BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(With Independent Auditors’ Review Report Thereon)
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Table of Contents
|
| |
| | Page(s) |
| | |
| Independent Auditors' Review Report | 1-2 |
| Condensed Consolidated Financial Statements: | |
| Condensed Consolidated Balance Sheets | 3 |
| Condensed Consolidated Statements of Income | 4 |
| Condensed Consolidated Statements of Comprehensive Income | 5 |
| Condensed Consolidated Statements of Cash Flows | 6 |
| Notes to Condensed Consolidated Financial Statements | 7-12 |
Independent Auditors’ Review Report
The Members
Bright House Networks, LLC:
Report on the Financial Statements
We have reviewed the condensed consolidated financial statements of Bright House Networks, LLC and its subsidiaries (the Company), which comprise the condensed consolidated balance sheet as of March 31, 2016, and the related condensed consolidated statements of income, comprehensive income and cash flows for the three month periods ended March 31, 2016 and 2015.
Management’s Responsibility
The Company’s management is responsible for the preparation and fair presentation of the condensed financial information in accordance with U.S. generally accepted accounting principles; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with U.S. generally accepted accounting principles.
Auditors’ Responsibility
Our responsibility is to conduct our reviews in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial information referred to above for it to be in accordance with U.S. generally accepted accounting principles.
Report on Condensed Balance Sheet as of December 31, 2015
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of income, comprehensive income, changes in member’s equity, and cash flows for the year then ended (not presented herein); and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated March 4, 2016. In our opinion, the accompanying condensed consolidated balance sheet of Bright House Networks, LLC and its subsidiaries as of December 31, 2015 is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
/s/ KPMG LLP
New York, New York
May 6, 2016
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 2015 and 2014
(In thousands of dollars)
|
| | | | | | |
| | March 31, | | December 31, |
| | 2016 | | 2015 |
| Assets | (Unaudited) | | |
| Current Assets: | | | |
| Cash and cash equivalents | $ | 162,927 |
| | 73,297 |
|
| Accounts receivable-trade, net of allowances of $20,543 and | | | |
| $20,908 as of March 31, 2016 and December 31, 2015, respectively | 143,309 |
| | 167,220 |
|
| Other current assets | 33,501 |
| | 41,080 |
|
| Total current assets | 339,737 |
| | 281,597 |
|
| | | | |
| Property, plant and equipment, net | 2,182,066 |
| | 2,186,222 |
|
| Investments | 10,854 |
| | 10,420 |
|
| Goodwill | 12,746 |
| | 12,746 |
|
| Intangible assets, net (note 3) | 859,247 |
| | 860,894 |
|
| Other assets | 11,008 |
| | 11,292 |
|
| Total assets | $ | 3,415,658 |
| | 3,363,171 |
|
| | | | |
| Liabilities and Member's Equity | | | |
| Accounts payable and other current liabilities (note 4) | $ | 333,864 |
| | 352,448 |
|
| Current maturities of long-term debt (note 5) | 42,857 |
| | 342,857 |
|
| Deferred revenue | 69,854 |
| | 67,955 |
|
| Total current liabilities | 446,575 |
| | 763,260 |
|
| | | | |
| Long-term debt (note 5) | 128,571 |
| | 128,571 |
|
| Other liabilities (note 6) | 454,961 |
| | 447,063 |
|
| Total liabilities | 1,030,107 |
| | 1,338,894 |
|
| | | | |
| Commitments and contingencies (note 10) | | | |
| Member's equity | 2,385,551 |
| | 2,024,277 |
|
| Total liabilities and member's equity | $ | 3,415,658 |
| | 3,363,171 |
|
See accompanying notes to condensed consolidated financial statements.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands of dollars)
(Unaudited)
|
| | | | | | |
| | Three months ended |
| | March 31 |
| | 2016 | | 2015 |
| | | | |
| Revenues: | | | |
| Subscriber | $ | 965,035 |
| | 929,635 |
|
| Advertising and other | 50,130 |
| | 48,015 |
|
| Total revenues | 1,015,165 |
| | 977,650 |
|
| | | | |
| Costs, expenses and other: | | | |
| Operating expenses | 684,804 |
| | 667,539 |
|
| Depreciation and amortization | 112,357 |
| | 110,676 |
|
| Gain from disposal of assets, net | (678 | ) | | (388 | ) |
| Income from equity investments | (647 | ) | | (242 | ) |
| Interest, net | 5,018 |
| | 7,172 |
|
| Total costs, expenses and other | 800,854 |
| | 784,757 |
|
| | | | |
| Net income | $ | 214,311 |
| | 192,893 |
|
See accompanying notes to condensed consolidated financial statements.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands of dollars)
(Unaudited)
|
| | | | | | |
| | Three months ended |
| | March 31 |
| | 2016 | | 2015 |
| | | | |
| Net income | $ | 214,311 |
| | 192,893 |
|
| Change in unrecognized amounts included in pension and | | | |
| postretirement obligations | 1,963 |
| | 3,175 |
|
| Comprehensive income | $ | 216,274 |
| | 196,068 |
|
See accompanying notes to condensed consolidated financial statements.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
|
| | | | | | |
| | Three months ended |
| | March 31 |
| | 2016 | | 2015 |
| Cash flows from operating activities: | | | |
| Net income | $ | 214,311 |
| | 192,893 |
|
| Adjustments to reconcile net income to cash flows from | | | |
operating activities:
| | | |
| Depreciation and amortization | 112,357 |
| | 110,676 |
|
| Income from equity investments | (647 | ) | | (242 | ) |
| Gain on disposal of assets, net | (678 | ) | | (388 | ) |
| Change in operating assets and liabilities: | | | |
| Accounts receivable | 23,911 |
| | 22,019 |
|
| Other current assets | 7,579 |
| | (3,812 | ) |
| Other assets | 652 |
| | (389 | ) |
| Accounts payable and other liabilities | (8,723 | ) | | 11,408 |
|
| Deferred revenue | 1,899 |
| | 12,359 |
|
| Net cash provided by operating activities | 350,661 |
| | 344,524 |
|
| | | | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (105,506 | ) | | (139,856 | ) |
| Franchise expenditures | (1,203 | ) | | (6,668 | ) |
| Purchases of marketable securities | — |
| | (89,419 | ) |
| Proceeds from sale and maturities of marketable securities | — |
| | 89,910 |
|
| Acquisitions of investments and other assets | — |
| | (265 | ) |
| Transfer from restricted cash | — |
| | 1,450 |
|
| Proceeds from sale of other assets | 678 |
| | 388 |
|
| Net cash used in investing activities | (106,031 | ) | | (144,460 | ) |
| | | | |
| Cash flows from financing activities: | | | |
| Member distributions | (45,000 | ) | | — |
|
| Capital contributions | 190,000 |
| | — |
|
| Repayment of senior note | (300,000 | ) | | — |
|
| Net cash used in financing activities | (155,000 | ) | | — |
|
| | | | |
| Net increase in cash and cash equivalents | 89,630 |
| | 200,064 |
|
| Cash and cash equivalents at beginning of period | 73,297 |
| | 653,714 |
|
| Cash and cash equivalents at end of period | $ | 162,927 |
| | 853,778 |
|
| | | | |
| Interest paid | $ | 17,344 |
| | 18,911 |
|
See accompanying notes to condensed consolidated financial statements.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(Unaudited)
| |
| (1) | Organization and Summary of Significant Accounting Policies |
| |
| (a) | Description of Business |
Bright House Networks, LLC and subsidiaries (BHN or the Company) is a cable operator with its primary markets in Florida, Michigan, Alabama, Indiana and California. The Company provides its subscribers with video, high‑speed data and digital phone services. The Company also sells advertising on its cable systems to local and national advertisers.
The Company is a wholly owned subsidiary of Time Warner Entertainment‑Advance/Newhouse (TWE‑A/N). TWE‑A/N is a partnership between Advance/Newhouse Partnership (A/N) and a subsidiary of Time Warner Cable Inc. (TWC). A/N is the manager of the Company and is entitled to 100% of its economic benefits.
| |
| (b) | Interim Financial Statements |
The condensed consolidated financial statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly, in all material respects, the financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America (GAAP) applicable to interim periods. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2015, which report was dated March 4, 2016.
| |
| (c) | Basis of Consolidation |
The accompanying condensed consolidated financial statements include all of the accounts and all entities that are majority‑owned by the Company and are required to be consolidated in accordance with GAAP. The Company has eliminated intercompany accounts and transactions among consolidated entities.
The Company pays for programming provided to its subscribers under joint contracts with TWC. Amounts paid to TWC for programming and other services were $264.7 million and $255.9 million for the three months ended March 31, 2016 and March 31, 2015, respectively. At March 31, 2016 and December 31, 2015, unpaid balances due to TWC were $176.9 million and $160.3 million, respectively. Such amounts are included in accounts payable and other current liabilities in the accompanying condensed consolidated balance sheets.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(Unaudited)
In the normal course of business, the Company is assessed nonincome related taxes by governmental authorities, including franchising authorities, and collects such taxes from its subscribers. The Company’s policy is that, in instances where the tax is being assessed directly on the Company, amounts paid to governmental authorities and amounts received from subscribers are recorded on a gross basis. That is, amounts paid to governmental authorities are recorded as operating expenses and amounts received from subscribers are recorded as revenues. The amount of such fees included as a component of revenues was $23.9 million and $23.6 million for the three months ended March 31, 2016 and March 31, 2015, respectively.
| |
| (e) | Fair Value Disclosures |
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
| |
| Level 1 - | Defined as observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities. |
| |
| Level 2 - | Defined as observable inputs other than Level 1 inputs. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
| Level 3 - | Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The carrying value of accounts receivable, accounts payable, and other current liabilities approximates fair value because of the relatively short maturity of these items.
The accompanying condensed consolidated financial statements are prepared in accordance with GAAP, which requires that management make estimates and assumptions that affect the reported amounts. Actual results could differ from these estimates.
Significant estimates inherent in the preparation of the accompanying condensed consolidated financial statements include accounting for asset impairments, allowances for doubtful accounts, investments, depreciation and amortization, pension benefits, and contingencies. Allocation methodologies used to prepare the accompanying condensed consolidated financial statements are based on estimates and are described in the notes, where appropriate.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(Unaudited)
On March 31, 2015, A/N entered into an agreement (the Agreement) with Charter Communications, Inc. (Charter) whereby Charter will acquire the BHN business (with the exception of certain excluded assets and liabilities). On May 26, 2015, Charter and TWC announced that they had entered into an agreement to merge, following which Charter and A/N amended their Agreement. Following the closing of the merger between Charter and TWC and the acquisition of BHN by Charter (which transactions are expected to close sequentially), A/N is expected to own between 14% and 13% of the combined Charter‑TWC‑BHN business (depending on final elections of cash versus stock available to shareholders of TWC), on an as‑converted, as‑exchanged basis.
The Agreement, as amended, between Charter and A/N is subject to several conditions, including, the completion of the merger between Charter and TWC and regulatory approvals.
Intangible assets and related accumulated amortization consist of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | | March 31, 2016 | | December 31, 2015 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Total | | Gross Carrying Amount | | Accumulated Amortization | | Total |
| | | (In thousands) |
| | | | | | | | | | | | | |
| Indefinite-lived cable franchise rights | | $ | 801,760 |
| | — |
| | 801,760 |
| | 801,760 |
| | — |
| | 801,760 |
|
| | | | | | | | | | | | | |
| Finite-lived intangible assets: | | | | | | | | | | | | |
| Renewal of cable franchise rights | | 49,338 |
| | (36,411 | ) | | 12,927 |
| | 48,706 |
| | (35,899 | ) | | 12,807 |
|
| Deferred right-of-way costs | | 93,293 |
| | (51,033 | ) | | 42,260 |
| | 93,071 |
| | (49,241 | ) | | 43,830 |
|
| Trade names and subscriber lists | | 1,564 |
| | (1,017 | ) | | 547 |
| | 1,564 |
| | (938 | ) | | 626 |
|
| Other | | 5,530 |
| | (3,777 | ) | | 1,753 |
| | 5,530 |
| | (3,659 | ) | | 1,871 |
|
| | | | | | | | | | | | | |
| | | 149,725 |
| | (92,238 | ) | | 57,487 |
| | 148,871 |
| | (89,737 | ) | | 59,134 |
|
| Total intangible | | | | | | | | | | | | |
| assets, net | | $ | 951,485 |
| | (92,238 | ) | | 859,247 |
| | 950,631 |
| | (89,737 | ) | | 860,894 |
|
| |
| (4) | Accounts Payable and Other Current Liabilities |
Accounts payable and other current liabilities consist of the following:
|
| | | | | | | |
| | | March 31, | | December 31, |
| | | 2016 | | 2015 |
| | | (In thousands) |
| | | | | |
| Accounts payable | | $ | 66,065 |
| | 81,455 |
|
| Amount owed to TWC | | 176,940 |
| | 160,345 |
|
| Other | | 90,859 |
| | 110,648 |
|
| | | | | |
| Total accounts payable and other current liabilities | | $ | 333,864 |
| | 352,448 |
|
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(Unaudited)
The following table summarizes the Company’s debt arrangements:
|
| | | | | | | | | | | | | |
| | | | | | | Balance outstanding |
| | | | | Principal | | March 31, | | December 31, |
| Type | | Maturity | | Amount | | 2016 | | 2015 |
| | | | | | | (In thousands) |
| | | | | | | | | |
| Senior notes | | 2016 | | 300,000 |
| | — |
| | 300,000 |
|
| Senior notes | | 2019 | | 300,000 |
| | 171,428 |
| | 171,428 |
|
| Revolving credit | | 2018 | | 500,000 |
| | — |
| | — |
|
| | | | | | | | | |
| Total | | | | $ | 1,100,000 |
| | 171,428 |
| | 471,428 |
|
| Less current portion | | | | | | 42,857 |
| | 342,857 |
|
| | | | | | | | | |
| Total long-term debt | | | | | | $ | 128,571 |
| | 128,571 |
|
The Company’s debt had an estimated fair value of $189.4 million and $491.6 million as of March 31, 2016 and December 31, 2015, respectively. The estimated fair value of the Company’s privately held debt was based on available interest rates for debt issuances with similar terms and remaining maturities. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and are not recognized for financial reporting purposes unless the debt is retired prior to its maturity.
The Company is required to maintain certain financial covenants and is in compliance with those covenants as of March 31, 2016. In the event of a change in control, the Company is required to give written notice to each holder containing an offer to prepay the senior notes at a price of 100% of the principal amount of the senior notes plus accrued and unpaid interest, accrued to such date of prepayment, plus a make‑whole amount.
Interest expense for the instruments above, (inclusive of the amortization of deferred financing fees and other fees) was $5.6 million and $9.6 for the three months ended March 31, 2016 and March 31, 2015, respectively.
Other liabilities consist of the following:
|
| | | | | | | |
| | | March 31, | | December 31, |
| | | 2015 | | 2015 |
| | | (In thousands) |
| | | | | |
| Accrued pension benefits | | $ | 405,985 |
| | 394,670 |
|
| Other | | 48,976 |
| | 52,393 |
|
| | | | | |
| Total other liabilities | | $ | 454,961 |
| | 447,063 |
|
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(Unaudited)
| |
| (7) | Accumulated Other Comprehensive Loss |
Accumulated other comprehensive loss consists of the following:
|
| | | | | | | |
| | | March 31, | | December 31, |
|
| | | 2016 | | 2015 |
| | | (In thousands) |
| | | | | |
| Cumulative net unrecognized loss on pension and other | | | | |
| postretirement employee benefits | | $ | (181,447 | ) | | (183,410 | ) |
| |
| (8) | Pension and Other Postretirement Benefits |
The Company sponsors a funded pension plan, the Bright House Networks Pension Plan (the Plan). The Plan provides employees with retirement benefits in accordance with benefit provision formulas based on years of service and compensation. Additionally, the Company sponsors unfunded supplemental pension benefit plans for a select group of management and highly compensated employees and provides postretirement healthcare to retirees and eligible dependents.
A summary of the components of the net periodic benefit costs for the Company’s pension and postretirement benefit plans are as follows:
|
| | | | | | | |
| | | Three months ended |
| | | March 31 |
| | | 2016 | | 2015 |
| | | (In thousands) |
| | | | | |
| Service cost | | $ | 10,263 |
| | 10,850 |
|
| Interest cost | | 8,287 |
| | 7,599 |
|
| Expected return on plan assets | | (6,325 | ) | | (5,425 | ) |
| Amortization of net loss | | 1,963 |
| | 3,175 |
|
| | | | | |
| Net periodic pension cost | | $ | 14,188 |
| | 16,199 |
|
| | | | | |
| Contribution to the plan | | $ | 200 |
| | 9,637 |
|
On April 11, 2016, the Company amended the Plan whereby it will be frozen on May 31, 2016. As a result of the freeze, the Company expects to recognize an estimated curtailment gain of approximately $141 million which will reduce projected benefit obligation and accumulated other comprehensive loss.
BRIGHT HOUSE NETWORKS, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2016 and December 31, 2015
(Unaudited)
| |
| (9) | Related Party Transactions |
Advance Publications, Inc. and its wholly owned subsidiaries (Advance) is a related party to the Company due to its ownership of A/N (note 1). Amounts due from Advance (included within other current assets in the accompanying condensed consolidated balance sheets at March 31, 2016 and December 31, 2015) are as follows:
|
| | | | | | |
| | March 31, | | December 31, |
| | 2016 | | 2015 |
| | (In thousands) |
| | | | |
| Total due from advance, net | $ | 474 |
| | 12,842 |
|
The accompanying condensed consolidated statements of income include allocations from Advance for certain corporate administrative expenses. Total allocated corporate expense was $18.8 million and $18.3 million for the three months ended March 31, 2016 and March 31, 2015, respectively, which is recorded by the Company as a component of operating expense within the accompanying condensed consolidated statements of income. Additionally, the Company recognized interest income of $0.5 million in each of the three months ended March 31, 2016 and March 31, 2015 pursuant to its revolving credit agreement with Advance. The aforementioned interest income is recorded as a component of interest, net within the accompanying condensed consolidated statements of income.
| |
| (10) | Commitments and Contingencies |
The Company has certain pending lawsuits, which, in the opinion of management, will not have a material adverse effect upon the financial condition of the Company.
The Company has evaluated subsequent events that have occurred through May 6, 2016, the date which the accompanying consolidated financial statements were available to be issued, and has determined there were no additional material events since the balance sheet date of this report requiring disclosure or adjustment to the accompanying consolidated financial statements.
