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3.8. SR 07-06-2009City of Elk -~-~ River REQUEST FOR ACTION To Item Number Ci Council 3,8,* Agenda Section Meeting Date Prepared by Consent ul 6, 2009 Tina Allard, Ci Clerk Item Description Reviewed by Resolution Consenting to Charter Restructuring Lori ohnson, Ci Administrator Reviewed by Action Requested Council motion to adopt a resolution consenting to Charter's Restructuring. Background/Discussion As you know Charter Communications, Inc. recently filed for Chapter 11 bankruptcy. Per our franchise agreement and state law, written approval of this reorganization is required. Attached is a report from Commission Attorney Bob Vose outlining the reorganization. Mr. Vose recommends the reorganization be approved and doesn't believe there will be any negative impacts on cable service or with compliance of our franchise agreement. Financial Impact There has been no change. Charter received authorization to continue to pay its franchise fees per its franchise agreements. Attachments Resolution Consenting to Restructuring prepared by Commission Attorney Bob Vose Report Concerning Charter Reorganization Action Motion by Second by Vote Follow Up S:\Administration\Council RCA\Cable Corrunission\Restructuring Consent.doc RESOLUTION NO. 09- CONSENT TO CHARTER RESTRUCTURING WHEREAS, CC VIII Operating, LLC ("Franchisee"), an indirect, wholly-owned subsidiary of Charter Communications, Inc. ("Charter"), owns a cable television system (the "System") in the City of Elk River, Minnesota (the "Franchise Authority"); and WHEREAS, Franchisee operates pursuant to a cable franchise ordinance ("Franchise") issued by the Franchising Authority; and WHEREAS, on March 27, 2009, Charter and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court fox the Southern District of New York ("Bankruptcy Court") seeking relief under the provisions of Chapter 11 of Title 11 of the United States Code in order to effectuate a financial restructuring (Case No. 09-11435); and WHEREAS, pursuant to the terms of agreements entered into between Charter and its key bondholders, Charter's current Class A Common Stock and Class B Common Stock will be cancelled and replaced with new voting stock owned by Paul G. Allen and such bondholders, as described in filings with the Bankruptcy Court (the "Reorganization"), copies of which have been provided to the Franchise Authority; and WHEREAS, pursuant to the Reorganization, the voting interest of Charter's current principle shareholder, Paul G. Allen and his affiliated entities, will be reduced from approximately 91% to 35%, and new stockholders (principally certain bondholders) will acquire the remaining 65% of the voting shares; and WHEREAS, under both the Franchise and Minnesota Statutes, Section 238.083, the Franchising Authority's written approval of the Reorganization is necessary; and WHEREAS, in April, 2009, Charter requested the Franchising Authority's written approval of the Reorganization by filing Federal Communications Commission ("FCC") Form 394; and WHEREAS, the City has reviewed the FCC Form 394 and finds that the Reorganization, as described therein, will not materially impair the legal, technical or financial ability of Charter or Franchisee to perform under the terms of the Franchise. WHEREAS, the Franchise Authority has considered and approves of the Reorganization described above. S:\Resolutions\Charter Restructuring Consent.DOC NOW, THEREFORE, IT IS RESOLVED AS FOLLOWS: 1. The foregoing recitals are approved and incorporated herein by reference. 2. The Franchise Authority consents to the Reorganization described in the FCC Form 394. 3. This Resolution shall be deemed effective upon adoption. 4. This Resolution shall have the force of a continuing agreement and the Franchise Authority shall not amend or otherwise alter this Resolution without the consent of the Franchisee. 5. The Franchisee remains fully subject to any liabilities or obligations under the Franchise and state and federal law regardless of when such liabilities or obligations arose. 6. The Franchising Authority expressly reserves and does not waive and its rights regarding Franchise compliance regardless of when the acts, failures to act, or other events giving rise to and such compliance matters occurred. PASSED, ADOPTED, AND APPROVED this 6`h day of July, 2009. By: Stephanie Klinzing, Mayor ATTEST: Tina Allard, City Clerk S:\Resolutions\Charter Restructuring Consent.DOC Kennedy Graven C;HAR'1'ERED 470 US Bank Plaza 200 South Sixth Street Minneapolis MN 55402 Robert J.V. Vose (612) 337-9275 telephone (612) 337-9310 fax rv ose@kennedy-graven. com REPORT CONCERNING CHARTER REORGANIZATION JUNE 18, 2009 This Report is prepared for the cities of Aitkin, Faribault, Little Falls, Rosemount and the Sherburne/Wright Counties Cable Commission, a 10-city consortium. The Report addresses Charter's request to reorganize. Charter's proposed reorganization requires local franchising authority (i.e. city) approval. CC VIII Operating, LLC holds the franchise in Aitkin, Faribault, Little Falls and the Sherburne/Wright cities. In Rosemount, Charter Cable Partners, LLC (formerly Marcus Cable Partners) holds the franchise. These entities are indirect, wholly-owned subsidiaries of Charter Communications, Inc. ("Charter"). On March 27, 2009, Charter and its subsidiaries filed for Chapter 11 bankruptcy in federal court in New York. Charter filed for bankruptcy because the company is insolvent-- its liabilities exceed its assets. The purpose for a Ch. 11 bankruptcy is to improve a company's financial position by facilitating the elimination, reduction or restructuring of a company's liabilities and debt. In this case, Charter will reduce certain bonded indebtedness in exchange for giving those bondholders a stake in the company. Charter's current common stock will be cancelled and replaced with new voting stock Currently, Charter's founder, Paul G. Allen, and his affiliated entities hold approximately 91 % of Charter's voting stock. Mr. Allen's ownership will be reduced to 35% while new stockholders (principally 5 bondholders) will acquire 65% of the voting shares. Additional details of the reorganization are set forth in the FCC Form 394, and axe more fully described in the proposed consent resolution. INFORMATION REVIEWED The following were relied upon for this Report: 1. FCC Form 394 (transfer application) executed and delivered April, 2009, along with various documents included on CD with the application. 2. Comments of the Minnesota Department of Commerce (MDOC) in Docket No. P5535, 56156; PA-09-560. 3. Various correspondence, a-mails and discussions with Charter officials concerning the request. STANDARD FOR REVIEW The local franchise, state law, and federal laws and regulations all apply to review of Charter's FCC Form 394 request. The Cable Communication Policy Act of 1984, as amended by the 1992 Cable Act and Telecommunications Act of 1996 (collectively the "Cable Act") establishes a national policy concerning the regulation of cable television systems. The Cable Act establishes a 120 day period for review of FCC Form 394 and such other information required by local law and the franchise. A requesting party must furnish such information as may be reasonably requested relative to a franchise transfer. 47 C.F.R. 76.502. The Cable Act preempts inconsistent state or local requirements. Accordingly, the cities have until August, 2009 to act on the request. Under Minnesota Statutes, Section 238.083, the local franchising authority must give prior consent to any "transfer of stock in a corporation so as to create a new controlling interest in a cable communication system." The term "controlling interest" includes both a change in majority stock ownership and a change in actual working control, however exercised. The approval must be in writing and cannot be unreasonably withheld. Minn. Stat. § 238.083, Subds. 2 and 4. 2 In this case, Mr. Allen will remain Charter's largest single shareholder but will no longer own a majority of Charter's stock. A majority of Charter's stock will be held by certain bondholders. Moreover, while no stock voting agreements exist, the bondholders will be in a position to exercise actual control over Charter and its subsidiaries. Thus, the reorganization requires franchising authority consent under Minnesota law. Charter apparently does not dispute this since, after all, Charter filed FCC Form 394s seeking local approvals. When reviewing a requested franchise transfer or change in stock ownership in a franchise-holder, municipalities normally review legal, technical, and financial qualifications of the resulting company. Local determinations are entitled to significant deference and will be sustained if they are fairly debatable. See, Charter Communications v. County of Santa Cruz, 304 F.3d 927 (9~' Cir. 2002). CHARTER REORGANIZATION Charter represents that the reorganization will not result any operational changes, nor any perceptible change or adverse impact on local cable service or operations. Charter will remain bound by all obligations and liabilities under the franchises including liabilities arising prior to reorganization. Accordingly, there are no significant legal or technical qualification issues to review. Charter's financial qualifications are obviously an issue. Charter maintains that the reorganization will improve its financial position. The question, however, is not whether Charter will be better off. Rather, the issue for review is whether Charter will emerge from bankruptcy with capacity to perform all franchise obligations for the term of the franchises. We have not retained a financial advisor to perform an in-depth analysis of this question. We have instead relied upon a financial review performed by the Minnesota Department of Commerce (DOC). The DOC reviewed the reorganization and provided its report to the Minnesota Public Utilities Commission (PUC) because Charter Fiberlink, LLC and Charter Telephone of Minnesota, LLC n/k/a Charter Fiberlink CC VIII, LLC are Charter subsidiaries with certificates of authority to provide local telecommunications services in Minnesota. These companies are subject to PUC regulation and the proposed reorganization requires PUC approval under Minn Stat. § 237.16, subd. 1(b). The DOC reviewed whether Charter has the financial capacity to continue to operate a telephone network and provide telephone service. The DOC found that Charter does have adequate financial capacity and recommended approval. The DOC's report is being provided with this Report. Among other things, the DOC notes that the reorganization will reduce Charter's debt by $8 billion and result in $3 billion in new investment in the company. The DOC concludes that "[a] reorganized Charter is in the public interest because it is expected to have a reduced debt to-equity or leverage ratio, reduced debt interest payments, and positive free cash flow." Based on these are positive steps for Charter's financial future, the DOC recommends that the PUC approve the reorganization in relation to oversight of telephone services provided by Charter subsidiaries. Based on the DOC recommendation and expected PUC approval (which is consistent with approvals granted by other state utility regulatory commissions), it is my opinion that Charter likely could and would seek to "overturn" any local government denial of the FCC Form 394 in bankruptcy court. Further, Charter's proposed reorganization does not sufficiently impact the public interest to justify participating in a bankruptcy court proceeding in New York to defend a denial. If anything, the evidence is that reorganization may positively impact Charter's financial future. Because there is no basis to conclude that the reorganization will negatively impact Charter's financial ability to provide cable service and comply with the local franchise, I recommend that the reorganization be approved 4 CONCLUSION I recommend adoption of the attached resolution conditionally approving the reorganization. The conditions imposed confirm: the City's right/obligation to consent to any future significant changes in control over the local cable franchise; that the franchisee remains fully subject to the franchise and applicable laws, and; that Charter remains subject to all liabilities or obligations regardless of when such liabilities or obligations arose. The City expressly reserves all its rights in that regard. After a fair amount of discussion and negotiation, Charter has agreed to reimburse the parties legal fees and expenses associated with this review, up to a capped amount. I do not believe that my fees will exceed this cap and Charter should fully reimburse all fees. 5