CHARTER COMMUNICATIONS, INC. /MO/
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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 number:
001-33664
Charter Communications, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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43-1857213
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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12405 Powerscourt Drive
St. Louis, Missouri 63131
(Address of principal executive offices including zip code)
(314) 965-0555
(Registrant's telephone number, including area code)
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
þ
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
þ
No
o
Number of shares of Class A common stock outstanding as of June 30, 2011: 110,023,072
Charter Communications, Inc.
Quarterly Report on Form 10-Q for the Period ended June 30, 2011
Table of Contents
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PART I. FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements - Charter Communications, Inc. and Subsidiaries
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Condensed Consolidated Balance Sheets as of June 30, 2011
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and December 31, 2010
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4
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Condensed Consolidated Statements of Operations for the three
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and six months ended June 30, 2011 and 2010
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5
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Condensed Consolidated Statements of Cash Flows for the
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six months ended June 30, 2011 and 2010
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6
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Notes to Condensed Consolidated Financial Statements
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7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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24
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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35
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Item 4. Controls and Procedures
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36
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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37
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Item 1A. Risk Factors
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38
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Item 6. Exhibits
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41
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SIGNATURES
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S-1
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EXHIBIT INDEX
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E-1
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This quarterly report on Form 10-Q is for the three and six months ended June 30, 2011. The Securities and Exchange Commission ("SEC") allows us to "incorporate by reference" information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. In this quarterly report, "we," "us" and "our" refer to Charter Communications, Inc. and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the “Results of Operations” and “Liquidity and Capital Resources” sections under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Risk Factors” under Part II, Item 1A and the factors described under “Risk Factors” under Part I, Item 1A of our most recent Form 10-K filed with the SEC. Many of the forward-looking statements contained in this quarterly report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” “intend,” “estimated,” “aim,” “on track,” “target,” “opportunity,” “tentative,” “positioning” and “potential,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in this quarterly report and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
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·
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our ability to sustain and grow revenues and free cash flow by offering video, Internet, telephone, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition
, the need for innovation and the related capital expenditures
and the difficult economic conditions in the United States;
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·
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the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, and digital subscriber line (“DSL”) providers and competition from video provided over the Internet;
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·
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general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;
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·
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our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents);
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·
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the effects of governmental regulation on our business;
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·
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the availability and access, in general, of funds to meet our debt obligations, prior to or when they become due, and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; and
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·
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our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions.
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All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.
3
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Item 1.
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Financial Statements.
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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA
)
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June 30,
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December 31,
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|||||||
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2011
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2010
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|||||||
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(Unaudited)
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||||||||
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ASSETS
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CURRENT ASSETS:
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||||||||
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Cash and cash equivalents
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$ | 166 | $ | 4 | ||||
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Restricted cash and cash equivalents
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28 | 28 | ||||||
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Accounts receivable, less allowance for doubtful accounts of $18 and $17, respectively
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243 | 247 | ||||||
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Prepaid expenses and other current assets
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53 | 47 | ||||||
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Total current assets
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490 | 326 | ||||||
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INVESTMENT IN CABLE PROPERTIES:
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Property, plant and equipment, net of accumulated depreciation
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6,879 | 6,819 | ||||||
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Franchises
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5,257 | 5,257 | ||||||
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Customer relationships, net
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1,846 | 2,000 | ||||||
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Goodwill
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951 | 951 | ||||||
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Total investment in cable properties
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14,933 | 15,027 | ||||||
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OTHER NONCURRENT ASSETS
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386 | 354 | ||||||
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Total assets
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$ | 15,809 | $ | 15,707 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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CURRENT LIABILITIES:
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Accounts payable and accrued expenses
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$ | 1,087 | $ | 1,049 | ||||
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Total current liabilities
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1,087 | 1,049 | ||||||
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LONG-TERM DEBT
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12,620 | 12,306 | ||||||
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OTHER LONG-TERM LIABILITIES
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1,038 | 874 | ||||||
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SHAREHOLDERS’ EQUITY:
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Class A common stock; $.001 par value; 900 million shares authorized;
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114,699,547 and 112,494,166 shares issued, respectively
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-- | -- | ||||||
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Class B common stock; $.001 par value; 25 million shares authorized;
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no shares and 2,241,299 shares issued and outstanding, respectively
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-- | -- | ||||||
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Preferred stock; $.001 par value; 250 million shares
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authorized; no non-redeemable shares issued and outstanding
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-- | -- | ||||||
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Additional paid-in capital
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1,795 | 1,776 | ||||||
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Accumulated deficit
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(452 | ) | (235 | ) | ||||
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Treasury stock at cost; 4,676,475 and 176,475 shares, respectively
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(213 | ) | (6 | ) | ||||
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Accumulated other comprehensive loss
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(66 | ) | (57 | ) | ||||
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Total shareholders’ equity
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1,064 | 1,478 | ||||||
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Total liabilities and shareholders’ equity
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$ | 15,809 | $ | 15,707 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
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Three Months Ended June 30,
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Six Months Ended June 30,
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|||||||||||||||
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2011
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2010
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2011
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2010
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REVENUES
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$ | 1,791 | $ | 1,771 | $ | 3,561 | $ | 3,506 | ||||||||
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COSTS AND EXPENSES:
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Operating (excluding depreciation and amortization)
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784 | 773 | 1,552 | 1,529 | ||||||||||||
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Selling, general and administrative
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343 | 357 | 688 | 704 | ||||||||||||
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Depreciation and amortization
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393 | 380 | 776 | 749 | ||||||||||||
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Other operating expenses, net
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1 | 7 | 6 | 19 | ||||||||||||
| 1,521 | 1,517 | 3,022 | 3,001 | |||||||||||||
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Income from operations
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270 | 254 | 539 | 505 | ||||||||||||
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OTHER INCOME (EXPENSES):
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Interest expense, net
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(241 | ) | (219 | ) | (474 | ) | (423 | ) | ||||||||
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Loss on extinguishment of debt
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(53 | ) | (34 | ) | (120 | ) | (35 | ) | ||||||||
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Other income (expenses), net
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(2 | ) | 1 | (2 | ) | (2 | ) | |||||||||
| (296 | ) | (252 | ) | (596 | ) | (460 | ) | |||||||||
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Income (loss) before income taxes
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(26 | ) | 2 | (57 | ) | 45 | ||||||||||
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INCOME TAX EXPENSE
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(81 | ) | (83 | ) | (160 | ) | (102 | ) | ||||||||
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Net loss
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$ | (107 | ) | $ | (81 | ) | $ | (217 | ) | $ | (57 | ) | ||||
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LOSS PER COMMON SHARE, BASIC AND DILUTED:
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$ | (0.98 | ) | $ | (0.72 | ) | $ | (1.95 | ) | $ | (0.51 | ) | ||||
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Weighted average common shares outstanding,
basic and diluted
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109,265,876 | 113,110,882 | 111,234,155 | 113,066,173 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
(DOLLARS IN MILLIONS)
Unaudited
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Six Months Ended June 30,
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||||||||
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2011
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2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (217 | ) | $ | (57 | ) | ||
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Adjustments to reconcile net loss to net cash flows from operating activities:
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Depreciation and amortization
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776 | 749 | ||||||
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Noncash interest expense
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20 | 36 | ||||||
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Loss on extinguishment of debt
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120 | 32 | ||||||
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Deferred income taxes
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155 | 98 | ||||||
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Other, net
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16 | 11 | ||||||
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Changes in operating assets and liabilities, net of effects from dispositions:
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Accounts receivable
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5 | (1 | ) | |||||
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Prepaid expenses and other assets
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(6 | ) | 12 | |||||
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Accounts payable, accrued expenses and other
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38 | 101 | ||||||
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Net cash flows from operating activities
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907 | 981 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property, plant and equipment
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(680 | ) | (649 | ) | ||||
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Other, net
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(14 | ) | (4 | ) | ||||
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Net cash flows from investing activities
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(694 | ) | (653 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Borrowings of long-term debt
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3,561 | 1,625 | ||||||
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Repayments of long-term debt
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(3,366 | ) | (2,440 | ) | ||||
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Repayment of preferred stock
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-- | (138 | ) | |||||
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Payments for debt issuance costs
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(43 | ) | (59 | ) | ||||
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Purchase of treasury stock
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(207 | ) | -- | |||||
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Other, net
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4 | (3 | ) | |||||
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Net cash flows from financing activities
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(51 | ) | (1,015 | ) | ||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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162 | (687 | ) | |||||
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CASH AND CASH EQUIVALENTS, beginning of period
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32 | 754 | ||||||
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CASH AND CASH EQUIVALENTS, end of period
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$ | 194 | $ | 67 | ||||
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CASH PAID FOR INTEREST
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$ | 402 | $ | 337 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
1.
Organization and Basis of Presentation
Organization
Charter Communications, Inc. (“Charter”) is a holding company whose principal asset is a 100% common equity interest in Charter Communications Holding Company, LLC (“Charter Holdco”). Charter owns cable systems through its subsidiaries, which are collectively, with Charter, referred to herein as the “Company.” All significant intercompany accounts and transactions among consolidated entities have been eliminated.
The Company is a cable operator providing services in the United States. The Company offers to residential and commercial customers traditional cable video programming (basic and digital video), Internet services, and telephone services, as well as advanced video services such as Charter OnDemand™, high-definition television, and digital video recorder (“DVR”) service. The Company sells its cable video programming, Internet, telephone, and advanced video services primarily on a subscription basis. The Company also sells local advertising on cable networks and provides fiber connectivity to cellular towers.
On November 17, 2009, the Company’s Joint Plan of Reorganization (the “Plan”) was confirmed by order of the Bankruptcy Court, and became effective on November 30, 2009 (the “Effective Date”), the date on which the Company emerged from protection under Chapter 11 of the Bankruptcy Code. Upon the Company’s emergence from bankruptcy, the Company adopted fresh start accounting. This resulted in the Company becoming a new entity on December 1, 2009, with a new capital structure, a new accounting basis in the identifiable assets and liabilities assumed and no retained earnings or accumulated losses.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures typically included in Charter’s Annual Report on Form 10-K have been condensed or omitted for this quarterly report. The accompanying condensed consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs; depreciation and amortization costs; impairments of property, plant and equipment, intangibles and goodwill; income taxes; contingencies; and programming expense. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 2011 presentation.
Restricted cash on the accompanying condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010 of $28 million represents amounts held in escrow accounts pending final resolution from the Bankruptcy Court. Restricted cash is included in cash and cash equivalents on the accompanying condensed consolidated statements of cash flows. Approximately $18 million of restricted cash held in an escrow account established in bankruptcy proceedings was used to pay for professional services for the six months ended June 30, 2010.
7
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
2.
Franchises, Goodwill and Other Intangible Assets
As of June 30, 2011 and December 31, 2010, indefinite-lived and finite-lived intangible assets are presented in the following table:
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June 30, 2011
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December 31, 2010
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Gross
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Net
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Gross
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Net
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|||||||||||||||||||||
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Carrying
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Accumulated
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Carrying
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Carrying
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Accumulated
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Carrying
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|||||||||||||||||||
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Amount
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Amortization
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Amount
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Amount
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Amortization
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Amount
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Indefinite-lived intangible assets:
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Franchises
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$ | 5,257 | $ | -- | $ | 5,257 | $ | 5,257 | $ | -- | $ | 5,257 | ||||||||||||
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Goodwill
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951 | -- | 951 | 951 | -- | 951 | ||||||||||||||||||
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Trademarks
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158 | -- | 158 | 158 | -- | 158 | ||||||||||||||||||
| $ | 6,366 | $ | -- | $ | 6,366 | $ | 6,366 | $ | -- | $ | 6,366 | |||||||||||||
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Finite-lived intangible assets:
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Customer relationships
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$ | 2,358 | $ | 512 | $ | 1,846 | $ | 2,358 | $ | 358 | $ | 2,000 | ||||||||||||
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Other intangible assets
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68 | 12 | 56 | 53 | 7 | 46 | ||||||||||||||||||
| $ | 2,426 | $ | 524 | $ | 1,902 | $ | 2,411 | $ | 365 | $ | 2,046 | |||||||||||||
Amortization expense related to customer relationships and other intangible assets for the three months ended June 30, 2011 and 2010 was approximately $80 million and $84 million, respectively, and for the six months ended June 30, 2011 and 2010 was approximately $159 million and $170 million, respectively.
The Company expects amortization expense on its finite-lived intangible assets will be as follows.
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6 months ending December 31, 2011
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$ | 156 | |
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2012
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289 | ||
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2013
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262 | ||
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2014
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236 | ||
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2015
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210 | ||
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2016
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183 | ||
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Thereafter
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566 | ||
| $ | 1,902 |
Actual amortization expense in future periods could differ from these estimates as a result of new intangible assets, acquisitions or divestitures, changes in useful lives, impairments and other relevant factors.
8
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
3
.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of June 30, 2011 and December 31, 2010:
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June 30,
2011
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December 31,
2010
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Accounts payable – trade
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$ | 155 | $ | 168 | ||||
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Accrued capital expenditures
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54 | 54 | ||||||
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Accrued expenses:
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Interest
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214 | 162 | ||||||
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Programming costs
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294 | 282 | ||||||
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Compensation
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115 | 124 | ||||||
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Franchise-related fees
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50 | 53 | ||||||
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Other
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205 | 206 | ||||||
| $ | 1,087 | $ | 1,049 | |||||
Long-term debt consists of the following as of June 30, 2011 and December 31, 2010:
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June 30, 2011
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December 31, 2010
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Principal Amount
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Accreted
Value
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Principal Amount
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Accreted
Value
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|||||||||||||
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CCH II, LLC:
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13.500% senior notes due November 30, 2016
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$ | 1,766 | $ | 2,038 | $ | 1,766 | $ | 2,057 | ||||||||
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CCO Holdings, LLC:
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7.25% senior notes due October 30, 2017
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1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
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7.875% senior notes due April 30, 2018
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900 | 900 | 900 | 900 | ||||||||||||
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7.00% senior notes due January 15, 2019
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1,400 | 1,391 | -- | -- | ||||||||||||
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8.125% senior notes due April 30, 2020
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700 | 700 | 700 | 700 | ||||||||||||
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6.50% senior notes due April 30, 2021
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1,500 | 1,500 | -- | -- | ||||||||||||
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Credit facility due September 6, 2014
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350 | 320 | 350 | 314 | ||||||||||||
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Charter Communications Operating, LLC:
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8.00% senior second-lien notes due April 30, 2012
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1,100 | 1,107 | 1,100 | 1,112 | ||||||||||||
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10.875% senior second-lien notes due September 15, 2014
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546 | 586 | 546 | 591 | ||||||||||||
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Credit facilities
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3,259 | 3,078 | 5,954 | 5,632 | ||||||||||||
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Long-Term Debt
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$ | 12,521 | $ | 12,620 | $ | 12,316 | $ | 12,306 | ||||||||
The accreted values presented above represent the fair value of the notes as of the Effective Date or the principal amount of the notes less the original issue discount at the time of sale, plus accretion to the balance sheet dates. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. The Company has availability under the revolving portion of its credit facility of approximately $1.2 billion as of June 30, 2011, and as such, debt maturing in the next twelve months is classified as long-term.
In May 2011, CCO Holdings, LLC (“CCO Holdings”) and CCO Holdings Capital Corp. closed on transactions in which they issued $1.5 billion aggregate principal amount of 6.50% senior notes due 2021 (the “2021 Notes”). The net proceeds of the issuances were contributed by CCO Holdings to Charter Communications Operating, LLC (“Charter Operating”) as a capital contribution and intercompany loan and were used to repay indebtedness under the Charter Operating credit facilities. The Company recorded a loss on extinguishment of debt of approximately $53 million for the
9
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
three and six months ended June 30, 2011 related to these transactions.
The 2021 Notes are guaranteed by Charter. They are senior debt obligations of CCO Holdings and CCO Holdings Capital Corp and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp. The 2021 Notes are structurally subordinated to all obligations of subsidiaries of CCO Holdings, including the Charter Operating notes and Charter Operating credit facilities.
CCO Holdings may redeem some or all of the 2021 Notes at any time at a premium. The optional redemption price declines to 100% of the respective series’ principal amount, plus accrued and unpaid interest, if any, on or after varying dates in 2015 through 2018.
In addition, at any time prior to April 30, 2014, CCO Holdings may redeem up to 35% of the aggregate principal amount of the notes at a redemption price at a premium plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided that certain conditions are met.
In the event of specified change of control events, CCO Holdings must offer to purchase the outstanding 2021 Notes from the holders at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest.
In January 2011, CCO Holdings and CCO Holdings Capital Corp. closed on transactions in which they issued $1.4 billion aggregate principal amount of 7.00% senior notes due 2019. Such notes are guaranteed by Charter. The net proceeds of the issuances were contributed by CCO Holdings to Charter Operating as a capital contribution and were used to repay indebtedness under the Charter Operating credit facilities. The Company recorded a loss on extinguishment of debt of approximately $67 million for the six months ended June 30, 2011 related to these transactions.
In April 2010, CCO Holdings and CCO Holdings Capital Corp. closed on transactions in which they issued $900 million aggregate principal amount of 7.875% Senior Notes due 2018 and $700 million aggregate principal amount of 8.125% Senior Notes due 2020. Such notes are guaranteed by Charter. The net proceeds were used to finance the tender offers and redemptions in which $800 million principal amount of CCO Holdings' outstanding 8.75% Senior Notes due 2013 and $770 million principal amount of Charter Operating’s outstanding 8.375% Senior Second Lien Notes due 2014 were repurchased. These transactions resulted in a loss on extinguishment of debt for the three and six months ended June 30, 2010 of approximately $34 million.
On March 31, 2010, Charter Operating entered into an amended and restated credit agreement. The refinancing resulted in a loss on extinguishment of debt for the six months ended June 30, 2010 of approximately $1 million.
5.
Preferred Stock
On the Effective Date, Charter issued approximately 5.5 million shares of 15% Pay-In-Kind Preferred Stock having an aggregate liquidation preference of $138 million to holders of Charter convertible notes (the “Preferred Stock”). Pursuant to the terms of the Preferred Stock, the Company was required to pay a dividend at an annual rate equal to 15% on the liquidation preference of the Preferred Stock. The liquidation preference of the Preferred Stock was $25 per share. On April 16, 2010, Charter redeemed all of the shares of the Preferred Stock for a redemption payment of $25.948 per share or a total redemption payment for all shares of approximately $143 million.
6.
Treasury Stock
On March 22, 2011, the Company purchased in a private transaction, 4.5 million shares of Charter’s Class A common stock from funds advised by Franklin Advisers, Inc. The price paid was $46.10 per share for a total of $207 million. The transaction was funded from existing cash on hand and available liquidity. The Company accounts for treasury stock using the cost method and the treasury shares are reflected on the Company’s condensed consolidated balance sheets as a component of total shareholders’ equity.
10
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
7.
Comprehensive Loss
The Company reports changes in the fair value of interest rate swap agreements designated as hedging the variability of cash flows associated with floating-rate debt obligations that meet the effectiveness criteria in other comprehensive loss. Comprehensive loss was $127 million and $226 million for the three and six months ended June 30, 2011, respectively. Comprehensive loss for the three and six months ended June 30, 2011 included a $20 million and $9 million loss on the change in the fair value of interest rate swap agreements designated as cash flow hedges, respectively. Comprehensive loss was $131 million and $107 million for the three and six months ended June 30, 2010, respectively. Comprehensive loss for each of the three and six months ended June 30, 2010 included a $50 million loss on the change in the fair value of interest rate swap agreements designated as cash flow hedges.
8.
Accounting for Derivative Instruments and Hedging Activities
The Company uses interest rate swap agreements to manage its interest costs and reduce the Company’s exposure to increases in floating interest rates. The Company manages its exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt. Using interest rate swap agreements, the Company agrees to exchange, at specified intervals through 2015, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.
The Company does not hold or issue derivative instruments for speculative trading purposes. The Company has certain interest rate derivative instruments that have been designated as cash flow hedging instruments. Such instruments effectively convert variable interest payments on certain debt instruments into fixed payments. For qualifying hedges, realized derivative gains and losses offset related results on hedged items in the consolidated statements of operations. The Company has formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting.
For the three and six months ended June 30, 2011 and 2010, there was no cash flow hedge ineffectiveness on interest rate swap agreements.
The effect of derivative instruments on the Company’s consolidated balance sheets is presented in the table below.
|
June 30, 2011
|
December 31, 2010
|
|||||||
|
Other long-term liabilities:
|
||||||||
|
Fair value of
interest rate derivatives designated as hedges
|
$ | 66 | $ | 57 | ||||
|
Accumulated other comprehensive loss:
|
||||||||
|
Interest rate derivatives designated as hedges
|
$ | (66 | ) | $ | (57 | ) | ||
Changes in the fair value of interest rate agreements that are designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, and that meet effectiveness criteria are reported in other comprehensive loss. The amounts are subsequently reclassified as an increase or decrease to interest expense in the same periods in which the related interest on the floating-rate debt obligations affected earnings (losses).
11
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The effect of derivative instruments on the Company’s consolidated statements of operations is presented in the table below.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||
|
Loss on interest rate derivatives
designated as hedges (effective portion)
|
$ | (20 | ) | $ | (50 | ) | $ | (9 | ) | $ | (50 | ) | ||||
|
Amount of loss reclassified from accumulated other
comprehensive loss into interest expense
|
$ | (10 | ) | $ | (8 | ) | $ | (20 | ) | $ | (8 | ) | ||||
As of June 30, 2011 and December 31, 2010, the Company had $2.0 billion in notional amounts of interest rate swap agreements outstanding. The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of exposure to credit loss. The amounts exchanged were determined by reference to the notional amount and the other terms of the contracts.
9.
Fair Value Measurements
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of June 30, 2011 and December 31, 2010 using available market information or other appropriate valuation methodologies. Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented in the accompanying condensed consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.
The carrying amounts of cash and cash equivalents, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
The estimated fair value of the Company’s long-term debt at June 30, 2011 and December 31, 2010 are based on quoted market prices and is classified within Level 1 (defined below) of the valuation hierarchy.
A summary of the carrying value and fair value of the Company’s long-term debt at June 30, 2011 and December 31, 2010 is as follows:
|
June 30, 2011
|
December 31, 2010
|
||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||||
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
Debt
|
|
||||||||||||||
|
CCH II, LLC notes
|
$
|
2,038
|
$
|
2,091
|
$
|
2,057
|
$
|
2,113
|
|||||||
|
CCO Holdings notes
|
5,491
|
5,633
|
2,600
|
2,709
|
|||||||||||
|
Charter Operating notes
|
1,693
|
1,744
|
1,703
|
1,774
|
|||||||||||
|
Credit facilities
|
3,398
|
3,584
|
5,946
|
6,252
|
|||||||||||
12
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:
|
·
|
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
·
|
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The interest rate derivatives designated as hedges were valued as $66 million and $57 million liabilities as of
June 30
, 2011 and December 31, 2010, respectively, using a present value calculation based on an implied forward LIBOR curve (adjusted for Charter Operating’s or counterparties’ credit risk) and were classified within Level 2 of the valuation hierarchy. The weighted average pay rate for the Company’s interest rate swap agreements was 2.25% (exclusive of applicable spread) at
June 30
, 2011 and December 31, 2010.
Nonfinancial Assets and Liabilities
The Company’s nonfinancial assets such as franchises, property, plant, and equipment, and other intangible assets are not measured at fair value on a recurring basis; however they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded in the three and six months ended June 30, 2011 and 2010.
10. Other Operating Expenses, Net
Other operating expenses, net consist of the following for the three and six months ended June 30, 2011 and 2010:
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Loss on sale of assets, net
|
$ | -- | $ | 2 | $ | -- | $ | 3 | ||||||||
|
Special charges, net
|
1 | 5 | 6 | 16 | ||||||||||||
| $ | 1 | $ | 7 | $ | 6 | $ | 19 | |||||||||
Loss on sales of assets, net
Loss on sales of assets, net represents the loss recognized on the sale of fixed assets and cable systems.
Special charges, net
Special charges, net for the three and six months ended June 30, 2011 primarily includes severance charges. For the three and six months ended June 30, 2010, special charges, net primarily includes severance charges as well as net amounts of litigation settlements.
13
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
11. Income Taxes
All operations are held through Charter Holdco and its direct and indirect subsidiaries. Charter Holdco and the majority of its subsidiaries are generally limited liability companies that are not subject to income tax. However, certain of these limited liability companies are subject to state income tax. In addition, the subsidiaries that are corporations are subject to federal and state income tax. All of the remaining taxable income, gains, losses, deductions and credits of Charter Holdco are passed through to Charter.
For the three and six months ended June 30, 2011, the Company recorded $81 million and $160 million of income tax expense, respectively, including $8 million of expense related to a state tax law change. For the three and six months ended June 30, 2010, the Company recorded $83 million and $102 million of income tax expense, respectively.
Income tax expense was recognized through increases in deferred tax liabilities related to Charter’s investment in Charter Holdco, and certain of Charter’s indirect subsidiaries, in addition to current federal and state income tax expense. Income tax expense for the six months ended June 30, 2010 was reduced by $69 million related to the reduction of the valuation allowance in connection with Mr. Allen’s exchange of his 0.19% Charter Holdco interest for 212,923 shares of Charter’s Class A common stock in a non-taxable transaction in February 2010.
As of June 30, 2011 and December 31, 2010, the Company had net deferred income tax liabilities of approximately $917 million and $762 million, respectively. Included in these net deferred tax liabilities is approximately $221 million and $225 million of net deferred tax liabilities at June 30, 2011 and December 31, 2010, respectively, relating to certain indirect subsidiaries of Charter Holdco that file separate income tax returns. The remainder of the Company’s net deferred tax liability arose from Charter’s investment in Charter Holdco, and was largely attributable to the characterization of franchises for financial reporting purposes as indefinite-lived.
No tax years for Charter or Charter Holdco are currently under examination by the Internal Revenue Service. Tax years ending 2007 through 2010 remain subject to examination and assessment. Years prior to 2007 remain open solely for purposes of examination of Charter’s net operating loss and credit carryforwards.
12.
Related Party Transactions
The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved.
Allen Agreement
In connection with the Plan, Charter, Mr. Allen and Charter Investment, Inc. (“CII”) entered into a separate restructuring agreement (as amended, the “Allen Agreement”), in settlement and compromise of their legal, contractual and equitable rights, claims and remedies against Charter and its subsidiaries. In addition to any amounts received by virtue of CII’s holding other claims against Charter and its subsidiaries, on the Effective Date, CII was issued 2.2 million shares of the new Charter Class B common stock and 35% (determined on a fully diluted basis) of the total voting power of all new capital stock of Charter. Each share of new Charter Class B common stock was convertible, at the option of the holder or the Disinterested Members of the Board of Directors of Charter, into one share of new Charter Class A common stock, and was subject to significant restrictions on transfer and conversion. Certain holders of new Charter Class A common stock (and securities convertible into or exercisable or exchangeable therefore) and new Charter Class B common stock received certain customary registration rights with respect to their shares. As of December 31, 2010, Mr. Allen held all 2.2 million shares of Class B common stock of Charter. Pursuant to the terms of the Certificate of Incorporation of Charter, on January 18, 2011, the Disinterested Members of the Board of Directors of Charter caused a conversion of the shares of Class B common stock into shares of Class A common stock on a one-for-one basis.
As a result of such conversion, Mr. Allen no longer has the right to appoint four directors and the Class B directors became Class A directors. On January 18, 2011, directors William L. McGrath and Christopher M. Temple, both former Class B directors, resigned from Charter’s board of directors. Edgar Lee and Stan Parker were appointed to fill the vacant positions.
14
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Franklin Stock Repurchase
See “Note 6. Treasury Stock” for the description of Charter’s purchase of 4.5 million shares of its Class A common stock from Franklin Advisers, Inc. At the time of the purchase, funds advised by Franklin Advisers, Inc. beneficially held more than 10% of Charter’s Class A common stock.
13.
Contingencies
On August 28, 2008, a lawsuit was filed against Charter and Charter Communications, LLC (“Charter LLC”) in the United States District Court for the Western District of Wisconsin (now entitled,
Marc Goodell et al. v. Charter Communications, LLC and Charter Communications, Inc.
). The plaintiffs sought to represent a class of current and former broadband, system and other types of technicians who are or were employed by Charter or Charter LLC in the states of Michigan, Minnesota, Missouri or California. Plaintiffs alleged that Charter and Charter LLC violated certain wage and hour statutes of those four states by failing to pay technicians for all hours worked. In May 2010, the parties entered into a settlement agreement disposing of all claims, including those potential wage and hour claims for potential class members in additional states beyond the four identified above. On September 24, 2010, the court granted final approval of the settlement. The Company had accrued and subsequently paid the settlement costs associated with this case. The Company has been subjected, in the normal course of business, to the assertion of other wage and hour claims and could be subjected to additional such claims in the future. The Company cannot predict the outcome of any such claims nor can they estimate a reasonable range of loss.
On March 27, 2009, Charter filed its Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. On the same day, JPMorgan Chase Bank, N.A., (“JPMorgan”), for itself and as Administrative Agent under the Charter Operating Credit Agreement, filed an adversary proceeding (the “JPMorgan Adversary Proceeding”) in Bankruptcy Court against Charter Operating and CCO Holdings seeking a declaration that there were events of default under the Charter Operating Credit Agreement. JPMorgan, as well as other parties, objected to the Plan. The Bankruptcy Court jointly held 19 days of trial in the JPMorgan Adversary Proceeding and on the objections to the Plan.
On November 17, 2009, the Bankruptcy Court issued its Order and Opinion confirming the Plan over the objections of JPMorgan and various other objectors. The Court also entered an order ruling in favor of Charter in the JPMorgan Adversary Proceeding. Several objectors attempted to stay the consummation of the Plan, but those motions were denied by the Bankruptcy Court and the U.S. District Court for the Southern District of New York. Charter consummated the Plan on November 30, 2009 and reinstated the Charter Operating Credit Agreement and certain other debt of its subsidiaries.
Six appeals were filed relating to confirmation of the Plan. The parties initially pursuing appeals were: (i) JPMorgan; (ii) Wilmington Trust Company (“Wilmington Trust”) (as indenture trustee for the holders of the 8% senior second lien notes due 2012 and 8.375% senior second lien notes due 2014 issued by and among Charter Operating and Charter Communications Operating Capital Corp. and the 10.875% senior second lien notes due 2014 issued by and among Charter Operating and Charter Communications Operating Capital Corp.); (iii) Wells Fargo Bank, N.A. (“Wells Fargo”) (in its capacities as successor Administrative Agent and successor Collateral Agent for the third lien prepetition secured lenders to CCO Holdings under the CCO Holdings credit facility); (iv) Law Debenture Trust Company of New York (“Law Debenture Trust”) (as the Trustee with respect to the $479 million in aggregate principal amount of 6.50% convertible senior notes due 2027 issued by Charter which are no longer outstanding following consummation of the Plan); (v) R2 Investments, LDC (“R2 Investments”) (an equity interest holder in Charter); and (vi) certain plaintiffs representing a putative class in a securities action against three former Charter officers or directors filed in the United States District Court for the Eastern District of Arkansas (Iron Workers Local No. 25 Pension Fund, Indiana Laborers Pension Fund, and Iron Workers District Council of Western New York and Vicinity Pension Fund, in the action styled
Iron Workers Local No. 25 Pension Fund v. Allen, et al.
, Case No. 4:09-cv-00405-JLH (E.D. Ark.).
15
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Charter Operating amended its senior secured credit facilities effective March 31, 2010. In connection with the closing of these amendments, each of Bank of America, N.A. and JPMorgan, for itself and on behalf of the lenders under the Charter Operating senior secured credit facilities, agreed to dismiss the appeal of the Company’s Confirmation Order pending before the District Court for the Southern District of New York and to waive any objections to the Company’s Confirmation Order issued by the United States Bankruptcy Court for the Southern District of New York. The lenders filed their stipulation of that dismissal and waiver of objections and in April 2010, the case was dismissed. On December 3, 2009, Wilmington Trust withdrew its notice of appeal. In April 2010, Wells Fargo filed its Stipulation of Dismissal of their appeal on behalf of the lenders under the CCO Holdings credit facility and in April 2010, the case was dismissed. The appeals by Law Debenture Trust and R2 Investments were denied by the District Court for the Southern District of New York in March 2011. A Notice of Appeal of that denial has been filed by both Law Debenture Trust and R2. The appeals of the securities plaintiffs were denied by the District Court for the Southern District of New York in July 2011.
The Company cannot predict the ultimate outcome
of the appeals nor can they estimate a reasonable range of loss.
The Company is party to lawsuits and claims that arise in the ordinary course of conducting its business. The ultimate outcome of these other legal matters pending against the Company cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
14. Stock Compensation Plans
Charter’s 2009 Stock Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock, restricted stock units and restricted stock. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting services for the Company, are eligible for grants under the 2009 Stock Plan.
During the three and six months ended June 30, 2011, the Company granted 17,600 and 30,100 shares of restricted stock, respectively. During the three and six months ended June 30, 2010, the Company granted 2,100 and 42,000 shares of restricted stock, respectively. Restricted stock vests annually over a one to three-year period beginning from the date of grant. During the three and six months ended June 30, 2011, the Company granted 2 million stock options. A portion of the stock options vest annually over four years from either the grant date or delayed vesting commencement dates. The remaining stock options vest based on achievement of stock price hurdles over a delayed vesting schedule. All stock options expire ten years from the grant date. During the three and six months ended June 30, 2011, the Company granted 230,500 restricted stock units. Restricted stock units have no voting rights and vest ratably over four years from either the grant date or delayed vesting commencement dates. As of June 30, 2011, total unrecognized compensation remaining to be recognized in future periods totaled $25 million for restricted stock, $61 million for stock options and $12 million for restricted stock units and the weighted average period over which it is expected to be recognized is 2 years for restricted stock, 3 years for stock options and 5 years for restricted stock units.
The Company recorded $9 million and $15 million of stock compensation expense for the three and six months ended June 30, 2011, respectively, and $5 million and $10 million of stock compensation expense for the three and six months ended June 30, 2010, respectively, which is included in selling, general, and administrative expense.
15. Consolidating Schedules
The CCO Holdings notes and the CCO Holdings credit facility are obligations of CCO Holdings. The CCH II, LLC (“CCH II”) notes are obligations of CCH II. However, these obligations are also jointly, severally, fully and unconditionally guaranteed on an unsecured senior basis by Charter.
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10,
Financial Statements of Guarantors and Affiliates Whose Securities Collateralize an Issue
16
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Registered or Being Registered.
This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.
Condensed consolidating financial statements as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and 2010 follow.
17
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
Charter Communications, Inc.
|
|||||||||||||||||||||||
|
Condensed Consolidating Balance Sheet
|
|||||||||||||||||||||||
|
As of June 30, 2011
|
|||||||||||||||||||||||
|
Charter
|
Intermediate Holding Companies
|
CCH II
|
CCO
Holdings
|
Charter Operating
and
Subsidiaries
|
Eliminations
|
Charter Consolidated
|
|||||||||||||||||
|
ASSETS
|
|||||||||||||||||||||||
|
CURRENT ASSETS:
|
|||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 3 | $ | 8 | $ | -- | $ | 2 | $ | 153 | $ | -- | $ | 166 | |||||||||
|
Restricted cash and cash equivalents
|
-- | -- | -- | -- | 28 | -- | 28 | ||||||||||||||||
|
Accounts receivable, net
|
-- | -- | -- | -- | 243 | -- | 243 | ||||||||||||||||
|
Receivables from related party
|
69 | 151 | 4 | 3 | -- | (227 | ) | -- | |||||||||||||||
|
Prepaid expenses and other current assets
|
2 | 22 | -- | -- | 29 | -- | 53 | ||||||||||||||||
|
Total current assets
|
74 | 181 | 4 | 5 | 453 | (227 | ) | 490 | |||||||||||||||
|
INVESTMENT IN CABLE PROPERTIES:
|
|||||||||||||||||||||||
|
Property, plant and equipment, net
|
-- | 34 | -- | -- | 6,845 | -- | 6,879 | ||||||||||||||||
|
Franchises
|
-- | -- | -- | -- | 5,257 | -- | 5,257 | ||||||||||||||||
|
Customer relationships, net
|
-- | -- | -- | -- | 1,846 | -- | 1,846 | ||||||||||||||||
|
Goodwill
|
-- | -- | -- | -- | 951 | -- | 951 | ||||||||||||||||
|
Total investment in cable properties
|
-- | 34 | -- | -- | 14,899 | -- | 14,933 | ||||||||||||||||
|
CC VIII PREFERRED INTEREST
|
85 | 199 | -- | -- | -- | (284 | ) | -- | |||||||||||||||
|
INVESTMENT IN SUBSIDIARIES
|
1,611 | 1,114 | 2,981 | 8,539 | -- | (14,245 | ) | -- | |||||||||||||||
|
LOANS RECEIVABLE – RELATED PARTY
|
-- | 43 | 256 | 261 | -- | (560 | ) | -- | |||||||||||||||
|
OTHER NONCURRENT ASSETS
|
-- | 160 | -- | 82 | 146 | (2 | ) | 386 | |||||||||||||||
|
Total assets
|
$ | 1,770 | $ | 1,731 | $ | 3,241 | $ | 8,887 | $ | 15,498 | $ | (15,318 | ) | $ | 15,809 | ||||||||
|
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
|
|||||||||||||||||||||||
|
CURRENT LIABILITIES:
|
|||||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 8 | $ | 116 | $ | 89 | $ | 95 | $ | 779 | $ | -- | $ | 1,087 | |||||||||
|
Payables to related party
|
-- | -- | -- | -- | 227 | (227 | ) | -- | |||||||||||||||
|
Total current liabilities
|
8 | 116 | 89 | 95 | 1,006 | (227 | ) | 1,087 | |||||||||||||||
|
LONG-TERM DEBT
|
-- | -- | 2,038 | 5,811 | 4,771 | -- | 12,620 | ||||||||||||||||
|
LOANS PAYABLE – RELATED PARTY
|
-- | -- | -- | -- | 560 | (560 | ) | -- | |||||||||||||||
|
OTHER LONG-TERM LIABILITIES
|
696 | 4 | -- | -- | 338 | -- | 1,038 | ||||||||||||||||
|
Shareholders’/Member’s equity
|
1,066 | 1,611 | 1,114 | 2,981 | 8,539 | (14,247 | ) | 1,064 | |||||||||||||||
|
Noncontrolling interest
|
-- | -- | -- | -- | 284 | (284 | ) | -- | |||||||||||||||
|
Total shareholders’/member’s equity
|
1,066 | 1,611 | 1,114 | 2,981 | 8,823 | (14,531 | ) | 1,064 | |||||||||||||||
|
Total liabilities and shareholders’/member’s equity
|
$ | 1,770 | $ | 1,731 | $ | 3,241 | $ | 8,887 | $ | 15,498 | $ | (15,318 | ) | $ | 15,809 | ||||||||
18
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
Charter Communications, Inc.
|
|||||||||||||||||||||||
|
Condensed Consolidating Balance Sheet
|
|||||||||||||||||||||||
|
As of December 31, 2010
|
|||||||||||||||||||||||
|
Charter
|
Intermediate Holding Companies
|
CCH II
|
CCO Holdings
|
Charter Operating
and
Subsidiaries
|
Eliminations
|
Charter Consolidated
|
|||||||||||||||||
|
ASSETS
|
|||||||||||||||||||||||
|
CURRENT ASSETS:
|
|||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | -- | $ | -- | $ | 3 | $ | 1 | $ | -- | $ | -- | $ | 4 | |||||||||
|
Restricted cash and cash equivalents
|
-- | -- | -- | -- | 28 | -- | 28 | ||||||||||||||||
|
Accounts receivable, net
|
-- | 1 | -- | -- | 246 | -- | 247 | ||||||||||||||||
|
Receivables from related party
|
57 | 182 | 8 | 8 | -- | (255 | ) | -- | |||||||||||||||
|
Prepaid expenses and other current assets
|
2 | 20 | -- | -- | 25 | -- | 47 | ||||||||||||||||
|
Total current assets
|
59 | 203 | 11 | 9 | 299 | (255 | ) | 326 | |||||||||||||||
|
INVESTMENT IN CABLE PROPERTIES:
|
|||||||||||||||||||||||
|
Property, plant and equipment, net
|
-- | 34 | -- | -- | 6,785 | -- | 6,819 | ||||||||||||||||
|
Franchises
|
-- | -- | -- | -- | 5,257 | -- | 5,257 | ||||||||||||||||
|
Customer relationships, net
|
-- | -- | -- | -- | 2,000 | -- | 2,000 | ||||||||||||||||
|
Goodwill
|
-- | -- | -- | -- | 951 | -- | 951 | ||||||||||||||||
|
Total investment in cable properties
|
-- | 34 | -- | -- | 14,993 | -- | 15,027 | ||||||||||||||||
|
CC VIII PREFERRED INTEREST
|
79 | 183 | -- | -- | -- | (262 | ) | -- | |||||||||||||||
|
INVESTMENT IN SUBSIDIARIES
|
1,889 | 1,409 | 3,296 | 5,946 | -- | (12,540 | ) | -- | |||||||||||||||
|
LOANS RECEIVABLE – RELATED PARTY
|
-- | 42 | 248 | 252 | -- | (542 | ) | -- | |||||||||||||||
|
OTHER NONCURRENT ASSETS
|
-- | 160 | -- | 43 | 153 | (2 | ) | 354 | |||||||||||||||
|
Total assets
|
$ | 2,027 | $ | 2,031 | $ | 3,555 | $ | 6,250 | $ | 15,445 | $ | (13,601 | ) | $ | 15,707 | ||||||||
|
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
|
|||||||||||||||||||||||
|
CURRENT LIABILITIES:
|
|||||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 11 | $ | 138 | $ | 89 | $ | 40 | $ | 771 | $ | -- | $ | 1,049 | |||||||||
|
Payables to related party
|
-- | -- | -- | -- | 255 | (255 | ) | -- | |||||||||||||||
|
Total current liabilities
|
11 | 138 | 89 | 40 | 1,026 | (255 | ) | 1,049 | |||||||||||||||
|
LONG-TERM DEBT
|
-- | -- | 2,057 | 2,914 | 7,335 | -- | 12,306 | ||||||||||||||||
|
LOANS PAYABLE – RELATED PARTY
|
-- | -- | -- | -- | 542 | (542 | ) | -- | |||||||||||||||
|
OTHER LONG-TERM LIABILITIES
|
536 | 4 | -- | -- | 334 | -- | 874 | ||||||||||||||||
|
Shareholders’/Member’s equity
|
1,480 | 1,889 | 1,409 | 3,296 | 5,946 | (12,542 | ) | 1,478 | |||||||||||||||
|
Noncontrolling interest
|
-- | -- | -- | -- | 262 | (262 | ) | -- | |||||||||||||||
|
Total shareholders’/member’s equity
|
1,480 | 1,889 | 1,409 | 3,296 | 6,208 | (12,804 | ) | 1,478 | |||||||||||||||
|
Total liabilities and shareholders’/member’s equity
|
$ | 2,027 | $ | 2,031 | $ | 3,555 | $ | 6,250 | $ | 15,445 | $ | (13,601 | ) | $ | 15,707 | ||||||||
19
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
Charter Communications, Inc.
|
|||||||||||||||||||||
|
Condensed Consolidating Statement of Operations
|
|||||||||||||||||||||
|
For the six months ended June 30, 2011
|
|||||||||||||||||||||
|
Charter
|
Intermediate Holding Companies
|
CCH II
|
CCO
Holdings
|
Charter Operating
and
Subsidiaries
|
Eliminations
|
Charter Consolidated
|
|||||||||||||||
|
REVENUES
|
$ | 16 | $ | 59 | $ | -- | $ | -- | $ | 3,561 | $ | (75 | ) | $ | 3,561 | ||||||
|
COSTS AND EXPENSES:
|
|||||||||||||||||||||
|
Operating (excluding depreciation and amortization)
|
-- | -- | -- | -- | 1,552 | -- | 1,552 | ||||||||||||||
|
Selling, general and administrative
|
16 | 59 | -- | -- | 688 | (75 | ) | 688 | |||||||||||||
|
Depreciation and amortization
|
-- | -- | -- | -- | 776 | -- | 776 | ||||||||||||||
|
Other operating expenses, net
|
-- | -- | -- | -- | 6 | -- | 6 | ||||||||||||||
| 16 | 59 | -- | -- | 3,022 | (75 | ) | 3,022 | ||||||||||||||
|
Income from operations
|
-- | -- | -- | -- | 539 | -- | 539 | ||||||||||||||
|
OTHER INCOME (EXPENSES):
|
|||||||||||||||||||||
|
Interest expense, net
|
-- | -- | (96 | ) | (169 | ) | (209 | ) | -- | (474 | ) | ||||||||||
|
Loss on extinguishment of debt
|
-- | -- | -- | -- | (120 | ) | -- | (120 | ) | ||||||||||||
|
Other expenses, net
|
-- | -- | -- | -- | (2 | ) | -- | (2 | ) | ||||||||||||
|
Equity in income (losses) of subsidiaries
|
(63 | ) | (79 | ) | 17 | 186 | -- | (61 | ) | -- | |||||||||||
| (63 | ) | (79 | ) | (79 | ) | 17 | (331 | ) | (61 | ) | (596 | ) | |||||||||
|
Income (loss) before income taxes
|
(63 | ) | (79 | ) | (79 | ) | 17 | 208 | (61 | ) | (57 | ) | |||||||||
|
INCOME TAX EXPENSE
|
(160 | ) | -- | -- | -- | -- | -- | (160 | ) | ||||||||||||
|
Consolidated net income (loss)
|
(223 | ) | (79 | ) | (79 | ) | 17 | 208 | (61 | ) | (217 | ) | |||||||||
|
Less: Net (income) loss – noncontrolling interest
|
6 | 16 | -- | -- | (22 | ) | -- | -- | |||||||||||||
|
Net income (loss)
|
$ | (217 | ) | $ | (63 | ) | $ | (79 | ) | $ | 17 | $ | 186 | $ | (61 | ) | $ | (217 | ) | ||
20
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
Charter Communications, Inc.
|
|||||||||||||||||||||
|
Condensed Consolidating Statement of Operations
|
|||||||||||||||||||||
|
For the six months ended June 30, 2010
|
|||||||||||||||||||||
|
Charter
|
Intermediate Holding Companies
|
CCH II
|
CCO
Holdings
|
Charter Operating
and
Subsidiaries
|
Eliminations
|
Charter Consolidated
|
|||||||||||||||
|
REVENUES
|
$ | 19 | $ | 56 | $ | -- | $ | -- | $ | 3,506 | $ | (75 | ) | $ | 3,506 | ||||||
|
COSTS AND EXPENSES:
|
|||||||||||||||||||||
|
Operating (excluding depreciation and amortization)
|
-- | -- | -- | -- | 1,529 | -- | 1,529 | ||||||||||||||
|
Selling, general and administrative
|
19 | 56 | -- | -- | 704 | (75 | ) | 704 | |||||||||||||
|
Depreciation and amortization
|
-- | -- | -- | -- | 749 | -- | 749 | ||||||||||||||
|
Other operating expenses, net
|
-- | -- | -- | -- | 19 | -- | 19 | ||||||||||||||
| 19 | 56 | -- | -- | 3,001 | (75 | ) | 3,001 | ||||||||||||||
|
Income from operations
|
-- | -- | -- | -- | 505 | -- | 505 | ||||||||||||||
|
OTHER INCOME (EXPENSES):
|
|||||||||||||||||||||
|
Interest expense, net
|
-- | -- | (98 | ) | (50 | ) | (275 | ) | -- | (423 | ) | ||||||||||
|
Loss on extinguishment of debt
|
-- | -- | -- | (17 | ) | (18 | ) | -- | (35 | ) | |||||||||||
|
Other income (expenses), net
|
3 | -- | -- | -- | (5 | ) | -- | (2 | ) | ||||||||||||
|
Equity in income of subsidiaries
|
31 | 18 | 116 | 183 | -- | (348 | ) | -- | |||||||||||||
| 34 | 18 | 18 | 116 | (298 | ) | (348 | ) | (460 | ) | ||||||||||||
|
Income before income taxes
|
34 | 18 | 18 | 116 | 207 | (348 | ) | 45 | |||||||||||||
|
INCOME TAX EXPENSE
|
(96 | ) | -- | -- | -- | (6 | ) | -- | (102 | ) | |||||||||||
|
Consolidated net income (loss)
|
(62 | ) | 18 | 18 | 116 | 201 | (348 | ) | (57 | ) | |||||||||||
|
Less: Net (income) loss – noncontrolling interest
|
5 | 13 | -- | -- | (18 | ) | -- | -- | |||||||||||||
|
Net income (loss)
|
$ | (57 | ) | $ | 31 | $ | 18 | $ | 116 | $ | 183 | $ | (348 | ) | $ | (57 | ) | ||||
21
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
Charter Communications, Inc.
|
||||||||||||||||||||||
|
Condensed Consolidating Statement of Cash Flows
|
||||||||||||||||||||||
|
For the six months ended June 30, 2011
|
||||||||||||||||||||||
|
Charter
|
Intermediate Holding Companies
|
CCH II
|
CCO
Holdings
|
Charter Operating
and
Subsidiaries
|
Eliminations
|
Charter Consolidated
|
||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||||
|
Consolidated net income (loss)
|
$ | (223 | ) | $ | (79 | ) | $ | (79 | ) | $ | 17 | $ | 208 | $ | (61 | ) | $ | (217 | ) | |||
|
Adjustments to reconcile net income (loss) to net
cash flows
from operating activities:
|
||||||||||||||||||||||
|
Depreciation and amortization
|
-- | -- | -- | -- | 776 | -- | 776 | |||||||||||||||
|
Noncash interest expense
|
-- | -- | (19 | ) | 10 | 29 | -- | 20 | ||||||||||||||
|
Loss on extinguishment of debt
|
-- | -- | -- | -- | 120 | -- | 120 | |||||||||||||||
|
Deferred income taxes
|
159 | -- | -- | -- | (4 | ) | -- | 155 | ||||||||||||||
|
Equity in (income) losses of subsidiaries
|
63 | 79 | (17 | ) | (186 | ) | -- | 61 | -- | |||||||||||||
|
Other, net
|
-- | 1 | -- | -- | 15 | -- | 16 | |||||||||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||||||||||||
|
Accounts receivable
|
-- | 1 | -- | -- | 4 | -- | 5 | |||||||||||||||
|
Prepaid expenses and other assets
|
-- | (2 | ) | -- | -- | (4 | ) | -- | (6 | ) | ||||||||||||
|
Accounts payable, accrued expenses and other
|
(3 | ) | (22 | ) | -- | 55 | 8 | -- | 38 | |||||||||||||
|
Receivables from and payables to related party
|
4 | 30 | (4 | ) | (4 | ) | (26 | ) | -- | -- | ||||||||||||
|
Net cash flows from operating activities
|
-- | 8 | (119 | ) | (108 | ) | 1,126 | -- | 907 | |||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||||
|
Purchases of property, plant and equipment
|
-- | -- | -- | -- | (680 | ) | -- | (680 | ) | |||||||||||||
|
Contribution to subsidiary
|
-- | -- | -- | (2,647 | ) | -- | 2,647 | -- | ||||||||||||||
|
Distributions from subsidiary
|
206 | 1,030 | 322 | 231 | -- | (1,789 | ) | -- | ||||||||||||||
|
Other, net
|
-- | -- | -- | -- | (14 | ) | -- | (14 | ) | |||||||||||||
|
Net cash flows from investing activities
|
206 | 1,030 | 322 | (2,416 | ) | (694 | ) | 858 | (694 | ) | ||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||||
|
Borrowings of long-term debt
|
-- | -- | -- | 2,890 | 671 | -- | 3,561 | |||||||||||||||
|
Repayments of long-term debt
|
-- | -- | -- | -- | (3,366 | ) | -- | (3,366 | ) | |||||||||||||
|
Payments for debt issuance costs
|
-- | -- | -- | (43 | ) | -- | -- | (43 | ) | |||||||||||||
|
Purchase of treasury stock
|
(207 | ) | -- | -- | -- | -- | -- | (207 | ) | |||||||||||||
|
Contribution from parent
|
-- | -- | -- | -- | 2,647 | (2,647 | ) | -- | ||||||||||||||
|
Distributions to parent
|
-- | (1,030 | ) | (206 | ) | (322 | ) | (231 | ) | 1,789 | -- | |||||||||||
|
Other, net
|
4 | -- | -- | -- | -- | -- | 4 | |||||||||||||||
|
Net cash flows from financing activities
|
(203 | ) | (1,030 | ) | (206 | ) | 2,525 | (279 | ) | (858 | ) | (51 | ) | |||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
3 | 8 | (3 | ) | 1 | 153 | -- | 162 | ||||||||||||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
-- | -- | 3 | 1 | 28 | -- | 32 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | 3 | $ | 8 | $ | -- | $ | 2 | $ | 181 | $ | -- | $ | 194 | ||||||||
22
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
Charter Communications, Inc.
|
||||||||||||||||||||||
|
Condensed Consolidating Statement of Cash Flows
|
||||||||||||||||||||||
|
For the six months ended June 30, 2010
|
||||||||||||||||||||||
|
Charter
|
Intermediate Holding Companies
|
CCH II
|
CCO
Holdings
|
Charter Operating
and
Subsidiaries
|
Eliminations
|
Charter Consolidated
|
||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||||||||
|
Consolidated net income (loss)
|
$ | (62 | ) | $ | 18 | $ | 18 | $ | 116 | $ | 201 | $ | (348 | ) | $ | (57 | ) | |||||
|
Adjustments to reconcile net income (loss) to net
cash flows f
rom operating activities:
|
||||||||||||||||||||||
|
Depreciation and amortization
|
-- | -- | -- | -- | 749 | -- | 749 | |||||||||||||||
|
Noncash interest expense
|
-- | -- | (17 | ) | 5 | 48 | -- | 36 | ||||||||||||||
|
Loss on extinguishment of debt
|
-- | -- | -- | 15 | 17 | -- | 32 | |||||||||||||||
|
Deferred income taxes
|
96 | -- | -- | -- | 2 | -- | 98 | |||||||||||||||
|
Equity in income of subsidiaries
|
(31 | ) | (18 | ) | (116 | ) | (183 | ) | -- | 348 | -- | |||||||||||
|
Other, net
|
(2 | ) | -- | -- | -- | 13 | -- | 11 | ||||||||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||||||||||||
|
Accounts receivable
|
-- | -- | -- | -- | (1 | ) | -- | (1 | ) | |||||||||||||
|
Prepaid expenses and other assets
|
(2 | ) | 4 | -- | -- | 10 | -- | 12 | ||||||||||||||
|
Accounts payable, accrued expenses and other
|
2 | (27 | ) | 69 | 14 | 43 | -- | 101 | ||||||||||||||
|
Receivables from and payables to related party
|
(21 | ) | 9 | (12 | ) | (8 | ) | 32 | -- | -- | ||||||||||||
|
Net cash flows from operating activities
|
(20 | ) | (14 | ) | (58 | ) | (41 | ) | 1,114 | -- | 981 | |||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||||
|
Purchases of property, plant and equipment
|
-- | -- | -- | -- | (649 | ) | -- | (649 | ) | |||||||||||||
|
Contribution to subsidiary
|
(45 | ) | (77 | ) | (5 | ) | (714 | ) | -- | 841 | -- | |||||||||||
|
Distributions from subsidiary
|
-- | -- | 47 | 54 | -- | (101 | ) | -- | ||||||||||||||
|
Loans to subsidiaries
|
-- | (30 | ) | -- | -- | -- | 30 | -- | ||||||||||||||
|
Other, net
|
-- | -- | -- | -- | (4 | ) | -- | (4 | ) | |||||||||||||
|
Net cash flows from investing activities
|
(45 | ) | (107 | ) | 42 | (660 | ) | (653 | ) | 770 | (653 | ) | ||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||||
|
Borrowings of long-term debt
|
-- | -- | -- | 1,600 | 25 | -- | 1,625 | |||||||||||||||
|
Borrowings from parent companies
|
-- | -- | -- | -- | 30 | (30 | ) | -- | ||||||||||||||
|
Repayments of long-term debt
|
-- | -- | -- | (826 | ) | (1,614 | ) | -- | (2,440 | ) | ||||||||||||
|
Repayment of preferred stock
|
(138 | ) | -- | -- | -- | -- | -- | (138 | ) | |||||||||||||
|
Payments for debt issuance costs
|
-- | -- | -- | (28 | ) | (31 | ) | -- | (59 | ) | ||||||||||||
|
Contribution from parent
|
-- | 109 | 13 | 5 | 714 | (841 | ) | -- | ||||||||||||||
|
Distributions to parent
|
-- | -- | -- | (47 | ) | (54 | ) | 101 | -- | |||||||||||||
|
Other, net
|
-- | -- | -- | -- | (3 | ) | -- | (3 | ) | |||||||||||||
|
Net cash flows from financing activities
|
(138 | ) | 109 | 13 | 704 | (933 | ) | (770 | ) | (1,015 | ) | |||||||||||
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
|
(203 | ) | (12 | ) | (3 | ) | 3 | (472 | ) | -- | (687 | ) | ||||||||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
203 | 12 | 6 | -- | 533 | -- | 754 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | -- | $ | -- | $ | 3 | $ | 3 | $ | 61 | $ | -- | $ | 67 | ||||||||
23
General
Charter Communications, Inc. (“Charter”) is a holding company whose principal asset is a 100% common equity interest in Charter Communications Holding Company, LLC (“Charter Holdco”). Charter owns cable systems through its subsidiaries.
We are a cable operator providing services in the United States with approximately 5.2 million residential and commercial customers at June 30, 2011. We offer our customers traditional cable video programming (basic and digital video), Internet services, and telephone services, as well as advanced video services such as Charter OnDemand™ (“OnDemand”), high-definition television and digital video recorder (“DVR”) service. We also sell local advertising on cable networks and provide fiber connectivity to cellular towers.
Overview
For the three and six months ended June 30, 2011, adjusted earnings before interest expense, income taxes, depreciation and amortization (“Adjusted EBITDA”) was $673 million and $1.3 billion, respectively. For the three and six months ended June 30, 2010, Adjusted EBITDA was $646 million and $1.3 billion, respectively. See “—Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow. Adjusted EBITDA increased as a result of continued growth in our commercial services along with growth in our Internet and telephone customers, combined with lower selling, general and administrative costs. For the three and six months ended June 30, 2011, our income from operations was $270 million and $539 million, respectively. For the three and six months ended June 30, 2010, our income from operations was $254 million and $505 million, respectively. The increase in income from operations is primarily due to increases in revenues offset by increases in operating expenses and depreciation and amortization.
For the six months ended June 30, 2011, we had a decrease in total customers of approximately 12,100 and lost approximately 107,500 basic video customers. We believe that continued competition and the weakened economic conditions in the United States, including the housing market and relatively high unemployment levels, have adversely affected consumer demand for our services. These conditions combined with
seasonality and disciplined customer acquisition contributed to video revenues declining
3% for each of the three and six months ended June 30, 2011 compared to the corresponding periods in
2010. Total
revenue growth was 1% and 2% for the three and six months ended June 30, 2011, respectively, compared to the corresponding periods in
2010 as we continued to grow our commercial, Internet and telephone businesses.
However, we believe competition from wireless and economic factors have contributed to an increase in the number of homes that replace their traditional telephone service with wireless service thereby impacting the growth of our telephone business. If these conditions do not improve, we believe the growth of our business and results of operations will be further adversely affected which may contribute to future impairments of our franchises and goodwill.
24
The following table summarizes our customer statistics for basic video, digital video, Internet, and telephone as of June 30, 2011 and 2010:
|
Approximate as of
|
||||||||
|
June 30,
|
June 30,
|
|||||||
|
2011 (a)
|
2010 (a)
|
|||||||
|
Video (b)
|
4,173,400 | 4,466,600 | ||||||
|
Internet (c)
|
3,352,500 | 3,187,900 | ||||||
|
Telephone (d)
|
1,747,600 | 1,658,100 | ||||||
|
Residential PSUs (e)
|
9,273,500 | 9,312,600 | ||||||
|
Video (b)(f)
|
239,500 | 249,900 | ||||||
|
Internet (c)(g)
|
149,100 | 129,400 | ||||||
|
Telephone (d)
|
68,500 | 50,000 | ||||||
|
Commercial PSUs (e)
|
457,100 | 429,300 | ||||||
|
Digital video RGUs (h)
|
3,386,700 | 3,337,500 | ||||||
|
Total RGUs (i)
|
13,117,300 | 13,079,400 | ||||||
After giving effect to sales of cable systems in 2010, residential basic video customers, residential Internet customers and residential telephone customers would have been approximately 4,407,000, 3,163,700, and 1,656,300, respectively, as of June 30, 2010. After giving effect to sales of cable systems in 2010, commercial basic video customers, commercial Internet customers, commercial telephone customers and digital revenue generating units would have been approximately 243,800, 128,300, 49,900 and 3,302,000, respectively, as of June 30, 2010.
|
(a)
|
We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, at June 30, 2011 and 2010, customers include approximately 16,100 and 20,800 persons, respectively, whose accounts were over 60 days past due in payment, approximately 2,200 and 2,500 persons, respectively, whose accounts were over 90 days past due in payment, and approximately 1,000 and 1,300 persons, respectively, whose accounts were over 120 days past due in payment.
|
|
(b)
|
“Video customers” represent those customers who subscribe to our video cable services.
|
|
(c)
|
“Internet customers” represent those customers who subscribe to our Internet service.
|
|
(d)
|
“Telephone customers” represent those customers who subscribe to our telephone service.
|
|
(e)
|
“Primary Service Units” or “PSUs” represent the total of video, Internet and telephone customers.
|
|
(f)
|
Included within commercial video customers are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit (“EBU”) basis. We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service rather than the most prevalent price charged. This EBU method of estimating basic video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators (“MSOs”). As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service or multi-dwelling customers, our EBU count will decline even if there is no real loss in commercial service or multi-dwelling customers.
|
|
(g)
|
Prior year commercial Internet customers were adjusted to reflect current year presentation.
|
|
(h)
|
“Digital video RGUs” include all video customers that rent one or more digital set-top boxes or cable cards.
|
|
(i)
|
“Revenue Generating Units” or “RGUs” represent the total of all basic video, digital video, Internet and telephone customers, not counting additional outlets within one household. For example, a customer who receives two types of service (such as basic video and digital video) would be treated as two RGUs and, if that
|
25
|
|
customer added on Internet service, the customer would be treated as three RGUs. This statistic is computed in accordance with the guidelines of the National Cable & Telecommunications Association (“NCTA”).
|
We have a history of net losses. Our net losses are principally attributable to insufficient revenue to cover the combination of operating expenses, interest expenses that we incur because of our debt, depreciation expenses resulting from the capital investments we have made and continue to make in our cable properties, and amortization expenses of customer relationships.
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2010 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues that items in the accompanying condensed consolidated statements of operations constituted for the periods presented (dollars in millions, except per share data):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||||||||
|
REVENUES
|
$ | 1,791 | 100 | % | $ | 1,771 | 100 | % | $ | 3,561 | 100 | % | $ | 3,506 | 100 | % | ||||||||||||
|
COSTS AND EXPENSES:
|
||||||||||||||||||||||||||||
|
Operating (excluding depreciation and
amortization)
|
784 | 44 | % | 773 | 44 | % | 1,552 | 44 | % | 1,529 | 44 | % | ||||||||||||||||
|
Selling, general and administrative
|
343 | 19 | % | 357 | 20 | % | 688 | 19 | % | 704 | 20 | % | ||||||||||||||||
|
Depreciation and amortization
|
393 | 22 | % | 380 | 22 | % | 776 | 22 | % | 749 | 21 | % | ||||||||||||||||
|
Other operating expenses, net
|
1 | -- | 7 | -- | 6 | -- | 19 | 1 | % | |||||||||||||||||||
| 1,521 | 85 | % | 1,517 | 86 | % | 3,022 | 85 | % | 3,001 | 86 | % | |||||||||||||||||
|
Income from operations
|
270 | 15 | % | 254 | 14 | % | 539 | 15 | % | 505 | 14 | % | ||||||||||||||||
|
OTHER INCOME (EXPENSES):
|
||||||||||||||||||||||||||||
|
Interest expense, net
|
(241 | ) | (219 | ) | (474 | ) | (423 | ) | ||||||||||||||||||||
|
Loss on extinguishment of debt
|
(53 | ) | (34 | ) | (120 | ) | (35 | ) | ||||||||||||||||||||
|
Other income (expenses), net
|
(2 | ) | 1 | (2 | ) | (2 | ) | |||||||||||||||||||||
| (296 | ) | (252 | ) | (596 | ) | (460 | ) | |||||||||||||||||||||
|
Income (loss) before income taxes
|
(26 | ) | 2 | (57 | ) | 45 | ||||||||||||||||||||||
|
INCOME TAX EXPENSE
|
(81 | ) | (83 | ) | (160 | ) | (102 | ) | ||||||||||||||||||||
|
Net loss
|
$ | (107 | ) | $ | (81 | ) | $ | (217 | ) | $ | (57 | ) | ||||||||||||||||
|
LOSS PER COMMON SHARE,
BASIC AND DILUTED
|
$ | (0.98 | ) | $ | (0.72 | ) | $ | (1.95 | ) | $ | (0.51 | ) | ||||||||||||||||
|
Weighted average common shares outstanding, basic and diluted
|
109,265,876 | 113,110,882 | 111,234,155 | 113,066,173 | ||||||||||||||||||||||||
Revenues
. Average monthly revenue per basic video customer increased to $134 for the three months ended June 30, 2011 from $124 for the three months ended June 30, 2010 and increased to $132 for the six months ended June 30, 2011 from $122 for the six months ended June 30, 2010. Average monthly revenue per basic video customer represents total revenue, divided by the number of respective months, divided by the average number of basic video customers during the respective period. Revenue growth primarily reflects increases in the number of residential telephone, commercial services, Internet customers, price increases, and incremental video revenues from DVR and
26
high-definition television services, offset by a decrease in basic video customers. Asset sales reduced the increase in revenues for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010 by approximately $18 million and $36 million, respectively.
Revenues by service offering were as follows (dollars in millions):
|
Three Months Ended
|
Three Months Ended
|
|||||||||||||||||||||||
|
June 30, 2011
|
June 30, 2010
|
2011 over 2010
|
||||||||||||||||||||||
|
Revenues
|
% of
Revenues
|
Revenues
|
% of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ | 903 | 51 | % | $ | 932 | 52 | % | $ | (29 | ) | (3 | %) | |||||||||||
|
Internet
|
419 | 23 | % | 402 | 23 | % | 17 | 4 | % | |||||||||||||||
|
Telephone
|
213 | 12 | % | 206 | 12 | % | 7 | 3 | % | |||||||||||||||
|
Commercial
|
141 | 8 | % | 121 | 7 | % | 20 | 17 | % | |||||||||||||||
|
Advertising sales
|
76 | 4 | % | 72 | 4 | % | 4 | 6 | % | |||||||||||||||
|
Other
|
39 | 2 | % | 38 | 2 | % | 1 | 3 | % | |||||||||||||||
| $ | 1,791 | 100 | % | $ | 1,771 | 100 | % | $ | 20 | 1 | % | |||||||||||||
|
Six Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||
|
June 30, 2011
|
June 30, 2010
|
2011 over 2010
|
||||||||||||||||||||||
|
Revenues
|
% of
Revenues
|
Revenues
|
% of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ | 1,811 | 51 | % | $ | 1,858 | 53 | % | $ | (47 | ) | (3 | %) | |||||||||||
|
Internet
|
831 | 23 | % | 797 | 23 | % | 34 | 4 | % | |||||||||||||||
|
Telephone
|
425 | 12 | % | 404 | 11 | % | 21 | 5 | % | |||||||||||||||
|
Commercial
|
278 | 8 | % | 239 | 7 | % | 39 | 16 | % | |||||||||||||||
|
Advertising sales
|
138 | 4 | % | 131 | 4 | % | 7 | 5 | % | |||||||||||||||
|
Other
|
78 | 2 | % | 77 | 2 | % | 1 | 1 | % | |||||||||||||||
| $ | 3,561 | 100 | % | $ | 3,506 | 100 | % | $ | 55 | 2 | % | |||||||||||||
Video revenues consist primarily of revenues from basic and digital video services provided to our non-commercial customers, as well as franchise fees, equipment rental and video installation revenue. Residential basic video customers decreased by 293,200 customers from June 30, 2010 compared to June 30, 2011, 59,600 of which were related to asset sales. Digital video customers increased by 49,200 during the same period, offset by asset sales of 35,500 customers. The decrease in video revenues is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Incremental video services and rate adjustments
|
$ | 2 | $ | 9 | ||||
|
Increase in digital video customers
|
9 | 23 | ||||||
|
Decrease in basic video customers
|
(29 | ) | (56 | ) | ||||
|
Asset sales
|
(11 | ) | (23 | ) | ||||
| $ | (29 | ) | $ | (47 | ) | |||
27
Residential Internet customers grew by 164,600 customers from June 30, 2010 to June 30, 2011. The increase was reduced by asset sales of 24,200 residential Internet customers. The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Increase in residential Internet customers
|
$ | 23 | $ | 47 | ||||
|
Rate adjustments and service level changes
|
(3 | ) | (7 | ) | ||||
|
Asset sales
|
(3 | ) | (6 | ) | ||||
| $ | 17 | $ | 34 | |||||
Average monthly revenue per residential Internet customer decreased during the three and six months ended June 30, 2011 compared to the corresponding periods in 2010 due to an increase in customers taking entry level products as a result of our speed upgrades offset by an increase in home networking customers.
Residential telephone customers grew by 89,500 customers from June 30, 2010 to June 30, 2011, offset by asset sales of 1,800 residential telephone customers. The increase in telephone revenues from our residential customers is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Increase in residential telephone customers
|
$ | 14 | $ | 31 | ||||
|
Rate adjustments and service upgrades
|
(6 | ) | (9 | ) | ||||
|
Asset sales
|
(1 | ) | (1 | ) | ||||
| $ | 7 | $ | 21 | |||||
Average monthly revenue per residential telephone customer decreased during the three and six months ended June 30, 2011 compared to the corresponding period in 2010 due to promotional activity to increase sales of The Charter Bundle
®
.
The increase in commercial revenues is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Sales to small-to-medium sized business customers
|
$ | 13 | $ | 24 | ||||
|
Carrier site customers
|
3 | 10 | ||||||
|
Other
|
5 | 7 | ||||||
|
Asset sales
|
(1 | ) | (2 | ) | ||||
| $ | 20 | $ | 39 | |||||
28
Increases in commercial revenues were the result of improved sales productivity and our strategic investments, such as DOCSIS 3.0. Commercial customers increased 27,800 from June 30, 2010 compared to June 30, 2011. The increase was reduced by asset sales of 7,300 commercial customers.
Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers, and other vendors. Advertising sales revenues for the three and six months ended June 30, 2011 increased primarily as a result of an increase in revenue from the automotive and retail sectors combined with a $3 million change to account for revenues received from selling advertising for third parties on a gross basis rather than a net basis. For the three months ended June 30, 2011 and 2010, we received $13 million and $11 million, respectively, and for the six months ended June 30, 2011 and 2010, we received $23 million and $21 million, respectively, in advertising sales revenues from vendors. Asset sales reduced the increase in advertising sales revenues for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010 by approximately $1 million and $2 million, respectively.
Other revenues consist of home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues. The increase in other revenues for the three and six months ended June 30, 2011 was primarily the result of increases in wire maintenance fees. Asset sales reduced the increase in other revenues for the three and six months ended June 30, 2011 as compared to the three and six months ended June 30, 2010 by approximately $1 million and $2 million, respectively.
Operating expenses
.
The increase in operating expenses is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Programming costs
|
$ | 16 | $ | 30 | ||||
|
Service labor costs
|
5 | 11 | ||||||
|
Commercial services
|
(1 | ) | 1 | |||||
|
Asset sales
|
(9 | ) | (19 | ) | ||||
| $ | 11 | $ | 23 | |||||
Programming costs were approximately $469 million and $459 million, representing 60% of total operating expenses, for the three months ended June 30, 2011 and 2010, respectively, and were approximately $935 million and $916 million, representing 60% of total operating expenses, for the six months ended June 30, 2011 and 2010, respectively. Programming costs consist primarily of costs paid to programmers for basic, premium, digital, OnDemand, and pay-per-view programming. The increase in programming costs is primarily a result of annual contractual rate adjustments, offset in part by asset sales and customer losses. Programming costs were also offset by the amortization of payments received from programmers of $2 million and $4 million for the three months ended June 30, 2011 and 2010, respectively, and $4 million and $8 million for the six months ended June 30, 2011 and 2010, respectively. We expect programming expenses to continue to increase, and at a higher rate than in 2010, due to a variety of factors, including amounts paid for retransmission consent, annual increases imposed by programmers, and additional programming, including high-definition, OnDemand, and pay-per-view programming, being provided to our customers.
29
Selling, general and administrative expenses.
The decrease in selling, general and administrative expenses is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Stock compensation
|
$ | 4 | $ | 5 | ||||
|
Commercial services
|
2 | 5 | ||||||
|
Other, net
|
3 | 1 | ||||||
|
Marketing costs
|
(6 | ) | 3 | |||||
|
Bad debt and collection costs
|
(6 | ) | (13 | ) | ||||
|
Customer care
|
(6 | ) | (8 | ) | ||||
|
Asset sales
|
(5 | ) | (9 | ) | ||||
| $ | (14 | ) | $ | (16 | ) | |||
The decrease in marketing costs for the three months ended June 30, 2011 and the increase for the six months ended June 30, 2011 includes approximately $7 million of favorable adjustments related to expenses previously accrued on 2010 marketing campaigns.
Depreciation and amortization.
Depreciation and amortization expense increased by $13 million and $27 million for the three and six months ended June 30, 2011 compared to the corresponding periods in 2010, respectively, primarily representing depreciation on capital expenditures, offset by certain assets becoming fully depreciated.
Other operating expenses, net.
The change in other operating expense, net is attributable to the following (dollars in millions):
|
Three months ended
June 30, 2011
compared to
three months ended
June 30, 2010
Increase / (Decrease)
|
Six months ended
June 30, 2011
compared to
six months ended
June 30, 2010
Increase / (Decrease)
|
|||||||
|
Special charges, net
|
$ | (4 | ) | $ | (10 | ) | ||
|
Loss on sales of assets, net
|
(2 | ) | (3 | ) | ||||
| $ | (6 | ) | $ | (13 | ) | |||
The change in special charges in the three and six months ended June 30, 2011 as compared to the prior periods is the result of litigation settlements plus severance charges. For more information, see Note 10 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”
Interest expense, net.
For the three and six months ended June 30, 2011 compared to June 30, 2010, net interest expense increased by $22 million and $51 million, respectively, which was primarily a result of an increase in our weighted average interest rate from 6.3% and 6.0% for the three and six months ended June 30, 2010 to 7.4% and 7.3% for the three and six months ended June 30, 2011 offset by a decrease in our weighted average debt outstanding from $12.8 billion and $13.0 billion for the three and six months ended June 30, 2010 to $12.6 billion and $12.5 billion for the three and six months ended June 30, 2011.
30
Loss on extinguishment of debt.
Loss on extinguishment of debt consists of the following for the periods presented:
|
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Charter Operating credit facility prepayments
|
$ | (53 | ) | $ | -- | $ | (120 | ) | $ | -- | ||||||
|
CCO Holdings and Charter Operating notes repurchases
|
-- | (34 | ) | -- | (34 | ) | ||||||||||
|
Charter Operating credit facility amendment
|
-- | -- | -- | (1 | ) | |||||||||||
| $ | (53 | ) | $ | (34 | ) | $ | (120 | ) | $ | (35 | ) | |||||
For more information, see Note 4 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”
Income tax expense.
Income tax expense was recognized for the three and six months ended June 30, 2011 and 2010, through increases in deferred tax liabilities related to our investment in Charter Holdco and certain of our indirect subsidiaries, in addition to current federal and state income tax expense. Income tax expense for the three and six months ended June 30, 2011 included an $8 million expense for a state tax law change.
Income tax expense for the six months ended June 30, 2010
included a $69 million benefit related to the February 8, 2010 Charter Holdco partnership interest exchange.
Net loss.
Net loss increased by $26 million for the three months ended June 30, 2011 compared to the three months ended June 30, 2010, and by $160 million for the six months ended June 30, 2011 compared to the six months ended June 30, 2010, primarily a result of an increase in loss on extinguishment of debt and higher interest expense.
Loss per common share.
During the three months ended June 30, 2011 compared to the three months ended June 30, 2010, net loss per common share increased by $0.26 and during the six months ended June 30, 2011 compared to the six months ended June 30, 2010 net loss per common share increased by $1.44 as a result of the factors described above.
Use of Adjusted EBITDA
and Free Cash Flow
We use certain measures that are not defined by accounting principles generally accepted in the United States (“GAAP”) to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net loss and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net loss and net cash flows from operating activities, respectively, below.
Adjusted EBITDA is defined as net loss plus net interest expense, income taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, and other expenses, such as special charges, loss on sale or retirement of assets and reorganization items. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. Adjusted EBITDA is used by management and Charter’s board of directors to evaluate the performance of our business. For this reason, it is a significant component of Charter’s annual incentive compensation program. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. Management evaluates these costs through other financial measures.
Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.
We believe that Adjusted EBITDA and free cash flow provide information useful to investors in assessing our performance and our ability to service our debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the United States Securities and Exchange Commission).
31
Adjusted EBITDA includes management fee expenses in the amount of $35 million and $36 million for the three months ended June 30, 2011 and 2010, respectively, and $70 million and $71 million for the six months ended June 30, 2011 and 2010, respectively, which expense amounts are excluded for the purposes of calculating compliance with leverage covenants.
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Net loss
|
$ | (107 | ) | $ | (81 | ) | $ | (217 | ) | $ | (57 | ) | ||||
|
Plus: Interest expense, net
|
241 | 219 | 474 | 423 | ||||||||||||
|
Income tax expense
|
81 | 83 | 160 | 102 | ||||||||||||
|
Depreciation and amortization
|
393 | 380 | 776 | 749 | ||||||||||||
|
Stock compensation expense
|
9 | 5 | 15 | 10 | ||||||||||||
|
Loss on extinguishment of debt
|
53 | 34 | 120 | 35 | ||||||||||||
|
Other, net
|
3 | 6 | 8 | 21 | ||||||||||||
|
Adjusted EBITDA
|
$ | 673 | $ | 646 | $ | 1,336 | $ | 1,283 | ||||||||
|
Net cash flows from operating activities
|
$ | 460 | $ | 451 | $ | 907 | $ | 981 | ||||||||
|
Less: Purchases of property, plant and equipment
|
(324 | ) | (339 | ) | (680 | ) | (649 | ) | ||||||||
|
Change in accrued expenses related to capital expenditures
|
19 | 15 | -- | -- | ||||||||||||
|
Free cash flow
|
$ | 155 | $ | 127 | $ | 227 | $ | 332 | ||||||||
Liquidity and Capital Resources
This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt. The accreted value of our debt as of June 30, 2011 was $12.6 billion, consisting of $3.4 billion of credit facility debt and $9.2 billion of notes. Our business requires significant cash to fund principal and interest payments on our debt. For the remainder of 2011, $16 million of our debt matures. As of June 30, 2011, $1.1 billion of our debt matures in 2012, $230 million in 2013, $1.0 billion in 2014, $30 million in 2015, $4.6 billion in 2016 and $5.5 billion thereafter. As of December 31, 2010, as shown in our annual report on Form 10-K, we had other contractual obligations totaling $646 million. We also expect to incur capital expenditures of approximately $1.3 billion to $1.4 billion for 2011.
Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. Free cash flow was $155 million and $227 million for the three months and six months ended June 30, 2011, respectively. We expect to continue to generate free cash flow. As of June 30, 2011, the amount available under our revolving credit facility was approximately $1.2 billion. We expect to utilize free cash flow and availability under our revolving credit facilities as well as future refinancing transactions to further extend or reduce the maturities of our principal obligations. The timing and terms of any refinancing transactions will be subject to market conditions. Additionally, we may, from time to time, depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings, to retire our debt through open market purchases, privately negotiated purchases, tender offers, or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Communications Operating, LLC’s (“Charter Operating”) revolving credit facility as well as access to the capital markets to fund our projected operating cash needs.
We continue to evaluate the deployment of our anticipated future free cash flow including to reduce our leverage, to invest in our business growth and other strategic opportunities, including mergers and acquisitions as well as stock repurchases and dividends. As possible acquisitions, swaps or dispositions arise in our industry, we actively review them against our objectives including, among other considerations, improving the operational efficiency and
32
clustering of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities. Although we are actively analyzing and considering several such possibilities, we do not believe any of these are both probable and material, and there can be no assurance that we will actually complete any acquisition, disposition or system swap or that any such transactions will be material to our operations or results.
Free Cash Flow
Free cash flow was $155 million and $127 million for the three months ended June 30, 2011 and 2010, respectively, and $227 million and $332 million for the six months ended June 30, 2011 and 2010, respectively. The decrease in free cash flow
for the six months ended June 30, 2011 compared to the corresponding period in 2010
is primarily due to changes in operating assets and liabilities, excluding the change in accrued interest, that provided $72 million less cash during the same period of 2011, an increase of $65 million in cash paid for interest primarily related to higher interest rates as part of refinancings, net of timing of interest payments, and an increase of $31 million in capital expenditures. The $72 million reduction in cash provided by changes in operating assets and liabilities is driven by one-time benefits in the first half of 2010 post emergence from bankruptcy along with timing of payments in 2011.
Limitations on Distributions
Distributions by Charter’s subsidiaries to a parent company for payment of principal on parent company notes are restricted under indentures and credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution. For the quarter ended June 30, 2011, there was no default under any of these indentures or credit facilities and each subsidiary met its applicable leverage ratio tests based on June 30, 2011 financial results. Such distributions would be restricted, however, if any such subsidiary fails to meet these tests at the time of the contemplated distribution. In the past, certain subsidiaries have from time to time failed to meet their leverage ratio test. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in its credit facilities.
Distributions by CCO Holdings, LLC (“CCO Holdings”) and Charter Operating to a parent company for payment of parent company interest are permitted if there is no default under the aforementioned indentures and CCO Holdings and Charter Operating credit facilities.
In addition to the limitation on distributions under the various indentures discussed above, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act.
Historical Operating, Investing and Financing Activities
Cash and Cash Equivalents.
We held $194 million in cash and cash equivalents, including restricted cash of $28 million, as of June 30, 2011 compared to $32 million as of December 31, 2010.
Operating Activities.
Net cash provided by operating activities decreased $74 million from $981 million for the six months ended June 30, 2010 to $907 million for the six months ended June 30, 2011, primarily as a result of changes in operating assets and liabilities, excluding the change in accrued interest, that provided $72 million less cash during the same period driven by one-time benefits in the first half of 2010 post emergence from bankruptcy along with timing of payments in 2011 and an increase of $65 million in cash paid for interest primarily related to higher interest rates as part of refinancings, net of timing of interest payments, offset by revenues increasing at a faster rate than cash expenses.
Investing Activities.
Net cash used in investing activities was $694 million and $653 million for the six months ended June 30, 2011 and 2010, respectively. The increase is primarily due to an increase of $31 million in purchases of property, plant, and equipment as a result of capital investments to enhance our residential and commercial products and services capabilities.
Financing Activities.
Net cash used in financing activities was $51 million and $1.0 billion for the six months ended June 30, 2011 and 2010, respectively. The decrease in cash used during the six months
33
ended June 30, 2011 as compared to the corresponding period in 2010, was primarily the result of increased borrowings of long-term debt, offset by increased repayments of long-term debt and purchase of treasury stock.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were $680 million and $649 million for the six months ended June 30, 2011 and 2010, respectively, and increased as a result of investments made to move into new commercial segments, incremental capital for storm-related damage, and bandwidth reclamation projects such as switched-digital video launches.
During 2011, we expect capital expenditures to be between $1.3 billion and $1.4 billion. We expect the nature of these expenditures will continue to be composed primarily of purchases of customer premise equipment related to advanced video services, scalable infrastructure and support capital. The actual amount of our capital expenditures depends in part on the deployment of advanced video services and offerings. Capital expenditures will increase if there is accelerated growth in Internet, telephone, commercial business or digital customers or there is an increased need to respond to competitive pressures by expanding the delivery of other advanced video services.
Our capital expenditures are funded primarily from free cash flow and borrowings on our credit facility.
The following table presents our major capital expenditures categories in accordance with NCTA disclosure guidelines for the three and six months ended June 30, 2011 and 2010. The disclosure is intended to provide more consistency in the reporting of capital expenditures among peer companies in the cable industry. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Customer premise equipment (a)
|
$ | 130 | $ | 140 | $ | 287 | $ | 296 | ||||||||
|
Scalable infrastructure (b)
|
85 | 108 | 207 | 195 | ||||||||||||
|
Line extensions (c)
|
29 | 22 | 49 | 38 | ||||||||||||
|
Upgrade/Rebuild (d)
|
7 | 7 | 12 | 16 | ||||||||||||
|
Support capital (e)
|
73 | 62 | 125 | 104 | ||||||||||||
|
Total capital expenditures (f)
|
$ | 324 | $ | 339 | $ | 680 | $ | 649 | ||||||||
|
(a)
|
Customer premise equipment includes costs incurred at the customer residence to secure new customers, revenue units and additional bandwidth revenues. It also includes customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems, etc.).
|
|
(b)
|
Scalable infrastructure includes costs not related to customer premise equipment or our network, to secure growth of new customers, revenue units, and additional bandwidth revenues, or provide service enhancements (e.g., headend equipment).
|
|
(c)
|
Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
|
|
(d)
|
Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.
|
|
(e)
|
Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).
|
|
(f)
|
Total capital expenditures includes $45 million and $34 million of capital expenditures related to commercial services for the three months ended June 30, 2011 and 2010, respectively, and $72 million and $52 million for the six months ended June 30, 2011 and 2010, respectively.
|
34
We are exposed to various market risks, including fluctuations in interest rates. We have used interest rate swap agreements
to manage our interest costs and reduce our exposure to increases in floating interest rates
. We manage our exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt. Using interest rate swap agreements, we agree to exchange, at specified intervals through 2015, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.
As of June 30, 2011 and December 31, 2010, the accreted value of our debt was approximately $12.6 billion and $12.3 billion, respectively. As of June 30, 2011 and December 31, 2010, the weighted average interest rate on the credit facility debt, including the effects of our interest rate swap agreements, was approximately 4.4% and 3.8%, respectively, and the weighted average interest rate on the notes was approximately 8.8% and 9.7%, respectively, resulting in a blended weighted average interest rate of 7.5% and 6.7%, respectively. The interest rate on approximately 87% and 65% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate swap agreements, as of June 30, 2011 and December 31, 2010, respectively.
We do not hold or issue derivative instruments for speculative trading purposes. We have interest rate derivative instruments that have been designated as cash flow hedging instruments. Such instruments effectively convert variable interest payments on certain debt instruments into fixed payments. For qualifying hedges, derivative gains and losses offset related results on hedged items in the consolidated statements of operations. We have formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting.
For the three and six months ended June 30, 2011 and 2010, there was no cash flow hedge ineffectiveness on interest rate swap agreements.
Changes in the fair value of interest rate agreements that are designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, and that meet effectiveness criteria are reported in other comprehensive loss. For the three and six months ended June 30, 2011, losses of $20 million and $9 million, respectively, and for each of the three and six months ended
June 30, 2010
, losses of $50 million related to derivative instruments designated as cash flow hedges, were recorded in other comprehensive loss. The amounts are subsequently reclassified as an increase or decrease to interest expense in the same periods in which the related interest on the floating-rate debt obligations affects earnings (losses).
The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of June 30, 2011 (dollars in millions):
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016 |
Thereafter
|
Total
|
Fair Value at
June
30, 2011
|
||||||||||||||||||||||||||||
|
Debt:
|
||||||||||||||||||||||||||||||||||||
| Fixed Rate | $ | -- | $ | 1,100 | $ | -- | $ | 546 | $ | -- | $ | 1,766 | $ | 5,500 | $ | 8,912 | $ | 9,468 | ||||||||||||||||||
| Average Interest Rate | -- | 8.00 | % | -- | 10.88 | % | -- | 13.50 | % | 7.20 | % | 8.77 | % | |||||||||||||||||||||||
|
Variable Rate
|
$ | 16 | $ | 31 | $ | 230 | $ | 467 | $ | 30 | $ | 2,835 | $ | -- | $ | 3,609 | $ | 3,584 | ||||||||||||||||||
|
Average Interest Rate
|
3.57 | % | 3.94 | % | 3.47 | % | 5.02 | % | 6.60 | % | 7.26 | % | -- | 6.68 | % | |||||||||||||||||||||
|
Interest Rate Instruments:
|
||||||||||||||||||||||||||||||||||||
|
Variable to Fixed Rate
|
$ | -- | $ | -- | $ | 900 | $ | 800 | $ | 300 | $ | -- | $ | -- | $ | 2,000 | $ | 66 | ||||||||||||||||||
|
Average Pay Rate
|
-- | -- | 5.21 | % | 5.65 | % | 5.99 | % | -- | -- | 5.50 | % | ||||||||||||||||||||||||
|
Average Receive Rate
|
-- | -- | 4.68 | % | 5.55 | % | 6.30 | % | -- | -- | 5.27 | % | ||||||||||||||||||||||||
At June 30, 2011, we had $2.0 billion in notional amounts of interest rate swaps outstanding. The notional amounts of interest rate instruments do not represent amounts exchanged by the parties and, thus, are not a measure of our exposure to credit loss. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The estimated fair value is determined using a present value calculation based on an implied forward LIBOR curve (adjusted for Charter Operating’s or counterparties’ credit risk). Interest rates on variable debt are estimated using the average implied forward LIBOR for the year of maturity based on the yield curve in effect at June 30, 2011 including applicable bank spread.
35
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this quarterly report. The evaluation was based in part upon reports and certifications provided by a number of executives. Based upon, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, we believe that our controls provide such reasonable assurances.
There was no change in our internal control over financial reporting during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
36
Bankruptcy Proceedings
On March 27, 2009, Charter filed its Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. On the same day, JPMorgan Chase Bank, N.A., (“JPMorgan”), for itself and as Administrative Agent under the Charter Operating Credit Agreement, filed an adversary proceeding (the “JPMorgan Adversary Proceeding”) in Bankruptcy Court against Charter Operating and CCO Holdings seeking a declaration that there were events of default under the Charter Operating Credit Agreement. JPMorgan, as well as other parties, objected to the Plan. The Bankruptcy Court jointly held 19 days of trial in the JPMorgan Adversary Proceeding and on the objections to the Plan.
On November 17, 2009, the Bankruptcy Court issued its Order and Opinion confirming the Plan over the objections of JPMorgan and various other objectors. The Court also entered an order ruling in favor of Charter in the JPMorgan Adversary Proceeding. Several objectors attempted to stay the consummation of the Plan, but those motions were denied by the Bankruptcy Court and the U.S. District Court for the Southern District of New York. Charter consummated the Plan on November 30, 2009 and reinstated the Charter Operating Credit Agreement and certain other debt of its subsidiaries.
Six appeals were filed relating to confirmation of the Plan. The parties initially pursuing appeals were: (i) JPMorgan; (ii) Wilmington Trust Company (“Wilmington Trust”) (as indenture trustee for the holders of the 8% Senior Second Lien Notes due 2012 and 8.375% senior second lien notes due 2014 issued by and among Charter Operating and Charter Communications Operating Capital Corp. and the 10.875% senior second lien notes due 2014 issued by and among Charter Operating and Charter Communications Operating Capital Corp.); (iii) Wells Fargo Bank, N.A. (“Wells Fargo”) (in its capacities as successor Administrative Agent and successor Collateral Agent for the third lien prepetition secured lenders to CCO Holdings under the CCO Holdings credit facility); (iv) Law Debenture Trust Company of New York (“Law Debenture Trust”) (as the Trustee with respect to the $479 million in aggregate principal amount of 6.50% convertible senior notes due 2027 issued by Charter which are no longer outstanding following consummation of the Plan); (v) R2 Investments, LDC (“R2 Investments”) (an equity interest holder in Charter); and (vi) certain plaintiffs representing a putative class in a securities action against three former Charter officers or directors filed in the United States District Court for the Eastern District of Arkansas (Iron Workers Local No. 25 Pension Fund, Indiana Laborers Pension Fund, and Iron Workers District Council of Western New York and Vicinity Pension Fund, in the action styled
Iron Workers Local No. 25 Pension Fund v. Allen, et al.
, Case No. 4:09-cv-00405-JLH (E.D. Ark.).
Charter Operating amended its senior secured credit facilities effective March 31, 2010. In connection with the closing of these amendments, each of Bank of America, N.A. and JPMorgan, for itself and on behalf of the lenders under the Charter Operating senior secured credit facilities, agreed to dismiss the appeal of our Confirmation Order pending before the District Court for the Southern District of New York and to waive any objections to our Confirmation Order issued by the United States Bankruptcy Court for the Southern District of New York. The lenders filed their stipulation of that dismissal and waiver of objections and in April 2010, the case was dismissed. On December 3, 2009, Wilmington Trust withdrew its notice of appeal. In April 2010, Wells Fargo filed its Stipulation of Dismissal of their appeal on behalf of the lenders under the CCO Holdings credit facility and in April 2010, the case was dismissed. The appeals by Law Debenture Trust and R2 Investments were denied by the District Court for the Southern District of New York in March 2011. A Notice of Appeal of that denial has been filed by both Law Debenture Trust and R2. The appeals of the securities plaintiffs were denied by the District Court for the Southern District of New York in July 2011. We cannot predict the ultimate outcome of the appeals.
Other Proceedings
We have had communications with the United States Environmental Protection Agency (“the EPA”) in connection with a self reporting audit which may result in a proceeding. Pursuant to the audit, we discovered certain compliance issues concerning our reports to the EPA for backup batteries used at our facilities. We do not view these matters as material.
37
We also are party to other lawsuits and claims that arise in the ordinary course of conducting our business. The ultimate outcome of these other legal matters pending against us or our subsidiaries cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on our consolidated financial condition, results of operations, or liquidity, such lawsuits could have in the aggregate a material adverse effect on our consolidated financial condition, results of operations, or liquidity. Whether or not we ultimately prevail in any particular lawsuit or claim, litigation can be time consuming and costly and injure our reputation.
Our Annual Report on Form 10-K for the year ended December 31, 2010 includes “Risk Factors” under Item 1A of Part I. Except for the updated risk factors described below, there have been no material changes from the risk factors described in our Form 10-K. The information below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.
Risks Related to Regulatory and Legislative Matters
Our business is subject to extensive governmental legislation and regulation, which could adversely affect our business.
Regulation of the cable industry has increased cable operators' operational and administrative expenses and limited their revenues. Cable operators are subject to, among other things:
|
·
|
rules governing the provision of cable equipment and compatibility with new digital technologies;
|
|
·
|
rules and regulations relating to subscriber and employee privacy and data security;
|
|
·
|
limited rate regulation;
|
|
·
|
rules governing the copyright royalties that must be paid for retransmitting broadcast signals;
|
|
·
|
requirements governing when a cable system must carry a particular broadcast station and when it must first obtain retransmission consent to carry a broadcast station;
|
|
·
|
requirements governing the provision of channel capacity to unaffiliated commercial leased access programmers;
|
|
·
|
rules limiting our ability to enter into exclusive agreements with multiple dwelling unit complexes and control our inside wiring;
|
|
·
|
rules, regulations, and regulatory policies relating to provision of high-speed Internet service, including net neutrality rules;
|
|
·
|
rules, regulations, and regulatory policies relating to provision of voice communications;
|
|
·
|
rules for franchise renewals and transfers; and
|
|
·
|
other requirements covering a variety of operational areas such as equal employment opportunity, emergency alert systems, technical standards, and customer service requirements.
|
Additionally, many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. In March 2010, the FCC submitted its National Broadband Plan to Congress and announced its intention to initiate approximately 40 rulemakings addressing a host of issues related to the delivery of broadband services, including video, data, VoIP and other services. The broad reach of these rulemakings could ultimately impact the environment in which we operate. On December 21, 2010, the FCC enacted new “net neutrality” rules, regulating the provision of broadband Internet access. There are also ongoing efforts to amend or expand the federal, state, and local regulation of some of our cable systems, which may compound the regulatory risks we already face, and proposals that might make it easier for our employees to unionize. For example, Congress and various federal agencies are now considering adoption of significant new privacy restrictions, including new restrictions on the use of personal and profiling information for behavioral advertising. In response to recent global data breaches, malicious activity and cyber threats, as well as the general increasing concerns regarding the protection of consumers’ personal information, Congress is considering the adoption of new data security and cybersecurity legislation that could result in additional network and information security requirements for our business. In the event of a data breach or cyber attack, these new laws, as well as existing legal and regulatory obligations, could require significant expenditures to remedy any such breach or attack. In addition, the Twenty-First Century Communications and Video Accessibility Act of 2010, which the FCC is now in the process of implementing, includes various provisions intended to ensure communications services are accessible to people
38
with disabilities. Certain states and localities are considering new cable and telecommunications taxes that could increase operating expenses.
Our cable system franchises are subject to non-renewal or termination. The failure to renew a franchise in one or more key markets could adversely affect our business.
Our cable systems generally operate pursuant to franchises, permits, and similar authorizations issued by a state or local governmental authority controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, local franchises have not been renewed at expiration, and we have operated and are operating under either temporary operating agreements or without a franchise while negotiating renewal terms with the local franchising authorities.
The traditional cable franchising regime is currently undergoing significant change as a result of various federal and state actions. Some of the new state franchising laws do not allow us to immediately opt into favorable statewide franchising. In many cases, state franchising laws, and their varying application to us and new video providers, will result in less franchise imposed requirements for our competitors, who are new entrants, than for us until we are able to opt into the applicable state franchise.
We cannot assure you that we will be able to comply with all significant provisions of our franchise agreements and certain of our franchisors have from time to time alleged that we have not complied with these agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, we cannot assure you that we will be able to renew, or to renew as favorably, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect our business in the affected geographic area.
Our cable system franchises are non-exclusive. Accordingly, local and state franchising authorities can grant additional franchises and create competition in market areas where none existed previously, resulting in overbuilds, which could adversely affect results of operations.
Our cable system franchises are non-exclusive. Consequently, local and state franchising authorities can grant additional franchises to competitors in the same geographic area or operate their own cable systems. In some cases, local government entities and municipal utilities may legally compete with us without obtaining a franchise from the local franchising authority. In addition, certain telephone companies are seeking authority to operate in communities without first obtaining a local franchise. As a result, competing operators may build systems in areas in which we hold franchises.
In a series of rulemakings, the FCC adopted new rules that streamline entry for new competitors (particularly those affiliated with telephone companies) and reduce franchising burdens for these new entrants. At the same time, a substantial number of states have adopted new franchising laws principally designed to streamline entry for new competitors, and often provide advantages for these new entrants that are not immediately available to existing operators.
Actions by pole owners might subject us to significantly increased pole attachment costs.
Pole attachments are cable wires that are attached to utility poles. Cable system attachments to investor-owned public utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates for attachments used to provide cable service. In contrast, utility poles owned by municipalities or cooperatives are not subject to federal regulation and are generally exempt from state regulation. On April 7, 2011, the FCC amended its pole attachment rules to promote broadband deployment. The new order (the "Order") maintains the basic rate formula applicable to "cable" attachments in the 30 states directly subject to FCC regulation, but reduces the rate formula previously applicable to "telecommunications" attachments to make it roughly equivalent to the cable attachment rate. Although the Order maintains the status quo treatment of cable-provided VoIP service as an unclassified service eligible for the favorable cable rate, there is still some uncertainty in this
39
area. The Order also allows for new penalties in certain cases involving unauthorized attachments that could result in additional costs for cable operators. The new Order overall strengthens the cable industry's ability to access investor-owned utility poles on reasonable rates, terms and conditions. Electric utilities, however, have filed Petitions for Reconsideration at the FCC and Petitions for Review in the D.C. Circuit Court of Appeals seeking to modify or overturn the FCC’s Order. Charter and other cable operators have intervened in the court proceeding.
Increasing regulation of our Internet service product could adversely affect our ability to provide new products and services.
In August 2005, the FCC issued a nonbinding policy statement identifying four principles it deemed necessary to ensure continuation of an “open” Internet that is not unduly restricted by network “gatekeepers.” In August 2008, the FCC issued an order concerning one Internet network management practice in use by another cable operator, effectively treating the four principles as rules and ordering a change in that operator’s network management practices. On April 6, 2010, the United States Court of Appeals for the D.C. Circuit concluded that the FCC lacked jurisdictional authority and vacated the FCC’s 2008 order. On December 21, 2010, the FCC responded by enacting new “net neutrality” rules based on three core principles of: (1) transparency, (2) no blocking, and (3) no unreasonable discrimination. The “transparency” rule requires broadband Internet access providers to disclose applicable terms, performance, and network management practices to consumers and third party users. The “no blocking” rule restricts Internet access providers from blocking lawful content, applications, services, or devices. The “no unreasonable discrimination” rule prohibits Internet access providers from engaging in unreasonable discrimination in transmitting lawful traffic. The new rules will permit broadband service providers to exercise “reasonable network management” for legitimate management purposes, such as management of congestion, harmful traffic, and network security. The rules will also permit usage-based billing, and permit broadband service providers to offer additional specialized services such as facilities-based IP voice services, without being subject to restrictions on discrimination. These rules do not become effective until 60 days following the announcement in the Federal Register of the Office of Management and Budget’s decision regarding the information collection requirements associated with the new rules. The Office of Management and Budget did not commence its proceeding regarding the proposed requirements until early July 2011. Assuming they become effective, the FCC will enforce these rules based on case-by-case complaints. Although the new rules encompass both wireline providers (like us) and wireless providers, the rules are less stringent with regard to wireless providers. The FCC premised the new “net neutrality” rules on its Title I and ancillary jurisdiction. An initial appeal filed by Verizon was rejected by the court on procedural grounds, but it is expected that Verizon will refile in due course. A legislative review is also possible. The FCC’s new rules, if they withstand such challenges, as well as any additional legislation or regulation, could impose new obligations and restraints on high-speed Internet providers. Any such rules or statutes could limit our ability to manage our cable systems to obtain value for use of our cable systems and respond to operational and competitive challenges.
Changes in channel carriage regulations could impose significant additional costs on us.
Cable operators also face significant regulation of their channel carriage. We can be required to devote substantial capacity to the carriage of programming that we might not carry voluntarily, including certain local broadcast signals; local public, educational and government access (“PEG”) programming; and unaffiliated, commercial leased access programming (required channel capacity for use by persons unaffiliated with the cable operator who desire to distribute programming over a cable system). Under FCC regulations, most cable systems are currently required to offer both an analog and digital version of local broadcast signals. This burden could increase further if we are required to carry multiple programming streams included within a single digital broadcast transmission (multicast carriage) or if our broadcast carriage obligations are otherwise expanded. Pursuant to recent copyright legislation, the Copyright Office and the General Accounting Office are now conducting proceedings exploring the feasibility of phasing out the compulsory copyright license through which cable systems have retransmitted broadcast programming since 1976. At the same time, the cost that cable operators face to secure retransmission consent (separate from copyright authority) for the carriage of popular broadcast stations is increasing significantly. The FCC also adopted new commercial leased access rules (currently stayed while under appeal) which dramatically reduce the rate we can charge for leasing this capacity and dramatically increase our associated administrative burdens. The FCC recently adopted amendments, and is currently considering additional amendments, to its program carriage rules that provide additional rights to programmers dissatisfied with their carriage arrangements with cable and satellite companies to pursue complaints against these companies at the FCC. These regulatory changes could disrupt existing programming commitments, interfere with our preferred use of limited channel capacity, increase our programming
costs, and limit our ability to offer services that would maximize our revenue
40
potential. It is possible that other legal restraints will be adopted limiting our discretion over programming decisions.
Offering voice communications service may subject us to additional regulatory burdens, causing us to incur additional costs.
We offer voice communications services over our broadband network and continue to develop and deploy VoIP services. The FCC has declared that certain VoIP services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of state and local regulation of VoIP services is not yet clear. Expanding our offering of these services may require us to obtain certain additional authorizations. We may not be able to obtain such authorizations in a timely manner, or conditions could be imposed upon such licenses or authorizations that may not be favorable to us. The FCC has extended certain traditional telecommunications carrier requirements, such as E911, Universal Service fund collection, CALEA, Customer Proprietary Network Information, number porting and telephone relay requirements to many VoIP providers such as us. There is a pending FCC proposal that might extend new inter-carrier compensation rules to VoIP traffic. Within the next year, the FCC is likely to change the rules that govern intercarrier compensation payments that Charter pays to other carriers to have calls terminated to their local telephone subscribers, and that Charter receives from other carriers to terminate calls made to Charter telephone subscribers. It is expected that intercarrier compensation revenues and expenses would both decline as a result of reform, but we cannot predict with certainty the details of these new rules and the extent to which it could affect Charter's revenues and expenses for its telephone services.
Telecommunications companies generally are subject to other significant regulation which could also be extended to VoIP providers. If additional telecommunications regulations are applied to our VoIP service, it could cause us to incur additional costs.
The index to the exhibits begins on page E-1 of this quarterly report.
41
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications, Inc. has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHARTER COMMUNICATIONS, INC.,
Registrant
|
Dated: August 2, 2011
|
By:
/s/ Kevin D. Howard
|
|
|
Name:
|
Kevin D. Howard
|
|
|
Title:
|
Senior Vice President - Finance, Controller and Chief Accounting Officer
|
|
S-1
|
Exhibit
|
Description
|
|
10.1+*
|
Form of Non-Qualified Price Vesting Stock Option Agreement for Chief Executive Officer dated April 26, 2011.
|
|
10.2+*
|
Form of Non-Qualified Price Vesting Stock Option Agreement dated April 26, 2011.
|
|
10.3+*
|
Form of Non-Qualified Time Vesting Stock Option Agreement dated April 26, 2011.
|
|
10.4+*
|
Form of Restricted Stock Unit Agreement dated April 26, 2011.
|
|
10.5+*
|
Amended and Restated 2009 Stock Incentive Plan dated as of July 26, 2011.
|
|
12.1*
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
31.1*
|
Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the under the Securities Exchange Act of 1934.
|
|
31.2*
|
Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.
|
|
32.1*
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
|
|
32.2*
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
|
|
101
|
The following financial statements from Charter Communications, Inc.’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2011, filed with the Securities and Exchange Commission on August 2, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements.
|
* Document attached
+ Management compensatory plan or arrangement
E-1
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 6. Exhibits