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EX-99.1 - EXHIBIT 99.1 - GCI, LLCex99-llcrecon093018.htm
EX-32 - EXHIBIT 32 - GCI, LLCllc09302018exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - GCI, LLCllc09302018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - GCI, LLCllc09302018exhibit311.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
 
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

 Commission File No. 000-05890
GCI, LLC
(Exact name of Registrant as specified in its charter)
 
Delaware
 
91-1820757
 
 
(State or other jurisdiction of
 
(I.R.S Employer
 
 
incorporation or organization)
 
Identification No.)
 

 
12300 Liberty Boulevard
 
 
 
 
Englewood, Colorado
 
80112
 
 
(Address of principal executive offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: (720) 875-5900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☐
Emerging growth company ☒
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

As of November 8, 2018, GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc.

1



TABLE OF CONTENTS


2




GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
 
 
 
September 30,

December 31,

2018

2017

amounts in thousands
Assets



Current assets:
 

 
Cash and cash equivalents
$
126,806


573,210

Trade and other receivables, net of allowance for doubtful accounts of $3,725 thousand and $0, respectively
243,734


6,803

Other current assets
40,795


1,265

Total current assets
411,335


581,278

Investments in equity securities (note 6)
1,751,210


1,803,064

Investments in affiliates, accounted for using the equity method (note 7)
174,134


114,655

Investment in Liberty Broadband measured at fair value (note 7)
3,598,079


3,634,786







Property and equipment, net
1,197,988


624

Intangible assets not subject to amortization





Goodwill (note 9)
967,687


25,569

Cable certificates
370,000



Wireless licenses
190,000



Other
16,525


4,000


1,544,212


29,569

Intangible assets subject to amortization, net (note 9)
480,559


4,237

Other assets, at cost, net of accumulated amortization
48,603


4,000

Total assets
$
9,206,120


6,172,213

 
 
 
 
 
 
 
(Continued)
 See accompanying notes to interim condensed consolidated financial statements.

3



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
September 30,
 
December 31,
 
2018
 
2017
 
amounts in thousands
Liabilities and Equity



Current liabilities:



Accounts payable and accrued liabilities
$
97,209


718

Deferred revenue
33,865



Other current liabilities
67,739


9,747

Total current liabilities
198,813


10,465

Long-term debt, net (note 10)
2,522,186



Obligations under capital leases and tower obligation, excluding current portion
125,541



Long-term deferred revenue
66,753


130

Deferred income tax liabilities
1,025,976


643,426

Taxes payable


1,198,315

Other liabilities
58,189


95,841

Total liabilities
3,997,458


1,948,177

Equity





Member's equity:





Member's investment
3,431,321


2,305,440

Retained earnings
1,767,391


1,914,963

Total member's equity
5,198,712


4,220,403

Non-controlling interests
9,950


3,633

Total equity
5,208,662


4,224,036

Commitments and contingencies




Total liabilities and equity
$
9,206,120


6,172,213

 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

4



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,

2018

2017
 
2018
 
2017

amounts in thousands
Revenue
$
210,146

 
5,493

 
504,840

 
15,639

Operating costs and expenses:


 


 
 
 
 
Operating expense (exclusive of depreciation and amortization shown separately below)
64,684

 
2,798

 
153,797

 
8,395

Selling, general and administrative, including stock-based compensation (note 4)
102,172

 
12,341

 
232,715

 
38,283

Depreciation and amortization expense
62,848

 
823

 
143,257

 
2,398


229,704

 
15,962

 
529,769

 
49,076

Operating income (loss)
(19,558
)
 
(10,469
)
 
(24,929
)
 
(33,437
)
Other income (expense):


 


 
 
 
 
Interest expense (including amortization of deferred loan fees)
(32,419
)
 

 
(72,470
)
 

Share of earnings (losses) of affiliates, net (note 7)
10,856

 
1,648

 
18,714

 
4,971

Realized and unrealized gains (losses) on financial instruments, net (note 5)
538,347

 
472,763

 
(21,058
)
 
1,270,764

Other, net
(3,339
)
 
328

 
(5,726
)
 
1,073


513,445

 
474,739

 
(80,540
)
 
1,276,808

Earnings (loss) before income taxes
493,887

 
464,270

 
(105,469
)
 
1,243,371

Income tax (expense) benefit
(140,886
)
 
(176,980
)
 
(44,691
)
 
(473,826
)
Net earnings (loss)
353,001

 
287,290

 
(150,160
)
 
769,545

Less net earnings (loss) attributable to the non-controlling interests
(127
)
 
(72
)
 
(320
)
 
(73
)
Net earnings (loss) attributable to member
$
353,128

 
287,362

 
(149,840
)
 
769,618

 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

5



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
 
September 30,
 
2018

2017
 
amounts in thousands
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(150,160
)
 
769,545

Adjustments to reconcile net earnings (loss) to net cash from operating activities:


 


Depreciation and amortization
143,257

 
2,398

Stock-based compensation expense
20,926

 
10,968

Share of (earnings) losses of affiliates, net
(18,714
)
 
(4,971
)
Realized and unrealized (gains) losses on financial instruments, net
21,058

 
(1,270,764
)
Deferred income tax expense (benefit)
45,270

 
473,826

Intergroup tax payments

 
231,114

Other, net
10,121

 
698

Change in operating assets and liabilities:


 


Current and other assets
(75,221
)
 
1,856

Payables and other liabilities
(13,854
)
 
2,320

Net cash provided (used) by operating activities
(17,317
)
 
216,990

Cash flows from investing activities:


 


GCI Holdings cash and restricted cash acquired in consolidation
147,958

 

Capital expended for property and equipment
(89,376
)
 
(2,686
)
Purchases of investments
(48,581
)

(76,815
)
Sales of investments

 
1,606

Other investing activities, net
2,699

 

Net cash provided (used) by investing activities
12,700

 
(77,895
)
Cash flows from financing activities:


 


Borrowings of debt
1,050,000

 

Repayment of debt, capital lease, and tower obligations
(13,543
)
 

Contributions from (distributions to) member
(396,427
)
 

Contributions from (distributions to) Qurate Retail
(1,077,061
)
 
(113,837
)
Distribution to non-controlling interests
(3,273
)
 

Other financing activities, net
(1,630
)
 
(512
)
Net cash provided (used) by financing activities
(441,934
)
 
(114,349
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(446,551
)
 
24,746

Cash, cash equivalents and restricted cash at beginning of period
574,148

 
488,127

Cash, cash equivalents and restricted cash at end of period
$
127,597

 
512,873


6



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
Nine Months Ended September 30, 2018
(Unaudited)
 
 
 
 
 
 
 
 
 
Member's investment
 
Retained earnings
 
Non-controlling interest in equity of subsidiaries
 
Total equity
 
 
Balances at January 1, 2018
$
2,305,440

 
1,914,963

 
3,633

 
4,224,036

Net earnings (loss)

 
(149,840
)
 
(320
)
 
(150,160
)
Stock-based compensation
18,766

 

 

 
18,766

Contribution of taxes in connection with HoldCo Split-Off
1,146,750

 

 

 
1,146,750

Distribution to Qurate Retail
(1,079,689
)
 

 

 
(1,079,689
)
Contributions from (distributions to) member, net
(398,441
)
 
2,014

 

 
(396,427
)
Allocated consideration in connection with the Transactions
1,441,669

 

 
7,000

 
1,448,669

Distribution to non-controlling interests

 

 
(3,273
)
 
(3,273
)
Other
(3,174
)
 
254

 
2,910

 
(10
)
Balances at September 30, 2018
$
3,431,321

 
1,767,391

 
9,950

 
5,208,662

 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

7



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



(1)
Basis of Presentation

GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with GCI, LLC's parent company, General Communication, Inc. ("GCI"), an Alaska corporation and indirect parent company of GCI Holdings, LLC ("GCI Holdings"), and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly‑owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group (the “reattribution”)), were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.

Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax‑free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split‑Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

These notes to the condensed consolidated financial statements refer to the combination of GCI Holdings, non‑controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, these financial statements present all periods as consolidated by the Company. All

8



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

The Company, through its ownership of interests in subsidiaries and other companies, is primarily engaged in providing a full range of wireless, data, video, voice, and managed services to residential customers, businesses, governmental entities, and educational and medical institutions primarily in Alaska.

The Company holds investments that are accounted for using the equity method. The Company does not control the decision making process or business management practices of these affiliates. Accordingly, the Company relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that the Company uses in the application of the equity method. In addition, the Company relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on its condensed consolidated financial statements.

Split‑Off from Qurate Retail

Following the HoldCo Split‑Off, Qurate Retail and GCI Liberty operate as separate, publicly traded companies, and neither have any stock ownership, beneficial or otherwise, in the other. In connection with the HoldCo Split‑Off, Qurate Retail, Liberty Media Corporation ("Liberty Media") (or its subsidiary) and GCI Liberty entered into certain agreements in order to govern certain of the ongoing relationships among the companies after the HoldCo Split‑Off and to provide for an orderly transition. These agreements include an indemnification agreement, a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Transactions and certain conditions to and provisions governing the relationship between GCI Liberty and Qurate Retail with respect to and resulting from the Transactions. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and GCI Liberty and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media provides GCI Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, GCI Liberty shares office space with Qurate Retail and Liberty Media and related amenities at their corporate headquarters. GCI Liberty reimburses Liberty Media for direct, out‑of‑pocket expenses incurred by Liberty Media in providing these services and for costs that will be negotiated semi‑annually. Under these agreements, approximately $2.1 million and $6.0 million was reimbursable to Liberty Media for the three and nine months ended September 30, 2018, respectively.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance replaced most existing revenue recognition guidance in GAAP. The Company adopted the new guidance, which established Accounting Standards Codification Topic 606 ("ASC 606"), effective January 1, 2018, under the modified retrospective transition method. The impact of the new guidance on Evite was not material to the condensed consolidated financial statements. GCI Holdings adopted the new guidance prior to its acquisition by HoldCo. As a result, there was no impact to the Company’s condensed consolidated financial statements related to GCI Holdings’ adoption of the new guidance.

In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments with readily determinable fair values

9



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. As the Company has historically measured its investments in equity securities with readily determinable fair values at fair value, the new guidance had no impact on the accounting for these instruments. The Company has elected the measurement alternative for its equity securities without readily determinable fair values and will perform a qualitative assessment of these instruments to identify potential impairments. See note 6 for information related to the Company’s equity securities.

In November 2016, the FASB issued a new accounting standard which requires that the statement of cash flows include restricted cash and cash equivalents when reconciling beginning and ending cash. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this new guidance effective January 1, 2018. Upon adoption, the Company added restricted cash to the reconciliation of beginning and ending cash and cash equivalents and included a reconciliation of total cash and cash equivalents and restricted cash to the balance sheet for each period presented in the condensed consolidated statements of cash flows. The following table reconciles cash and cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:
 
September 30,
 
December 31,
 
2018
 
2017
 
amounts in thousands
Cash and cash equivalents
$
126,806

 
573,210

Restricted cash included in other current assets
791

 
938

Total cash and cash equivalents and restricted cash at end of period
$
127,597

 
574,148


New Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for the Company in the first quarter of 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

In February 2016, the FASB issued new accounting guidance on lease accounting. This guidance requires a company to recognize lease assets and lease liabilities arising from operating leases in the statement of financial position. Additionally, the criteria for classifying a lease as a finance lease versus an operating lease are substantially the same as the previous guidance. In January 2018, the FASB issued an additional amendment that provides a practical expedient that gives companies the option to not evaluate existing or expired land easements that were not previously accounted for as leases under the current leases guidance. The amendments in these updates are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company plans to adopt this guidance on January 1, 2019. The Company expects to adopt using the optional transitional method that allows for a cumulative effect adjustment in the period of adoption without adjusting the comparative periods presented. Additionally, we currently expect to elect certain optional practical expedients under the transition guidance. We continue to assess the impact of the new lease guidance with respect to our current operating and capital leases and specifically are reviewing the impact of a previous failed sale and leaseback tower transaction in order to determine the appropriate treatment upon transition to the new lease guidance. The Company has identified a technology solution to use for managing the population of leases identified and for making the necessary calculations. The Company continues to work with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases and collecting lease data.

(2)
Acquisition

GCI, LLC's parent company, GCI Liberty was acquired on March 9, 2018. The acquisition of our parent company was accounted for as a reverse acquisition. Under this method, HoldCo is the acquirer of our parent company and is also

10



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


considered the acquirer of GCI, LLC. We have elected to apply pushdown accounting given there was a change-in-control event related to our parent company. We have reflected the new basis of accounting established by our parent company for the individual assets and liabilities that were acquired by HoldCo using the acquisition method of accounting. The acquisition price was $1.4 billion (primarily level 1). The application of the acquisition method resulted in the assignment of purchase price to the GCI, LLC assets acquired and liabilities assumed based on our preliminary estimates of their acquisition date fair values (primarily level 3). The assets acquired and liabilities assumed, and as discussed within this note, are those assets and liabilities of GCI, LLC prior to the completion of the acquisition by HoldCo. The determination of the fair values of the acquired assets and liabilities (and the determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
    
The preliminary acquisition price allocation for GCI, LLC is as follows (amounts in thousands):
 
 
 
Cash and cash equivalents
 
$
132,563

Receivables
 
171,014

Property and equipment
 
1,211,392

Goodwill
 
942,118

Intangible assets not subject to amortization
 
572,500

Intangible assets subject to amortization
 
503,737

Other assets
 
97,279

Deferred revenue
 
(92,561
)
Debt, including capital leases
 
(1,632,002
)
Other liabilities
 
(171,151
)
Deferred income tax liabilities
 
(286,220
)
Non-controlling interest
 
(7,000
)
 
 
$
1,441,669


Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and non-contractual relationships. Amortizable intangible assets of $503.7 million were acquired and are comprised of a tradename with an estimated useful life of approximately 8 years, customer relationships with a weighted average useful life of approximately 13 years and right-to-use assets with a weighted average useful life of 8 years. Approximately $170.0 million of the acquired goodwill will be deductible for income tax purposes. As of September 30, 2018, the determination of the estimated acquisition date fair value of the acquired assets and assumed liabilities is preliminary and subject to revision. The primary areas of our acquisition price allocation that changed from the initial allocation relate to a decrease in receivables of $13.7 million, an increase in property and equipment of $16.3 million, an increase to intangible assets not subject to amortization of $9.5 million, a decrease to intangible assets subject to amortization of $40.2 million, an increase in deferred revenue of $15.6 million, a decrease in other liabilities of $21.4 million, a decrease in deferred income tax liabilities of $6.1 million, and an increase to goodwill of $17.5 million. The primary estimated acquisition date fair values that are not yet finalized are related to certain property and equipment, intangible assets, liabilities and tax balances.

Since the date of the acquisition, included in net earnings (loss) attributable to the GCI, LLC member for the three and nine months ended September 30, 2018 is $40.4 million and $35.9 million in losses related to GCI Holdings, respectively. The unaudited pro forma revenue and net earnings of GCI, LLC, prepared utilizing the historical financial statements of HoldCo, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the acquisition discussed above occurred on January 1, 2017, are as follows:

11



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands, except per share amounts
Revenue
 
$
220,737

 
227,860

 
664,287

 
685,911

Net earnings (loss)
 
$
362,791

 
281,438

 
(148,286
)
 
748,827

Net earnings (loss) attributable to GCI, LLC member
 
$
362,917

 
281,628

 
(147,850
)
 
749,253


The pro forma results include adjustments directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, revenue, interest expense, stock-based compensation, and the exclusion of transaction related costs; the impact of the Federal Communications Commission's decision to reduce rates paid to us under the Rural Health Care Program; and the new revenue standard. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the acquisition had occurred previously and the Company consolidated the results of GCI, LLC during the periods presented.

(3)
Revenue

Revenue Recognition

Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Substantially all of the Company's revenue is earned from services transferred over time. If at contract inception we determine the time period between when we transfer a promised good or service to a customer and when the customer pays us for that good or service is one year or less, we do not adjust the promised amount of consideration for the effects of a significant financing component.

Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction that are collected by the Company from a customer, are excluded from revenue from contracts with customers.

Nature of Services and Products

Wireless

Wireless revenue is generated by providing access to, and usage of the Company's network, as well as the sale of equipment. In general, access revenue is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Equipment sales revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and control transfers to the customer. Consideration received from the customer is allocated to the service and products based on stand-alone selling prices when purchased together.

New and existing wireless customers have the option to participate in Upgrade Now, a program that provides eligible customers with the ability to purchase certain wireless devices in installments over a period of up to 24 months. Participating customers have the right to trade-in the original equipment for a new device after making the equivalent of 12 monthly installment payments, provided their handset is in good working condition. Upon upgrade, the outstanding balance of the wireless equipment installment plan is exchanged for the used handset. The Company accounts for this upgrade option as a right of return with a reduction of Revenue and Operating expense for handsets expected to be upgraded based on historical data.


12



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Data

Data revenue is generated by providing data network access, high-speed internet services, and product sales. Monthly service revenue for data network access and high-speed internet services is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Internet service excess usage revenue is recognized when the services are provided. The Company recognizes revenue for product sales when a customer takes possession of the equipment. The Company provides telecommunications engineering services on a time and materials basis. Revenue is recognized for these services as-invoiced.

Video

Video revenue is generated primarily from residential and business customers that subscribe to the Company's cable video plans. Video revenue is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer.

Voice

Voice revenue is for fixed monthly fees for voice plans as well as usage based fees for long-distance service usage. Voice plan fees are billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Usage based fees are recognized as services are provided.

Arrangements with Multiple Performance Obligations

Contracts with customers may include multiple performance obligations as customers purchase multiple services and products within those contracts. For such arrangements, revenue is allocated to each performance obligation based on the relative standalone selling price for each service or product within the contract. Standalone selling prices are generally determined based on the prices charged to customers.

Significant Judgments

Some contracts with customers include variable consideration, and may require significant judgment to determine the total transaction price, which impacts the amount and timing of revenue recognized. The Company uses historical customer data to estimate the amount of variable consideration included in the total transaction price and reassess its estimate at each reporting period. Any change in the total transaction price due to a change in the estimated variable consideration is allocated to the performance obligations on the same basis as at contract inception. Any portion of a change in transaction price that is allocated to a satisfied or partially satisfied performance obligation is recognized as revenue (or a reduction in revenue) in the period of the transaction price change. Variable consideration has been constrained to reduce the likelihood of a significant revenue reversal.

Often contracts with customers include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the standalone selling price for each distinct performance obligation. Services and products are generally sold separately, and help establish standalone selling price for services and products the Company provides.

Remaining Performance Obligations

The Company expects to recognize revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018 of $56.0 million in the remainder of 2018, $221.2 million in 2019, $199.5 million in 2020, $124.2 million in 2021 and $107.5 million in 2022 and thereafter.

The Company applies certain practical expedients as permitted under ASC 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, information about

13



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


revenue remaining from usage based performance obligations that are recognized over time as-invoiced, or variable consideration allocated to wholly unsatisfied performance obligations.

Contract Balances

The Company had receivables of $243.4 million and deferred revenue of $27.3 million at September 30, 2018 from contracts with customers, which amounts exclude receivables and deferred revenue that are out of the scope of ASC 606. Our customers generally pay for services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue is recognized as revenue in the accompanying condensed consolidated statements of operations as the services are provided. Changes in the contract liability balance for the Company during the three and nine months ended September 30, 2018 were not materially impacted by other factors.
    
Assets Recognized from the Costs to Obtain a Contract with a Customer

Management expects that incremental commission fees paid to intermediaries as a result of obtaining customer contracts are recoverable and therefore the Company capitalizes them as contract costs.

Capitalized commission fees are amortized based on the transfer of goods or services to which the assets relate which typically range from two to five years, and are included in Selling, general, and administrative expenses.

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in Selling, general, and administrative expenses.

Revenue from contracts with customers, classified by customer type and significant service offerings follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
amounts in thousands
GCI Holdings
 
 
 
Consumer Revenue
 
 
 
Wireless
$
25,584

 
62,312

Data
39,652

 
88,921

Video
22,272

 
50,180

Voice
4,368

 
10,246

Business Revenue
 
 
 
Wireless
18,071

 
44,889

Data
59,585

 
154,239

Video
4,927

 
9,436

Voice
6,361

 
14,282

Evite
5,100

 
15,221

Lease, grant, and revenue from subsidies
24,226

 
55,114

Total
$
210,146

 
504,840



14



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(4)
Stock-Based Compensation

GCI Liberty has granted to certain directors, employees and employees of its subsidiaries, restricted shares (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of GCI Liberty’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options, RSAs and RSUs) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.

Included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $7.8 million and $4.4 million of stock based compensation during the three months ended September 30, 2018 and 2017, respectively, and $20.9 million and $11.0 million during the nine months ended September 30, 2018 and 2017, respectively.

During the nine months ended September 30, 2018, GCI Liberty granted to GCI Liberty directors five thousand options to purchase shares of GCI Liberty Series A common stock. Such options had a weighted average GDFV of $13.36 per share and vest on December 12, 2018.

Also during the nine months ended September 30, 2018, and in connection with GCI Liberty's CEO's employment agreement, GCI Liberty granted 143 thousand options to purchase shares of GCI Liberty Series B common stock to GCI Liberty's CEO. Such options had a weighted average GDFV of $16.55 per share and vest on December 31, 2018.

The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of GCI Liberty's stock and the implied volatility of publicly traded GCI Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

GCI Liberty-Outstanding Awards

The following tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase GCI Liberty common stock granted to certain officers, employees and directors of the Company. The options outstanding as of January 1, 2018 reflect Qurate Retail's Series A and Series B Liberty Ventures common stock. On March 9, 2018, Qurate Retail redeemed each outstanding share of Qurate Retail's Series A and Series B Liberty Ventures common stock for the corresponding class of GCI Liberty common stock using a one-for-one ratio.
 
 
Series A
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2018
 
1,670

 
$
47.12

 
 
 
 
 
Granted
 
5

 
$
42.99

 
 
 
 
 
Exercised
 
(23
)
 
$
16.61

 
 
 
 
 
Forfeited/Cancelled
 
(3
)
 
$
56.13

 
 
 
 
 
Outstanding at September 30, 2018
 
1,649

 
$
47.52

 
1.9
years
 
$
11

Exercisable at September 30, 2018
 
1,296

 
$
47.80

 
1.4
years
 
$
9



15



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


 
 
Series B
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2018
 
1,080

 
$
56.38

 
 
 
 
 
Granted
 
143

 
$
54.01

 
 
 
 
 
Exercised
 

 
$

 
 
 
 
 
Forfeited/Cancelled
 

 
$

 
 
 
 
 
Outstanding at September 30, 2018
 
1,223

 
$
56.10

 
4.3
years
 
$

Exercisable at September 30, 2018
 
443

 
$
56.38

 
5.0
years
 
$


As of September 30, 2018, the total unrecognized compensation cost related to unvested options and RSAs was approximately $12 million and $15 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.9 years and 1.5 years, respectively.

As of September 30, 2018, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.6 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.

As of September 30, 2018, GCI Liberty had approximately 1.2 million and 32 thousand unvested RSAs and RSUs, respectively, of GCI Liberty common stock and preferred stock held by certain directors, officers and employees of the Company. These Series A common stock, Series B common stock and Series A Cumulative Redeemable Preferred unvested RSAs, along with the Series A common stock unvested RSUs of GCI Liberty had a weighted average GDFV of $46.77 per share.

The aggregate fair value of all restricted shares of GCI Liberty common and preferred stock that vested during the nine months ended September 30, 2018 was $2.5 million.

(5)
Assets and Liabilities Measured at Fair Value

For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.


16



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The Company’s assets and liabilities measured at fair value are as follows:
 
 
September 30, 2018
 
December 31, 2017
Description
 
Total
 
Quoted prices
in active
markets
for identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Total
 
Quoted prices
in active
markets
for identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
 
amounts in thousands
Cash equivalents
 
$
79,550

 
79,550

 

 
570,526

 
570,526

 

Equity securities
 
$
1,749,132

 
1,749,132

 

 
1,800,208

 
1,800,208

 

Investment in Liberty Broadband
 
$
3,598,079

 
3,598,079

 

 
3,634,786

 
3,634,786

 

Variable forward
 
$
26,980

 

 
26,980

 
94,807

 

 
94,807

    
On June 6, 2017, Qurate Retail purchased 450,000 LendingTree shares and executed a 2‑year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on June 6, 2017 of $170.70 per share and has a floor price of $128.03 per share and a cap price of $211.67 per share. The liability associated with this instrument is included in the Other current liabilities line item in the condensed consolidated balance sheets. The fair value of the variable forward was derived from a Black‑Scholes‑Merton model using observable market data as the significant inputs.

Realized and Unrealized Gains (Losses) on Financial Instruments, net

Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands
Equity securities
 
$
175,359

 
143,158

 
(53,681
)
 
405,655

Investment in Liberty Broadband
 
366,211

 
364,930

 
(36,706
)
 
906,136

Variable forward
 
(3,223
)
 
(35,325
)
 
69,329

 
(41,027
)
 
 
$
538,347

 
472,763

 
(21,058
)
 
1,270,764


(6)
Investments in Equity Securities

Investments in equity securities, the majority of which are carried at fair value, are summarized as follows:
 
 
 
September 30,
 
December 31,
 
 
 
2018
 
2017
 
 
 
amounts in thousands
Charter (a)
 
 
$
1,746,196

 
1,800,208

Other investments (b)
 
 
5,014

 
2,856

 
 
 
$
1,751,210

 
1,803,064

(a) A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement entered into by GCI Liberty. Pursuant to the indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC 1.75% exchangeable debentures due 2046.
(b) The Company has elected the measurement alternative for a portion of these securities.


17



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(7)
Investments in Affiliates Accounted for Using the Equity Method

Investment in LendingTree

The Company has various investments accounted for using the equity method. The following table includes the Company’s carrying amount and percentage ownership of the more significant investments in affiliates at September 30, 2018 and the carrying amount at December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
Percentage
ownership
 
Market
value
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in thousands
LendingTree (a)
25.05
%
 
$
792,462

 
$
171,027

 
114,655

Other
various

 
NA

 
3,107

 

 
 
 
 
 
$
174,134

 
114,655

 
 
 
 
 
 
 
 
(a) Both our ownership interest in LendingTree and our share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of September 30, 2018 and includes an additional 220,000 shares of LendingTree that were purchased during the three months ended September 30, 2018.

The Company’s share of LendingTree’s earnings (losses) was $10.2 million and $1.7 million for the three months ended September 30, 2018 and 2017, respectively. The Company's share of LendingTree's earnings (losses) was $15.5 million and $5.0 million for the nine months ended September 30, 2018 and 2017, respectively.

Investment in Liberty Broadband

On May 18, 2016, Qurate Retail completed a $2.4 billion investment in Liberty Broadband Series C non-voting shares (for accounting purposes a related party of the Company) in connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company, Charter, of the combined enterprises. Qurate Retail, along with third party investors, all of whom invested on the same terms as Qurate Retail, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum‑of‑the parts basis at the time the investment agreements were executed (May 2015). Qurate Retail, as part of the merger described above, exchanged, in a tax‑free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one‑for‑one basis, and Qurate Retail granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Qurate Retail following the exchange, which proxy and right of first refusal was assigned to GCI Liberty in connection with the completion of the Transactions.

18



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



As of September 30, 2018, the Company has a 23.5% economic ownership interest in Liberty Broadband. Due to overlapping boards of directors and management at GCI Liberty, the Company has been deemed to have significant influence over Liberty Broadband for accounting purposes, even though the Company does not have any voting rights. The Company has elected to apply the fair value option for its investment in Liberty Broadband (Level 1) as it is believed that investors value this investment based on the trading price of Liberty Broadband. The Company recognizes changes in the fair value of its investment in Liberty Broadband in realized and unrealized gains (losses) on financial instruments, net in the condensed consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:
 
 
September 30,
 
December 31,
 
 
2018
 
2017
 
 
amounts in thousands
Current assets
 
$
95,478

 
84,054

Investment in Charter, accounted for using the equity method
 
11,977,368

 
11,835,613

Other assets
 
9,828

 
12,122

Total assets
 
12,082,674

 
11,931,789

Long-term debt, including current portion
 
522,617

 
497,370

Deferred income tax liabilities
 
961,835

 
932,593

Other liabilities
 
12,927

 
14,925

Equity
 
10,585,295

 
10,486,901

Total liabilities and shareholders' equity
 
$
12,082,674

 
11,931,789

 
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands
Revenue
 
$
3,518

 
3,430

 
18,680

 
9,643

Operating expenses, net
 
(7,614
)
 
(9,217
)
 
(25,601
)
 
(29,125
)
Operating income (loss)
 
(4,096
)
 
(5,787
)
 
(6,921
)
 
(19,482
)
Share of earnings (losses) of affiliates
 
84,739

 
(5,280
)
 
126,952

 
25,109

Gain (loss) on dilution of investment in affiliate
 
(3,203
)
 
(3,718
)
 
(35,165
)
 
(42,515
)
Realized and unrealized gains (losses) on financial instruments, net
 
5,678

 
2,675

 
3,659

 
5,026

Other income (expense), net
 
(5,717
)
 
(5,087
)
 
(16,371
)
 
(13,669
)
Income tax benefit (expense)
 
(17,762
)
 
7,333

 
(17,005
)
 
18,245

Net earnings (loss)
 
$
59,639

 
(9,864
)
 
55,149

 
(27,286
)

(8)
Variable Interest Entities

New Markets Tax Credit Entities

GCI entered into several arrangements under the New Markets Tax Credit ("NMTC") program with US Bancorp to help fund various projects that extended terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) to induce capital investment in qualified lower income communities.  The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”).  CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

Each of the transactions has an investment fund, which is a special purpose entity created to effect the financing arrangement. In each of the transactions, we loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from our loan and US Bancorp's investment to a

19



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


CDE. The CDE, in turn, would loan the funds to our wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.

US Bancorp is entitled to substantially all of the benefits derived from the NMTCs.  All of the loan proceeds to Unicom, net of syndication and arrangement fees, were restricted for use on the projects.  Restricted cash of $0.8 million was held by Unicom at September 30, 2018 and is included in our condensed consolidated balance sheets. We completed construction of the projects partially funded by these transactions.

These transactions include put/call provisions whereby we may be obligated or entitled to repurchase US Bancorp’s interest in each investment fund for a nominal amount. We believe that US Bancorp will exercise the put options at the end of the compliance periods for each of the transactions.  The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code of 1986, as amended.  We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements.  Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp.  We have agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved.  There have been no credit recaptures as of September 30, 2018.  The value attributed to the put/calls is nominal.

The Company has determined that each of the investment funds are variable interest entities ("VIEs").  The consolidated financial statements of each of the investment funds include the CDEs.  The ongoing activities of the VIEs – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIEs.  Management considered the contractual arrangements that obligate us to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that we are obligated to absorb losses of the VIEs.  The Company concluded that it is the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.

On September 14, 2018, US Bancorp exercised its put option for the NMTC #1 transaction that we entered into on August 30, 2011 resulting in the Company obtaining ownership of the investment fund. Upon obtaining control of the investment fund, the Company settled the loans and dissolved the VIEs associated with the August 30, 2011 NMTC transaction.

The assets and liabilities of the consolidated VIEs were $89.0 million and $63.0 million, respectively, as of September 30, 2018.

The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities. US Bank does not have recourse to us or our other assets, with the exception of customary representations and indemnities we have provided. The Company is not required and does not currently intend to provide additional financial support to these VIEs. While these subsidiaries are included in its consolidated financial statements, these subsidiaries are separate legal entities and their assets are legally owned by them and not available to the Company's creditors.

The following table summarizes the key terms of each of the NMTC transactions:
Financing Arrangement
Investment Funds
Transaction Date
Loan Amount
Interest Rate on Loan to Investment Fund
Maturity Date
US Bancorp Investment
Loan to Unicom
Interest Rate on Loan(s) to Unicom
Expected Put Option Exercise
NMTC #2
TIF 2 & TIF 2-USB
October 3, 2012
$37.7 million
1%
October 2, 2042
$17.5 million
$52.0 million
0.71% to 0.77%
October 2019
NMTC #3
TIF 3
December 11, 2012
$8.2 million
1%
December 10, 2042
$3.8 million
$12.0 million
1.35%
December 2019
NMTC #4
TIF 4
March 21, 2017
$6.7 million
1%
March 21, 2040
$3.3 million
$9.8 million
0.73%
March 2024
NMTC #5
TIF 5-1 and TIF 5-2
December 22, 2017
$10.4 million
1%
December 22, 2047
$5.1 million
$14.7 million
0.67% to 1.24%
December 2024


20



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(9)
Intangible Assets and Goodwill

Goodwill
 
 
GCI Holdings
 
Corporate and other
 
Total
 
 
amounts in thousands
Balance at January 1, 2018
 
$

 
25,569

 
25,569

Acquisitions
 
942,118

 

 
942,118

Balance at September 30, 2018
 
$
942,118

 
25,569

 
967,687


Intangible Assets Subject to Amortization
 
 
September 30, 2018
 
    
Gross
    
 
    
Net
 
 
carrying
 
Accumulated
 
carrying
 
 
amount
 
amortization
 
amount
 
 
amounts in thousands
Customer relationships
 
$
443,267

 
(46,981
)
 
396,286

Other amortizable intangibles
 
117,482

 
(33,209
)
 
84,273

Total
 
$
560,749

 
(80,190
)
 
480,559


Amortization expense for intangible assets with finite useful lives was $17.1 million and $0.8 million for the three months ended September 30, 2018 and 2017, respectively. Amortization expense for intangible assets with finite useful lives was $38.7 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
Remainder of 2018
$
16,994

2019
$
59,357

2020
$
51,358

2021
$
45,754

2022
$
41,656



21



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(10)
Long-Term Debt

Debt is summarized as follows:
 
 
Outstanding
 
 
 
    
Principal
 
Carrying Value
 
 
September 30,
 
September 30,
 
December 31,
 
 
2018
 
2018
 
2017
 
 
amounts in thousands
Margin Loan Facility
 
$
1,000,000

 
1,000,000

 

Senior notes
 
775,000

 
804,450

 
NA

Senior credit facility
 
715,739

 
715,739

 
NA

Wells Fargo note payable
 
7,673

 
7,675

 
NA

Deferred financing costs
 

 
(2,719
)
 

Total debt
 
$
2,498,412

 
2,525,145

 

Debt classified as current (included in other current liabilities)
 
 
 
(2,959
)
 

Total long-term debt
 
 
 
$
2,522,186

 


Margin Loan

On December 29, 2017, Broadband Holdco, LLC ("Broadband Holdco"), a wholly owned subsidiary of, at such time, Qurate Retail, and now the Company, entered into a margin loan agreement with various lender parties consisting of a term loan in an aggregate principal amount of $1 billion (the “Margin Loan”). Approximately 42.7 million shares of Liberty Broadband Series C common stock with a value of $3.6 billion were pledged by Broadband Holdco, LLC as collateral for the loan as of September 30, 2018. This Margin Loan has a term of two years and bears interest at a rate of LIBOR plus 1.85% and contains an undrawn commitment fee of up to 1.0% per annum. Deferred financing costs incurred on the Margin Loan are reflected in Long-term debt, net in the condensed consolidated balance sheet. In connection with the completion of the Transactions, Broadband Holdco borrowed the full principal amount of the Margin Loan. A portion of the proceeds of the Margin Loan was used to make a distribution to Qurate Retail to be used within one year for the repurchase of QVC Group stock (now the Qurate Retail common stock) or to pay down certain debt at Qurate Retail, and for the payment of fees and other costs and expenses, in each case, pursuant to the terms of the reorganization agreement.  The distributed loan proceeds constituted a portion of the cash reattributed to the QVC Group.

On October 5, 2018 (the “Closing Date”), Broadband Holdco entered into Amendment No. 1 (the “Amendment”) to the Margin Loan (the “Margin Loan Agreement”). Pursuant to the Amendment, lenders under the Margin Loan have agreed to, among other things, provide commitments (the “Revolving Commitments”) for a new revolving credit facility in an aggregate principal amount of up to $200.0 million (the “Revolving Credit Facility” and, the loans thereunder, the “Revolving Loans”). The Revolving Credit Facility established under the Margin Loan Agreement is in addition to the existing term loan credit facility under the Margin Loan Agreement (the “Term Loan Facility” and, together with Revolving Credit Facility, the “Margin Loan Facility” and the loans thereunder, the “Loans”). After giving effect to the initial borrowing of Revolving Loans and Term Loan Prepayment (as defined below) on the Closing Date, $800.0 million of loans under the Term Loan Facility were outstanding and $200.0 million of Revolving Loans were outstanding. The Amendment also amends certain covenants in the Margin Loan to permit, among other things, a designated GCI Liberty subsidiary to enter into a subordinated revolving note with GCI Liberty and certain additional investments.

Broadband Holdco is permitted to use the proceeds of the Revolving Loans for any purpose not prohibited under the Margin Loan, including, without limitation, (i) to make dividends and distributions, (ii) for the purchase of margin stock, (iii) to make investments not prohibited under the Margin Loan, (iv) to repay an intercompany loan to GCI Liberty, and/or (v) otherwise for general corporate purposes, including, without limitation, for payment of interest and fees and other costs and expenses. On the Closing Date, Broadband Holdco drew down on the full amount of the commitments under the Revolving Credit Facility and applied all of the proceeds to prepay, on the Closing Date, a portion of the loans outstanding under the Term Loan Facility (the “Term Loan Prepayment”).

22



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



The Loans will mature on December 29, 2019 (the “maturity date”) and accrue interest at a rate equal to the 3-month LIBOR rate plus a per annum spread of 1.85%, subject to certain conditions and exceptions. Undrawn Revolving Commitments shall be available to Broadband Holdco from the Closing Date to but excluding the earlier of (i) the date that is one month prior to the maturity date and (ii) the date of the termination of such Revolving Commitments pursuant to the terms of the Margin Loan. The obligations under the Revolving Credit Facility, together with the obligations under Term Loan Facility, are secured by first priority liens on the shares of Liberty Broadband owned by Broadband Holdco and certain other cash collateral provided by Broadband Holdco. In addition, the Revolving Credit Facility and the Term Loan Facility are subject to the same affirmative and negative covenants and events of default.

Senior Notes

Interest on the 6.75% Senior Notes due 2021 (the "2021 Notes") and the 6.875% Senior Notes due 2025, both of which were issued by GCI, Inc., which is now GCI, LLC (collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at our option, in whole or in part, at a redemption price defined in the respective indentures, and accrued and unpaid interest (if any) to the date of redemption. The Senior Notes are stated net of an aggregate unamortized premium of $29.5 million at September 30, 2018. Such premium is being amortized to interest expense in the accompanying consolidated statements of operations. As of September 30, 2018, GCI, LLC did not meet the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility, as defined below.

Senior Credit Facility

GCI, LLC and GCI Holdings, a wholly-owned subsidiary of GCI, LLC, are party to a Seventh Amended and Restated Credit Agreement which provides a $245.9 million term loan B ("Term Loan B"), $215.0 million term loan A ("Term Loan A") and a $300.0 million revolving credit facility (collectively, the "Senior Credit Facility"). GCI, LLC is the borrower under the Senior Credit Facility.

Under the Senior Credit Facility, the interest rate for the Term Loan A is LIBOR plus margin based on the Company's leverage ratio and ranges from 2.00% to 3.00%. Our Senior Credit Facility Total Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 5.95 to one; the Secured Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 3.50 to one; and the Company's Interest Coverage Ratio (as defined in the Senior Credit Facility) must not be less than 2.50 to one at any time. The full principal amount of our Term Loan A and revolving credit facility included in the Senior Credit Facility will mature on November 17, 2021 or December 3, 2020 if our 2021 Notes are not refinanced prior to such date.

The interest rate for the Term Loan B is LIBOR plus 2.25%. The Term Loan B requires principal payments of 0.25% of the original principal amount on the last day of each calendar quarter with the full amount maturing on February 2, 2022 or December 3, 2020 if our 2021 Notes are not refinanced prior to such date.

The terms of the Senior Credit Facility include customary representations and warranties, customary affirmative and negative covenants and customary events of default. At any time after the occurrence of an event of default under the Senior Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Senior Credit Facility immediately due and payable and terminate any commitment to make further loans under the Senior Credit Facility. The obligations under the Senior Credit Facility are secured by a security interest on substantially all of the assets of GCI Holdings and the subsidiary guarantors, as defined in the Senior Credit Facility, and on the stock of GCI Holdings.

As of September 30, 2018, there is $240.7 million outstanding under the Term Loan B, $215.0 million outstanding under the Term Loan A, $260.0 million outstanding under the revolving portion of the Senior Credit Facility and $10.1 million in letters of credit under the Senior Credit Facility, which leaves $29.9 million available for borrowing when the Company meets the maximum leverage threshold, as measured by the terms of its Senior Notes.

Wells Fargo Note Payable

GCI Holdings issued a note to Wells Fargo that matures on July 15, 2029 and is payable in monthly installments of principal and interest (the "Wells Fargo Note Payable"). The interest rate is variable at one month LIBOR plus 2.25%.

23



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



The note is subject to similar affirmative and negative covenants as the Senior Credit Facility. The obligations under the note are secured by a security interest and lien on the building purchased with the note.

Debt Covenants

GCI, LLC is subject to covenants and restrictions under its Senior Notes and Senior Credit Facility. GCI, LLC is in compliance with all debt maintenance covenants as of September 30, 2018.

Fair Value of Debt

The fair value of the Senior Notes was $792.6 million at September 30, 2018.

Due to the variable rate nature of the Margin Loan, Senior Credit Facility and Wells Fargo Note Payable, the Company believes that the carrying amount approximates fair value at September 30, 2018.

(11)
Information About the Company's Operating Segments

The Company, through its interests in subsidiaries and other companies, is primarily engaged in the broadband communications services industry. The Company identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of the Company’s annual pre‑tax earnings. The segment presentation for prior periods has been conformed to the current period segment presentation.

The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA, and subscriber metrics.
    
The Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock‑based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock‑based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.

For the three and nine months ended September 30, 2018 the Company has identified the following subsidiary as a reportable segment:

GCI Holdings-provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska.

For presentation purposes the Company is providing financial information for Liberty Broadband. While the Company’s equity method investment in Liberty Broadband does not meet the reportable segment threshold defined above, the Company believes that the inclusion of such information is relevant to users of these financial statements.
Liberty Broadband-an equity method affiliate of the Company, accounted for at fair value, has a non‑controlling interest in Charter, and a wholly‑owned subsidiary, Skyhook Wireless, Inc. ("Skyhook"). Charter is the second largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services. Skyhook provides a Wi‑Fi based location platform focused on providing positioning technology and contextual location intelligence solutions.
The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies.

24



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The accounting policies of the consolidated subsidiaries included in the segments are the same as those described in the Company’s summary of significant accounting policies.
Performance Measures
 
Three Months Ended September 30,
 
2018
 
2017
 
Revenue
 
Adjusted OIBDA
 
Revenue
 
Adjusted OIBDA
 
amounts in thousands
GCI Holdings
$
205,047

 
57,945

 

 

Liberty Broadband
3,518

 
(2,198
)
 
3,430

 
(3,346
)
Corporate and other
5,099

 
(6,894
)
 
5,493

 
(5,277
)
 
213,664

 
48,853

 
8,923

 
(8,623
)
Eliminate Liberty Broadband
(3,518
)
 
2,198

 
(3,430
)
 
3,346

 
$
210,146

 
51,051

 
5,493

 
(5,277
)

 
Nine Months Ended September 30,
 
2018
 
2017
 
Revenue
 
Adjusted OIBDA
 
Revenue
 
Adjusted OIBDA
 
amounts in thousands
GCI Holdings
$
489,620

 
156,608

 

 

Liberty Broadband
18,680

 
(414
)
 
9,643

 
(12,262
)
Corporate and other
15,220

 
(17,354
)
 
15,639

 
(20,071
)
 
523,520

 
138,840

 
25,282

 
(32,333
)
Eliminate Liberty Broadband
(18,680
)
 
414

 
(9,643
)
 
12,262

 
$
504,840

 
139,254

 
15,639

 
(20,071
)

Other Information
 
 
September 30, 2018
 
 
Total
 
Investments
 
Capital
 
 
assets
 
in affiliates
 
expenditures
 
 
amounts in thousands
GCI Holdings
 
$
3,561,569

 

 
86,977

Liberty Broadband
 
12,082,674

 
11,977,368

 
35

Corporate and other
 
5,644,551

 
174,134

 
2,399

 
 
21,288,794

 
12,151,502

 
89,411

Eliminate Liberty Broadband
 
(12,082,674
)
 
(11,977,368
)
 
(35
)
Consolidated
 
$
9,206,120

 
174,134

 
89,376



25



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The following table provides a reconciliation of segment Adjusted OIBDA to operating income and earnings (loss) from continuing operations before income taxes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Consolidated segment Adjusted OIBDA
$
51,051

 
(5,277
)
 
139,254

 
(20,071
)
Stock‑based compensation
(7,761
)
 
(4,369
)
 
(20,926
)
 
(10,968
)
Depreciation and amortization
(62,848
)
 
(823
)
 
(143,257
)
 
(2,398
)
Operating income (loss)
(19,558
)
 
(10,469
)
 
(24,929
)
 
(33,437
)
Interest expense
(32,419
)
 

 
(72,470
)
 

Share of earnings (loss) of affiliates, net
10,856

 
1,648

 
18,714

 
4,971

Realized and unrealized gains (losses) on financial instruments, net
538,347

 
472,763

 
(21,058
)
 
1,270,764

Other, net
(3,339
)
 
328

 
(5,726
)
 
1,073

Earnings (loss) from continuing operations before income taxes
$
493,887

 
464,270

 
(105,469
)
 
1,243,371


26



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our anticipated sources and uses of cash; fluctuations in interest rates and stock prices; future Universal Service Fund program related revenue; the implementation of new systems; and the anticipated impact of accounting pronouncements, economic conditions in Alaska and certain contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors (as they relate to our consolidated subsidiaries and equity affiliates) that could cause actual results or events to differ materially from those anticipated:

The ability of GCI, LLC (the "Company") to successfully integrate and recognize anticipated efficiencies and benefits from the Transactions (as defined below); 
customer demand for the Company's products and services and the Company's ability to adapt to changes in demand; 
competitor responses to the Company's and its businesses' products and services; 
the levels of online traffic to the Company's businesses' websites and its ability to convert visitors into consumers or contributors; 
uncertainties inherent in the development and integration of new business lines and business strategies; 
future financial performance, including availability, terms and deployment of capital; 
the ability of suppliers and vendors to deliver products, equipment, software and services; 
the outcome of any pending or threatened litigation; 
availability of qualified personnel; 
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission (the "FCC"), and adverse outcomes from regulatory proceedings; 
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors; 
domestic and international economic and business conditions and industry trends; 
consumer spending levels, including the availability and amount of individual consumer debt; 
rapid technological changes; 
failure to protect the security of personal information about the Company's and its businesses' customers, subjecting the Company and its businesses to potentially costly government enforcement actions or private litigation and reputational damage; and
the regulatory and competitive environment of the industries in which the Company operates.

For additional risk factors, please see Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. Any forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.
Overview

GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with GCI, LLC's parent company, General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group (the “reattribution”)) were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the

27



Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.

Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split-Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.

We refer to the combination of GCI Holdings, LLC ("GCI Holdings"), non controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, the accompanying financial statements and the following discussion present all periods as consolidated by the Company.
 
Update on Economic Conditions

GCI Holdings offers wireless and wireline telecommunication services, data services, video services, and managed services to customers primarily throughout Alaska. Because of this geographic concentration, growth of GCI Holdings' business and operations depends upon economic conditions in Alaska. The economy of Alaska is dependent upon the oil industry, state government spending, United States military spending, investment earnings and tourism. Prolonged periods of low oil prices adversely impacts the Alaska economy, which in turn can have an adverse impact on the demand for GCI Holdings' products and services and on its results of operations and financial condition.

Low oil prices have put significant pressure on the Alaska state government budget since the majority of its revenue comes from the oil industry. While the Alaska state government has significant reserves that GCI Holdings believes will help fund the state government for the next couple of years, major structural budgetary reforms will need to be implemented in order to offset the impact of low oil prices.

The Alaska economy is in a recession that started in late 2015. While it is difficult for GCI Holdings to predict the future impact of the continuing recession on its business, these conditions have had an adverse impact on its business and could continue to adversely affect the affordability of and demand for some of its products and services and cause customers to shift to lower priced products and services or to delay or forgo purchases of its products and services. Additionally, GCI Holdings' customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to GCI Holdings. If that were to occur, GCI Holdings could be required to increase its allowance for doubtful accounts, and the number of days outstanding for its accounts receivable could increase. If the recession continues, it could continue to negatively affect GCI Holdings' business including its financial position, results of operations, or liquidity, as well as its ability to service debt, pay other obligations and enhance shareholder returns.

Rural Health Care (“RHC”) Program

We receive support from various Universal Service Fund ("USF") programs including the RHC Program. The USF programs are subject to change by regulatory actions taken by the FCC or legislative actions. The following paragraphs describe certain separate matters related to the RHC Program that impact or could impact the revenue earned by the Company.


28



In November 2017, the Universal Service Administrative Company ("USAC") requested further information in support of the rural rates charged to a number of our RHC customers in connection with the funding requests for the year that runs July 1, 2017 through June 30, 2018. On October 10, 2018, we received a letter from the FCC's Wireline Competition Bureau notifying us of their decision to reduce the rural rates charged to RHC customers for the 2017 funding year by approximately 26% resulting in a reduction of total support payments of $27.8 million. The FCC also informed us that the same cost methodology used for the 2017 funding year would be applied to rates charged to RHC customers in subsequent funding years. Although we intend to appeal the FCC's decision, we recorded a $19.1 million reduction (including approximately $6 million discussed in prior quarters) in our receivables balance as part of our acquisition accounting and recorded a reduction in revenue in the current period for the 2017 funding year of approximately $8.6 million. We expect to reduce future RHC Program revenue by a similar rate as the 2017 funding year, which based on a current run rate would approximate $7 million per quarter (including the quarter ended September 30, 2018) until we can reach a final resolution with the FCC regarding the funding amounts.
  
On March 15, 2018, USAC announced that the funding requests for the year that runs July 1, 2017 through June 30, 2018 exceeded the funding available for the RHC Program. Since that time, on June 25, 2018, the FCC issued an order resulting in an increase of the annual RHC Program funding cap from $400 million to $571 million and applied it to the funding year that ended on June 30, 2018. The FCC also determined that it would annually adjust the RHC Program funding cap for inflation, beginning with the funding year ending on June 30, 2019 and carry-forward unused funds from past funding years for use in future funding years. As a result, aggregate funding is available to pay in full any approved funding under the RHC program for the 2017 funding year.

In addition, on March 23, 2018, we received a separate letter of inquiry and request for information from the Enforcement Bureau of the FCC, to which we are in the process of responding. This inquiry into the rates charged by us is still pending, and we presently are unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding could have an adverse effect on our business, financial position, results of operations or liquidity.

Results of Operations - Consolidated

General.     We provide in the tables below information regarding our consolidated operating results and other income and expenses, as well as information regarding the contribution to those items from our reportable segments. The "Corporate and other" category consists of those assets or businesses which do not qualify as a separate reportable segment. For a more detailed discussion and analysis of the financial results of our principal reportable segment see "Results of Operations-GCI Holdings" below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Revenue
 
 
 
 
 
 
 
GCI Holdings
$
205,047

 

 
489,620

 

Corporate and other
5,099

 
5,493

 
15,220

 
15,639

Consolidated
$
210,146

 
5,493

 
504,840

 
15,639

 
 
 
 
 
 
 
 
Operating Income (Loss)
 
 
 
 
 
 
 
GCI Holdings
$
(8,859
)
 

 
4,661

 

Corporate and other
(10,699
)
 
(10,469
)
 
(29,590
)
 
(33,437
)
Consolidated
$
(19,558
)
 
(10,469
)
 
(24,929
)
 
(33,437
)
 
 
 
 
 
 
 
 
Adjusted OIBDA
 
 
 
 
 
 
 
GCI Holdings
$
57,945

 

 
156,608

 

Corporate and other
(6,894
)
 
(5,277
)
 
(17,354
)
 
(20,071
)
Consolidated
$
51,051

 
(5,277
)
 
139,254

 
(20,071
)

Revenue. Our consolidated revenue increased $204.7 million and $489.2 million during the three and nine months ended September 30, 2018, respectively, as compared to the corresponding periods in the prior year. The increase during the three and nine months ended September 30, 2018 is primarily due to an increase of $205.0 million and $489.6 million,

29



respectively, at GCI Holdings for the same periods as a result of the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

Operating Income (Loss). Our consolidated operating loss increased $9.1 million and decreased $8.5 million during the three and nine months ended September 30, 2018, respectively, as compared to the corresponding periods in the prior year. The increase for the three months ended September 30, 2018 as compared to the corresponding period in the prior year is primarily due to an $8.9 million operating loss at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018. The decrease for the nine months ended September 30, 2018 as compared to the corresponding period in the prior year is primarily due to $4.7 million of operating income at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

Stock-based compensation. Stock based compensation includes compensation related to restricted shares of GCI Liberty's common stock and preferred stock, restricted stock units with respect to GCI Liberty's common stock, and options to purchase shares of GCI Liberty's common stock granted to certain of the Company's directors, employees, and employees of its subsidiaries. We recorded $7.8 million and $4.4 million of stock compensation expense for the three months ended September 30, 2018 and 2017, respectively. We recorded $20.9 million and $11.0 million of stock compensation expense for the nine months ended September 30, 2018 and 2017, respectively. The increase for the three and nine months ended September 30, 2018 as compared to the corresponding prior year periods is primarily due to the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings. As of September 30, 2018, the total unrecognized compensation cost related to unvested options and RSAs was approximately $12 million and $15 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.9 years and 1.5 years, respectively.

Adjusted OIBDA. The Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 11 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to operating income (loss) and earnings (loss) from continuing operations before income taxes.

Consolidated Adjusted OIBDA increased $56.3 million and $159.3 million during the three and nine months ended September 30, 2018, respectively, as compared to the corresponding periods in the prior year primarily due to the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.


30



Other Income and Expense

Components of Other income (expense) are presented in the table below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Interest expense
 
 
 
 
 
 
 
GCI Holdings
$
(21,266
)
 

 
(47,455
)
 

Corporate and other
(11,153
)
 

 
(25,015
)
 

Consolidated
$
(32,419
)
 

 
(72,470
)
 

 
 
 
 
 
 
 
 
Share of earnings (losses) of affiliates, net
 
 
 
 
 
 
 
GCI Holdings
$
(36
)
 

 
(86
)
 

Corporate and other
10,892

 
1,648

 
18,800

 
4,971

Consolidated
$
10,856

 
1,648

 
18,714

 
4,971

 
 
 
 
 
 
 
 
Realized and unrealized gains (losses) on financial instruments, net
 
 
 
 
 
 
 
GCI Holdings
$

 

 

 

Corporate and other
538,347

 
472,763

 
(21,058
)
 
1,270,764

Consolidated
$
538,347

 
472,763

 
(21,058
)
 
1,270,764

 
 
 
 
 
 
 
 
Other, net
 
 
 
 
 
 
 
GCI Holdings
$
(198
)
 

 
620

 

Corporate and other
(3,141
)
 
328

 
(6,346
)
 
1,073

Consolidated
$
(3,339
)
 
328

 
(5,726
)
 
1,073


Interest Expense. Consolidated interest expense increased $32.4 million and $72.5 million during the three and nine months ended September 30, 2018, respectively, as compared to the corresponding periods in the prior year primarily due to the acquisition of GCI Holdings on March 9, 2018 and the $1.0 billion margin loan.

Share of earnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net increased $9.2 million and $13.7 million during the three and nine months ended September 30, 2018, respectively, as compared to the corresponding periods in the prior year due to increases in LendingTree's results.

Realized and unrealized gains (losses) on financial instruments, net. Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands
Equity securities
 
$
175,359

 
143,158

 
(53,681
)
 
405,655

Investment in Liberty Broadband
 
366,211

 
364,930

 
(36,706
)
 
906,136

Variable forward
 
(3,223
)
 
(35,325
)
 
69,329

 
(41,027
)
 
 
$
538,347

 
472,763

 
(21,058
)
 
1,270,764


The changes in these accounts are primarily due to market factors and changes in the fair value of the underlying stocks or financial instruments to which these related. The increase for the three months months ended September 30, 2018 as compared to the corresponding prior period was primarily driven by an unrealized gain in our investment in Charter and a reduction of the unrealized loss for the variable forward. The decrease for the nine months ended September 30, 2018 as

31



compared to the corresponding prior period was primarily driven by an unrealized loss in our investment in Liberty Broadband and Charter.

Income taxes. The Company had earnings before income taxes of $493.9 million and income tax expense of $140.9 million during the three months ended September 30, 2018 and losses before income taxes of $105.5 million and income tax expense of $44.7 million during the nine months ended September 30, 2018.

The Company recognized additional income tax expense in the three months ended September 30, 2018, primarily due to the effect of state income taxes.

The Company recognized additional income tax expense in the nine months ended September 30, 2018 primarily related to an increase in the Company’s state effective tax rate used to measure deferred taxes resulting from the HoldCo Split-Off in March 2018, partially offset by a decrease in the Company’s state effective tax rate used to measure deferred taxes resulting from a state law change and the effect of additional state tax benefits.

The Company had earnings before income taxes of $464.3 million and income tax expense of $177.0 million during the three months ended September 30, 2017 and earnings before income taxes of $1,243.4 million and income tax expense of $473.8 million during the nine months ended September 30, 2017. The Company recognized additional income tax expense in the three and nine months ended September 30, 2017 primarily due to the effect of state income taxes.

Net earnings (loss). The Company had net earnings of $353.0 million and $287.3 million for the three months ended September 30, 2018 and 2017, respectively. The Company had a net loss of $150.2 million and net earnings of $769.5 million for the nine months ended September 30, 2018 and 2017, respectively. The change in net earnings was the result of the above-described fluctuations in our revenue, expenses, and other income and expenses.

Liquidity and Capital Resources

As of September 30, 2018, substantially all of our cash and cash equivalents were invested in U.S. Treasury securities, other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.

The following are potential sources of liquidity: available cash balances, proceeds from asset sales, monetization of our investments, outstanding or anticipated debt facilities, and debt and equity issuances.

As of September 30, 2018, the Company had a cash balance of $126.8 million.
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
amounts in thousands
Cash flow information
 
 
 
 
Net cash provided (used) by operating activities
 
$
(17,317
)
 
216,990

Net cash provided (used) by investing activities
 
12,700

 
(77,895
)
Net cash provided (used) by financing activities
 
(441,934
)
 
(114,349
)
 
 
$
(446,551
)
 
24,746


During the nine months ended September 30, 2018, the Company’s primary uses of cash included a $1.1 billion distribution to Qurate Retail in connection with the Transactions a distribution to GCI Liberty, and repayments of debt. The Company’s primary sources of cash included cash from operations, borrowing $1.1 billion under the Company's margin loan, and cash from the acquisition of GCI Holdings on March 9, 2018.

Net cash used for investing activities consists primarily of cash paid for capital expenditures and investments. Our significant recurring investing activity has been capital expenditures and the purchase of investments. We expect that this will continue in the future.  A significant portion of our capital expenditures are based on the level of customer growth and the technology being deployed. Purchases of investments are based on what we believe are good opportunities for growth.

Proceeds from borrowings fluctuate from year to year based on our liquidity needs. We may use excess cash to make optional repayments on our debt or repurchase our common stock depending on various factors, such as market conditions.


32



The projected uses of the Company's cash for the remainder of 2018 are capital expenditures of approximately $66.7 million, approximately $32.6 million for interest payments on outstanding debt, and potential additional investments in existing or new businesses. As of September 30, 2018, GCI, LLC did not meet the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility. We believe we have sufficient cash from operating activities and cash on hand to fund our business.

Exhibit 99.1 shows the net assets and net earnings of GCI, LLC and its Restricted Subsidiaries under and as defined in its bond indentures.

Results of Operations - GCI Holdings, LLC

GCI Holdings provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska. We have seen a general decrease in subscriber metrics primarily due to the recession in Alaska as discussed in the Overview section. The following table highlights selected key performance indicators used in evaluating GCI Holdings.

 
September 30,
 
2018
 
2017
Consumer
 
 
 
Wireless:
 
 
 
Wireless lines in service1
197,800

 
200,900

Data:
 
 
 
Cable modem subscribers2
125,300

 
125,400

Video:
 
 
 
Basic subscribers3
90,300

 
99,800

Homes passed
253,400

 
251,600

Voice:
 
 
 
Total local access lines in service4
45,800

 
50,200

Business
 
 
 
Wireless:
 
 
 
Wireless lines in service1
22,000

 
22,800

Data:
 
 
 
Cable modem subscribers2
9,200

 
10,000

Voice:
 
 
 
Total local access lines in service4
36,600

 
39,600

 
 
 
 
1 A wireless line in service is defined as a revenue generating wireless device. On January 1, 2018, we transferred 600 small business wireless lines from Business to Consumer.
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber. On January 1, 2018, we transferred 700 small business cable modem subscribers from Business to Consumer.
3 A basic subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof regardless of the number of outlets purchased. On January 1, 2018, we transferred 100 small business basic subscribers from Business to Consumer.
4 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. On January 1, 2018, we transferred 1,600 small business local access lines from Business to Consumer.

As described in notes 1 and 2 to the accompanying condensed consolidated financial statements, for accounting purposes, HoldCo is considered to have acquired GCI, LLC's parent company, GCI Liberty in the contribution. Although GCI Holdings’ results are only included in the Company’s results beginning on March 9, 2018, we believe a discussion of GCI Holdings’ results for all periods presented promotes a better understanding of the overall results of its business. For comparison and discussion purposes we are presenting the pro forma results of GCI Holdings for the full three and nine months ended September 30, 2018 and 2017, inclusive of acquisition accounting adjustments. The pro forma financial information was prepared based on the historical financial information of GCI Holdings and assuming the acquisition of GCI Holdings took place on January 1, 2017. The acquisition price allocation related to the GCI Holdings business combination is preliminary.  Accordingly, the pro forma adjustments are based on this preliminary allocation and have been made solely for the purpose of

33



providing comparative pro forma financial information. We have made pro forma adjustments to the results for the three and nine months ended September 30, 2017 for the impact of the new revenue standard (as described in note 1) to assist in the comparability of the three and nine months ended September 30, 2018. We have made pro forma adjustments to the results for the three and nine months ended September 30, 2018 and 2017 to reflect the impact of the FCC's decision in regards to RHC funding as described above in the Overview section. The financial information below is presented for illustrative purposes only and does not purport to represent what the results of operations of GCI Holdings would actually have been had the business combination occurred on January 1, 2017, or to project the results of operations of the Company for any future periods. The pro forma adjustments are based on available information and certain assumptions that the Company's management believes are reasonable. The pro forma adjustments are directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, interest expense, stock-based compensation, and the exclusion of transaction related costs; RHC funding as described above; and the new revenue standard and are expected to have a continuing impact on the results of operations of the Company.

GCI Holdings’ pro forma operating results were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Revenue
$
215,637

 
222,367

 
649,066

 
670,271

Operating expenses (excluding stock-based compensation included below):
 
 
 
 
 
 
 
Operating expense
(61,201
)
 
(66,717
)
 
(190,020
)
 
(202,624
)
Selling, general and administrative expenses
(86,044