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 32 million customers in 41 states through our Spectrum brand. Over an advanced communications 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 and sports programming to our customers through Spectrum Networks. 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 Beginning in the first quarter of 2023, we removed separate mobile reporting, among several other changes, to better reflect the converged and integrated nature of our business and operations. We made the following changes to our reporting: • Residential and small and medium business (“SMB”) monthly revenue per customer calculations now include mobile service revenue • Residential mobile service revenue previously included in mobile revenue is now separately reported in residential revenue • SMB mobile service revenue previously included in mobile revenue is now included in SMB revenue • Mobile equipment revenue previously included in mobile revenue is now included in other revenue • Mobile expenses are no longer reported separately and are included in applicable expense categories • Other costs of revenue includes regulatory, connectivity and produced content costs as well as mobile device costs and direct costs associated with mobile and selling advertising • Costs to service customers now also includes costs related to field operations, network operations and customer operations for mobile customers but no longer includes costs to service bulk properties • Sales and marketing expense, which previously included sales and marketing for Spectrum Enterprise, Spectrum Reach and Spectrum Networks as well as costs associated with selling to and servicing bulk properties, now only consists of residential and SMB sales and marketing expenses, including sales and marketing for mobile • Other expense now also includes sales and marketing for Spectrum Enterprise, Spectrum Reach and Spectrum Networks as well as costs associated with selling to and servicing bulk properties but no longer includes direct costs associated with selling advertising • Reclasses within capital expenditure categories were made to reclassify all costs associated with our network evolution initiative to upgrade/rebuild • Line extensions capital expenditures are now broken out between subsidized rural construction line extensions and other line extensions • Subsidized rural construction initiative capital expenditures subcategory only includes rural construction projects for which we are receiving subsidies from federal, state or local governments There were no changes to total revenue, Adjusted EBITDA, capital expenditures or net income. Prior periods have been revised to conform with the presentation noted above. During the first quarter of 2023, we added 686,000 mobile lines, 76,000 Internet customers and 16,000 residential and SMB customer relationships, which excludes mobile-only customers. Our Spectrum One offering, which brings together Spectrum Internet, Advanced WiFi and Unlimited Spectrum Mobile to offer consumers fast, reliable and secure online connections on their favorite devices at home and on-the-go in a high-value package, contributed to our increase in mobile lines in the first quarter. We continue to see lower customer move rates and switching behavior among providers, which has reduced our selling opportunities. We are beginning to see benefits from the targeted investments we are making in employee wages and benefits inside of our operations to build employee skill sets and tenure, as well as the continued investments in digitization of our customer service platforms and proactive maintenance, all with the goal of improving the customer experience, reducing transactions and driving customer growth and retention. 12 We spent $391 million on our subsidized rural construction initiative during the three months ended March 31, 2023. We expect that over time, our subsidized rural construction initiative will support customer growth, and in the first quarter of 2023, we activated approximately 44,000 subsidized rural passings. In addition, we continue to evolve and upgrade our network to provide higher Internet speeds and reliability and invest in our products and customer service platforms. We currently offer Spectrum Internet products with speeds up to 1 Gbps across our entire footprint and over the next three years, we plan to upgrade our network to provide multi-gigabit speeds. Our Advanced WiFi, a managed WiFi service that provides customers an optimized home network while providing greater control of their connected devices with enhanced security and privacy, is available to all Internet customers. We continue to invest in our ability to provide a differentiated Internet connectivity experience for our mobile and fixed Internet customers with increasing availability of out-of-home WiFi access points across our footprint. In addition, we continue to work towards the construction of our own 5G mobile data-only network leveraging our Citizen Broadband Radio Service ("CBRS") Priority Access Licenses. By continually improving our product set and offering consumers the opportunity to save money by switching to our services, we believe we can continue to penetrate our expanding footprint and capture more spend on additional products for our existing customers. 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, 2023 2022 % Change Revenues $ 13,653 $ 13,200 3.4 % Adjusted EBITDA $ 5,350 $ 5,213 2.6 % Income from operations $ 2,926 $ 2,771 5.6 % Adjusted EBITDA is defined as net income attributable to Charter shareholders plus net income attributable to noncontrolling interest, interest expense, net, income taxes, depreciation and amortization, stock compensation expense, other income (expenses), net and other operating (income) 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 pass-through of programming cost increases to video customers and other price adjustments and growth in our residential mobile, Internet and commercial customers. Adjusted EBITDA growth and changes in income from operations were impacted by growth in revenue and increases in operating costs and expenses, primarily other costs of revenue and costs to service customers partly offset by a decrease in programming expense. 13 The following table summarizes our customer statistics for Internet, video, voice and mobile as of March 31, 2023 and 2022 (in thousands except per customer data and footnotes). Approximate as of March 31, 2023 (a) 2022 (a) Customer Relationships (b) Residential 29,996 30,035 SMB 2,215 2,163 Total Customer Relationships 32,211 32,198 Monthly Residential Revenue per Residential Customer (c) $ 120.56 $ 117.58 Monthly SMB Revenue per SMB Customer (d) $ 164.58 $ 165.58 Internet Residential 28,479 28,301 SMB 2,030 1,973 Total Internet Customers 30,509 30,274 Video Residential 14,260 15,093 SMB 646 628 Total Video Customers 14,906 15,721 Voice Residential 7,473 8,465 SMB 1,290 1,288 Total Voice Customers 8,763 9,753 Mobile Lines (e) Residential 5,782 3,805 SMB 196 132 Total Mobile Lines 5,978 3,937 Enterprise Primary Service Units ("PSUs") (f) 288 274 (a) We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of March 31, 2023 and 2022, customers include approximately 119,800 and 132,500 customers, respectively, whose accounts were over 60 days past due, approximately 42,100 and 29,000 customers, respectively, whose accounts were over 90 days past due and approximately 217,800 and 74,500 customers, respectively, whose accounts were over 120 days past due. Bad debt expense associated with these past due accounts has been reflected in our consolidated statements of operations. The increase in accounts past due is predominately due to pre-existing and incremental unsubsidized amounts of customers’ bills for those customers participating in government assistance programs, including video services. These customers are downgraded to a fully subsidized Internet-only service. (b) Customer relationships include the number of customers that receive one or more levels of service, encompassing Internet, video, voice and mobile 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-only 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-only customers. 14 (e) Mobile lines include phones and tablets which require one of our standard rate plans (e.g., "Unlimited" or "By the Gig"). Mobile lines exclude wearables and other devices that do not require standard phone rate plans. (f) 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 2022 Annual Report on Form 10-K. There have been no material changes from the critical accounting policies described in our Form 10-K. 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, 2023 2022 Revenues $ 13,653 $ 13,200 Costs and Expenses: Operating costs and expenses (exclusive of items shown separately below) 8,511 8,134 Depreciation and amortization 2,206 2,294 Other operating expenses, net 10 1 10,727 10,429 Income from operations 2,926 2,771 Other Income (Expenses): Interest expense, net (1,265) (1,060) Other income (expenses), net (104) 23 (1,369) (1,037) Income before income taxes 1,557 1,734 Income tax expense (374) (345) Consolidated net income 1,183 1,389 Less: Net income attributable to noncontrolling interests (162) (186) Net income attributable to Charter shareholders $ 1,021 $ 1,203 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: Basic $ 6.74 $ 7.05 Diluted $ 6.65 $ 6.90 Weighted average common shares outstanding, basic 151,438,371 170,688,127 Weighted average common shares outstanding, diluted 153,538,359 174,500,472 Revenues. Total revenues grew $453 million for the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to price adjustments and increases in the number of residential mobile, Internet and commercial customers. 15 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, 2023 2022 % Change Internet $ 5,718 $ 5,452 4.9 % Video 4,254 4,346 (2.1) % Voice 373 391 (4.6) % Mobile service 497 387 28.3 % Residential revenue 10,842 10,576 2.5 % Small and medium business 1,091 1,070 2.0 % Enterprise 682 661 3.1 % Commercial revenue 1,773 1,731 2.4 % Advertising sales 355 383 (7.2) % Other 683 510 34.0 % $ 13,653 $ 13,200 3.4 % The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Increase related to rate and product mix changes $ 226 Increase in average residential Internet customers 40 $ 266 The increase related to rate and product mix was primarily due to promotional roll-off and rate adjustments. Residential Internet customers grew by 178,000 customers from March 31, 2022 to March 31, 2023. Video revenues consist primarily of revenues from 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, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Decrease in average residential video customers $ (223) Increase related to rate and product mix changes 131 $ (92) Residential video customers decreased by 833,000 from March 31, 2022 to March 31, 2023. The increase related to rate and product mix was primarily due to pass-through of programming cost increases and promotional roll-off and was partly offset by a higher mix of lower cost video packages within our video customer base. 16 The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Decrease in average residential voice customers $ (44) Increase related to rate 26 $ (18) Residential wireline voice customers decreased by 992,000 customers from March 31, 2022 to March 31, 2023. Residential mobile service revenues increased $110 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to an increase of 1,977,000 mobile lines from March 31, 2022 to March 31, 2023. The increase in SMB revenues is attributable to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Increase in SMB customers $ 28 Decrease related to rate and product mix changes (7) $ 21 SMB customers grew by 52,000 from March 31, 2022 to March 31, 2023. Enterprise revenues increased $21 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to an increase in Internet PSUs partly offset by lower wholesale PSUs. Enterprise PSUs increased 14,000 from March 31, 2022 to March 31, 2023. 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 $28 million during the three months ended March 31, 2023 as compared to the corresponding period in 2022 primarily due to a decrease in political and local ad revenue partly offset by higher advanced advertising. Other revenues consist of revenue from mobile and video device sales, processing fees, regional sports and news channels (excluding intercompany charges or advertising sales on those channels), subsidy revenue, home shopping, wire maintenance fees and other miscellaneous revenues. Other revenues increased $173 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to higher mobile device sales. 17 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, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Programming $ (178) Other costs of revenue 220 Costs to service customers 136 Sales and marketing 66 Other 133 $ 377 Programming costs were approximately $2.8 billion and $3.0 billion for the three months ended March 31, 2023 and 2022, representing 33% and 37% of total operating costs and expenses, respectively. Programming costs consist primarily of costs paid to programmers for basic, premium, video on demand, and pay-per-view programming. Programming costs decreased as a result of fewer customers and a higher mix of lower cost video packages within our video customer base partly offset by contractual rate adjustments, including renewals and increases in amounts paid for retransmission consent. First quarter 2023 programming costs include $50 million of favorable adjustments, which is similar in size to sports network rebates and other favorable adjustments in the first quarter of 2022. Other costs of revenue increased $220 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to higher mobile device sales and higher other mobile direct costs due to an increase in mobile lines. Costs to service customers increased $136 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to adjustments to job structure, pay and benefits to build a more skilled and longer tenured workforce resulting in lower frontline employee attrition compared to 2022, and additional activity to support the accelerated growth of Spectrum Mobile. Sales and marketing increased $66 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to higher staffing across sales channels and the accelerated growth of Spectrum Mobile. The increase in other expense is attributable to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Stock compensation expense $ 61 Corporate costs 36 Enterprise 14 Other 22 $ 133 Stock compensation expense increased during the three months ended March 31, 2023 compared to the corresponding prior period primarily due to an increase in equity awards granted. Corporate and enterprise costs increased primarily due to higher labor costs. Depreciation and amortization. Depreciation and amortization expense decreased by $88 million during the three months ended March 31, 2023 compared to the corresponding period in 2022 primarily due to certain assets acquired in acquisitions becoming fully depreciated partly offset by an increase in depreciation as a result of more recent capital expenditures. 18 Other operating expenses, net. The change in other operating expenses, net is attributable to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Special charges, net $ 11 Loss on disposal of assets, net (2) $ 9 See Note 9 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information. Interest expense, net. Net interest expense increased by $205 million for the three months ended March 31, 2023, compared to the corresponding period in 2022. The increase in net interest expense is the result of an increase in weighted average interest rates as well as an increase in weighted average debt outstanding of approximately $4.7 billion during the three months ended March 31, 2023 compared to the corresponding period in 2022. The increase in weighted average debt outstanding is primarily due to the issuance of notes throughout 2022 and 2023. Other income (expenses), net. The change in other income (expenses), net is attributable to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Gain (loss) on financial instruments, net (see Note 6) $ (41) Net periodic pension benefits (15) Loss on equity investments, net (71) $ (127) See Note 10 and the Note referenced above to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information. Income tax expense. We recognized income tax expense of $374 million and $345 million for the three months ended March 31, 2023 and 2022, respectively. The increase is primarily a result of decreased recognition of excess tax benefits resulting from share-based compensation partly offset by lower pretax income. Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting purposes represents Advance/Newhouse Partnership's (“A/N”) portion of Charter Holdings’ net income based on its effective common unit ownership interest. For more information, see Note 5 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.” Net income attributable to Charter shareholders. Net income attributable to Charter shareholders decreased $182 million during the three months ended March 31, 2023 compared to the corresponding period in 2022, 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 19 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 $374 million and $342 million for the three months ended March 31, 2023 and 2022, respectively. 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, 2023 2022 Net income attributable to Charter shareholders $ 1,021 $ 1,203 Plus: Net income attributable to noncontrolling interest 162 186 Interest expense, net 1,265 1,060 Income tax expense 374 345 Depreciation and amortization 2,206 2,294 Stock compensation expense 208 147 Other, net 114 (22) Adjusted EBITDA $ 5,350 $ 5,213 Net cash flows from operating activities $ 3,323 $ 3,647 Less: Purchases of property, plant and equipment (2,464) (1,857) Change in accrued expenses related to capital expenditures (195) 10 Free cash flow $ 664 $ 1,800 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 February 2023, CCO Holdings, LLC (“CCO Holdings”) and CCO Holdings Capital Corp. jointly issued $1.1 billion of 7.375% senior unsecured notes due March 2031 at par. The net proceeds were used for general corporate purposes, including repaying certain indebtedness, funding buybacks of Charter Class A common stock and Charter Holdings common units and to pay related fees and expenses. 20 In February 2023, Charter Operating entered into an amendment to its credit agreement to replace London Interbank Offering Rate (“LIBOR”) as the benchmark rate applicable to the Term B loans with Secured Overnight Financing Rate (“SOFR”) and in March 2023, Charter Operating entered into another amendment to its credit agreement to incur a new Term B-3 loan with an aggregate principal amount of $750 million maturing in 2030 concurrently with the cancelation of certain of Charter Operating's existing Term B-1 and B-2 loans, among other amendments. Pricing on the new Term B-3 loan is SOFR plus 2.25%. After giving effect to the amendments, the aggregate principal amount of Term B-1 loans is $2.3 billion with pricing unchanged at SOFR plus 1.75% and the aggregate principal amount of Term B-2 loans is $3.1 billion with pricing unchanged at SOFR plus 1.75%. Overview of Our Contractual Obligations and Liquidity We have significant amounts of debt. The principal amount of our debt as of March 31, 2023 was $97.8 billion, consisting of $14.6 billion of credit facility debt, $55.9 billion of investment grade senior secured notes and $27.3 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 market penetration of our mobile product, we will continue to experience negative working capital impacts from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans. Further, in 2022, Charter became a meaningful federal cash tax payer as the majority of our net operating losses have been utilized. Free cash flow was $664 million and $1.8 billion for the three months ended March 31, 2023 and 2022, respectively. See the table below for factors impacting free cash flow during the three months ended March 31, 2023 compared to the corresponding prior period. As of March 31, 2023, the amount available under our credit facilities was approximately $3.3 billion and cash on hand was approximately $534 million. We expect to utilize free cash flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of our obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating’s revolving credit facility as well as access to the capital markets to fund our projected cash needs. We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including our network evolution and expansion initiatives, the build-out and deployment of our CBRS spectrum, and 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 4.5 times Adjusted EBITDA as of March 31, 2023. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. Excluding purchases from Liberty Broadband Corporation (“Liberty Broadband”) discussed below, during the three months ended March 31, 2023 and 2022, Charter purchased in the public market approximately 2.2 million and 4.4 million shares of Charter Class A common stock, respectively, for approximately $821 million and $2.6 billion, respectively. Since the beginning of its buyback program in September 2016 through March 31, 2023, Charter has purchased approximately 152.0 million shares of Class A common stock and Charter Holdings common units for approximately $69.4 billion, including purchases from Liberty Broadband and A/N discussed below. 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 among 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. Charter purchased from Liberty Broadband 0.1 million and 1.0 million shares of Charter Class A common stock for approximately $42 million and $602 million during the three months ended March 31, 2023 and 2022, respectively. 21 In December 2016, Charter and A/N entered into a letter agreement, as amended in December 2017 (the “A/N Letter Agreement”), that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis. During the three months ended March 31, 2023 and 2022, Charter Holdings purchased from A/N 0.3 million and 0.7 million Charter Holdings common units for approximately $122 million and $416 million, respectively. As of March 31, 2023, Charter had remaining board authority to purchase an additional $305 million of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. 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. Free Cash Flow Free cash flow decreased $1.1 billion during the three months ended March 31, 2023 compared to the corresponding prior period in 2022 due to the following (dollars in millions): Three months ended March 31, 2023 compared to three months ended March 31, 2022 Increase / (Decrease) Changes in working capital, excluding change in accrued interest and taxes $ (653) Increase in capital expenditures (607) Increase in cash paid for interest, net (203) Increase in cash paid for taxes, net (19) Increase in Adjusted EBITDA 137 Other, net 209 $ (1,136) 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 governing CCO Holdings' indebtedness, unless there is no default under the applicable indenture, and unless CCO Holdings' leverage ratio test is met at the time of such distribution. As of March 31, 2023, there was no default under any of these indentures, and CCO Holdings met its leverage ratio test based on March 31, 2023 financial results. There can be no assurance that CCO Holdings will satisfy its leverage ratio test at the time of the contemplated distribution. 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. 22 Historical Operating, Investing, and Financing Activities Cash and Cash Equivalents. We held $534 million and $645 million in cash and cash equivalents as of March 31, 2023 and December 31, 2022, respectively. Operating Activities. Net cash provided by operating activities decreased $324 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to an increase in cash paid for interest and changes in working capital, partly offset by an increase in Adjusted EBITDA of $137 million. Investing Activities. Net cash used in investing activities was $2.7 billion and $1.8 billion for the three months ended March 31, 2023 and 2022, respectively. The increase in cash used was primarily due to an increase in capital expenditures and changes in accrued expenses related to capital expenditures that increased by $205 million. Financing Activities. Net cash used in financing activities increased $665 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to a decrease in the amount by which borrowings of long-term debt exceeded repayments, partly offset by a decrease in the purchase of treasury stock and noncontrolling interest. Capital Expenditures We have significant ongoing capital expenditure requirements. Capital expenditures were $2.5 billion and $1.9 billion for the three months ended March 31, 2023 and 2022, respectively. The increase was primarily due to an increase in line extensions in connection with our subsidized rural construction initiative and continued residential and commercial network expansion. The increase in capital expenditures excluding line extensions was primarily driven by higher spend on network evolution, customer premise equipment and support capital. See the table below for more details. We currently expect full year 2023 capital expenditures, excluding line extensions, to be between $6.5 billion and $6.8 billion. We expect 2023 line extensions capital expenditures to be approximately $4 billion. The actual amount of capital expenditures in 2023 will depend on a number of factors including, but not limited to, the pace of our network evolution and expansion initiatives, supply chain timing and growth rates in 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 $195 million and increased by $10 million for the three months ended March 31, 2023 and 2022, respectively. 23 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, 2023 and 2022. 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, 2023 2022 Customer premise equipment (a) $ 537 $ 469 Scalable infrastructure (b) 354 359 Upgrade/rebuild (c) 289 159 Support capital (d) 394 329 Capital expenditures, excluding line extensions 1,574 1,316 Subsidized rural construction line extensions 371 192 Other line extensions 519 349 Total line extensions (e) 890 541 Total capital expenditures $ 2,464 $ 1,857 Of which: Commercial services $ 367 $ 365 Subsidized rural construction initiative (f) $ 391 $ 201 Mobile $ 77 $ 74 (a) Customer premise equipment includes equipment and devices located at the customer's premise used to deliver our Internet, video and voice services (e.g., modems, routers and set-top boxes), as well as installation costs. (b) Scalable infrastructure includes costs, not related to customer premise equipment or our network, to secure growth of new customers or provide service enhancements (e.g., headend equipment). (c) Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including our network evolution initiative which started in 2022. (d) Support capital includes costs associated with the replacement or enhancement of non-network assets (e.g., back-office systems, non-network equipment, land and buildings, vehicles, tools and test equipment). (e) Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering). (f) The subsidized rural construction initiative subcategory includes projects for which we are receiving subsidies from federal, state and local governments (for which separate reporting was initiated in 2022), excluding customer premise equipment and installation. Recently Issued Accounting Standards See Note 22 to the Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of recently issued accounting standards. There have been no material changes from the recently issued accounting standards described in our Form 10-K.