HomeMy WebLinkAboutItem 077
City of Lakeville
Communications
Memorandum
To: Mayor and City Council Members
Allyn Kuennen, Interim City Administr
From: Sue Palm, Communications Manager
Date: Monday, Nov. 24, 2014
Subject: Review resolution approving the change in ownership of Charter Communications.
Staff is presenting a draft resolution requested by Charter for transfer of ownership along with the
report created by Moss & Barnet. This resolution is scheduled for the Dec.1 Council Meeting.
Written consent is required from the City.
Brian Grogan, franchise attorney representing the City of Lakeville, evaluated the FCC Form 394
application for Franchise Authority Consent for Transfer of Control of Cable Television Franchise
and the resolution. He feels that this transaction is relatively straight forward. It will allow for
changes should the potential merger of Comcast and Time Warner be approved. With that
merger, Charter would gain some Comcast franchise holding in Minnesota, creating the need for
reorganization of Charter and new Comcast customers. Current Charter customers are not
expected to see any changes in billing or service.
RESOLUTION NO.
APPROVING THE PROPOSED TRANSFER OF
THE CABLE FRANCHISE CURRENTLY HELD BY CC VIII OPERATING, LLC
D/B/A CHARTER COMMUNICATIONS
WHEREAS, CC VIII Operating, LLC, d/b/a Charter Communications (hereinafter
referred to as "Grantee', currently holds a cable television franchise ffranchise'� granted by
the City of Lakeville, Minnesota ("City').
WHEREAS, Grantee owns, operates and maintains a cable television system in the City
C'System') pursuant to the terms of the Franchise.
WHEREAS, on February 12, 2014, Comcast Corporation ("Comcast") and Time Warner
Cable Inc. ("TWC") entered into an Agreement and Plan of Merger; and
WHEREAS, on April 25, 2014, Charter Communications, Inc., ("Charter') the parent
entity of Grantee and Comcast entered into the Comcast/Charter Transactions Agreement, and
contingent upon Comcast's consummation of its acquisition of TWC, Charter shall undertake a
pro forma corporate restructuring pursuant to which Charter will merge with and into a wholly
owned indirect subsidiary of Charter which will become "New Charter," which shall become the
ultimate parent of Grantee ("Transaction"); and
WHEREAS, the ultimate control of Grantee will not change as a result of this corporate
restructuring, and the stockholders of Charter shall become the stockholders of New Charter;
and
WHEREAS, on or about August 29, 2014 the City received from Grantee, FCC Form 394
- Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable
Television Franchise ("Application'D; and
WHEREAS, Federal law and the terms of the Franchise require that the City take action
to consider the Application within one hundred twenty (120) days of the date of receipt, or on
or before December 27, 2014; and
WHEREAS, Section 3-11-1.8 of the City's Cable Television Regulatory Ordinance
requires the City's advance written consent prior to the Grantee's change in ownership; and
WHEREAS, as a result of the proposed Transaction Grantee has requested consent
from the City to the proposed change in ownership; and
WHEREAS, the City has reviewed the proposed Transaction, and based on information
provided by Grantee and Comcast and on the information received by the City, the City has
elected to approve the proposed Transaction subject to certain conditions as set forth herein.
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NOW, THEREFORE, the City of Lakeville, Minnesota hereby resolves as follows:
1. All of the above recitals are hereby incorporated by reference as if fully
set forth herein.
2. The Franchise is in full force and effect and Grantee is the lawful holder
of the Franchise.
3. The City hereby consents and approves of the proposed Transaction.
4. Grantee will be the lawful holder of the Franchise after completion of the
Transaction.
5. The City's consent to the Transaction shall not serve to waive any rights
City may have to hold Grantee liable for any and all liabilities, known and unknown,
under the Franchise.
6. In the event the proposed Transaction contemplated by the foregoing
resolution is not completed, for any reason, the City's consent shall not be effective.
This Resolution shall take effect and continue and remain in effect from and after the
date of its passage, approval, and adoption.
Approved by the City of Lakeville, Minnesota this day of 12014.
ATTEST:
CITY OF LAKEVILLE, MINNESOTA
By: By:
Its: Its:
2
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Lakeville
Memorandum
To: Mayor and City Council Members
Allyn Kuen nen, Interim City Administrator
From: Sue Palm, Communications Manager
Date: Monday, Nov. 24, 2014
Subject: Consideration of Cable Board restructure
City of Lakeville
Communications
City Council members have recently expressed an interest in reviewing the structure and
responsibilities of the Cable TV Board. The Board was originally established in 1982 and has
been changed by resolution five times over the years. The most recent changes occurred in
2011. Over the course of its 32 years of existence, the changes in responsibility have been due
mainly to franchise changes, changes in the FCC rulings, and changes in technology.
History
1982 -Cable Board was formed after the first cable franchise. It was created to provide
advice to the City Council on cable TV franchise, renewals and administration,
including performance and programming. Resolution called for seven members m
including one from each school district.
1990 - Membership changed to eight members - still including one from each school
district. Added making recommendations to the Council on use of the franchise funds.
1998 -Minor changes concerning membership and attendance.
1999 - Established a Telecommunications Commission. The City recognized the
progression of technology and added new areas of responsibility - including fiber and
technology. For several years during this time period metro cities had the ability to
collect franchise fees on the Internet portion of bills, providing the impetus for
including telecommunications and Internet in the duties.
2017 - Reestablished a Cable Board and removed technology and
telecommunications responsibilities, The board now focused on cable franchise
administration only. Membership changed to five members.
Current Cable Board
Currently, the Cable TV Board structure limits the area of responsibility specifically to that of
Cable Franchise administration. The current Board of five members is recognized as one of
the strongest boards in the metro area. Expertise on the board includes members with
knowledge in both the areas of cable and telecommunications.
• Robin Selvig — Currently employed as Customer Relations Manager for MVTA. Served on
previous Cable Board, Telecommunications Commission, and the City's Business and Technology
Task Force in 2007. Was part of advisory group that set up the Burnsville/Eagan cable and
technology board.
• Mike Reardon —Currently serves as the St. Paul Cable Communications Officer, overseeing
franchise, government access, broadband, and telecommunications. Twenty years of service to
local government in the telecommunications field. Currently president of MACTA, the
Minnesota Association of Telecommunications Administrators.
• C. John Harrison — Currently serves as Manager of Cable and Media services for the City of
Minneapolis. Has extensive knowledge in technology and fiber.
• Terry Lind — member of the previous Telecommunications Commission, teacher and Principal for
Lakeville public schools
• Doug Thompson — Currently retired from the telecom industry, previous member of the city's
Telecommunications Commission, previous instructor in Telecommunications for DCTC.
Recommendations
At the Nov. 12 Cable Board meeting members reviewed the Board history, discussed other
cities boards, and formed a recommendation for the Council's consideration.
The board recommends:
Changing back into a Telecommunications Commission, The commission would oversee
administration of the cable franchise including public access television and right-of-way. Also
seek and assess potential opportunities and partnerships in telecommunications, broadband,
and fiber technology.
Membership:
Nine members: three with expertise in cable television; three with IT/broadband/fiber
expertise; and the final three from technology or business. Staff liaisons would be
Communication Manager and IT Manager. Economic Development and Planning would be
resources as appropriate. Board would meet quarterly and as needed.
Staff is available any time prior to the Work Session to answer questions or supply additional
information.
Moss & Barnett
REPORT
Regarding the Proposed Change in Ownership of
Charter Communications
November 17, 2014
Submitted by:
Brian T. Grogan, Esq.
Yuri B. Berndt, Esq.
150 South Fifth Street, Suite 1200
Minneapolis, MN 55402
(P) 612-877-5000
(F) 612-877-5031
www.lawmoss.com
TABLE OF CONTENTS
INTRODUCTION......................................................................................................................................1
FEDERALLAW..........................................................................................................................................1
STATELAW................................................................................................................................................2
FINANCIALQUALIFICATIONS...........................................................................................................3
I. SCOPE OF REVIEW.....................................................................................................................3
II. OVERVIEW OF TRANSACTION...........................................................................................4
III. OVERVIEW OF RELATED TRANSACTIONS.....................................................................
5
IV. OVERVIEW OF CHARTER..................................................................................................... 6
V. FINDINGS......................................................................................................................................8
VI. SUMMARY................................................................................................................................10
EXHIBITA.............................................................................................................................................
A-1
EXHIBITB..............................................................................................................................................B-1
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INTRODUCTION
This report has been provided by Moss & Barnett, a Professional Association, for the
express purpose of evaluating FCC Form 394 ("Form 394' - Application for Franchise Authority
Consent to Assignment or Transfer of Control of Cable Television Franchise ("Application'
Moss & Barnett has been retained by the cities listed below (hereinafter collectively
referred to as "City" or "Cities') to review the Application.
City of Austin
City of Benson
City of Duluth
City of Goodview
City of Lakeville
City of Marshall
City of Montevideo
City of North Mankato
List of Minnesota Cities
City of Red Wing
City of Rochester
City of St. Cloud
City of Sartell
City of Sauk Rapids
City of Tracy
City of Waite Park
City of Willmar
City of Winona
Pursuant to each City's Franchise, this proposed transfer is prohibited without the
written consent of the City. Federal law provides the City with a period of 120 days to examine
the legal, technical and financial qualifications of the proposed transferee. In addition to local
franchise requirements, the following provisions of Federal law and State law govern the actions
of the City in acting on the request for approval of the proposed transfer.
FEDERAL LAW
The Cable Communications Policy Act of 1984, as amended by the Cable Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of 1996 ("Cable
Act'), provides at Section 617 (47 U.S.C. § 537):
Sales of Cable Systems. A franchising authority shall, if the franchise requires
franchising authority approval of a sale or transfer, have 120 days to act upon
any request for approval of such sale or transfer that contains or is accompanied
by such information as is required in accordance with Commission regulations
and by the franchising authority. If the franchising authority fails to render a
final decision on the request within 120 days, such request shall be deemed
granted unless the requesting party and the franchising authority agree to an
extension of time.
The Cable Act also provides at Section 613(d) (47 U.S.C. § 533(d)) as follows:
(d) Regulation of ownership by States or franchising_ authorities. Any State
or franchising authority may not prohibit the ownership or control of a cable
system by any person because of such person's ownership or control of any
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other media of mass communications or other media interests. Nothing in this
section shall be construed to prevent any State or franchising authority from
prohibiting the ownership or control of a cable system in a jurisdiction by any
person (1) because of such person's ownership or control of any other cable
system in such jurisdiction, or (2) in circumstances in which the State or
franchising authority determines that the acquisition of such a cable system may
eliminate or reduce competition in the delivery of cable service in such
jurisdiction.
Further, the Federal Communications Commission ("FCC's has promulgated regulations
governing the sale of cable systems. Section 76.502 of the FCC's regulations (47 C.F.R. §
76.502) provides:
Time Limits Applicable to Franchise Authority Consideration of Transfer
Applications.
(a) A franchise authority shat! have 120 days from the date of submission of
a completed FCC Form 394, together with all exhibits, and any additional
information required by the terms of the franchise agreement or applicable state
or local law to act upon an application to sell, assign, or otherwise transfer
controlling ownership of a cable system.
(b) A franchise authority that questions the accuracy of the information
provided under paragraph (a) must notify the cable operator within 30 days of
the filing of such information, or such information shall be deemed accepted,
unless the cable operator has failed to provide any additional information
reasonably requested by the franchise authority within 10 days of such request.
(c) If the franchise authority fails to act upon such transfer request within
120 days, such request shall be deemed granted unless the franchise authority
and the requesting party otherwise agree to an extension of time.
STATE LAW
Minnesota Statutes Section 238.083 provides:
Sale or Transfer of Franchise.
Subd. I. Fundamental corporate change defined, For purposes of this
section, "fundamental corporate change" means the sale or transfer of a majority
of a corporation's assets; merger, including a parent and its subsidiary
corporation; consolidation, or creation of a subsidiary corporation.
Subd. 2. Written approval of franchising authority. A sale or transfer of a
franchise, including a sale or transfer by means of a fundamental corporate
change, requires the written approval of the franchising authority. The parties to
the sale or transfer of a franchise shall make a written request to the franchising
authority for its approval of the sale or transfer.
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Subd. 3. Repealed, 2004 c 261 art 7 s 29
Subd. 4. Approval or denial of transfer request. The franchising authority
shall approve or deny in writing the sale or transfer request. The approval must
not be unreasonably withheld.
Subd. S. Repealed, 2004 c 261 art 7 s 29
Subd. 6. Transfer of stock; controlling interest defined. Sale or transfer
of stock in a corporation so as to create a new controlling interest in a cable
communication system is subject to the requirements of this section.
The term "controlling interest" as used herein is not limited to majority stock
ownership, but includes actual working control in whatever manner exercised.
FINANCIAL QUALIFICATIONS
I. SCOPE OF REVIEW
CC VIII Operating, LLC, a Delaware limited liability company, and Charter Cable
Partners, LLC, a Delaware limited liability company (both referred to herein as "Operating'), are
the current holders of the cable television franchises (hereinafter referred to as the "Franchise
Agreement's granted by the Cities' (collectively referred to herein as the "City'). Under the
Franchise Agreement, Operating operates cable television systems (the "System") that provide
cable services and other communication services in the City. Operating has requested the City's
approval of the proposed transfer of the ownership of Charter Communications, Inc., a
Delaware corporation ("Charter', the indirect parent of Operating, to an entity wholly owned
by Charter.
At the request of the City, Moss & Barnett, PA has reviewed selected financial
information that was provided by Charter or publicly available to assess the financial
qualifications of Operating, as an entity indirectly wholly-owned by Charter, following
completion of the proposed transfer of ownership.
The financial information that was provided or available through other public sources
and to which our review has been limited, consists solely of the following financial information
(hereinafter referred to collectively as the "Financial Statements'):
1. FCC Form 394 "Application for Franchise Authority Consent to Assignment or
Transfer of Control of Cable Television Franchise" dated August 29, 2014, provided by Charter
Communications, Inc. (the "Application'), along with such other exhibits as provided therewith;
1 The Cities include Austin, Benson, Duluth, Goodview, Lakeville, Marshall, Montevideo, North Mankato, Red Wing,
Rochester, St. Cloud, Sartell, Sauk Rapids, Tracy, Waite Park, Willmar, and Winona, Minnesota.
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2. Comcast/Charter Transaction Agreement between Comcast Corporation and
Charter Communications, Inc. dated April 25, 2014 (the "Transaction Agreement');
3. Form 10-K for Charter Communications, Inc. filed with the Securities and
Exchange Commission on February 21, 2014, for the fiscal year ended December 31, 2013;
4. Form 10-Q for Charter Communications, Inc. filed with the Securities and
Exchange Commission on October 31, 2014 for the fiscal quarter and nine-month period ended
September 30, 2014;
5. Form 8-K for Charter Communications, Inc. filed with the Securities and
Exchange Commission on April 25, 2014;
6. Form S-1 for Midwest Cable, Inc. filed with the Securities and Exchange
Commission on October 31, 2014;
7. The audited financial statements of Charter Communications, Inc. and
Subsidiaries as of December 31, 2013 and 2012, including Consolidated Balance Sheets as of
December 31, 2013 and 2012, Consolidated Statements of Operations, Cash Flows and Change
in Shareholders' Equity for the years ended December 31, 2013, 2012 and 2011, and the
Independent Auditors' Report of KPMG LLP dated February 20, 2014;
8. The unaudited financial statements of Charter Communications, Inc. and
Subsidiaries as of September 30, 2014, including a Condensed Consolidating Balance Sheet as
of September 30, 2014, and Statements of Operations, Cash Flows and Comprehensive Income
(Loss) for the nine-month period ended September 30, 2014 and 2013;
9. The draft Charter Services Agreement by and between Midwest Cable, Inc. and
Charter Communications Operating, LLC; and
10. Such other information as we requested and that was provided by Charter
relating to the transfer.
Our procedure is limited to providing a summary of our analysis of the Financial
Statements in order to facilitate the City's assessment of the financial capabilities of Charter to
indirectly control the System in the City.
II. OVERVIEW OF TRANSACTION
CC VIII Operating, LLC and Charter Cable Partners, LLC, are indirect subsidiaries of
Charter Communications Operating, LLC, which is an indirect wholly owned subsidiary of
Charter Communications, Inc., the parent company.2 Charter Communications, Inc. entered
into the Transaction Agreement that provides, among other transactions, for the merger of
Charter into a new wholly owned indirect subsidiary of Charter.3 Under the Transaction
Agreement, the new Charter subsidiary will acquire one hundred percent (100%) of the
z FCC Form 394 "Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable Television
Franchise" dated August 29, 2014 provided by Charter Communications, Inc. (the "Application's at Figure 1.
3 Comcast/Charter Transaction Agreement between Comcast Corporation and Charter Communications, Inc. dated
April 25, 2014 at p. 2.
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ownership interests of Charter, which as of the current date does, and acquisition date will, hold
indirectly all of the membership interests of Operating.4 This ultimately results in a
reorganization of the parent entity, but no change in the ultimate shareholders of Charters The
closing under the Transaction Agreement is expected to occur in early 2015.6
The transaction is structured in a stepped process as follows:'
1. CCH I, LLC, a Delaware limited liability company, a subsidiary of CCH I Holdings,
LLC, a Delaware limited liability company, will distribute all of its interests in CCH II, LLC, a
Delaware limited liability company, to CCH I Holdings, LLC.
2. CCH Holdings, LLC, wholly owned by Charter, will distribute its CCH I, LLC
interests to Charter.
3. CCH I, LLC will convert to a new corporation ("New Charter') to become the
surviving merger subsidiary.
4. New Charter will merge with Charter and Charter will become a wholly owned
subsidiary of New Charter.
After the transaction, all of the Charter shareholders will become New Charter
shareholders. This transaction, exclusive of the other transactions, will not change the
underlying ownership of Charter.
See Exhibit A and Exhibit B attached hereto and incorporated herewith for the Charter
organizational structure before and after the transaction as described in this Section.
III. OVERVIEW OF RELATED TRANSACTIONS
The Charter transaction is part of a larger group of transactions that involve Comcast
Corporation, a Pennsylvania corporation (''Comcast'; Time Warner Cable Inc., a Delaware
corporation ("TWC') and Midwest Cable, Inc., a newly formed Delaware corporation (an entity
that will change its name to Greatland Connections Inc. as part of the transactions)
("Midwest').$ The other transactions include:
i. Charter's purchase from Comcast of systems currently served by TWC
that represents approximately 1.5 million video subscribers;
ii. Charter's exchange that includes its transfer to Comcast of certain cable
systems that represent approximately 1.6 million video subscribers in exchange for TWC
systems that represent approximately 1.5 million video subscribers; and
iii. a spin-off transaction whereby Comcast creates Midwest as a new
subsidiary by contributing 2.5 million video subscribers to Midwest and subsequently
4 Application at Figure 2.
s Id.
6 Comcast Corporation Press Release — August 26, 2014.
Application — Charter Communication, Inc. cover letter dated August 29, 2014.
8 Form 10-Q for Charter Communications, Inc. filed with the Securities and Exchange Commission on October 31,
2014 for the fiscal quarter ended September 30, 2014 ("Form 10-Q'� at p. 6.
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distributes the Midwest stock to Comcast's public shareholders (after the spin-off, the
Midwest stock will be a publicly traded stock).'
Prior to the spin-off of Midwest, Midwest expects to incur debt in an amount equal to
five times the stand-alone Midwest assets' earnings before interest, taxes, depreciation and
amortization (EBITDA) and distribute those debt proceeds to Comcast.10 In addition, Comcast
and Midwest will enter into a Transition Services Agreement pursuant to which Comcast will
continue to provide certain services to Midwest for a period of 12 to 18 months pursuant to the
applicable statements of work." In order for Charter to complete the above transactions, it is
estimated that Charter will acquire new indebtedness of approximately $8 billion. 12 These
transactions are subject to many conditions including federal regulatory approval, stockholder
approvals, performance covenants, financing, favorable tax opinions and other requirements of
the parties. 13
After the completion of the above transactions, Charter will acquire an approximately
thirty-three percent (33%) interest in Midwest.14 The acquisition is structured as a merger of a
newly created Charter subsidiary into Midwest.ls As consideration for this merger, Charter will
issue new stock to the Midwest shareholders. 16 In conjunction with this transaction, Charter will
enter into a Charter Services Agreement with Midwest in which Charter will provide Midwest
with certain services. 17 Charter will receive compensation for out-of-pocket costs related to
these services plus a services fee equal to 4.25% of Midwest's gross revenues. 18 The Charter
Services Agreement has an initial three (3) year term with automatic one (1) year renewals. 19
As a result of the transactions described above, the current Comcast shareholders will
receive shares of Charter stock and Midwest stock.
IV. OVERVIEW OF CHARTER
Charter is a full service communications provider and provides cable services along with
other video programming, Internet services, voice services and other advertising to residential
and commercial customers across the United States .20 At the current time, Charter is one of the
largest cable operators in the United States .21 As of December 31, 2013 Charter's cable system
passed approximately 12.8 million potential customers and Charter served approximately 5.9
million residential and commercial cable customers.22 Charter holds a total of approximately
9 Id. at p. 5.
10 Id. at p. 6.
11 Draft Transition Services Agreement by and between Comcast Corporation and Midwest Cable Inc.
12 Form 10-Q at p. 5
13 Form 10-Q at p. 40.
14 Id. at p. 6.
15 Id.
16 Id.
17 Draft Charter Services Agreement by and between Midwest Cable, Inc. and Charter Communications Operating,
LLC.
1s Id.
19 Id.
20 Form 10-Q at p.25.
21 Form 10-K for Charter Communications, Inc. filed with the Securities and Exchange Commission on February 21,
2014, for the fiscal year ended December 31, 2013 ("Form 10 -KD at p. 1.
22 Id.
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3,300 franchises.23 Charter has been in existence for over 24 years.24 Charter currently
operates in 29 states and employs over 21,000 employees.25 Charter's management has an
extensive background in the cable industry.26
As of May 1, 2013, twenty-seven percent (27%) of the shares of Charter
Communications, Inc. were beneficially owned by Liberty Media Corporation .27 Liberty Media
Corporation has the ability to influence the operations of Charter on a going forward basis
through its right to designate members to its Board of Directors. 28
In 2009, Charter filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code .29 A Joint Plan of Reorganization was confirmed by the Bankruptcy Court in
November of 2009 and a final decree closing the case was entered into in December of 2013.30
During the bankruptcy period, Charter continued to operate and provide cable services to its
customers.
After the Related Transaction as described in Section III above, Charter will be the
second largest cable provider and its cable services will serve approximately 7.5 million
residential and commercial customers.31 In addition, Charter will provide certain services to
Midwest under the Charter Services Agreement to another 2.5 million residential and
commercial customers.32
Cable providers and telecommunication companies operate in a competitive environment
and the financial performance of cable television operators, like Charter and other cable
operators, are subject to many factors, including, but not limited to, the general business
conditions, incumbent operators, digital broadcast satellite service, technology advancements,
employment issues, and customer preferences, as well as competition from multiple sources,
which provide and distribute programming, information, news, entertainment and other
telecommunication services.33 The Liberty Media Corporation will have the ability to influence
certain Charter decisions, which could affect Charter's ongoing operations.34 In addition,
Charter, as a result of the transaction, will become even a more highly leveraged company
which may reduce its ability to withstand prolonged adverse business conditions. The cable
business is inherently capital intensive, requiring capital for the construction and maintenance
of its communications systems. We specifically requested information on Charter capital
expenditures budget, but Charter declined to provide that information to US. 35 Each of these
23 Id. at pp. 9-10.
24 Id.
25 Application at Exhibit 9.
26 Id.
27 Form 10-Q at p. 14.
211 Id.
29 Form 10-K at p. 1.
30 Id.
31 Form 8-K for Charter Communications, Inc. filed with the Securities and Exchange Commission on April 25, 2014 at
p.1.
32 Form 10-Q at p. 6.
33 Form 10-K at pp 16-27.
34 Form 10-Q at p. 23.
35Correspondence to author from Mark E. Brown, Vice President, State Government Affairs, Charter Communication,
Inc. dated October 6, 2014.
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factors could have a significant financial impact on Charter and its ability to continue to operate
the System.
V. FINDINGS
We have analyzed Charter's historical financial statements and publicly filed information
along with its Charter Services Agreement with Midwest. Charter declined to provide us with
projected statements of cash flow and income and a balance sheet for its future operations and
further stated that "projected pro forma statements of cash flows and income for 2014 and
2015 have not been created and it is not possible to make them available at this time.i36 As
such, we are reporting our Findings hereunder based upon Charter's historical information.
Overall, from a financial point -of -view, the information provided below shows that Charter has
sustained losses over the last few years and is highly leveraged.
1. Analysis of Financial Statements. Neither federal law nor FCC regulations provide
franchising authorities, such as the City, with limited guidance concerning the evaluation of the
financial qualifications of an applicant for a cable franchise. In evaluating the financial
capabilities of Charter and the ability of Charter to continue to operate the System serving the
City with the new ownership structure, we believe it is appropriate to consider the performance
of an applicant based on the applicant's historical performance plus its projected or budgeted
financial information, the latter of which was not provided by Charter. Charter's historical
operations do not consider the additional debt load, along with the additional revenue and
expenses that will be recognized as part of the transactions under the Transaction Agreement
and related Charter Services Agreement. However, we believe a general review of the Charter
financial information is appropriate and may provide some insight into the general ongoing
financial operations of Charter with respect to the Application.
As noted above, Charter's operations include both cable television video services (which
represent approximately 49% of its operations as of September 30, 2014) and other non -cable
television video services (which represent approximately 51% of its operations as of September
30, 2014).37 The Charter financial information discussed below includes all of the Charter
operations, including the non -cable television video services. We have analyzed Charter's
Financial Statements as of December 31, 2013 and 2012 and September 30, 2014, in providing
the information in this Section.
Specific Financial Statement Data and Analysis.
a. Assets. Charter had (i) current assets of $370 million, $322 million, and
$330 million; (ii) working capital of a negative $1,216 million, a negative $1,145 million,
and a negative $894 million; and (iii) total assets of $20,950 million, $17,295 million,
and $15,596 million as of September 30, 2014, and December 31, 2013 and 2012,
respectively. 38 Working capital, which is the excess of current assets over current
liabilities, is a short-term analytical tool used to assess the ability of a particular entity to
meet its current financial obligations in the ordinary course of business. The trend
shows an increase in the negative working capital from December 31, 2012 to
36 Id.
37 Form 10-Q at p. 30.
38 Form 10-Q at p. 1 and Form 10-K at p.F-3.
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September 30, 2014 and suggests that Charter's cash flow may be unable to meet is
current obligations. Charter's current ratio (current assets divided by current liabilities)
as of September 30, 2014, of 0.23:1 is well below a generally recognized standard of
1:1 for a sustainable business operation.39 Charter's Total Assets have continued to
grow, however, the asset growth in 2014 relates to approximately $3.5 billion of
financing acquired in anticipation of the transactions as discussed above.40
b. Liabilities and Net Equity. Charter had (i) current liabilities of $1,586
million, $1,467 million and $1,224 million; (ii) long-term debt of $17,595 million,
$14,181 million and $12,808 million; and (iii) shareholders' net equity of $97 million,
$151 million and $149 million as of September 30, 2014, December 31, 2013 and 2012,
respectively.41 As part of the Transaction Agreement, Charter will borrow an additional
approximately $8 billion of debt which will increase its long-term debt. 41 Charter has
received debt commitments from a number of leading Wall Street banks that will be
used for the transactions and represents almost $9 billion of debt commitments.43 This
additional debt will require Charter to generate additional cash flow, including through
the acquired Comcast operations and its service arrangement with Midwest, to fund its
debt service. The interest rates on the Charter debt ranged from 5.125% to
approximately 8.125% and the debts mature in varying amounts over the next 10 years
including $1 billion in 2017 and $1.4 billion in 2019.44 As of September 30, 2014,
Charter had $774 million of available credit on its credit facilities. 45 This available credit
along with the committed debt (which if not received would likely terminate the above
described transactions) appears to be sufficient to allow Charter to fund its operations
and acquisitions in the near term.
C. Income and Expense. Charter had (i) revenue of $6,748 million, $8,155
million, and $7,504 million; (ii) operating expenses of $6,054 million, $7,230 million and
$6,588 million; and (iii) operating income of $694 million, $925 million, and $916 million
for the nine-month period ending September 30, 2014, and the years ending December
31, 2013 and 2012, respectively. 46 Charter's operating income has remained relatively
steady from 2012 through the third quarter of 2014. For the nine-month period ending
on September 30, 2014, Charter generated cash flow from operations of $1,729
million.47 However, Charter has experienced a net loss in each period due to the large
amount of interest expense and other deductions, including a current year loss through
September 30, 2014 of $135 million .4" The ability to generate cash is important for
Charter due to its highly leveraged operations. Charter's growth mode and goals to
increase customers and revenue require that Charter continue to expand with leverage
as is the case with the Transaction Agreement .4' As a result of the transactions and
39 Form 10-Q at p. 1.
40 Id.
41 Form 10-Q at p. 1-2 and Form 10-K at p.F-3.
42 Form 10-Q at p. 5.
43 Id.
44 Id. at p. 8.
45 Id.
46 Form 10-Q at p. 2 and Form 10-K at p. F-4.
47 Form 10-Q at p. 3.
48 Id.
49 Id. at p. 26.
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changes in its business and business structure, Charter will incur significant non-
recurring expenses which may negatively affect Charter's short-term income statement
performance.50 In addition, as a result of the transaction, Charter may be required to
incur significant capital expenditures for the assimilation of the new systems and
services into Charter's existing network.
VI. SUMMARY
Using the FCC Form 394 to establish an absolute minimum standard of financial
qualifications that a proposed applicant must demonstrate in order to be qualified as the
successor operator of the System, Charter has the burden of demonstrating to the City's
satisfaction that Charter has "sufficient net liquid assets on hand or available from committed
resources" to consummate the transaction and operate the System, together with its existing
operations, for three (3) months. This minimum standard is not easy to apply to the complex
organizational structure of Chanter and the multiple wholly-owned companies that hold cable
operations in other geographical locations.
Based solely on Charter's financial information that we reviewed, Charter's public filings
show that Charter has sufficient debt commitments to consummate the Transaction Agreement
and operate the System. Based on the foregoing and limited strictly to the financial information
analyzed in conducting this review, we do not believe that Charter's request for transfer of
indirect ownership of a subsidiary entity that holds the System can reasonably be denied based
solely on a lack of financial qualifications of Charter, if the financing is obtained (the failure to
obtain the debt committed to Charter would almost certainly result in the termination of the
Transaction Agreement and proposed transfer of ownership).
In the event the City elects to proceed with approving the proposed transfer of control,
the assessment of Charter's financial qualifications should not be construed in any way to
constitute an opinion as to the financial capability or stability of Charter to (i) operate under the
Franchise Agreement, (ii) operate its other operations, or (iii) successfully consummate the
transaction as contemplated in the Transaction Agreement. The sufficiency of the procedures
used in making an assessment of Charter's financial qualifications and its capability to remain
the parent of the operator of the System is solely the responsibility of the City. Consequently,
we make no representation regarding the sufficiency of the procedures used either for the
purpose for which this analysis of financial capabilities and qualifications was requested or for
any other purpose.
Lastly, in order to ensure compliance with its obligations to operate the System and
since we have based a significant part of our analysis on the Financial Statements of Charter,
the parent entity; we recommend that the City maintain any performance bonds or corporate
parent guaranty required under any City Franchise Agreement.
" Id. at p. 43.
10
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::I:I 11.)19_1
Charter Communications, Inc. Organizational Structure
(immediately prior to reorganization)
Existing Charter Communications,
Inc. Public Shareholders
Charter Communications, Inc.
CCH I Holdings, LLC
CCH I, LLC
(Merger Sub I/New Charter)
CCH II, LLC
Charter Communications
Operating, LLC
100% Indirect
CC VIII Operating, LLC and
Charter Cable Partners, LLC
(Franchise Holder)
A-1
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EXHIBIT B
Charter Communications, Inc. Organizational Structure
(immediately after reorganization)
Existing Charter Communications,
Inc. Public Shareholders
"New Charter", Inc.
f/k/a CCH I, LLC
Charter Communications, Inc.
CCH I Holdings, LLC
CCH II, LLC
Charter Communications
Operating, LLC
100% Indirect
CC VIII Operating, LLC and
Charter Cable Partners, LLC
(Franchise Holder)
B-1
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