CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
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|
|
|
|
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|
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|
|
5.000% senior notes due February 1, 2028
|
2,500
|
|
|
2,474
|
|
|
2,500
|
|
|
2,472
|
|
5.375% senior notes due June 1, 2029
|
1,500
|
|
|
1,501
|
|
|
1,500
|
|
|
1,501
|
|
4.750% senior notes due March 1, 2030
|
3,050
|
|
|
3,042
|
|
|
3,050
|
|
|
3,042
|
|
4.500% senior notes due August 15, 2030
|
2,750
|
|
|
2,750
|
|
|
2,750
|
|
|
2,750
|
|
4.250% senior notes due February 1, 2031
|
3,000
|
|
|
3,002
|
|
|
3,000
|
|
|
3,001
|
|
4.500% senior notes due May 1, 2032
|
2,900
|
|
|
2,927
|
|
|
2,900
|
|
|
2,928
|
|
4.500% senior notes due June 1, 2033
|
1,750
|
|
|
1,728
|
|
|
—
|
|
|
—
|
|
Charter Communications Operating, LLC:
|
|
|
|
|
|
|
|
4.464% senior notes due July 23, 2022
|
3,000
|
|
|
2,994
|
|
|
3,000
|
|
|
2,992
|
|
Senior floating rate notes due February 1, 2024
|
900
|
|
|
901
|
|
|
900
|
|
|
902
|
|
4.500% senior notes due February 1, 2024
|
1,100
|
|
|
1,095
|
|
|
1,100
|
|
|
1,094
|
|
4.908% senior notes due July 23, 2025
|
4,500
|
|
|
4,478
|
|
|
4,500
|
|
|
4,475
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|
3.750% senior notes due February 15, 2028
|
1,000
|
|
|
989
|
|
|
1,000
|
|
|
989
|
|
4.200% senior notes due March 15, 2028
|
1,250
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|
|
1,242
|
|
|
1,250
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|
|
1,241
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|
5.050% senior notes due March 30, 2029
|
1,250
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|
|
1,242
|
|
|
1,250
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|
|
1,242
|
|
2.800% senior notes due April 1, 2031
|
1,600
|
|
|
1,584
|
|
|
1,600
|
|
|
1,583
|
|
2.300% senior notes due February 1, 2032
|
1,000
|
|
|
991
|
|
|
1,000
|
|
|
991
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|
6.384% senior notes due October 23, 2035
|
2,000
|
|
|
1,984
|
|
|
2,000
|
|
|
1,983
|
|
5.375% senior notes due April 1, 2038
|
800
|
|
|
787
|
|
|
800
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|
|
786
|
|
3.500% senior notes due June 1, 2041
|
1,500
|
|
|
1,482
|
|
|
—
|
|
|
—
|
|
6.484% senior notes due October 23, 2045
|
3,500
|
|
|
3,468
|
|
|
3,500
|
|
|
3,468
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|
5.375% senior notes due May 1, 2047
|
2,500
|
|
|
2,506
|
|
|
2,500
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|
|
2,506
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|
5.750% senior notes due April 1, 2048
|
2,450
|
|
|
2,392
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|
|
2,450
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|
|
2,392
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|
5.125% senior notes due July 1, 2049
|
1,250
|
|
|
1,240
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|
|
1,250
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|
|
1,240
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|
4.800% senior notes due March 1, 2050
|
2,800
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|
|
2,797
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|
|
2,800
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|
|
2,797
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|
3.700% senior notes due April 1, 2051
|
2,050
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|
|
2,031
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|
|
2,050
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|
|
2,030
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|
3.900% senior notes due June 1, 2052
|
2,400
|
|
|
2,321
|
|
|
—
|
|
|
—
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|
6.834% senior notes due October 23, 2055
|
500
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|
|
495
|
|
|
500
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|
|
495
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|
3.850% senior notes due April 1, 2061
|
1,850
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|
|
1,809
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|
|
1,350
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|
|
1,339
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|
4.400% senior notes due December 1, 2061
|
1,400
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|
|
1,389
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|
|
—
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|
|
—
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|
Credit facilities
|
10,012
|
|
|
9,949
|
|
|
10,150
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|
|
10,081
|
|
Time Warner Cable, LLC:
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|
|
|
|
|
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|
4.000% senior notes due September 1, 2021
|
1,000
|
|
|
1,002
|
|
|
1,000
|
|
|
1,008
|
|
5.750% sterling senior notes due June 2, 2031 (a)
|
865
|
|
|
919
|
|
|
854
|
|
|
911
|
|
6.550% senior debentures due May 1, 2037
|
1,500
|
|
|
1,665
|
|
|
1,500
|
|
|
1,668
|
|
7.300% senior debentures due July 1, 2038
|
1,500
|
|
|
1,759
|
|
|
1,500
|
|
|
1,763
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|
6.750% senior debentures due June 15, 2039
|
1,500
|
|
|
1,703
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|
|
1,500
|
|
|
1,706
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|
5.875% senior debentures due November 15, 2040
|
1,200
|
|
|
1,253
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|
|
1,200
|
|
|
1,254
|
|
5.500% senior debentures due September 1, 2041
|
1,250
|
|
|
1,258
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|
|
1,250
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|
|
1,258
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|
5.250% sterling senior notes due July 15, 2042 (b)
|
899
|
|
|
869
|
|
|
889
|
|
|
859
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|
4.500% senior debentures due September 15, 2042
|
1,250
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|
|
1,146
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|
|
1,250
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|
|
1,145
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|
Time Warner Cable Enterprises LLC:
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|
|
|
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8.375% senior debentures due March 15, 2023
|
1,000
|
|
|
1,081
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|
|
1,000
|
|
|
1,104
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|
8.375% senior debentures due July 15, 2033
|
1,000
|
|
|
1,262
|
|
|
1,000
|
|
|
1,270
|
|
Total debt
|
87,526
|
|
|
87,964
|
|
|
82,143
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|
|
82,752
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|
Less current portion:
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|
|
|
|
|
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.000% senior notes due September 1, 2021
|
(1,000)
|
|
|
(1,002)
|
|
|
(1,000)
|
|
|
(1,008)
|
|
Long-term debt
|
$
|
86,526
|
|
|
$
|
86,962
|
|
|
$
|
81,143
|
|
|
$
|
81,744
|
|
(a)Principal amount includes £625 million remeasured at $865 million and $854 million as of June 30, 2021 and December 31, 2020, respectively, using the exchange rate at the respective dates.
(b)Principal amount includes £650 million remeasured at $899 million and $889 million as of June 30, 2021 and December 31, 2020, respectively, using the exchange rate at the respective dates.
The accreted values presented in the table above represent the principal amount of the debt adjusted for original issue discount or premium at the time of sale, deferred financing costs, and, in regards to debt assumed in acquisitions, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the fixed-rate British pound sterling denominated notes (the “Sterling Notes”), the principal amount of the debt and any premium or discount is remeasured into US dollars as of each balance sheet date. See Note 9. The Company has availability under the Charter Operating credit facilities of approximately $4.7 billion as of June 30, 2021.
In March 2021, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.5 billion aggregate principal amount of 3.500% senior secured notes due June 2041 at a price of 99.544% of the aggregate principal amount, $1.0 billion aggregate principal amount of 3.900% senior secured notes due June 2052 at a price of 99.951% of the aggregate principal amount and an additional $500 million aggregate principal amount of 3.850% senior secured notes due April 2061 at a price of 94.668% 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, including $750 million of CCO Holdings, LLC's ("CCO Holdings") 5.750% notes due February 2026.
In June 2021, Charter Operating and Charter Communications Operating Capital Corp. issued an additional $1.4 billion of 3.900% senior secured notes due June 2052 priced at 95.578% of the aggregate principal amount and $1.4 billion aggregate principal amount of 4.400% senior secured notes due December 2061 at a price of 99.906% of the aggregate principal amount. 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, including $500 million of CCO Holdings' 5.750% notes due February 2026, all of CCO Holdings' 5.875% notes due May 2027, and in July 2021, $1.0 billion of Time Warner Cable, LLC's 4.000% notes due September 2021.
The Charter Operating notes are guaranteed by CCO Holdings and substantially all of the 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 and substantially all of its subsidiaries to the extent such liens can be perfected under the Uniform Commercial Code by the filing of a financing statement and the liens rank equally with the liens on the collateral securing obligations under the Charter Operating credit facilities. Charter Operating may redeem some or all of the Charter Operating notes at any time at a premium.
The Charter Operating notes are subject to the terms and conditions of the indenture governing the Charter Operating notes. The Charter Operating notes contain customary representations and warranties and affirmative covenants with limited negative covenants. The Charter Operating indenture also contains customary events of default.
In April 2021, CCO Holdings and CCO Holdings Capital Corp. jointly issued $1.0 billion of 4.500% senior unsecured notes due June 2033 at par, and in June 2021, an additional $750 million of the same series of notes was issued at a price of 99.250% of the aggregate principal amount. The net proceeds were used for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units, to repay certain indebtedness and to pay related fees and expenses.
The CCO Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings Capital Corp. and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
CCO Holdings may redeem some or all of the notes at any time at a premium. Beginning in 2030, 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 2024, 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.
Losses on extinguishment of debt are recorded in other income (expenses), net in the consolidated statements of operations and consisted of the following.
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
CCO Holdings notes redemption
|
$
|
(46)
|
|
|
$
|
(36)
|
|
|
$
|
(75)
|
|
|
$
|
(63)
|
|
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 six months ended June 30, 2021 and 2020.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Shares
|
|
$
|
|
Shares
|
|
$
|
|
Shares
|
|
$
|
|
Shares
|
|
$
|
Share buybacks
|
5,147,257
|
|
|
$
|
3,392
|
|
|
2,028,234
|
|
|
$
|
1,026
|
|
|
10,703,575
|
|
|
$
|
6,866
|
|
|
6,480,783
|
|
|
$
|
3,202
|
|
Income tax withholding
|
183,357
|
|
|
124
|
|
|
247,651
|
|
|
129
|
|
|
467,920
|
|
|
302
|
|
|
583,305
|
|
|
305
|
|
Exercise cost
|
185,698
|
|
|
|
|
188,923
|
|
|
|
|
495,513
|
|
|
|
|
430,675
|
|
|
|
|
5,516,312
|
|
|
$
|
3,516
|
|
|
2,464,808
|
|
|
$
|
1,155
|
|
|
11,667,008
|
|
|
$
|
7,168
|
|
|
7,494,763
|
|
|
$
|
3,507
|
|
Share buybacks above include shares of Charter Class A common stock purchased from Liberty Broadband Corporation (“Liberty Broadband”) pursuant to the LBB Letter Agreement as follows (see Note 19).
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2021
|
|
Six Months Ended June 30, 2021
|
Number of shares purchased
|
1,927,032
|
|
|
2,761,608
|
|
Amount of shares purchased
|
$
|
1,244
|
|
|
$
|
1,762
|
|
In July 2021, the Company purchased from Liberty Broadband an additional 0.4 million shares of Charter Class A common stock for approximately $279 million.
As of June 30, 2021, Charter had remaining board authority to purchase an additional $1.7 billion of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. 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 2020, Charter’s board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2020. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity.
In March 2020, pursuant to the terms of the Amended and Restated Stockholders Agreement with Liberty Broadband, Advance/Newhouse Partnership (“A/N”) and Charter, dated May 23, 2015 (the "Stockholders Agreement"), Charter, Liberty and A/N
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
closed on transactions in which Liberty Broadband and A/N exercised their preemptive right to purchase 35,112 and 20,182 shares, respectively, of Charter Class A common stock for a total purchase price of approximately $23 million.
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 A/N's equity interests in Charter Holdings, which is comprised of a common ownership interest and prior to June 18, 2021, a convertible preferred ownership interest.
On June 18, 2021, the Company caused the conversion of all of A/N's 25 million Charter Holdings convertible preferred units into Charter Holdings common units. Each preferred unit was converted into 0.37334 Charter Holdings common units, representing a conversion price of $267.85 per unit, based on a conversion feature as defined in the Limited Liability Company Agreement of Charter Holdings, resulting in the issuance of a total of 9.3 million common units to A/N.
Net income of Charter Holdings attributable to A/N’s common noncontrolling interest for financial reporting purposes is based on the weighted average effective common ownership interest of approximately 7% prior to conversion of the preferred units and 11% after conversion during 2021 and 8% during 2020, and was $105 million and $181 million for the three and six months ended June 30, 2021, respectively, and $72 million and $105 million for the three and six months ended June 30, 2020, 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 $32 million and $70 million for the three and six months ended June 30, 2021, respectively, and $37 million and $75 million for the three and six months ended June 30, 2020, respectively.
The following table represents Charter Holdings' purchase of Charter Holdings common units from A/N pursuant to the A/N Letter Agreement (see Note 19) and the effect on total shareholders' equity during the three and six months ended June 30, 2021 and 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Number of units purchased
|
912,034
|
|
|
280,069
|
|
|
1,704,688
|
|
|
1,075,676
|
|
Average price per unit
|
$
|
639.28
|
|
|
$
|
445.15
|
|
|
$
|
639.28
|
|
|
$
|
481.68
|
|
Amount of units purchased
|
$
|
583
|
|
|
$
|
125
|
|
|
$
|
1,090
|
|
|
$
|
518
|
|
Decrease in noncontrolling interest based on carrying value
|
$
|
(213)
|
|
|
$
|
(69)
|
|
|
$
|
(405)
|
|
|
$
|
(264)
|
|
Decrease in additional paid-in-capital, net of tax
|
$
|
(279)
|
|
|
$
|
(42)
|
|
|
$
|
(516)
|
|
|
$
|
(191)
|
|
Total shareholders' equity was also adjusted during the three and six months ended June 30, 2021 and 2020 due to the changes in Charter Holdings' ownership including the impact of the preferred unit conversion discussed above as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Decrease in noncontrolling interest
|
$
|
(1,333)
|
|
|
$
|
(52)
|
|
|
$
|
(1,508)
|
|
|
$
|
(161)
|
|
Increase in additional paid-in-capital, net of tax
|
$
|
1,003
|
|
|
$
|
41
|
|
|
$
|
1,134
|
|
|
$
|
123
|
|
As a result of the preferred unit conversion, the preferred noncontrolling interest carrying amount of $3.2 billion was reclassified to common noncontrolling interest and remeasured to $2.0 billion representing the relative effective Charter Holdings common ownership amount in all Charter Holdings partnership capital account balances resulting in a $1.2 billion reclass from noncontrolling interest to additional paid-in capital. A deferred tax liability of $300 million was recorded with the offset to additional paid-in capital as part of the Charter Holdings ownership change equity adjustments.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
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. In March 2021, the collateral holiday for 20% of the swaps was extended to November 2022 in consideration for the Company's agreement to post collateral over a threshold amount on that 20% portion of the swaps from March 2021 through October 2021. The fair value of the Company's cross-currency derivatives was $206 million and $184 million and is included in other long-term liabilities on its consolidated balance sheets as of June 30, 2021 and December 31, 2020, 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 in the consolidated statements of operations in other income (expenses), net. 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 are recorded in other income (expenses), net in the consolidated statements of operations and consisted of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Change in fair value of cross-currency derivative instruments
|
$
|
(85)
|
|
|
$
|
61
|
|
|
$
|
(22)
|
|
|
$
|
(365)
|
|
Foreign currency remeasurement of Sterling Notes to U.S. dollars
|
(6)
|
|
|
3
|
|
|
(21)
|
|
|
111
|
|
Gain (loss) on financial instruments, net
|
$
|
(91)
|
|
|
$
|
64
|
|
|
$
|
(43)
|
|
|
$
|
(254)
|
|
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.
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of June 30, 2021 and December 31, 2020 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.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The carrying amounts of cash and cash equivalents, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
As of June 30, 2021 and December 31, 2020, accounts receivable, net on the consolidated balance sheets includes approximately $363 million and $338 million of current equipment installment plan receivables, respectively, and other noncurrent assets includes approximately $173 million and $134 million of noncurrent equipment installment plan receivables, respectively.
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 which are recorded in other-long term liabilities on the consolidated balance sheets and were valued at $206 million and $184 million as of June 30, 2021 and December 31, 2020, respectively.
The estimated fair value of the Company’s senior notes and debentures as of June 30, 2021 and December 31, 2020 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 June 30, 2021 and December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Senior notes and debentures
|
$
|
78,015
|
|
|
$
|
87,958
|
|
|
$
|
72,671
|
|
|
$
|
84,163
|
|
Credit facilities
|
$
|
9,949
|
|
|
$
|
9,963
|
|
|
$
|
10,081
|
|
|
$
|
10,063
|
|
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.
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 June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Internet
|
$
|
5,221
|
|
|
$
|
4,530
|
|
|
$
|
10,307
|
|
|
$
|
8,937
|
|
Video
|
4,378
|
|
|
4,371
|
|
|
8,722
|
|
|
8,793
|
|
Voice
|
394
|
|
|
451
|
|
|
793
|
|
|
908
|
|
Residential revenue
|
9,993
|
|
|
9,352
|
|
|
19,822
|
|
|
18,638
|
|
|
|
|
|
|
|
|
|
Small and medium business
|
1,042
|
|
|
983
|
|
|
2,054
|
|
|
1,979
|
|
Enterprise
|
636
|
|
|
606
|
|
|
1,274
|
|
|
1,228
|
|
Commercial revenue
|
1,678
|
|
|
1,589
|
|
|
3,328
|
|
|
3,207
|
|
|
|
|
|
|
|
|
|
Advertising sales
|
411
|
|
|
249
|
|
|
755
|
|
|
614
|
|
Mobile
|
519
|
|
|
310
|
|
|
1,011
|
|
|
568
|
|
Other
|
201
|
|
|
196
|
|
|
408
|
|
|
407
|
|
|
$
|
12,802
|
|
|
$
|
11,696
|
|
|
$
|
25,324
|
|
|
$
|
23,434
|
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Programming
|
$
|
2,978
|
|
|
$
|
2,873
|
|
|
$
|
5,966
|
|
|
$
|
5,765
|
|
Regulatory, connectivity and produced content
|
668
|
|
|
488
|
|
|
1,268
|
|
|
1,039
|
|
Costs to service customers
|
1,827
|
|
|
1,848
|
|
|
3,631
|
|
|
3,696
|
|
Marketing
|
741
|
|
|
719
|
|
|
1,492
|
|
|
1,485
|
|
Mobile
|
586
|
|
|
413
|
|
|
1,158
|
|
|
787
|
|
Other
|
1,082
|
|
|
956
|
|
|
2,078
|
|
|
1,957
|
|
|
$
|
7,882
|
|
|
$
|
7,297
|
|
|
$
|
15,593
|
|
|
$
|
14,729
|
|
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 contract period. Costs to service customers include costs related to field operations, network operations and customer care for the Company’s residential and SMB customers, including internal and third-party labor for the non-capitalizable portion of installations, service and repairs, maintenance, bad debt expense, billing and collection, occupancy and vehicle costs. 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, 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.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
13. Other Operating (Income) Expenses, Net
Other operating (income) expenses, net consist of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Special charges, net
|
$
|
(6)
|
|
|
$
|
6
|
|
|
$
|
249
|
|
|
$
|
22
|
|
(Gain) loss on disposal of assets, net
|
(3)
|
|
|
(4)
|
|
|
44
|
|
|
(13)
|
|
|
$
|
(9)
|
|
|
$
|
2
|
|
|
$
|
293
|
|
|
$
|
9
|
|
Special charges, net
Special charges, net primarily includes net amounts of litigation settlements, including the $220 million tentative settlement with Sprint Communications Company L.P. (“Sprint”) and T-Mobile USA, Inc. ("T-Mobile") for the six months ended June 30, 2021 discussed in Note 20, and employee termination costs.
(Gain) loss on disposal of assets, net
(Gain) loss on disposal of assets, net represents the net (gain) loss recognized on the sales and disposals of fixed assets and cable systems.
14. Other Income (Expenses), Net
Other income (expenses), net consist of the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Loss on extinguishment of debt (see Note 6)
|
$
|
(46)
|
|
|
$
|
(36)
|
|
|
$
|
(75)
|
|
|
$
|
(63)
|
|
Gain (loss) on financial instruments, net (see Note 9)
|
(91)
|
|
|
64
|
|
|
(43)
|
|
|
(254)
|
|
Other pension benefits, net (see Note 21)
|
173
|
|
|
11
|
|
|
191
|
|
|
21
|
|
Loss on equity investments, net (see Note 3)
|
(168)
|
|
|
(9)
|
|
|
(153)
|
|
|
—
|
|
|
$
|
(132)
|
|
|
$
|
30
|
|
|
$
|
(80)
|
|
|
$
|
(296)
|
|
15. 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 June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Stock options
|
16,800
|
|
|
11,600
|
|
|
1,241,800
|
|
|
1,265,300
|
|
Restricted stock
|
4,600
|
|
|
6,000
|
|
|
4,600
|
|
|
6,000
|
|
Restricted stock units
|
9,100
|
|
|
7,600
|
|
|
354,200
|
|
|
415,900
|
|
Charter stock options and restricted stock units generally cliff vest three years from the date of grant. 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.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
As of June 30, 2021, total unrecognized compensation remaining to be recognized in future periods totaled $319 million for stock options, $2 million for restricted stock and $305 million for restricted stock units and the weighted average period over which they are expected to be recognized is two years for stock options, ten months for restricted stock and two years for restricted stock units.
The Company recorded stock compensation expense of $100 million and $234 million for the three and six months ended June 30, 2021, respectively, and $90 million and $180 million for the three and six months ended June 30, 2020, respectively, which is included in operating costs and expenses.
16. 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 $281 million and $497 million for the three and six months ended June 30, 2021, respectively, and $166 million and $195 million for the three and six months ended June 30, 2020, respectively. Income tax expense increased during the three and six months ended June 30, 2021 compared to the corresponding period in 2020 primarily as a result of higher pretax income.
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 $333 million and $298 million, excluding interest and penalties, as of June 30, 2021 and December 31, 2020, respectively. The Company does not currently anticipate that its reserve for uncertain tax positions will significantly increase or decrease during 2021; 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 2020 tax years remain open for examination and assessment. Charter’s short period return dated May 17, 2016 (prior to the merger with Time Warner Cable Inc. ("TWC") and acquisition of Bright House Networks, LLC ("Bright House")) and prior years remain open solely for purposes of examination of Charter’s loss and credit carryforwards. The IRS is currently examining Charter Holdings’ income tax return for 2016. Charter Holdings’ 2017 through 2020 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
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
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 six months ended June 30, 2021, nor does the Company anticipate a material impact in the future.
17. 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 units of 15 million for the three and six months ended June 30, 2021 and Charter Holdings common and convertible preferred units of 26 million for the three and six months ended June 30, 2020 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 six months ended June 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to Charter shareholders
|
$
|
1,020
|
|
|
$
|
766
|
|
|
$
|
1,827
|
|
|
$
|
1,162
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter Holdings convertible preferred units
|
32
|
|
|
—
|
|
|
70
|
|
|
—
|
|
Net income attributable to Charter shareholders after assumed conversions
|
$
|
1,052
|
|
|
$
|
766
|
|
|
$
|
1,897
|
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
185,916,505
|
|
|
205,777,438
|
|
|
188,645,356
|
|
|
206,804,371
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Assumed exercise or issuance of shares relating to stock plans
|
5,058,176
|
|
|
5,129,508
|
|
|
5,098,205
|
|
|
5,353,847
|
|
|
|
|
|
|
|
|
|
Weighted average Charter Holdings convertible preferred units
|
8,102,709
|
|
|
—
|
|
|
8,714,704
|
|
|
—
|
|
Weighted average common shares outstanding, diluted
|
199,077,390
|
|
|
210,906,946
|
|
|
202,458,265
|
|
|
212,158,218
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share attributable to Charter shareholders
|
$
|
5.48
|
|
|
$
|
3.72
|
|
|
$
|
9.69
|
|
|
$
|
5.62
|
|
Diluted earnings per common share attributable to Charter shareholders
|
$
|
5.29
|
|
|
$
|
3.63
|
|
|
$
|
9.37
|
|
|
$
|
5.48
|
|
18. Comprehensive Income
Comprehensive income equaled net income attributable to Charter shareholders for each of the three and six months ended June 30, 2021 and 2020.
19. 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 Stockholders Agreement, 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
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
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 designations and other governance rights. Mr. Thomas Rutledge, the Company’s CEO, is the chairman of the board of Charter.
In December 2016, Charter and A/N entered into a letter agreement, as amended in December 2017 (the “A/N Letter Agreement”), that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the 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.
In February 2021, Charter and Liberty Broadband entered into a letter agreement (the “LBB Letter Agreement”). The LBB Letter Agreement implements Liberty Broadband’s obligations under the Stockholders Agreement to participate in share repurchases by Charter. Under the LBB Letter Agreement, Liberty Broadband will sell to Charter, generally on a monthly basis, a number of shares of Charter Class A common stock representing an amount sufficient for Liberty Broadband’s ownership of Charter to be reduced such that it does not exceed the ownership cap then applicable to Liberty Broadband under the Stockholders Agreement at a purchase price per share equal to the volume weighted average price per share paid by Charter for shares repurchased during such immediately preceding calendar month other than (i) purchases from A/N, (ii) purchases in privately negotiated transactions or (iii) purchases for the withholding of shares of Charter Class A common stock pursuant to equity compensation programs of Charter.
Gregory Maffei, a director of Charter and President and CEO and director and holder of 12.6% voting interest in Liberty Broadband, is Chairman of the board of directors of Qurate Retail, Inc. ("Qurate") and Dr. John Malone, a director emeritus of Charter and Chairman of the board of directors and holder of 45.8% of voting interest in Liberty Broadband, also serves on the Qurate board of directors. As reported in SEC filings of Qurate, Mr. Maffei and Dr. Malone, Mr. Maffei has ownership of an approximate 6.3% voting interest in Quarate and Dr. Malone has ownership of an approximate 41.2% voting interest in Qurate. Qurate wholly owns HSN, Inc. (“HSN”) and QVC, Inc. (“QVC”). The Company has programming relationships with HSN and QVC. For the three and six months ended June 30, 2021, the Company recorded revenue in aggregate of approximately $12 million and $23 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, and approximately $12 million and $24 million for the three and six months ended June 30, 2020, respectively.
Dr. Malone and Mr. Steven Miron, a member of Charter’s board of directors, also serve on the board of directors of Discovery, Inc. (“Discovery”). As reported in Discovery's SEC filings, Dr. Malone owns less than 1.0% of the series A common stock, 95.0% of the series B common stock and 3.7% of the series C common stock of Discovery and has a 26.5% voting interest in Discovery for the election of directors. As reported in Discovery's SEC filings, Advance/Newhouse Programming Partnership (“A/N PP”), an affiliate of A/N and in 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 23.2% voting interest for matters other than the election of directors. A/N PP also has the right to appoint three directors out of a total of twelve directors to Discovery’s board. The Company purchases programming from Discovery. Based on publicly available information, the Company does not believe that Discovery would currently be considered a related party. The amount paid in the aggregate to Discovery represents less than 2% of total operating costs and expenses for the three and six months ended June 30, 2021 and 2020.
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 $59 million and $117 million during the
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
three and six months ended June 30, 2021, respectively, and $54 million and $117 million during the three and six months ended June 30, 2020, respectively.
20. 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. 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.
Sprint filed a patent suit against Charter and Bright House on December 2, 2017 in the United States District Court for the District of Delaware. This suit alleges infringement of 9 patents related to the Company's provision of Voice over Internet Protocol (“VoIP”) services. Sprint previously sued TWC with respect to eight of these patents and obtained a final judgment of $151 million inclusive of interest and costs, which the Company paid in November 2019. The Company has also brought a patent suit against Sprint (TC Tech, LLC v. Sprint) in the United States District Court for the District of Delaware implicating Sprint's LTE technology and a similar suit against T-Mobile in the United States District Court for the Western District of Texas.
Sprint filed a subsequent patent suit against Charter on May 17, 2018 in the United States District Court for the Eastern District of Virginia. This suit alleges infringement of two patents related to the Company's video on demand services. The court transferred this case to the United States District Court for the District of Delaware on December 20, 2018 pursuant to an agreement between the parties.
On February 18, 2020, Sprint filed a lawsuit against Charter, Bright House and TWC. Sprint alleges that Charter misappropriated trade secrets from Sprint years ago through employees hired by Bright House. Sprint asserts that the alleged trade secrets relate to the VoIP business of Charter, TWC and Bright House. The case is now pending in the United States District Court for the District of Kansas.
Charter, T-Mobile and Sprint have tentatively reached a settlement of all of the foregoing suits that would result in a payment of $220 million by Charter to T-Mobile. The Company can give no assurance that this tentative settlement will be finalized. Pending finalization of the settlement and in the event the settlement is not finalized, the Company will vigorously defend these Sprint suits and prosecute the suits it has brought against T-Mobile and Sprint. While the Company is unable to predict the outcome of these lawsuits, it does not expect that the litigation will have a material effect on its operations, financial condition, or cash flows.
In addition to the Sprint litigation described above, the Company 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 or related cases. In the event that a court ultimately determines that the Company infringes on any intellectual property, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the intellectual property at issue. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company’s 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.
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.
21. Employee Benefit Plans
The Company sponsors qualified defined and nonqualified defined benefit pension plans that provide pension benefits to a majority of employees who were employed by TWC before the merger with TWC.
Pension benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. The Company has elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period. No future compensation increases or future service will be credited to participants of the pension plans given the frozen nature of the plans.
The components of net periodic pension benefit (costs) for the three and six months ended June 30, 2021 and 2020 are recorded in in other income (expenses), net in the consolidated statements of operations and consisted of the following:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
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2020
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2021
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2020
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Interest cost
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$
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(24)
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$
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(28)
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$
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(48)
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$
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(56)
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Expected return on plan assets
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42
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39
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84
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77
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Remeasurement gain, net
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155
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—
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155
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—
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Net periodic pension benefits
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$
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173
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$
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11
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$
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191
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$
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21
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During the three and six months ended June 30, 2021, settlements for lump-sum distributions to pension plan participants exceeded the estimated annual interest cost of the plans. As a result, the pension liability and pension asset values were reassessed as of June 30, 2021 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 $155 million remeasurement gain recorded during the three and six months ended June 30, 2021 was primarily driven by changes in the discount rate.
The Company made no cash contributions to the qualified pension plans during the three and six months ended June 30, 2021 and 2020; 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 2021 to the extent benefits are paid.
22. Recently Issued Accounting Standards
ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”)
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, which reduces the number of accounting models for convertible instruments, amends diluted earnings per share calculations for convertible instruments and allows more contracts to qualify for equity classification. ASU 2020-06 will be effective for interim and annual periods beginning after December 15, 2021. Early adoption is permitted. The Company elected to early adopt ASU 2020-06 on January 1, 2021. The adoption of ASU 2020-06 did not have a material impact on the Company's consolidated financial statements.