. As the Company has determined the SPE is a variable interest entity ("VIE") of which it became the primary beneficiary upon the effectiveness of the arrangement, the Company has consolidated the assets and liabilities of the SPE in its consolidated balance sheet as of September 30, 2019 and December 31, 2018 as follows.

 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
$
2

 
$
2

Restricted cash
$
89

 
$
214

Property, plant and equipment
$
266

 
$
130

Liabilities
 
 
 
Current liabilities
$
7

 
$

Other long-term liabilities
$
350

 
$
346



Property, plant and equipment includes land, a parking garage and building construction costs, including the capitalization of qualifying interest. As of September 30, 2019 and December 31, 2018, other long-term liabilities include $341 million and $342 million, respectively, in VIE's mortgage note liability and $9 million and $4 million, respectively, in liability-classified noncontrolling interest recorded at amortized cost with accretion towards settlement of the put/call option in the lease. The consolidated statement of cash flows for the nine months ended September 30, 2019 includes a decrease to restricted cash of $125 million primarily related to building construction costs. The consolidated statement of cash flows for the nine months ended September 30, 2018 includes an increase to restricted cash of $48 million as a result of activity in the VIE including borrowings of $170 million by the VIE on the mortgage note liability offset by distributions by the VIE to the noncontrolling interest of $107 million for the contributed land and parking garage and $15 million incurred by the VIE for building construction costs.

Equity Investments

The Company recorded impairments on equity investments of approximately $121 million and $58 million during the nine months ended September 30, 2019 and 2018, respectively, which was recorded in other expense, net in the consolidated statements of operations.



8


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


4.    Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following as of September 30, 2019 and December 31, 2018:

 
September 30, 2019
 
December 31, 2018
Accounts payable – trade
$
663

 
$
758

Deferred revenue
526

 
494

Accrued liabilities:
 
 
 
Programming costs
2,064

 
2,044

Labor
1,005

 
1,052

Capital expenditures
973

 
1,472

Interest
943

 
1,045

Taxes and regulatory fees
575

 
526

Property and casualty
464

 
424

Other
1,050

 
990

 
$
8,263

 
$
8,805



5.    Leases

The primary leased asset classes of the Company include real estate, dark fiber, colocation facilities and other equipment. The lease agreements include both lease and non-lease components, which the Company accounts for separately depending on the election made for each leased asset class. For real estate and dark fiber leased asset classes, the Company accounts for lease and non-lease components as a single lease component and includes all fixed payments in the measurement of lease liabilities and lease assets. For colocation facilities leased asset class, the Company accounts for lease and non-lease components separately including only the fixed lease payment component in the measurement of lease liabilities and lease assets.

In addition to fixed lease payments, certain of the Company’s lease agreements include variable lease payments which are tied to an index or rate such as the change in the Consumer Price Index. These variable payments are not included in the measurement of the lease liabilities and lease assets.

Lease assets and lease liabilities are initially recognized based on the present value of the future lease payments over the expected lease term. As for most leases the implicit rate is not readily determinable, the Company uses a discount rate in determining the present value of future payments based on the yield-to-maturity of the Company’s secured publicly traded USD denominated debt instruments interpolating the duration of the debt to the term of the executed lease.

The Company’s leases have base rent periods and some have optional renewal periods. Leases with base rent periods of less than 12 months are not recorded on the balance sheet. For purposes of measurement of lease liabilities, the expected lease terms may include renewal options when it is reasonably certain that the Company will exercise such options. Based on conditions of the Company's existing leases and its overall business strategies, the majority of the Company's renewal options are not reasonably certain in determining the expected lease term. The Company will periodically reassess expected lease terms (and purchase options, if applicable) based on significant triggering events or compelling economic reasons to exercise such options.

The Company’s primary lease income represents sublease income on certain real estate leases. Sublease income is included in other revenue and presented gross from rent expense. For customer premise equipment ("CPE") where such CPE would qualify as a lease, the Company applies the practical expedient to combine the operating lease with the subscription service revenue as a single performance obligation in accordance with revenue recognition accounting guidance as the subscription service is the predominant component.



9


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The components of lease related expenses, net are as follows.

 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease expense (a)
$
105

 
$
321

 
 
 
 
Finance lease expense:
 
 
 
Amortization of right-of-use assets
3

 
10

Interest on lease liabilities
1

 
4

Total finance lease expense
4

 
14

 
 
 
 
Sublease income
(6
)
 
(20
)
Total lease related expenses, net
$
103

 
$
315


(a) 
Includes short-term leases and variable leases costs of $31 million and $96 million for the three and nine months ended September 30, 2019, respectively.

Supplemental cash flow information related to leases is as follows.

 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
219

Operating cash flows from finance leases
$
4

Financing cash flows from finance leases
$
5

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
209

Finance leases
$
27





10


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Supplemental balance sheet information related to leases is as follows.

 
September 30, 2019
Operating leases:
 
Operating lease right-of-use assets
$
1,103

 
 
Current operating lease liabilities
$
210

Long-term operating lease liabilities
991

Total operating lease liabilities
$
1,201

 
 
Finance leases:
 
Finance lease right-of-use assets (included within property, plant and equipment, net)
$
165

 
 
Current finance lease liabilities (included within accounts payable and accrued liabilities)
$
7

Long-term finance lease liabilities (included within other long-term liabilities)
51

Total finance lease liabilities
$
58

 
 
Weighted average remaining lease term
 
Operating leases
6.8 years

Finance leases
16.3 years

 
 
Weighted average discount rate
 
Operating leases
4.5
%
Finance leases
5.7
%


Maturities of lease liabilities are as follows.

 
Operating leases
 
Finance leases
Three months ended December 31, 2019
$
71

 
$
1

2020
280

 
6

2021
247

 
6

2022
210

 
6

2023
182

 
5

Thereafter
526

 
59

Undiscounted lease cash flow commitments
1,516

 
83

Reconciling impact from discounting
(315
)
 
(25
)
Lease liabilities on consolidated balance sheet as of September 30, 2019
$
1,201

 
$
58





11


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The following table presents the Company’s unadjusted lease commitments as of December 31, 2018 as a required disclosure for companies adopting the lease standard prospectively without revising comparative period information.

 
Operating leases
 
Capital leases
2019
$
286

 
$
10

2020
254

 
9

2021
207

 
9

2022
170

 
9

2023
143

 
10

Thereafter
440

 
64

 
$
1,500

 
$
111



6.    Long-Term Debt

Long-term debt consists of the following as of September 30, 2019 and December 31, 2018:

 
September 30, 2019
 
December 31, 2018
 
Principal Amount
 
Accreted Value
 
Principal Amount
 
Accreted Value
CCO Holdings, LLC:
 
 
 
 
 
 
 
5.250% senior notes due March 15, 2021
$
500

 
$
499

 
$
500

 
$
498

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

 
1,240

 
1,250

 
1,238

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

 
995

 
1,000

 
994

4.000% senior notes due March 1, 2023
500

 
497

 
500

 
496

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

 
1,145

 
1,150

 
1,144

5.750% senior notes due September 1, 2023
500

 
497

 
500

 
497

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

 
994

 
1,000

 
993

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

 
1,690

 
1,700

 
1,688

5.375% senior notes due May 1, 2025
750

 
746

 
750

 
745

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

 
2,470

 
2,500

 
2,467

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

 
1,491

 
1,500

 
1,490

5.875% senior notes due May 1, 2027
800

 
795

 
800

 
795

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

 
3,221

 
3,250

 
3,219

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

 
2,468

 
2,500

 
2,466

5.375% senior notes due June 1, 2029
1,500

 
1,501

 

 

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

 
1,996

 
2,000

 
1,992

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

 
2,985

 
3,000

 
2,982

Senior floating rate notes due February 1, 2024
900

 
902

 
900

 
903

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

 
1,092

 
1,100

 
1,091

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

 
4,470

 
4,500

 
4,466

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

 
987

 
1,000

 
986

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

 
1,240

 
1,250

 
1,240

5.050% senior notes due March 30, 2029
1,250

 
1,241

 

 

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

 
1,982

 
2,000

 
1,982

5.375% senior notes due April 1, 2038
800

 
786

 
800

 
785

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

 
3,467

 
3,500

 
3,467




12


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


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

 
2,506

 
2,500

 
2,506

5.750% senior notes due April 1, 2048
2,450

 
2,391

 
1,700

 
1,683

5.125% senior notes due July 1, 2049
1,250

 
1,240

 

 

6.834% senior notes due October 23, 2055
500

 
495

 
500

 
495

Credit facilities
10,834

 
10,759

 
10,038

 
9,959

Time Warner Cable, LLC:
 
 
 
 
 
 
 
8.750% senior notes due February 14, 2019

 

 
1,250

 
1,260

8.250% senior notes due April 1, 2019

 

 
2,000

 
2,030

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

 
1,513

 
1,500

 
1,541

4.125% senior notes due February 15, 2021
700

 
714

 
700

 
721

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

 
1,024

 
1,000

 
1,033

5.750% sterling senior notes due June 2, 2031 (a)
769

 
823

 
796

 
855

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

 
1,676

 
1,500

 
1,680

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

 
1,774

 
1,500

 
1,780

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

 
1,714

 
1,500

 
1,719

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

 
1,255

 
1,200

 
1,256

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)
799

 
771

 
827

 
798

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

 
1,142

 
1,250

 
1,140

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

 
1,159

 
1,000

 
1,191

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

 
1,288

 
1,000

 
1,298

Total debt
74,202

 
74,899

 
71,961

 
72,827

Less current portion:
 
 
 
 
 
 
 
8.750% senior notes due February 14, 2019

 

 
(1,250
)
 
(1,260
)
8.250% senior notes due April 1, 2019

 

 
(2,000
)
 
(2,030
)
5.000% senior notes due February 1, 2020
(1,500
)
 
(1,513
)
 

 

3.579% senior notes due July 23, 2020
(2,000
)
 
(1,996
)
 

 

Long-term debt
$
70,702

 
$
71,390

 
$
68,711

 
$
69,537



(a) 
Principal amount includes £625 million remeasured at $769 million and $796 million as of September 30, 2019 and December 31, 2018, respectively, using the exchange rate at the respective dates.
(b) 
Principal amount includes £650 million remeasured at $799 million and $827 million as of September 30, 2019 and December 31, 2018, 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 9. The Company has availability under the Charter Operating credit facilities of approximately $4.3 billion as of September 30, 2019.

In July 2019, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.25 billion aggregate principal amount of 5.125% senior notes due 2049 at a price of 99.880% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness, which may include Time Warner Cable, LLC's 5.000% senior notes due 2020.



13


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


In October 2019, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.5 billion aggregate principal amount of 4.800% senior unsecured notes due 2050 at a price of 99.436% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.

The Charter Operating notes are guaranteed by CCO Holdings, LLC (“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 indentures governing the Charter Operating notes. The Charter Operating notes contain customary representations and warranties and affirmative covenants with limited negative covenants. The Charter Operating indentures also contains customary events of default.

In October 2019, Charter Operating entered into an amendment to its Credit Agreement repricing $4.5 billion of its revolving loan and $4.0 billion of term loan A to LIBOR plus 1.25% and its existing term loan B to LIBOR plus 1.75%. In addition, $4.5 billion of the revolving loan and $4.0 billion of term loan A maturities were extended to 2025 and $3.8 billion of term loan B maturities were extended to 2027.

In May 2019, CCO Holdings and CCO Holdings Capital Corp. jointly issued $750 million aggregate principal amount of 5.375% senior unsecured notes due 2029 at par and in July 2019, an additional $750 million of the same series of notes were issued at a price of 102.000% of the aggregate principal amount. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.

On October 1, 2019, CCO Holdings and CCO Holdings Capital Corp. jointly issued $1.35 billion aggregate principal amount of 4.750% senior unsecured notes due 2030 at par and on October 24, 2019, an additional $500 million of the same series of notes were issued at a price of 101.250% of the aggregate principal amount. The net proceeds from the October 1, 2019 issuance were used to finance a tender offer and call redemption of $500 million aggregate principal amount of CCO Holdings' 5.250% senior unsecured notes due 2021 and $850 million aggregate principal amount of CCO Holdings' 5.750% senior unsecured notes due 2024, as well as to pay related fees and expenses and for general corporate purposes. The net proceeds from the October 24, 2019 issuance will be used to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.

The CCO Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings Capital and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings.

CCO Holdings may redeem some or all of the notes at any time at a premium. Beginning in 2027, the optional redemption price declines to 100% of the principal amount, plus accrued and unpaid interest, if any.

In addition, at any time prior to varying dates in 2022, CCO Holdings may redeem up to 40% of the aggregate principal amount of the notes at a premium plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided that certain conditions are met. In the event of specified change of control events, CCO Holdings must offer to purchase the outstanding notes from the holders at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest.



14


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


7.    Common Stock

The following represents the Company's purchase of Charter Class A common stock and the effect on the consolidated statements of cash flows during the three and nine months ended September 30, 2019 and 2018.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
Share buybacks
6,894,762

 
$
2,748

 
3,046,346

 
$
929

 
11,757,758

 
$
4,455

 
10,349,639

 
$
3,142

Income tax withholding
46,691

 
19

 
12,703

 
4

 
324,731

 
113

 
209,394

 
72

Exercise cost
75,476

 
 
 
8,785

 
 
 
260,646

 
 
 
15,200

 
 
 
7,016,929

 
$
2,767

 
3,067,834

 
$
933

 
12,343,135

 
$
4,568

 
10,574,233

 
$
3,214



As of September 30, 2019, Charter had remaining board authority to purchase an additional $1.4 billion of Charter’s Class A common stock and/or Charter Holdings common units. The Company also withholds shares of its Class A common stock in payment of income tax withholding owed by employees upon vesting of equity awards as well as exercise costs owed by employees upon exercise of stock options.

In 2018, Charter’s board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2018. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity.

8.    Noncontrolling Interests

Noncontrolling interests represents consolidated subsidiaries of which the Company owns less than 100%. The Company is a holding company whose principal asset is a controlling equity interest in Charter Holdings, the indirect owner of the Company’s cable systems. Noncontrolling interests on the Company’s balance sheet consist primarily of Advance/Newhouse Partnership's (“A/N”) equity interests in Charter Holdings, which is comprised of a common ownership interest and a convertible preferred ownership interest.

Net income of Charter Holdings attributable to A/N’s common noncontrolling interest for financial reporting purposes is based on the effective common ownership interest of approximately 8%, and was $43 million and $103 million for the three and nine months ended September 30, 2019, respectively, and $54 million and $99 million for the three and nine months ended September 30, 2018, respectively. Net income of Charter Holdings attributable to A/N's preferred noncontrolling interest for financial reporting purposes is based on the preferred dividend which was $37 million and $112 million for each of the three and nine months ended September 30, 2019 and 2018, respectively.

The following table represents Charter Holdings' purchase of Charter Holdings common units from A/N pursuant to the Letter Agreement (see Note 18) and the effect on total shareholders' equity during the three and nine months ended September 30, 2019 and 2018.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Number of units purchased
864,826

 
495,447

 
1,615,561

 
1,546,475

Average price per unit
$
391.62

 
$
292.81

 
$
366.76

 
$
306.11

Amount of units purchased
$
339

 
$
145

 
$
593

 
$
473

Decrease in noncontrolling interest based on carrying value
$
(215
)
 
$
(122
)
 
$
(400
)
 
$
(376
)
Decrease in additional paid-in-capital, net of tax
$
(93
)
 
$
(17
)
 
$
(145
)
 
$
(73
)




15


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Total shareholders' equity was also adjusted during the three and nine months ended September 30, 2019 and 2018 due to the changes in Charter Holdings' ownership as follows.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Decrease in noncontrolling interest
$
(87
)
 
$
(10
)
 
$
(139
)
 
$
(53
)
Increase in additional paid-in-capital, net of tax
$
65

 
$
7

 
$
104

 
$
39



9.     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 April 2019, the Company entered into a collateral holiday agreement for 60% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years, as well as a ten year collateral cap on the remaining 40% of the cross-currency swaps which limits the required collateral posting on that 40% of the cross-currency swaps to $150 million. The fair value of the Company's cross-currency derivatives was $409 million and $237 million and is included in other long-term liabilities on its consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.

The Company’s derivative instruments are not designated as hedges and are marked to fair value each period, with the impact recorded as a gain or loss on financial instruments, net in the consolidated statements of operations. While these derivative instruments are not designated as hedges for accounting purposes, management continues to believe such instruments are closely correlated with the respective debt, thus managing associated risk.

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,
 
2019
 
2018
 
2019
 
2018
Gain (Loss) on Financial Instruments, Net:
 
 
 
 
 
 
 
Change in fair value of cross-currency derivative instruments
$
(86
)
 
$
(10
)
 
$
(172
)
 
$
(63
)
Foreign currency remeasurement of Sterling Notes to U.S. dollars
52

 
22

 
56

 
63

 
$
(34
)
 
$
12

 
$
(116
)
 
$



10.    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.



16


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Financial Assets and Liabilities

The Company has estimated the fair value of its financial instruments as of September 30, 2019 and December 31, 2018 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, restricted cash, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.

Financial instruments accounted for at fair value on a recurring basis and classified within Level 2 of the valuation hierarchy include the Company's cross-currency derivative instruments and were valued at $409 million and $237 million as of September 30, 2019 and December 31, 2018, respectively.

The estimated fair value of the Company’s senior notes and debentures as of September 30, 2019 and December 31, 2018 is based on quoted market prices in active markets and is classified within Level 1 of the valuation hierarchy, while the estimated fair value of the Company’s credit facilities is based on quoted market prices in inactive markets and is classified within Level 2. The carrying amount of the consolidated variable interest entity's mortgage note liability approximates fair value.

A summary of the carrying value and fair value of debt as of September 30, 2019 and December 31, 2018 is as follows:

 
 
September 30, 2019
 
December 31, 2018
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Senior notes and debentures
 
$
64,140

 
$
69,315

 
$
62,868

 
$
61,087

Credit facilities
 
$
10,759

 
$
10,842

 
$
9,959

 
$
9,608



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.  When such impairments are recorded, fair values are generally classified within Level 3 of the valuation hierarchy.



17


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


11.    Revenues

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Video
$
4,359

 
$
4,332

 
$
13,134

 
$
12,987

Internet
4,195

 
3,809

 
12,322

 
11,286

Voice
477

 
512

 
1,470

 
1,599

Residential revenue
9,031

 
8,653

 
26,926

 
25,872

 
 
 
 
 
 
 
 
Small and medium business
974

 
922

 
2,882

 
2,737

Enterprise
644

 
632

 
1,939

 
1,881

Commercial revenue
1,618

 
1,554

 
4,821

 
4,618

 
 
 
 
 
 
 
 
Advertising sales
394

 
440

 
1,134

 
1,223

Mobile
192

 
17

 
490

 
17

Other
215

 
228

 
632

 
673

 
$
11,450

 
$
10,892

 
$
34,003

 
$
32,403



12.     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,
 
2019
 
2018
 
2019
 
2018
Programming
$
2,790

 
$
2,778

 
$
8,482

 
$
8,333

Regulatory, connectivity and produced content
612

 
546

 
1,770

 
1,639

Costs to service customers
1,894

 
1,854

 
5,483

 
5,492

Marketing
793

 
790

 
2,296

 
2,310

Mobile
337

 
94

 
874

 
135

Other
1,009

 
950

 
3,010

 
2,812

 
$
7,435

 
$
7,012

 
$
21,915

 
$
20,721



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.
 


18


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


13.     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,
 
2019
 
2018
 
2019
 
2018
Special charges, net
$
19

 
$
14

 
$
38

 
$
125

(Gain) loss on sale of assets, net
(5
)
 
4

 
33

 
(9
)
 
$
14

 
$
18

 
$
71

 
$
116



Special charges, net

Special charges, net primarily includes employee termination costs and net amounts of litigation settlements. The three and nine months ended September 30, 2018 includes $14 million and $85 million of merger and restructuring costs, respectively. The nine months ended September 30, 2018 also includes a $22 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. The nine months ended September 30, 2019 includes a $41 million impairment of non-strategic assets.

14.     Stock Compensation Plans

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

Charter granted the following equity awards for the periods presented.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Stock options
39,400

 
24,200

 
1,821,800

 
1,490,700

Restricted stock
200

 
500

 
8,300

 
10,200

Restricted stock units
11,300

 
13,500

 
698,200

 
518,900



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. Time Warner Cable Inc. ("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, 2019, total unrecognized compensation remaining to be recognized in future periods totaled $211 million for stock options, $2 million for restricted stock and $246 million for restricted stock units and the weighted average period over which they are expected to be recognized is two years for stock options, seven months for restricted stock and two years for restricted stock units.

The Company recorded $71 million and $238 million for the three and nine months ended September 30, 2019, respectively, and $71 million and $213 million of stock compensation expense for the three and nine months ended September 30, 2018, respectively,


19


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


which is included in operating costs and expenses. The Company also recorded $5 million of expense related to accelerated vesting of equity awards of terminated employees, which is recorded in other operating expenses, net in the consolidated statements of operations for the nine months ended September 30, 2018.

15.    Income Taxes

Substantially all of the Company’s operations are held through Charter Holdings and its direct and indirect subsidiaries. Charter Holdings and the majority of its subsidiaries are limited liability companies that are generally not subject to income tax. However, certain of these limited liability companies are subject to state income tax. In addition, the subsidiaries that are corporations are subject to income tax. Generally, the taxable income, gains, losses, deductions and credits of Charter Holdings are passed through to its members, Charter and A/N. Charter is responsible for its share of taxable income or loss of Charter Holdings allocated to it in accordance with the Charter Holdings Limited Liability Company Agreement (“LLC Agreement”) and partnership tax rules and regulations. As a result, Charter's primary deferred tax component recorded in the consolidated balance sheets relates to its excess financial reporting outside basis, excluding amounts attributable to nondeductible goodwill, over Charter's tax basis in the investment in Charter Holdings.

The Company recorded income tax expense of $126 million and $329 million for the three and nine months ended September 30, 2019, respectively, and $109 million and $178 million for the three and nine months ended September 30, 2018, respectively. Income tax expense increased during the nine months ended September 30, 2019 compared to the corresponding period in 2018 primarily as a result of higher pretax income and lower benefit from state tax law changes.

Charter Holdings, the indirect owner of the Company’s cable systems, generally allocates its taxable income, gains, losses, deductions and credits proportionately according to the members’ respective ownership interests, except for special allocations required under Section 704(c) of the Internal Revenue Code and the Treasury Regulations (“Section 704(c)”).  Pursuant to Section 704(c) and the LLC Agreement, each item of income, gain, loss and deduction with respect to any property contributed to the capital of the partnership shall, solely for tax purposes, be allocated among the members so as to take into account any variation between the adjusted basis of such property to the partnership for U.S. federal income tax purposes and its initial gross asset value using the “traditional method” as described in the Treasury Regulations.

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 $186 million and $180 million, excluding interest and penalties, as of September 30, 2019 and December 31, 2018, respectively. The Company does not currently anticipate that its reserve for uncertain tax positions will significantly increase or decrease during 2019; however, various events could cause the Company’s current expectations to change in the future. These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision.

No tax years for Charter are currently under examination by the Internal Revenue Service ("IRS") for income tax purposes.  Charter's 2016 through 2018 tax years remain open for examination and assessment. Charter’s short period return dated May 17, 2016 (prior to the acquisition of TWC and Bright House Networks, LLC) remains subject to examination and assessment. Years prior to 2016 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 and 2018 tax years remain open for examination and assessment. The IRS is currently examining TWC’s income tax returns for 2011 through 2014. TWC’s tax year 2015 remains subject to examination and assessment. Prior to TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009, TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS has examined Time Warner’s 2008 through 2010 income tax returns and the results are under appeal. The Company does not anticipate that these examinations will have a material impact on the Company’s consolidated financial position or results of operations. In addition, the Company is also subject to ongoing examinations of the Company’s tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s consolidated financial position or results of operations during the three and nine months ended September 30, 2019, nor does the Company anticipate a material impact in the future.



20


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


16.    Earnings Per Share

Basic earnings per common share is computed by dividing net income attributable to Charter shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share considers the impact of potentially dilutive securities using the treasury stock and if-converted methods and is based on the weighted average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of stock options, restricted stock, restricted stock units, equity awards with market conditions and Charter Holdings convertible preferred units and common units. Charter Holdings common and convertible preferred units of 28 million and 29 million for the three and nine months ended September 30, 2019, respectively, and 30 million and 31 million for the three and nine months ended September 30, 2018, respectively, were not included in the computation of diluted earnings per share as their effect would have been antidilutive. The following is the computation of diluted earnings per common share for the three and nine months ended September 30, 2019 and 2018.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income attributable to Charter shareholders
$
387

 
$
493

 
$
954

 
$
934

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
218,499,213

 
230,554,633

 
221,818,079

 
234,159,830

Effect of dilutive securities:
 
 
 
 
 
 
 
Assumed exercise or issuance of shares relating to stock plans
3,856,654

 
3,052,781

 
3,519,905

 
3,184,094

Weighted average common shares outstanding, diluted
222,355,867

 
233,607,414

 
225,337,984

 
237,343,924

 
 
 
 
 
 
 
 
Basic earnings per common share attributable to Charter shareholders
$
1.77

 
$
2.14

 
$
4.30

 
$
3.99

Diluted earnings per common share attributable to Charter shareholders
$
1.74

 
$
2.11

 
$
4.23

 
$
3.93



17.     Comprehensive Income

Comprehensive income equaled net income attributable to Charter shareholders for the three and nine months ended September 30, 2019 and three months ended September 30, 2018. The following table sets forth the consolidated statements of comprehensive income for the nine months ended September 30, 2018.

 
Nine Months Ended September 30, 2018
Consolidated net income
$
1,146

Foreign currency translation adjustment
(1
)
Consolidated comprehensive income
1,145

Less: Comprehensive income attributable to noncontrolling interest
(212
)
Comprehensive income attributable to Charter shareholders
$
933





21


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


18.     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 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.

The Company is aware that Dr. John Malone, a director emeritus of Charter and Chairman of the board of directors and holder of 49.0% of voting interest in Liberty Broadband, may be deemed to have a 39.9% voting interest in Qurate Retail, Inc. ("Qurate") 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, 2019, the Company recorded revenue in aggregate of approximately $11 million and $35 million, respectively, and for the three and nine months ended September 30, 2018, the Company recorded revenue in aggregate of approximately $18 million and $51 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 1.2% of the series A common stock, 93.6% of the series B common stock and 2.6% of the series C common stock of Discovery and has a 28.2% 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 24.1% voting interest for the election of directors. A/N PP has the right to appoint three directors out of a total of eleven directors to Discovery’s board to be elected by the holders of Discovery’s Series A-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 2% of total operating costs and expenses for the three and nine months ended September 30, 2019 and 2018.

Equity Investments

The Company has agreements with certain equity investees pursuant to which the Company has made or received related party transaction payments. The Company recorded payments to equity investees totaling $78 million and $245 million during the three and nine months ended September 30, 2019, respectively, and $99 million and $248 million during the three and nine months ended September 30, 2018, respectively.


22


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



19.     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 is vigorously defending this lawsuit. Although Charter is unable to predict the outcome of this lawsuit, it does not expect the outcome will have a material effect on its operations, financial condition or cash flows.

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

On December 19, 2011, Sprint Communications Company L.P. (“Sprint”) filed a complaint in the 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. At the trial, 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 appealed the case to the United States Court of Appeals for the Federal Circuit where the Company lost the appeal. The Company has filed a petition for writ of certiorari with the United States Supreme Court, and the Company could receive the decision of the Supreme Court as to whether the Court will grant the petition as early as November 2019. In addition to pursuing 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 expected financial impact of the Sprint verdict has been reflected in the Company's financial statements. 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 outcomes of the appeal of the Sprint Kansas case, the pursuit of indemnity against the Company’s vendor and the TC Tech litigation cannot be predicted.
 
Sprint filed a second suit against Charter and Bright House Networks, LLC on December 2, 2017 in the United States District Court for the District of Delaware. This suit alleges infringement of 15 patents related to the Company's provision of VoIP services (ten of which were asserted against Legacy TWC in the matter described above). Charter is vigorously defending 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 is vigorously defending this case. The court transferred this case to the United States District Court for the District of Delaware on December 20, 2018 pursuant to an agreement between the parties. While the Company is 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.

In addition to the Sprint litigation described above, the Company is a defendant or co-defendant in several additional lawsuits involving alleged infringement of various intellectual property relating to various aspects of its businesses. Other industry participants are also defendants in certain of these cases. In the event that a court ultimately determines that the Company infringes on any intellectual property, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the intellectual property at issue. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company’s 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.



23


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The Company is party to other lawsuits, claims and regulatory inquiries that arise in the ordinary course of conducting its 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.

20.     Employee Benefit Plans

The Company sponsors three qualified defined benefit pension plans 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.
 
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, 2019 and 2018 are recorded in other pension benefits, net in the consolidated statements of operations and consisted of the following:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Interest cost
$
(32
)
 
$
(32
)
 
$
(96
)
 
$
(96
)
Expected return on plan assets
41

 
52

 
123

 
156

Remeasurement gain, net

 
187

 

 
187

Net periodic pension benefits
$
9

 
$
207

 
$
27

 
$
247



During the three and nine months ended September 30, 2018, 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 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 Company made no cash contributions to the qualified pension plans during the three and nine months ended September 30, 2019 and 2018; 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 2019 to the extent benefits are paid.

21.     Recently Issued Accounting Standards

Accounting Standards Adopted January 1, 2018

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

Upon adoption of ASU 2014-09, the Company recorded a cumulative-effect adjustment, which included an increase to total shareholders’ equity of $38 million as of January 1, 2018.



24


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


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

The Company identified a $31 million increase to total shareholders' equity and corresponding increase to deferred tax assets related to the adoption of ASU 2016-16, which was recorded during the three months ended September 30, 2018.

Accounting Standards Adopted January 1, 2019

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 lease asset and a lease liability.  For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria largely similar to the criteria applied under legacy lease accounting, but without explicit bright lines.  

The Company adopted 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, the Company recognized and measured operating leases on the consolidated balance sheet without revising comparative period information or disclosure. At transition, the Company elected the package of practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of past leases, classification and initial direct costs. The Company did not elect to use hindsight to reassess lease terms or impairment at the adoption date. The Company elected the land easements practical expedient which allows the Company 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 implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The new standard resulted in the recording of leased assets and lease liabilities for the Company’s operating leases of approximately $1.1 billion and $1.2 billion, respectively, as of January 1, 2019. The difference between the leased assets and lease liabilities primarily represents the prior year end deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have an impact on the Company’s shareholders equity and is not anticipated to have an impact on the Company’s results from operations and cash flows. The adoption of the new standard resulted in additional interim and annual lease disclosures. See Note 5 for interim lease disclosures for the three and nine months ended September 30, 2019.

Accounting Standards Not Yet Adopted

ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)

In June 2016, the FASB issued ASU 2016-13, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be assessed for impairment under the current expected credit loss model rather than an incurred loss model. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount.  ASU 2016-13 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). The primary financial assets of the Company in scope of ASU 2016-13 include accounts receivables and equipment installment plan notes receivables. The Company is currently in the process of evaluating the impact, if any, the adoption of ASU 2016-13 will have on its consolidated financial statements.

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. 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. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.



25


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


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. ASU 2018-15 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). The Company does not expect the adoption of ASU 2018-15 to have a material impact on its consolidated financial statements.

ASU No. 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials ("ASU 2019-02")

In March 2019, the FASB issued ASU 2019-02, which aligns the accounting for production costs of an episodic television series with the accounting for production costs of films regarding cost capitalization, amortization, impairment, presentation and disclosure. ASU 2019-02 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). The Company does not expect the adoption of ASU 2019-02 to have a material impact on its consolidated financial statements.

22.     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 to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.
 
The "Intermediate Holding Companies" column includes the assets and liabilities of the captive insurance company, a company wholly-owned by Charter outside of Charter Holdings and which does not, directly or indirectly, own any interest in Charter Holdings. The “Charter Operating and Restricted Subsidiaries” column is presented to comply with the terms of the Credit Agreement.

Comprehensive income equaled net income attributable to Charter shareholders for the nine months ended September 30, 2019. Condensed consolidating financial statements as of September 30, 2019 and December 31, 2018 and for the nine months ended September 30, 2019 and 2018 follow.



26


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
As of September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
218

 
$

 
$
290

 
$

 
$
508

Accounts receivable, net
1

 
31

 

 
2,252

 

 
2,284

Receivables from related party
26

 
463

 
55

 

 
(544
)
 

Prepaid expenses and other current assets
7

 
41

 

 
548

 

 
596

Total current assets
34

 
753

 
55

 
3,090

 
(544
)
 
3,388

 
 
 
 
 
 
 
 
 
 
 
 
RESTRICTED CASH

 
89

 

 

 

 
89

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

 
658

 

 
33,560

 

 
34,218

Customer relationships, net

 

 

 
7,956

 

 
7,956

Franchises

 

 

 
67,322

 

 
67,322

Goodwill

 

 

 
29,554

 

 
29,554

Total investment in cable properties, net

 
658

 

 
138,392

 

 
139,050

 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENT IN SUBSIDIARIES
50,471

 
56,947

 
76,898

 

 
(184,316
)
 

OPERATING LEASE RIGHT-OF-USE ASSETS

 
173

 

 
930

 

 
1,103

LOANS RECEIVABLE – RELATED PARTY
260

 
699

 
545

 

 
(1,504
)
 

OTHER NONCURRENT ASSETS
2

 
237

 

 
1,398

 

 
1,637

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
50,767

 
$
59,556

 
$
77,498

 
$
143,810

 
$
(186,364
)
 
$
145,267

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
26

 
$
916

 
$
302

 
$
7,019

 
$

 
$
8,263

Operating lease liabilities

 
30

 

 
180

 

 
210

Payables to related party

 

 

 
544

 
(544
)
 

Current portion of long-term debt

 

 

 
3,509

 

 
3,509

Total current liabilities
26

 
946

 
302

 
11,252

 
(544
)
 
11,982

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT

 

 
20,249

 
51,141

 

 
71,390

LOANS PAYABLE – RELATED PARTY

 

 

 
1,504

 
(1,504
)
 

DEFERRED INCOME TAXES
17,542

 
15

 

 
52

 

 
17,609

LONG-TERM OPERATING LEASE LIABILITIES

 
197

 

 
794

 

 
991

OTHER LONG-TERM LIABILITIES
225

 
402

 

 
2,146

 

 
2,773

 
 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
Controlling interest
32,974

 
50,471

 
56,947

 
76,898

 
(184,316
)
 
32,974

Noncontrolling interests

 
7,525

 

 
23

 

 
7,548

Total shareholders’/member’s equity
32,974

 
57,996

 
56,947

 
76,921

 
(184,316
)
 
40,522

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’/member’s equity
$
50,767

 
$
59,556

 
$
77,498

 
$
143,810

 
$
(186,364
)
 
$
145,267




27


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Balance Sheets
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
251

 
$

 
$
300

 
$

 
$
551

Accounts receivable, net
1

 
33

 

 
1,699

 

 
1,733

Receivables from related party
27

 
518

 
57

 

 
(602
)
 

Prepaid expenses and other current assets
14

 
32

 

 
400

 

 
446

Total current assets
42

 
834

 
57

 
2,399

 
(602
)
 
2,730

 
 
 
 
 
 
 
 
 
 
 
 
RESTRICTED CASH

 
214

 

 

 

 
214

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

 
468

 

 
34,658

 

 
35,126

Customer relationships, net

 

 

 
9,565

 

 
9,565

Franchises

 

 

 
67,319

 

 
67,319

Goodwill

 

 

 
29,554

 

 
29,554

Total investment in cable properties, net

 
468

 

 
141,096

 

 
141,564

 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENT IN SUBSIDIARIES
53,592

 
60,530

 
78,960

 

 
(193,082
)
 

LOANS RECEIVABLE – RELATED PARTY
251

 
674

 
526

 

 
(1,451
)
 

OTHER NONCURRENT ASSETS

 
222

 

 
1,403

 
(3
)
 
1,622

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
53,885

 
$
62,942

 
$
79,543

 
$
144,898

 
$
(195,138
)
 
$
146,130

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
9

 
$
893

 
$
283

 
$
7,620

 
$

 
$
8,805

Payables to related party

 

 

 
602

 
(602
)
 

Current portion of long-term debt

 

 

 
3,290

 

 
3,290

Total current liabilities
9

 
893

 
283

 
11,512

 
(602
)
 
12,095

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT

 

 
18,730

 
50,807

 

 
69,537

LOANS PAYABLE – RELATED PARTY

 

 

 
1,451

 
(1,451
)
 

DEFERRED INCOME TAXES
17,376

 
16

 

 

 
(3
)
 
17,389

OTHER LONG-TERM LIABILITIES
215

 
478

 

 
2,144

 

 
2,837

 
 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
Controlling interest
36,285

 
53,592

 
60,530

 
78,960

 
(193,082
)
 
36,285

Noncontrolling interests

 
7,963

 

 
24

 

 
7,987

Total shareholders’/member’s equity
36,285

 
61,555

 
60,530

 
78,984

 
(193,082
)
 
44,272

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’/member’s equity
$
53,885

 
$
62,942

 
$
79,543

 
$
144,898

 
$
(195,138
)
 
$
146,130




28


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
REVENUES
$
39

 
$
880

 
$

 
$
33,997

 
$
(913
)
 
$
34,003

 
 
 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
39

 
843

 

 
21,950

 
(917
)
 
21,915

Depreciation and amortization

 
12

 

 
7,453

 

 
7,465

Other operating (income) expense, net

 
(10
)
 

 
77

 
4

 
71

 
39

 
845

 

 
29,480

 
(913
)
 
29,451

Income from operations

 
35

 

 
4,517

 

 
4,552

 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
7

 
25

 
(785
)
 
(2,080
)
 

 
(2,833
)
Loss on financial instruments, net

 

 

 
(116
)
 

 
(116
)
Other pension benefits, net

 

 

 
27

 

 
27

Other expense, net

 
(2
)
 

 
(129
)
 

 
(131
)
Equity in income of subsidiaries
1,180

 
1,347

 
2,132

 

 
(4,659
)
 

 
1,187

 
1,370

 
1,347

 
(2,298
)
 
(4,659
)
 
(3,053
)
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
1,187

 
1,405

 
1,347

 
2,219

 
(4,659
)
 
1,499

Income tax expense
(233
)
 
(10
)
 

 
(86
)
 

 
(329
)
Consolidated net income
954

 
1,395

 
1,347

 
2,133

 
(4,659
)
 
1,170

Less: Net income attributable to noncontrolling interests

 
(215
)
 

 
(1
)
 

 
(216
)
Net income
$
954

 
$
1,180

 
$
1,347

 
$
2,132

 
$
(4,659
)
 
$
954




29


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)



Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
REVENUES
$
37

 
$
844

 
$

 
$
32,390

 
$
(868
)
 
$
32,403

 
 
 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
37

 
810

 

 
20,742

 
(868
)
 
20,721

Depreciation and amortization

 
8

 

 
7,776

 

 
7,784

Other operating expenses, net

 
4

 

 
112

 

 
116

 
37

 
822

 

 
28,630

 
(868
)
 
28,621

Income from operations

 
22

 

 
3,760

 

 
3,782

 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
7

 
21

 
(762
)
 
(1,896
)
 

 
(2,630
)
Other pension benefits, net

 

 

 
247

 

 
247

Other expense, net

 
(26
)
 

 
(49
)
 

 
(75
)
Equity in income of subsidiaries
1,085

 
1,286

 
2,048

 

 
(4,419
)
 

 
1,092

 
1,281

 
1,286

 
(1,698
)
 
(4,419
)
 
(2,458
)
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
1,092

 
1,303

 
1,286

 
2,062

 
(4,419
)
 
1,324

Income tax expense
(158
)
 
(7
)
 

 
(13
)
 

 
(178
)
Consolidated net income
934

 
1,296

 
1,286

 
2,049

 
(4,419
)
 
1,146

Less: Net income attributable to noncontrolling interests

 
(211
)
 

 
(1
)
 

 
(212
)
Net income
$
934

 
$
1,085

 
$
1,286

 
$
2,048

 
$
(4,419
)
 
$
934




Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Statements of Comprehensive Income
For the nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
Consolidated net income
$
934

 
$
1,296

 
$
1,286

 
$
2,049

 
$
(4,419
)
 
$
1,146

Foreign currency translation adjustment
(1
)
 
(1
)
 
(1
)
 
(1
)
 
3

 
(1
)
Consolidated comprehensive income
$
933

 
$
1,295

 
$
1,285

 
$
2,048

 
$
(4,416
)
 
$
1,145

Less: Comprehensive income attributable to noncontrolling interests

 
(211
)
 

 
(1
)
 

 
(212
)
Comprehensive income
$
933

 
$
1,084

 
$
1,285

 
$
2,047

 
$
(4,416
)
 
$
933





30


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
NET CASH FLOWS FROM OPERATING ACTIVITIES
$
(22
)
 
$
65

 
$
(762
)
 
$
9,109

 
$

 
$
8,390

 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment

 
(67
)
 

 
(4,913
)
 
67

 
(4,913
)
Change in accrued expenses related to capital expenditures

 

 

 
(449
)
 

 
(449
)
Real estate investments through variable interest entities

 
(125
)
 

 

 

 
(125
)
Contributions to subsidiaries
(117
)
 
(54
)
 
(1,559
)
 

 
1,730

 

Distributions from subsidiaries
4,601

 
5,222

 
5,988

 

 
(15,811
)
 

Other, net

 
(8
)
 

 
85

 
(67
)
 
10

Net cash flows from investing activities
4,484

 
4,968

 
4,429

 
(5,277
)
 
(14,081
)
 
(5,477
)
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Borrowings of long-term debt

 

 
1,515

 
11,642

 

 
13,157

Repayments of long-term debt

 

 

 
(10,886
)
 

 
(10,886
)
Payments for debt issuance costs

 

 
(14
)
 
(34
)
 

 
(48
)
Purchase of treasury stock
(4,568
)
 

 

 

 

 
(4,568
)
Proceeds from exercise of stock options
106

 

 

 

 

 
106

Purchase of noncontrolling interest

 
(593
)
 

 

 

 
(593
)
Distributions to noncontrolling interest

 
(114
)
 

 
(2
)
 

 
(116
)
Contributions from parent

 
117

 
54

 
1,559

 
(1,730
)
 

Distributions to parent

 
(4,601
)
 
(5,222
)
 
(5,988
)
 
15,811

 

Other, net

 

 

 
(133
)
 

 
(133
)
Net cash flows from financing activities
(4,462
)
 
(5,191
)
 
(3,667
)
 
(3,842
)
 
14,081

 
(3,081
)
 
 
 
 
 
 
 
 
 
 
 
 
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 
(158
)
 

 
(10
)
 

 
(168
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period

 
465

 

 
300

 

 
765

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$

 
$
307

 
$

 
$
290

 
$

 
$
597




31


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Charter Communications, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Restricted Subsidiaries
 
Eliminations
 
Charter Consolidated
NET CASH FLOWS FROM OPERATING ACTIVITIES
$
4

 
$
91

 
$
(728
)
 
$
9,232

 
$

 
$
8,599

 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment

 

 

 
(6,692
)
 

 
(6,692
)
Change in accrued expenses related to capital expenditures

 

 

 
(620
)
 

 
(620
)
Real estate investments through variable interest entities

 
(15
)
 

 

 

 
(15
)
Contribution to subsidiaries
(56
)
 
(127
)
 
(127
)
 

 
310

 

Distributions from subsidiaries
3,217

 
3,763

 
4,491

 

 
(11,471
)
 

Other, net

 
(10
)
 

 
(93
)
 

 
(103
)
Net cash flows from investing activities
3,161

 
3,611

 
4,364

 
(7,405
)
 
(11,161
)
 
(7,430
)
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Borrowings of long-term debt

 

 

 
11,552

 

 
11,552

Repayments of long-term debt

 

 

 
(8,964
)
 

 
(8,964
)
Borrowings (repayments) loans payable - related parties
(7
)
 

 

 
7

 

 

Payments for debt issuance costs

 

 

 
(29
)
 

 
(29
)
Purchase of treasury stock
(3,214
)
 

 

 

 

 
(3,214
)
Proceeds from exercise of stock options
56

 

 

 

 

 
56

Purchase of noncontrolling interest

 
(473
)
 

 

 

 
(473
)
Distributions to noncontrolling interest

 
(113
)
 

 
(1
)
 

 
(114
)
Contributions from parent

 
56

 
127

 
127

 
(310
)
 

Distributions to parent

 
(3,217
)
 
(3,763
)
 
(4,491
)
 
11,471

 

Borrowings for real estate investments through variable interest entities

 
170

 

 

 

 
170

Distributions to variable interest entities noncontrolling interest

 
(107
)
 

 

 

 
(107
)
Other, net

 

 

 
(7
)
 

 
(7
)
Net cash flows from financing activities
(3,165
)
 
(3,684
)
 
(3,636
)
 
(1,806
)
 
11,161

 
(1,130
)
 
 
 
 
 
 
 
 
 
 
 
 
NET INCRASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 
18

 

 
21

 

 
39

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period

 
291

 

 
330

 

 
621

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$

 
$
309

 
$

 
$
351

 
$

 
$
660





32



Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Charter Communications, Inc. (together with its controlled subsidiaries, “Charter”) is the second largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services to approximately 29.0 million residential and small and medium business customers at September 30, 2019. We also offer mobile service to residential customers and recently launched mobile service to a select number of small and medium business customers. In addition, we sell 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. We also own and operate regional sports networks and local sports, news and community channels.

Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.

Overview

Since the close of the merger in 2016 of Charter and Time Warner Cable Inc. ("TWC") and the acquisition of Bright House Networks, LLC ("Bright House"), we have been focused on integrating the practices and systems of Charter, TWC and Bright House, centralizing our product, marketing, sales and service operations, insourcing the TWC and Bright House workforces in our call centers and field operations, and rolling out Spectrum pricing and packaging ("SPP") to TWC and Bright House service areas. In 2018, we completed the conversion of the remaining TWC and Bright House analog service areas to an all-digital platform enabling us to deliver more HD channels and higher Internet speeds. Nearly all of our footprint is now all-digital. Additionally, we have doubled minimum Internet speeds to 200 Mbps in a number of service areas at no additional cost to new and existing SPP Internet customers. In 2018, leveraging DOCSIS 3.1 technology, we also expanded the availability of our Spectrum Internet Gig service to nearly all of our footprint. With our integration nearly complete, we are focused on operating as one company, with a unified product, marketing and service infrastructure, which will allow us to accelerate growth and innovate faster. With significantly less customer-facing change expected in 2019, we are focused on deploying superior products and service with minimal service disruptions. We expect our growing levels of productivity will result in lower customer churn, longer customer lifetimes and improved productivity with fewer customer calls and truck rolls per customer relationship. With nearly 85% of our residential customer base now in SPP packages, we expect additional benefits from lower legacy package migration activity, combined with SPP customers rolling off introductory pricing and modest price increases. Further, we expect to continue to drive customer relationship growth through sales of video, Internet, wireline voice and mobile packaged services. Additionally, with the completion of our all-digital conversion, roll-out of DOCSIS 3.1 technology across our footprint, and the integration of TWC and Bright House mostly complete, we have experienced a meaningful reduction in capital expenditures in dollars and as a percent of revenue in 2019 and expect these reductions to continue for the remainder of 2019.

At the end of the second quarter of 2018, we launched our mobile product, Spectrum Mobile, under our mobile virtual network operator ("MVNO") reseller agreement with Verizon. Our Spectrum Mobile service is offered to our customers subscribing to our Internet service and runs on Verizon's mobile network combined with Spectrum WiFi. We began mass market advertising of Spectrum Mobile in September 2018. In the second quarter of 2019, we expanded our Spectrum Mobile bring-your-own-device ("BYOD") program across all sales channels to include a broader set of devices. We believe our BYOD program will lower the cost for consumers of switching mobile carriers, and will reduce the short-term working capital impact of selling new mobile devices on installment plans. We expect these developments to contribute to the growth of our mobile business. We also continue to explore ways to manage our own network and drive even more mobile traffic to our network through our continued deployment of in-home and outdoor WiFi hotspots. In addition, we plan to use our WiFi network in conjunction with additional unlicensed or licensed spectrum to improve network performance and expand capacity to offer consumers a superior mobile service at a lower total cost to us.​​ Further, we have experimental wireless licenses from the Federal Communications Commission that we are utilizing to test next generation mobile services in several service areas around the country.

We believe Spectrum-branded mobile services will drive higher sales of our core products, create longer customer lives and increase profitability and cash flow over time. As a result of growth costs associated with our new mobile product line, we cannot be certain that we will be able to grow revenues or maintain our margins at recent historical rates. During the three and nine months ended September 30, 2019, our mobile product line increased revenues by $192 million and $490 million, respectively, reduced Adjusted EBITDA by approximately $145 million and $384 million, respectively, and reduced free cash flow by approximately $256 million and $844 million, respectively. During the three and nine months ended September 30, 2018, our mobile product


33



line increased revenues by $17 million during both time periods, reduced Adjusted EBITDA by approximately $77 million and $118 million, respectively, and reduced free cash flow by $149 million and $290 million, respectively. As we continue to grow our mobile service and scale the business, we expect continued negative impacts to Adjusted EBITDA, as well as negative working capital impacts from the timing of device-related cash flows when we sell the handset or tablet to customers pursuant to equipment installment plans.

We realized revenue, Adjusted EBITDA and income from operations during the periods presented as follows (in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Revenues
$
11,450

 
$
10,892

 
5.1
%
 
$
34,003

 
$
32,403

 
4.9
%
Adjusted EBITDA
$
4,086

 
$
3,951

 
3.4
%
 
$
12,326

 
$
11,895

 
3.6
%
Income from operations
$
1,586

 
$
1,380

 
15.0
%
 
$
4,552

 
$
3,782

 
20.4
%

Adjusted EBITDA is defined as net income attributable to Charter shareholders plus net income attributable to noncontrolling interest, net interest expense, income taxes, depreciation and amortization, stock compensation expense, (gain) loss on financial instruments, net, other pension (benefits) costs, other (income) expense, net and other operating (income) expenses, such as special charges and (gain) loss on sale or retirement of assets. See “—Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow. 

Growth in total revenue for the three and nine months ended September 30, 2019 compared to the corresponding prior periods was primarily due to growth in our residential Internet, mobile and commercial business customers. Adjusted EBITDA and income from operations growth was impacted by growth in revenue and increases in operating costs and expenses, primarily mobile, other and programming. Income from operations was also affected by a decrease in depreciation and amortization expense.

The following table summarizes our customer statistics for video, Internet and voice as of September 30, 2019 and 2018 (in thousands except per customer data and footnotes).

 
Approximate as of
 
September 30,
 
2019 (a)
 
2018 (a)
Customer Relationships (b)
 
 
 
Residential
27,037

 
26,063

Small and Medium Business
1,930

 
1,792

Total Customer Relationships
28,967

 
27,855

 
 
 
 
Residential Primary Service Units (“PSU”)
 
 
 
Video
15,725

 
16,140

Internet
24,595

 
23,336

Voice
9,595

 
10,218

 
 
 
 
Monthly Residential Revenue per Residential Customer (c)
$
112.00

 
$
111.13

 
 
 
 
Small and Medium Business PSUs
 
 
 
Video
520

 
488

Internet
1,730

 
1,594

Voice
1,120

 
1,024

 
 
 
 
Monthly Small and Medium Business Revenue per Customer (d)
$
169.44

 
$
173.52

 
 
 
 
Enterprise PSUs (e)
264

 
243


(a) 
Customer statistics do not include mobile. We calculate the aging of customer accounts based on the monthly billing cycle


34



for each account. On that basis, as of September 30, 2019 and 2018, customers include approximately 148,000 and 231,400 customers, respectively, whose accounts were over 60 days past due, approximately 16,400 and 23,100 customers, respectively, whose accounts were over 90 days past due and approximately 14,100 and 18,500 customers, respectively, whose accounts were over 120 days past due.
(b) 
Customer relationships include the number of customers that receive one or more levels of service, encompassing video, Internet and voice services, without regard to which service(s) such customers receive. Customers who reside in residential multiple dwelling units (“MDUs”) and that are billed under bulk contracts are counted based on the number of billed units within each bulk MDU. Total customer relationships exclude enterprise customer relationships.
(c) 
Monthly residential revenue per residential customer is calculated as total residential video, Internet and voice quarterly revenue divided by three divided by average residential customer relationships during the respective quarter.
(d) 
Monthly small and medium business revenue per customer is calculated as total small and medium business quarterly revenue divided by three divided by average small and medium business customer relationships during the respective quarter.
(e) 
Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering as an individual PSU.

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report on Form 10-K. There have been no material changes from the critical accounting policies described in our Form 10-K.



35



Results of Operations

The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions, except per share data):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
11,450

 
$
10,892

 
$
34,003

 
$
32,403

 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Operating costs and expenses (exclusive of items shown separately below)
7,435

 
7,012

 
21,915

 
20,721

Depreciation and amortization
2,415

 
2,482

 
7,465

 
7,784

Other operating expenses, net
14

 
18

 
71

 
116

 
9,864

 
9,512

 
29,451

 
28,621

Income from operations
1,586

 
1,380

 
4,552

 
3,782

 
 
 
 
 
 
 
 
Other Income (Expenses):
 
 
 
 
 
 
 
Interest expense, net
(963
)
 
(901
)
 
(2,833
)
 
(2,630
)
Gain (loss) on financial instruments, net
(34
)
 
12

 
(116
)
 

Other pension benefits, net
9

 
207

 
27

 
247

Other expense, net
(5
)
 
(5
)
 
(131
)
 
(75
)
 
(993
)
 
(687
)
 
(3,053
)
 
(2,458
)
 
 
 
 
 
 
 
 
Income before income taxes
593

 
693

 
1,499

 
1,324

Income tax expense
(126
)
 
(109
)
 
(329
)
 
(178
)
Consolidated net income
467

 
584

 
1,170

 
1,146

Less: Net income attributable to noncontrolling interests
(80
)
 
(91
)
 
(216
)
 
(212
)
 
 
 
 
 
 
 
 
Net income attributable to Charter shareholders
$
387

 
$
493

 
$
954

 
$
934

 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS:
 
 
 
 
 
 
 
Basic
$
1.77

 
$
2.14

 
$
4.30

 
$
3.99

Diluted
$
1.74

 
$
2.11

 
$
4.23

 
$
3.93

 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
218,499,213

 
230,554,633

 
221,818,079

 
234,159,830

Weighted average common shares outstanding, diluted
222,355,867

 
233,607,414

 
225,337,984

 
237,343,924


Revenues. Total revenues grew $558 million and $1.6 billion for the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to increases in the number of residential Internet and commercial business customers, price adjustments as well as the launch of our mobile service in the second half of 2018 offset by a decrease in video customers.
   


36



Revenues by service offering were as follows (dollars in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Video
$
4,359

 
$
4,332

 
0.6
 %
 
$
13,134

 
$
12,987

 
1.1
 %
Internet
4,195

 
3,809

 
10.1
 %
 
12,322

 
11,286

 
9.2
 %
Voice
477

 
512

 
(6.8
)%
 
1,470

 
1,599

 
(8.0
)%
Residential revenue
9,031

 
8,653

 
4.4
 %
 
26,926

 
25,872

 
4.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
Small and medium business
974

 
922

 
5.7
 %
 
2,882

 
2,737

 
5.3
 %
Enterprise
644

 
632

 
1.8
 %
 
1,939

 
1,881

 
3.0
 %
Commercial revenue
1,618

 
1,554

 
4.1
 %
 
4,821

 
4,618

 
4.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Advertising sales
394

 
440

 
(10.6
)%
 
1,134

 
1,223

 
(7.3
)%
Mobile
192

 
17

 
NM

 
490

 
17

 
NM

Other
215

 
228

 
(5.6
)%
 
632

 
673

 
(6.0
)%
 
$
11,450

 
$
10,892

 
5.1
 %
 
$
34,003

 
$
32,403

 
4.9
 %

Video revenues consist primarily of revenues from basic and digital video services provided to our residential customers, as well as franchise fees, equipment service fees and video installation revenue. The increase in video revenues is attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Increase related to rate changes
$
167

 
$
497

Decrease in average residential video customers
(110
)
 
(291
)
Decrease in video on demand and pay-per-view
(30
)
 
(59
)
 
$
27

 
$
147


The increases related to rate changes were primarily due to price adjustments including annual increases and promotional roll-off. Residential video customers decreased by 415,000 from September 30, 2018 to September 30, 2019.

The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Increase in average residential Internet customers
$
199

 
$
577

Increase related to rate changes
187

 
459

 
$
386

 
$
1,036


Residential Internet customers grew by 1,259,000 customers from September 30, 2018 to September 30, 2019. The increases related to rate changes were primarily due to price adjustments including promotional roll-off.



37



The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Decrease in average residential voice customers
$
(29
)
 
$
(68
)
Decrease related to rate changes
(6
)
 
(61
)
 
$
(35
)
 
$
(129
)

The decreases related to rate changes were primarily due to value-based pricing. Residential wireline voice customers decreased by 623,000 customers from September 30, 2018 to September 30, 2019.

The increase in small and medium business commercial revenues is attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Increase in small and medium business customers
$
76

 
$
251

Decrease related to rate changes
(24
)
 
(106
)
 
$
52

 
$
145


Small and medium business customers grew by 138,000 from September 30, 2018 to September 30, 2019. The decreases related to rate changes were primarily due to value-based pricing related to SPP, net of promotional roll-off and price adjustments.

Enterprise revenues increased $12 million and $58 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to growth in customers offset by the sale of non-strategic assets. Enterprise PSUs increased 21,000 from September 30, 2018 to September 30, 2019.

Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues decreased $46 million and $89 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to a decrease in political revenue.

During the three and nine months ended September 30, 2019, mobile revenues represented approximately $123 million and $348 million of device revenues, respectively, and approximately $69 million and $142 million of service revenues, respectively, related to our mobile service. During both the three and nine months ended September 30, 2018, mobile revenues represented approximately $16 million of device revenues and approximately $1 million of service revenues related to our mobile service. As of September 30, 2019, we had 794,000 mobile lines.

Other revenues consist of revenue from regional sports and news channels (excluding intercompany charges or advertising sales on those channels), home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues. Other revenues decreased $13 million and $41 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to a decrease in late payment fees and home shopping revenue offset by the sale of video devices.



38



Operating costs and expenses. The increases in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, are attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Programming
$
12

 
$
149

Regulatory, connectivity and produced content
66

 
131

Costs to service customers
40

 
(9
)
Marketing
3

 
(14
)
Mobile
243

 
739

Other
59

 
198

 
$
423

 
$
1,194


Programming costs were approximately $2.8 billion and $8.5 billion for the three and nine months ended September 30, 2019, respectively, representing 38% and 39% of total operating costs and expenses, respectively, and $2.8 billion and $8.3 billion for the three and nine months ended September 30, 2018, respectively, representing 40% of total operating costs and expenses for both time periods. Programming costs consist primarily of costs paid to programmers for basic, digital, premium, VOD, and pay-per-view programming. The increase in programming costs is primarily a result of contractual rate adjustments, including renewals and increases in amounts paid for retransmission consents partly offset by lower video customers and pay-per-view.  We expect programming expenses will continue to increase due to a variety of factors, including annual increases imposed by programmers with additional selling power as a result of media consolidation, increased demands by owners of broadcast stations for payment for retransmission consent or linking carriage of other services to retransmission consent, and additional programming, particularly new services. We have been unable to fully pass these increases on to our customers and do not expect to be able to do so in the future without a potential loss of customers.

Regulatory, connectivity and produced content increased $66 million and $131 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to higher regulatory pass-through fees, original programming costs and costs of video devices sold to customers.
 
Costs to service customers increased $40 million and decreased $9 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The increase during the three months ended September 30, 2019 compared to the corresponding period in 2018 was primarily due to an increase in bad debt expense. Bad debt expense increased despite lower non-pay churn due to billing simplification changes we made which pushed out collections and resulted in higher balances at disconnect.

Mobile costs of $337 million and $874 million for the three and nine months ended September 30, 2019, respectively, and $94 million and $135 million for the three and nine months ended September 30, 2018, respectively, were comprised of mobile device costs, mobile launch costs and mobile service and operating costs.



39



The increase in other expense is attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Corporate costs
$
33

 
$
69

Property tax and insurance
9

 
49

Stock compensation expense

 
25

Enterprise

 
14

Advertising sales expense
2

 
7

Other
15

 
34

 
$
59

 
$
198


Depreciation and amortization. Depreciation and amortization expense decreased by $67 million and $319 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in depreciation and amortization as certain assets acquired from TWC and Bright House become fully depreciated offset by an increase in depreciation as a result of more recent capital expenditures.

Other operating expenses, net. The changes in other operating expenses, net are attributable to the following (dollars in millions):

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Special charges, net
$
5

 
$
(87
)
(Gain) loss on sale of assets, net
(9
)
 
42

 
$
(4
)
 
$
(45
)

Special charges, net decreased during the nine months ended September 30, 2019 compared to the corresponding period in 2018 primarily due to a decrease in merger and restructuring costs. The nine months ended September 30, 2018 also included a $22 million charge related to a withdrawal liability from a multiemployer pension plan. Loss on sale of assets, net increased during the nine months ended September 30, 2019 compared to the corresponding period in 2018 primarily due to a $41 million impairment of non-strategic assets recognized during the nine months ended September 30, 2019. See Note 13 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”

Interest expense, net. Net interest expense increased by $62 million and $203 million for the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily as a result of an increase in weighted average debt outstanding of approximately $2.4 billion during both time periods, primarily due to the issuance of notes throughout 2018 and 2019 for general corporate purposes including stock buybacks and debt repayments.

Gain (loss) on financial instruments, net. We recorded losses on financial instruments of $34 million and $116 million during the three and nine months ended September 30, 2019, respectively, and a gain of $12 million during the three months ended September 30, 2018. Gains and losses on financial instruments are primarily recognized due to changes in the fair value of our cross-currency derivative instruments and the foreign currency remeasurement of the fixed-rate British pound sterling denominated notes (the “Sterling Notes”) into U.S. dollars. For more information, see Note 9 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”

Other pension benefits, net. Net other pension benefits decreased by $198 million and $220 million during the three and nine months ended September 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to a remeasurement gain in the third quarter of 2018 as a result of significant lump sum settlement payments to participants. For more information, see Note 20 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”


40




Other expense, net. Other expense, net primarily represents equity losses on our equity investments. Other expense, net also includes impairments on equity investments of approximately $121 million and $58 million during the nine months ended September 30, 2019 and 2018, respectively.

Income tax expense. We recognized income tax expense of $126 million and $329 million for the three and nine months ended September 30, 2019, respectively, and $109 million and $178 million for the three and nine months ended September 30, 2018, respectively. Income tax expense increased during the nine months ended September 30, 2019 compared to the corresponding period in 2018 primarily as a result of higher pretax income and lower benefit from state tax law changes. For more information, see Note 15 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”

Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting purposes represents A/N’s portion of Charter Holdings’ net income based on its effective common unit ownership interest and the preferred dividend of $37 million and $112 million for each of the three and nine months ended September 30, 2019 and 2018, respectively. For more information, see Note 8 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”

Net income attributable to Charter shareholders. Net income attributable to Charter shareholders decreased from $493 million for the three months ended September 30, 2018 to $387 million for the three months ended September 30, 2019 and increased from $934 million for the nine months ended September 30, 2018 to $954 million for the nine months ended September 30, 2019 primarily as a result of the factors described above.

Use of Adjusted EBITDA and Free Cash Flow

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income attributable to Charter shareholders and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, below.

Adjusted EBITDA eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial measures.

Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.

Management and Charter’s board of directors use Adjusted EBITDA and free cash flow to assess our performance and our ability to service our debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the Securities and Exchange Commission (the “SEC”)). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which were $317 million and $916 million for the three and nine months ended September 30, 2019, respectively, and $278 million and $816 million for the three and nine months ended September 30, 2018, respectively.



41



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income attributable to Charter shareholders
$
387

 
$
493

 
$
954

 
$
934

Plus: Net income attributable to noncontrolling interest
80

 
91

 
216

 
212

Interest expense, net
963

 
901

 
2,833

 
2,630

Income tax expense
126

 
109

 
329

 
178

Depreciation and amortization
2,415

 
2,482

 
7,465

 
7,784

Stock compensation expense
71

 
71

 
238

 
213

(Gain) loss on financial instruments, net
34

 
(12
)
 
116

 

Other pension benefits, net
(9
)
 
(207
)
 
(27
)
 
(247
)
Other, net
19

 
23

 
202

 
191

Adjusted EBITDA
$
4,086

 
$
3,951

 
$
12,326

 
$
11,895

 
 
 
 
 
 
 
 
Net cash flows from operating activities
$
2,943

 
$
2,804

 
$
8,390

 
$
8,599

Less: Purchases of property, plant and equipment
(1,651
)
 
(2,118
)
 
(4,913
)
 
(6,692
)
Change in accrued expenses related to capital expenditures
(21
)
 
(154
)
 
(449
)
 
(620
)
Free cash flow
$
1,271

 
$
532

 
$
3,028

 
$
1,287


Liquidity and Capital Resources

Introduction

This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.

Recent Events

In May 2019, CCO Holdings, LLC and CCO Holdings Capital Corp. jointly issued $750 million aggregate principal amount of 5.375% senior unsecured notes due 2029 at par and in July 2019, an additional $750 million of the same series of notes were issued at a price of 102.000% of the aggregate principal amount. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.

In July 2019, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.25 billion aggregate principal amount of 5.125% senior notes due 2049 at a price of 99.880% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including funding potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness, which may include Time Warner Cable, LLC's 5.000% senior notes due 2020.

On October 1, 2019, CCO Holdings and CCO Holdings Capital Corp. jointly issued $1.35 billion aggregate principal amount of 4.750% senior unsecured notes due 2030 at par and on October 24, 2019, an additional $500 million of the same series of notes were issued at a price of 101.250% of the aggregate principal amount. The net proceeds from the October 1, 2019 issuance were used to finance a tender offer and call redemption of $500 million aggregate principal amount of CCO Holdings' 5.250% senior unsecured notes due 2021 and $850 million aggregate principal amount of CCO Holdings' 5.750% senior unsecured notes due 2024, as well as to pay related fees and expenses and for general corporate purposes. The net proceeds from the October 24, 2019 issuance will be used to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.

In October 2019, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.5 billion aggregate principal amount of 4.800% senior unsecured notes due 2050 at a price of 99.436% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.


42




In October 2019, Charter Operating entered into an amendment to its Credit Agreement repricing $4.5 billion of its revolving loan and $4.0 billion of term loan A to LIBOR plus 1.25% and its existing term loan B to LIBOR plus 1.75%. In addition, $4.5 billion of the revolving loan and $4.0 billion of term loan A maturities were extended to 2025 and $3.8 billion of term loan B maturities were extended to 2027.

Overview of Our Contractual Obligations and Liquidity

We have significant amounts of debt. The principal amount of our debt as of September 30, 2019 was $74.2 billion, consisting of $10.8 billion of credit facility debt, $43.0 billion of investment grade senior secured notes and $20.4 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt. 

Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. As we launch our new mobile services, we expect an initial funding period to grow a new product as well as negative working capital impacts from the timing of device-related cash flows when we provide the handset or tablet to customers pursuant to equipment installment plans. Free cash flow was $1.3 billion and $3.0 billion for the three and nine months ended September 30, 2019, respectively, and $532 million and $1.3 billion for the three and nine months ended September 30, 2018, respectively. See table below for factors impacting free cash flow during the three and nine months ended September 30, 2019 compared to the corresponding prior periods. As of September 30, 2019, the amount available under our credit facilities was approximately $4.3 billion and cash on hand was approximately $508 million. We expect to utilize free cash flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of our obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating’s revolving credit facility as well as access to the capital markets to fund our projected cash needs.

We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including mergers and acquisitions as well as stock repurchases and dividends. Charter's target leverage remains at 4 to 4.5 times Adjusted EBITDA, and up to 3.5 times Adjusted EBITDA at the Charter Operating level. Our leverage was 4.5 times Adjusted EBITDA as of September 30, 2019. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. During the three and nine months ended September 30, 2019, Charter purchased approximately 6.9 million and 11.8 million shares, respectively, of Charter Class A common stock for approximately $2.7 billion and $4.5 billion, respectively, and during the three and nine months ended September 30, 2018, Charter purchased 3.0 million and 10.3 million shares, respectively, of Charter Class A common stock for approximately $929 million and $3.1 billion, respectively.

In December 2017, Charter and A/N entered into an amendment to the letter agreement (the "Letter Agreement") that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis. Charter Holdings purchased from A/N 0.9 million and 1.6 million Charter Holdings common units at an average price per unit of $391.62 and $366.76, or $339 million and $593 million, during the three and nine months ended September 30, 2019, respectively, and 0.5 million and 1.5 million Charter Holdings common units at an average price per unit of $292.81 and $306.11, or $145 million and $473 million, during the three and nine months ended September 30, 2018, respectively.

As of September 30, 2019, Charter had remaining board authority to purchase an additional $1.4 billion of Charter’s Class A common stock and/or Charter Holdings common units. Charter is not obligated to acquire any particular amount of common stock, and the timing of any purchases that may occur cannot be predicted and will largely depend on market conditions and other potential uses of capital. Purchases may include open market purchases, tender offers or negotiated transactions.

As possible acquisitions, swaps or dispositions arise, we actively review them against our objectives including, among other considerations, improving the operational efficiency, geographic clustering of assets, product development or technology capabilities of our business and achieving appropriate return targets, and we may participate to the extent we believe these


43



possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisitions, dispositions or system swaps, or that any such transactions will be material to our operations or results.

Free Cash Flow

Free cash flow increased $739 million and $1.7 billion during the three and nine months ended September 30, 2019 compared to the corresponding prior periods in 2018 due to the following (dollars in millions).

 
Three months ended
September 30, 2019
compared to
three months ended
September 30, 2018
Increase / (Decrease)
 
Nine months ended
September 30, 2019
compared to
nine months ended
September 30, 2018
Increase / (Decrease)
Decrease in capital expenditures
$
467

 
$
1,779

Increase in Adjusted EBITDA
135

 
431

Changes in working capital, excluding change in accrued interest
162

 
(378
)
Increase in cash paid for interest, net
(12
)
 
(126
)
Other, net
(13
)
 
35

 
$
739

 
$
1,741


Free cash flow was reduced by $256 million and $844 million during the three and nine months ended September 30, 2019, respectively, and $149 million and $290 million during the three and nine months ended September 30, 2018, respectively, due to mobile with impacts negatively affecting working capital, capital expenditures and Adjusted EBITDA.

Limitations on Distributions

Distributions by our subsidiaries to a parent company for payment of principal on parent company notes are restricted under indentures and credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution. As of September 30, 2019, there was no default under any of these indentures or credit facilities, and each subsidiary met its applicable leverage ratio tests based on September 30, 2019 financial results. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in its credit facilities.

However, without regard to leverage, during any calendar year or any portion thereof during which the borrower is a flow-through entity for tax purposes, and so long as no event of default exists, the borrower may make distributions to the equity interests of the borrower in an amount sufficient to make permitted tax payments.

In addition to the limitation on distributions under the various indentures, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act.

Historical Operating, Investing, and Financing Activities

Cash, Cash Equivalents and Restricted Cash. We held $508 million and $551 million in cash and cash equivalents as of September 30, 2019 and December 31, 2018, respectively. We also held $89 million and $214 million in restricted cash as of September 30, 2019 and December 31, 2018, respectively, representing escrowed funds of a consolidated variable interest entity. See Note 3 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”

Operating Activities. Net cash provided by operating activities decreased $209 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to changes in working capital, excluding the change in accrued interest and accrued expenses related to capital expenditures, that used $549 million more cash and an increase in cash paid for interest, net of $126 million offset by an increase in Adjusted EBITDA of $431 million.

Investing Activities. Net cash used in investing activities was $5.5 billion and $7.4 billion for the nine months ended September 30, 2019 and 2018, respectively. The decrease in cash used was primarily due to a decrease in capital expenditures.


44




Financing Activities. Net cash used in financing activities was $3.1 billion and $1.1 billion for the nine months ended September 30, 2019 and 2018, respectively. The increase in cash used was primarily due to an increase in the purchase of treasury stock and noncontrolling interest and a decrease in the amount by which borrowings of long-term debt exceeded repayments.

Capital Expenditures

We have significant ongoing capital expenditure requirements.  Capital expenditures were $1.7 billion and $4.9 billion for the three and nine months ended September 30, 2019, respectively, and $2.1 billion and $6.7 billion for the three and nine months ended September 30, 2018, respectively.  The decrease was primarily due to lower customer premise equipment expenditures as a result of the completion of our all-digital conversion and fewer SPP migrations, lower scalable infrastructure as a result of the completion of the roll-out of DOCSIS 3.1 technology across our footprint in 2018 and lower support spending with the substantial completion of the integration of TWC and Bright House. See the table below for more details.
 
We currently expect capital expenditures, excluding capital expenditures related to mobile, to be slightly below $7 billion in 2019, versus $8.9 billion in 2018. The actual amount of our capital expenditures in 2019 will depend on a number of factors including further spend related to product development and growth rates of both our residential and commercial businesses.

Our capital expenditures are funded primarily from cash flows from operating activities and borrowings on our credit facility. In addition, our accrued liabilities related to capital expenditures decreased by $449 million and $620 million for the nine months ended September 30, 2019 and 2018, respectively.

The following tables present our major capital expenditures categories in accordance with National Cable and Telecommunications Association (“NCTA”) disclosure guidelines for the three and nine months ended September 30, 2019 and 2018. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Customer premise equipment (a)
$
470

 
$
675

 
$
1,527

 
$
2,437

Scalable infrastructure (b)
320

 
505

 
840

 
1,578

Line extensions (c)
370

 
348

 
1,054

 
992

Upgrade/rebuild (d)
165

 
190

 
451

 
522

Support capital (e)
326

 
400

 
1,041

 
1,163

Total capital expenditures
$
1,651

 
$
2,118

 
$
4,913

 
$
6,692

 
 
 
 
 
 
 
 
Capital expenditures included in total related to:
 
 
 
 
 
 
 
Mobile
$
100

 
$
66

 
$
281

 
$
136

Commercial services
$
327

 
$
342

 
$
956

 
$
934

All-digital transition
$

 
$
42

 
$

 
$
316


(a)
Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems).
(b)
Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment).
(c)
Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
(d)
Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.
(e)
Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).

Recently Issued Accounting Standards

See Note 21 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for a discussion


45



of recently issued accounting standards.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

We use derivative instruments to manage foreign exchange risk on the Sterling Notes, and do not hold or issue derivative instruments for speculative trading purposes.

Cross-currency derivative instruments are used to effectively convert £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency derivative instruments have maturities of June 2031 and July 2042. We are required to post collateral on the cross-currency derivative instruments when such instruments are in a liability position. In April 2019, we entered into a collateral holiday agreement for 60% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years, as well as a ten year collateral cap on the remaining 40% of the cross-currency swaps which limits the required collateral posting on that 40% of the cross-currency swaps to $150 million. For more information, see Note 9 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
      
As of September 30, 2019 and December 31, 2018, the weighted average interest rate on credit facility debt was approximately 3.8% and 4.3%, respectively, and the weighted average interest rate on the senior notes was approximately 5.4% and 5.6%, respectively, resulting in a blended weighted average interest rate of 5.2% and 5.4%, respectively. The interest rate on approximately 84% and 85% of the total principal amount of our debt was effectively fixed as of September 30, 2019 and December 31, 2018, respectively.
  
The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of September 30, 2019 (dollars in millions).

 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
Fair Value
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-Rate
$

 
$
3,500

 
$
2,200

 
$
4,250

 
$
4,150

 
$
48,368

 
$
62,468

 
$
68,395

Average Interest Rate
%
 
4.19
%
 
4.32
%
 
4.70
%
 
5.85
%
 
5.61
%
 
5.44
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable Rate
$
71

 
$
286

 
$
286

 
$
286

 
$
584

 
$
10,221

 
$
11,734

 
$
11,762

Average Interest Rate
3.49
%
 
3.01
%
 
2.79
%
 
2.79
%
 
2.78
%
 
3.20
%
 
3.11
%
 
 

Interest rates on variable-rate debt are estimated using the average implied forward LIBOR for the year of maturity based on the yield curve in effect at September 30, 2019 including applicable bank spread.

Item 4.     Controls and Procedures.

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our design and operation of disclosure controls and procedures with respect to the information generated for use in this quarterly report. The evaluation was based upon reports and certifications provided by a number of executives. Based on, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation, we believe that our controls provide such reasonable assurances.

During the quarter ended September 30, 2019, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


46



PART II. OTHER INFORMATION

Item 1.     Legal Proceedings.

Our Annual Report on Form 10-K for the year ended December 31, 2018 includes “Legal Proceedings” under Item 3 of Part I. Other than as described in Note 19 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements,” there have been no material changes from the legal proceedings described in our Form 10-K.

Item 1A.     Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, 2018 includes "Risk Factors" under Item 1A of Part I. There have been no material changes from the updated risk factors described in our Form 10-K.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

(C) Purchases of Equity Securities by the Issuer

The following table presents Charter’s purchases of equity securities completed during the third quarter of 2019 (dollars in millions, except per share amounts):

Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 - 31, 2019
633,701
$401.83
583,021
$2,565
August 1 - 31, 2019
4,335,395
$388.63
4,295,096
$2,316
September 1 - 30, 2019
2,047,833
$418.61
2,016,645
$1,377

(1) 
Includes 50,680, 40,299 and 31,188 shares withheld from employees for the payment of taxes and exercise costs upon the exercise of stock options or vesting of other equity awards for the months of July, August and September 2019, respectively.
(2) 
During the three months ended September 30, 2019, Charter purchased approximately 6.9 million shares of its Class A common stock for approximately $2.7 billion. Charter Holdings purchased 0.9 million Charter Holdings common units from A/N at an average price per unit of $391.62, or $339 million, during the three months ended September 30, 2019. As of September 30, 2019, Charter had remaining board authority to purchase an additional $1.4 billion of Charter’s Class A common stock and/or Charter Holdings common units. In addition to open market purchases including pursuant to Rule 10b5-1 plans adopted from time to time, Charter may also buy shares of Charter Class A common stock, from time to time, pursuant to private transactions outside of its Rule 10b5-1 plan and any such repurchases would also trigger the repurchases from A/N pursuant to and to the extent provided in the Letter Agreement.

Item 6.     Exhibits.

See Exhibit Index.


47



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications, Inc. has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

 
CHARTER COMMUNICATIONS, INC.,
 
Registrant
 
 
 
 
 
By:
 
/s/ Kevin D. Howard
 
 
 
Kevin D. Howard
Date: October 25, 2019
 
 
Executive Vice President, Chief Accounting Officer and Controller



S- 1




Exhibit Index
Exhibit
 
Description
 
 
 
10.1
 
10.2
 
10.3
 
10.4
 
31.1
 
31.2
 
32.1
 
32.2
 
101
 
The following financial information from Charter Communications, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019, filed with the Securities and Exchange Commission on October 25, 2019, formatted in iXBRL (inline eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Shareholders' Equity; (iv) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.
104
 
Cover Page, formatted in iXBRL and contained in Exhibit 101.




E- 1

Exhibit


Exhibit 31.1

I, Thomas M. Rutledge, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Charter Communications, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: October 25, 2019
/s/ Thomas M. Rutledge
Thomas M. Rutledge
Chairman and Chief Executive Officer


Exhibit


Exhibit 31.2
I, Christopher L. Winfrey, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Charter Communications, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: October 25, 2019
/s/ Christopher L. Winfrey
Christopher L. Winfrey
Chief Financial Officer
(Principal Financial Officer)



Exhibit
Exhibit 32.1


CERTIFICATION OF CHIEF EXECUTIVE
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS

I, Thomas M. Rutledge, the Chairman and Chief Executive Officer of Charter Communications, Inc. (the "Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019 (the "Report") filed with the Securities and Exchange Commission:
fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Thomas M. Rutledge
Thomas M. Rutledge
Chairman and Chief Executive Officer
October 25, 2019


Exhibit
Exhibit 32.2


CERTIFICATION OF CHIEF FINANCIAL
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS

I, Christopher L. Winfrey, the Chief Financial Officer of Charter Communications, Inc. (the "Company"), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019 (the "Report") filed with the Securities and Exchange Commission:
fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Christopher L. Winfrey
Christopher L. Winfrey
Chief Financial Officer
(Principal Financial Officer)
October 25, 2019