CHARTER COMMUNICATIONS, INC. /MO/ 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. General Charter Communications, Inc. (together with its controlled subsidiaries, “Charter”) is a leading broadband connectivity company and cable operator serving more than 31 million customers in 41 states through our Spectrum brand. Over an advanced high-capacity, two-way telecommunications network, we offer a full range of state-of-the-art residential and business services including Spectrum Internet, TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise provides highly customized, fiber-based solutions. Spectrum Reach delivers tailored advertising and production for the modern media landscape. We also distribute award-winning news coverage, sports and high-quality original programming to our customers through Spectrum Networks and Spectrum Originals. Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated. Overview In the first quarters of both 2021 and 2020, the Novel Coronavirus (“COVID-19”) pandemic has significantly impacted how our customers use our products and services, how they interact with us, and how our employees work and provide services to our customers. During the first quarter of 2021, customer activity levels remained below normal which contributed to lower operating expense from reduced service transactions and significantly lower bad debt, however, we expect those trends to slowly return to pre-COVID-19 levels throughout 2021 as the economy reopens and normal activities resume. Although the ultimate impact of the COVID-19 pandemic cannot be predicted, we remain focused on driving customer relationship growth by deploying superior products and services packaged with attractive pricing. Further, we expect to continue to drive customer relationship growth through sales of bundled services and improving customer retention despite the expectation for continued losses of video and wireline voice customers. Our Spectrum Mobile service is offered to customers subscribing to our Internet service and runs on Verizon Communications Inc.'s ("Verizon") mobile network combined with Spectrum WiFi. We continue to explore ways to drive even more mobile traffic to our network. We intend to use Citizens Broadband Radio Service (“CBRS”) Priority Access Licenses (“PALs”) we purchased in 2020, along with unlicensed CBRS spectrum to build our own 5G mobile network which we plan to use in combination with our mobile virtual network operator (“MVNO”) reseller agreement with Verizon and WiFi network to enhance the customer’s experience and improve our cost structure. We believe Spectrum-branded mobile services will drive higher sales of our core products, create longer customer lives and increase profitability and cash flow over time. As a result of growth costs associated with our new mobile product line, we cannot be certain that we will be able to grow revenues or maintain our margins at recent historical rates. During the three months ended March 31, 2021 and 2020, our mobile product line increased revenues by $492 million and $258 million, respectively, reduced Adjusted EBITDA by approximately $80 million and $116 million, respectively, and reduced free cash flow by approximately $184 million and $260 million, respectively. Primarily as a result of growth-related sales and marketing and other customer acquisition costs for mobile services, and depending on the pace of that growth, we expect mobile Adjusted EBITDA will continue to be negative. We also expect to continue to see negative free cash flow from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans and capital expenditures related to retail store and CBRS build-out. 22 We realized revenue, Adjusted EBITDA and income from operations during the periods presented as follows (in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding): Three Months Ended March 31, 2021 2020 % Change Revenues $ 12,522 $ 11,738 6.7 % Adjusted EBITDA $ 4,945 $ 4,396 12.5 % Income from operations $ 2,068 $ 1,802 14.8 % Adjusted EBITDA is defined as net income attributable to Charter shareholders plus net income attributable to noncontrolling interest, net interest expense, income taxes, depreciation and amortization, stock compensation expense, other (income) expenses, net and other operating expenses, net, such as special charges and (gain) loss on sale or retirement of assets. See “—Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow. Growth in total revenue was primarily due to growth in our residential Internet and mobile customers. Adjusted EBITDA and income from operations growth was impacted by growth in revenue and reduced service transactions and lower bad debt. The following table summarizes our customer statistics for Internet, video, voice and mobile as of March 31, 2021 and 2020 (in thousands except per customer data and footnotes). Approximate as of March 31, 2021 (a) 2020 (a) Customer Relationships (b) Residential 29,361 27,745 Small and Medium Business ("SMB") 2,071 1,976 Total Customer Relationships 31,432 29,721 Monthly Residential Revenue per Residential Customer (c) $ 112.18 $ 112.73 Monthly SMB Revenue per SMB Customer (d) $ 163.79 $ 168.83 Internet Residential 27,357 25,471 SMB 1,877 1,775 Total Internet Customers 29,234 27,246 Video Residential 15,483 15,550 SMB 579 524 Total Video Customers 16,062 16,074 Voice Residential 9,113 9,360 SMB 1,238 1,162 Total Voice Customers 10,351 10,522 Mobile Lines Residential 2,605 1,359 SMB 70 13 Total Mobile Lines 2,675 1,372 Enterprise Primary Service Units ("PSUs") (e) 276 269 23 (a) We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of March 31, 2021 and 2020, customers include approximately 125,100 and 140,800 customers, respectively, whose accounts were over 60 days past due, approximately 26,500 and 12,500 customers, respectively, whose accounts were over 90 days past due and approximately 20,000 and 8,200 customers, respectively, whose accounts were over 120 days past due. Included in the March 31, 2021 aging statistics are approximately 26,900 residential voice customers that would have been disconnected under our normal collection policies, but were not due to certain state mandates in place. (b) Customer relationships include the number of customers that receive one or more levels of service, encompassing Internet, video and voice services, without regard to which service(s) such customers receive. Customers who reside in residential multiple dwelling units (“MDUs”) and that are billed under bulk contracts are counted based on the number of billed units within each bulk MDU. Total customer relationships exclude enterprise and mobile-only customer relationships. (c) Monthly residential revenue per residential customer is calculated as total residential quarterly revenue divided by three divided by average residential customer relationships during the respective quarter and excludes mobile revenue and customers. (d) Monthly SMB revenue per SMB customer is calculated as total SMB quarterly revenue divided by three divided by average SMB customer relationships during the respective quarter and excludes mobile revenue and customers. (e) Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering at each customer location as an individual PSU. Critical Accounting Policies and Estimates For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K. There have been no material changes from the critical accounting policies described in our Form 10-K. 24 Results of Operations The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions, except per share data): Three Months Ended March 31, 2021 2020 Revenues $ 12,522 $ 11,738 Costs and Expenses: Operating costs and expenses (exclusive of items shown separately below) 7,711 7,432 Depreciation and amortization 2,441 2,497 Other operating expenses, net 302 7 10,454 9,936 Income from operations 2,068 1,802 Other Income (Expenses): Interest expense, net (983) (980) Other income (expenses), net 52 (326) (931) (1,306) Income before income taxes 1,137 496 Income tax expense (216) (29) Consolidated net income 921 467 Less: Net income attributable to noncontrolling interests (114) (71) Net income attributable to Charter shareholders $ 807 $ 396 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: Basic $ 4.22 $ 1.91 Diluted $ 4.11 $ 1.86 Weighted average common shares outstanding, basic 191,404,527 207,831,305 Weighted average common shares outstanding, diluted 205,872,536 212,810,613 Revenues. Total revenues grew $784 million for the three months ended March 31, 2021 compared to the corresponding period in 2020 primarily due to increases in the number of residential Internet and mobile customers and price adjustments. 25 Revenues by service offering were as follows (dollars in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding): Three Months Ended March 31, 2021 2020 % Change Internet $ 5,086 $ 4,407 15.4 % Video 4,344 4,422 (1.8) % Voice 399 457 (12.6) % Residential revenue 9,829 9,286 5.8 % Small and medium business 1,012 996 1.6 % Enterprise 638 622 2.5 % Commercial revenue 1,650 1,618 2.0 % Advertising sales 344 365 (5.8) % Mobile 492 258 90.7 % Other 207 211 (2.0) % $ 12,522 $ 11,738 6.7 % The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Increase in average residential Internet customers $ 358 Increase related to rate, product mix and bundle allocation changes 321 $ 679 Residential Internet customers grew by 1,886,000 customers from March 31, 2020 to March 31, 2021. The increase related to rate, product mix and bundle allocation changes was primarily due to price adjustments including annual increases, promotional roll-off and higher bundled revenue allocation. Video revenues consist primarily of revenues from basic and digital video services provided to our residential customers, as well as franchise fees, equipment service fees and video installation revenue. The decrease in video revenues is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Decrease related to rate, product mix and bundle allocation changes $ (47) Decrease in video on demand and pay-per-view (20) Decrease in installation (10) Decrease in average residential video customers (1) $ (78) The decrease related to rate, product mix and bundle allocation changes was primarily due to a higher mix of lower cost video packages within our video customer base and lower bundled revenue allocation, partly offset by price adjustments including annual increases and promotional roll-off. Residential video customers decreased by 67,000 from March 31, 2020 to March 31, 2021. 26 The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Decrease related to rate and bundle allocation changes $ (47) Decrease in average residential voice customers (11) $ (58) The decrease related to rate and bundle allocation changes was impacted by value-based pricing and changes in bundled revenue allocations. Residential wireline voice customers decreased by 247,000 customers from March 31, 2020 to March 31, 2021. The increase in SMB commercial revenues is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Increase in SMB customers $ 47 Decrease related to rate and product mix changes (31) $ 16 SMB customers grew by 95,000 from March 31, 2020 to March 31, 2021. The decrease related to rate and product mix changes was primarily due to value-based pricing related to Spectrum pricing and packaging ("SPP") and some continuing COVID-19 related seasonal plans, net of promotional roll-off and price adjustments. Enterprise revenues increased $16 million during the three months ended March 31, 2021, respectively, compared to the corresponding period in 2020 primarily due to an increase in Internet and video enterprise PSUs offset by lower wholesale PSUs. Enterprise PSUs increased 7,000 from March 31, 2020 to March 31, 2021. Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues decreased $21 million during the three months ended March 31, 2021 as compared to the corresponding period in 2020 primarily due to a decrease in political revenue, partially offset by higher advanced advertising. During the three months ended March 31, 2021 and 2020, mobile revenues represented approximately $228 million and $131 million of device revenues, respectively, and approximately $264 million and $127 million of service revenues, respectively. The increases in revenues are a result of increases in the number of mobile lines from 1,372,000 as of March 31, 2020 to 2,675,000 mobile lines as of March 31, 2021. Other revenues consist of revenue from regional sports and news channels (excluding intercompany charges or advertising sales on those channels), home shopping, late payment fees, video device sales, wire maintenance fees and other miscellaneous revenues. Other revenues decreased $4 million during the three months ended March 31, 2021 compared to the corresponding period in 2020 primarily due to a decrease in late payment fees offset by an increase in regional sports and news revenue. 27 Operating costs and expenses . The increase in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, are attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Programming $ 96 Regulatory, connectivity and produced content 49 Costs to service customers (44) Marketing (15) Mobile 198 Other (5) $ 279 Programming costs were approximately $3.0 billion and $2.9 billion, representing 39% of total operating costs and expense for the three months ended March 31, 2021 and 2020, respectively. Programming costs consist primarily of costs paid to programmers for basic, digital, premium, video on demand, and pay-per-view programming. Programming costs increased as a result of contractual rate adjustments, including renewals and increases in amounts paid for retransmission consent offset by a higher mix of lower cost video packages within our video customer base. We expect programming rates per customer will continue to increase due to a variety of factors, including annual increases imposed by programmers with additional selling power as a result of media and broadcast station groups consolidation, increased demands by owners of broadcast stations for payment for retransmission consent or linking carriage of other services to retransmission consent, and additional programming. We have been unable to fully pass these increases on to our customers and do not expect to be able to do so in the future without a potential loss of customers. Regulatory, connectivity and produced content increased $49 million during the three months ended March 31, 2021, respectively, compared to the corresponding period in 2020 primarily due to higher sports rights costs as a result of more basketball games during the three months ended March 31, 2021 as compared to the corresponding period in 2020 as the prior period had postponement of games and the current period had additional games due to the delayed start of the 2020 - 2021 NBA season as a result of COVID-19. Costs to service customers decreased $44 million during the three months ended March 31, 2021 compared to the corresponding period in 2020 primarily due to a decrease in bad debt expense as a result of lower write-offs and higher recoveries enhanced by the stimulus packages offset by higher labor costs resulting from our commitment to a minimum $20 per hour wage in 2022, along with 5.8% customer growth. Mobile costs of $572 million and $374 million for the three months ended March 31, 2021 and 2020, respectively, were comprised of mobile device costs and mobile service, customer acquisition and operating costs. The increase is attributable to an increase in the number of mobile lines. 28 The decrease in other expense is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Corporate costs $ (30) Advertising sales expense (17) Property tax and insurance (6) Stock compensation expense 44 Enterprise 2 Other 2 $ (5) Corporate costs decreased during the three months ended March 31, 2021 compared to the corresponding prior period primarily due to a non-recurring adjustment to bonuses related to COVID-19. Advertising sales expense decreased due to lower cost of sales fees driven by lower revenue, as well as lower bad debt. Stock compensation expense increased during the three months ended March 31, 2021 compared to the corresponding period in 2020 primarily due to changes in certain equity award provisions that result in additional expense at the time of grant. Depreciation and amortization. Depreciation and amortization expense decreased by $56 million during the three months ended March 31, 2021 compared to the corresponding period in 2020 primarily due to a decrease in depreciation and amortization as certain assets acquired in acquisitions become fully depreciated offset by an increase in depreciation as a result of more recent capital expenditures. Other operating expenses, net. The change in other operating expenses, net is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Special charges, net $ 239 (Gain) loss on disposal of assets, net 56 $ 295 See Note 13 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information. Interest expense, net. Net interest expense decreased by $3 million for the three months ended March 31, 2021 compared to the corresponding period in 2020. The decrease in net interest expense is the result of reductions in weighted average interest rates offset by an increase in weighted average debt outstanding of approximately $4.6 billion during the three months ended March 31, 2021 compared to the corresponding period in 2020. The increase in weighted average debt outstanding is primarily due to the issuance of notes throughout 2020 and 2021 for general corporate purposes including stock buybacks and debt repayments. 29 Other income (expenses), net. The change in other income (expenses), net is attributable to the following (dollars in millions): Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Loss on extinguishment of debt $ (2) Gain (loss) on financial instruments, net 366 Other pension benefits, net 8 Gain on equity investments, net 6 $ 378 See Note 14 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information. Income tax expense. We recognized income tax expense of $216 million and $29 million for the three months ended March 31, 2021 and 2020, respectively. The increase is primarily a result of higher pretax income. For more information, see Note 16 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.” Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting purposes represents A/N’s portion of Charter Holdings’ net income based on its effective common unit ownership interest and the preferred dividend of $38 million for each of the three months ended March 31, 2021 and 2020. For more information, see Note 8 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.” Net income attributable to Charter shareholders. Net income attributable to Charter shareholders increased from $396 million for the three months ended March 31, 2020 to $807 million for the three months ended March 31, 2021 primarily as a result of the factors described above. Use of Adjusted EBITDA and Free Cash Flow We use certain measures that are not defined by U.S. generally accepted accounting principles ("GAAP") to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income attributable to Charter shareholders and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, below. Adjusted EBITDA eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial measures. Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures. Management and Charter’s board of directors use Adjusted EBITDA and free cash flow to assess our performance and our ability to service our debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the Securities and Exchange Commission (the “SEC”)). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which were $277 million and $311 million for the three months ended March 31, 2021 and 2020, respectively. 30 A reconciliation of Adjusted EBITDA and free cash flow to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, is as follows (dollars in millions). Three Months Ended March 31, 2021 2020 Net income attributable to Charter shareholders $ 807 $ 396 Plus: Net income attributable to noncontrolling interest 114 71 Interest expense, net 983 980 Income tax expense 216 29 Depreciation and amortization 2,441 2,497 Stock compensation expense 134 90 Other expenses, net 250 333 Adjusted EBITDA $ 4,945 $ 4,396 Net cash flows from operating activities $ 3,751 $ 3,220 Less: Purchases of property, plant and equipment (1,821) (1,461) Change in accrued expenses related to capital expenditures (75) (388) Free cash flow $ 1,855 $ 1,371 Liquidity and Capital Resources Introduction This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt. Recent Events In 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 5.750% notes due February 2026. In April 2021, CCO Holdings and CCO Holdings Capital Corp. jointly issued $1.0 billion of 4.500% senior unsecured notes due 2033 at par. The net proceeds will be 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. Overview of Our Contractual Obligations and Liquidity We have significant amounts of debt. The principal amount of our debt as of March 31, 2021 was $84.3 billion, consisting of $10.1 billion of credit facility debt, $50.8 billion of investment grade senior secured notes and $23.5 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt. Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. As we continue to grow our mobile services, we expect an initial funding period to grow a new product as well as negative working capital impacts from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans. Free cash flow was $1.9 billion and $1.4 billion for the three months ended March 31, 2021 and 2020, respectively. See table below for factors impacting free cash flow during the three months ended March 31, 2021 compared to the corresponding prior period. As of March 31, 2021, the amount available under our credit facilities was approximately $4.7 billion and cash on hand was approximately $772 million. We expect to utilize free cash 31 flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of our obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating’s revolving credit facility as well as access to the capital markets to fund our projected cash needs. We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including mergers and acquisitions as well as stock repurchases and dividends. Charter's target leverage of net debt to the last twelve months Adjusted EBITDA remains at 4 to 4.5 times Adjusted EBITDA, and up to 3.5 times Adjusted EBITDA at the Charter Operating first lien level. Our leverage ratio was 4.4 times Adjusted EBITDA as of March 31, 2021. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. During the three months ended March 31, 2021 and 2020, Charter purchased approximately 4.7 million and 4.5 million of Charter Class A common stock, respectively, for approximately $3.0 billion and $2.2 billion, respectively. Since the beginning of its buyback program in September 2016 through March 31, 2021, Charter has purchased approximately 92.4 million shares of Class A common stock for approximately $37.6 billion, excluding purchases by Liberty Broadband Corporation (“Liberty Broadband”) discussed below. In December 2016, Charter and Advance/Newhouse Partnership (“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. During each of the three months ended March 31, 2021 and 2020, Charter Holdings purchased from A/N 0.8 million Charter Holdings common units, respectively, for approximately $507 million and $393 million, respectively. 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 Amended and Restated Stockholders Agreement with Charter, Liberty Broadband and A/N, dated as of May 23, 2015 (as amended, 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. During the three months ended March 31, 2021, Charter purchased from Liberty Broadband 0.8 million shares of Charter Class A common stock for approximately $518 million. In April 2021, the Company purchased from Liberty Broadband an additional 0.7 million shares of Charter Class A common stock for approximately $460 million. As of March 31, 2021, Charter had remaining board authority to purchase an additional $1.2 billion of Charter’s Class A common stock and/or Charter Holdings common units. Although Charter expects to continue to buy back its common stock consistent with its leverage target range, Charter is not obligated to acquire any particular amount of common stock, and the timing of any purchases that may occur cannot be predicted and will largely depend on market conditions and other potential uses of capital. Purchases may include open market purchases, tender offers or negotiated transactions. As possible acquisitions, swaps or dispositions arise, we actively review them against our objectives including, among other considerations, improving the operational efficiency, geographic clustering of assets, product development or technology capabilities of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisitions, dispositions or system swaps, or that any such transactions will be material to our operations or results. 32 Free Cash Flow Free cash flow increased $484 million during the three months ended March 31, 2021 compared to the corresponding prior period in 2020 due to the following (dollars in millions). Three months ended March 31, 2021 compared to three months ended March 31, 2020 Increase / (Decrease) Increase in Adjusted EBITDA $ 549 Changes in working capital, excluding change in accrued interest 515 Decrease in cash paid for interest, net 23 Increase in capital expenditures (360) Other, net (243) $ 484 Free cash flow was reduced by $184 million and $260 million during the three months ended March 31, 2021 and 2020, respectively, due to mobile with impacts negatively affecting working capital, capital expenditures and Adjusted EBITDA. Limitations on Distributions Distributions by our subsidiaries to a parent company for payment of principal on parent company notes are restricted under CCO Holdings indentures and Charter Operating credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable entity’s leverage ratio test is met at the time of such distribution. As of March 31, 2021, there was no default under any of these indentures or credit facilities, and each applicable entity met its applicable leverage ratio tests based on March 31, 2021 financial results. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on parent company (CCO Holdings) notes are further restricted by the covenants in its credit facilities. However, without regard to leverage, during any calendar year or any portion thereof during which the borrower is a flow-through entity for tax purposes, and so long as no event of default exists, the borrower may make distributions to the equity interests of the borrower in an amount sufficient to make permitted tax payments. In addition to the limitation on distributions under the various indentures, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act. Historical Operating, Investing, and Financing Activities Cash and Cash Equivalents. We held $772 million and $1.0 billion in cash and cash equivalents as of March 31, 2021 and December 31, 2020, respectively. Operating Activities. Net cash provided by operating activities increased $531 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to an increase in Adjusted EBITDA of $549 million. Investing Activities. Net cash used in investing activities was $2.0 billion and $1.9 billion for the three months ended March 31, 2021 and 2020, respectively. The increase in cash used was primarily due to an increase in capital expenditures offset by lower changes in accrued expenses related to capital expenditures. Financing Activities. Net cash used in financing activities was $2.0 billion for each of the three months ended March 31, 2021 and 2020 as the increase in the purchase of treasury stock and noncontrolling interest was offset by an increase in the amount by which borrowings of long-term debt exceeded repayments. 33 Capital Expenditures We have significant ongoing capital expenditure requirements. Capital expenditures were $1.8 billion and $1.5 billion for the three months ended March 31, 2021 and 2020, respectively. The increase was primarily due to an increase in scalable infrastructure driven by augmentation of network capacity for customer growth and usage, with incremental spending to reclaim network headroom maintained prior to COVID-19, and higher line extensions driven by continued network expansion, including to rural areas. See the table below for more details. We currently expect 2021 cable capital expenditures, excluding Rural Digital Opportunity Fund ("RDOF") investments which will begin later this year, to be relatively consistent as a percentage of cable revenue versus 2020. The actual amount of our capital expenditures in 2021 will depend on a number of factors including further spend related to product development and growth rates of both our residential and commercial businesses. Our capital expenditures are funded primarily from cash flows from operating activities and borrowings on our credit facility. In addition, our accrued liabilities related to capital expenditures decreased by $75 million and $388 million for the three months ended March 31, 2021 and 2020, respectively. The following tables present our major capital expenditures categories in accordance with National Cable and Telecommunications Association (“NCTA”) disclosure guidelines for the three months ended March 31, 2021 and 2020. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions): Three Months Ended March 31, 2021 2020 Customer premise equipment (a) $ 489 $ 463 Scalable infrastructure (b) 411 170 Line extensions (c) 399 343 Upgrade/rebuild (d) 145 129 Support capital (e) 377 356 Total capital expenditures $ 1,821 $ 1,461 Capital expenditures included in total related to: Commercial services $ 333 $ 261 Mobile $ 112 $ 87 (a) Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including customer installation costs and customer premise equipment (e.g., digital receivers and cable modems). (b) Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment). (c) Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering). (d) Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments. (e) Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles). Recently Issued Accounting Standards See Note 22 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for a discussion of recently issued accounting standards. 34