10-Q 1 chtr93013-10q.htm 10-Q CHTR 9.30.13 - 10Q


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 September 30, 2013
or
 
 
 
o
 
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)
Delaware
 
43-1857213
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
400 Atlantic Street, 10th Floor
Stamford, Connecticut 06901
 
(203) 905-7801
(Address of principal executive offices including zip code)
 
(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 x No o

Indicate by check mark whether the registrants have submitted electronically and posted on their 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 registrants were required to submit and post such files). Yes x 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 x    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 x

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 x No o

Number of shares of Class A common stock outstanding as of September 30, 2013: 104,132,858








CHARTER COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 2013

TABLE OF CONTENTS

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2013. 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.
 



i



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,” “designed,” “create” 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, in our annual report on Form 10-K, and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

our ability to sustain and grow revenues and cash flow from operations 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;

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, digital subscriber line (“DSL”) providers, and video provided over the Internet;

general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;

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);

the development and deployment of new products and technologies;

the effects of governmental regulation on our business;

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

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.
 
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.


ii



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
 
September 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
41

 
$
7

Restricted cash and cash equivalents

 
27

Accounts receivable, less allowance for doubtful accounts of
 
 
 
$15 and $14, respectively
235

 
234

Prepaid expenses and other current assets
81

 
62

Total current assets
357

 
330

 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
Property, plant and equipment, net of accumulated
 
 
 
depreciation of $4,673 and $3,563, respectively
7,838

 
7,206

Franchises
6,009

 
5,287

Customer relationships, net
1,465

 
1,424

Goodwill
1,159

 
953

Total investment in cable properties, net
16,471

 
14,870

 
 
 
 
OTHER NONCURRENT ASSETS
422

 
396

 
 
 
 
Total assets
$
17,250

 
$
15,596

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
1,382

 
$
1,224

Total current liabilities
1,382

 
1,224

 
 
 
 
LONG-TERM DEBT
14,306

 
12,808

DEFERRED INCOME TAXES
1,432

 
1,321

OTHER LONG-TERM LIABILITIES
69

 
94

 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
Class A common stock; $.001 par value; 900 million shares authorized;
 
 
 
104,246,203 and 101,176,247 shares issued, respectively

 

Class B common stock; $.001 par value; 25 million shares authorized;
 
 
 
no shares issued and outstanding

 

Preferred stock; $.001 par value; 250 million shares authorized;
 
 
 
no shares issued and outstanding

 

Additional paid-in capital
1,720

 
1,616

Accumulated deficit
(1,600
)
 
(1,392
)
Treasury stock at cost; 113,345 and 0 shares, respectively
(11
)
 

Accumulated other comprehensive loss
(48
)
 
(75
)
Total shareholders’ equity
61

 
149

 
 
 
 
Total liabilities and shareholders’ equity
$
17,250

 
$
15,596


The accompanying notes are an integral part of these condensed consolidated financial statements.
1



CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share and share data)
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
REVENUES
$
2,118

 
$
1,880

 
$
6,007

 
$
5,591

 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
Operating costs and expenses (excluding depreciation and amortization)
1,397

 
1,242

 
3,950

 
3,632

Depreciation and amortization
493

 
424

 
1,354

 
1,247

Other operating expenses, net
8

 
3

 
24

 
2

 
 
 
 
 
 
 
 
 
1,898

 
1,669

 
5,328

 
4,881

 
 
 
 
 
 
 
 
Income from operations
220

 
211

 
679

 
710

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
Interest expense, net
(214
)
 
(229
)
 
(635
)
 
(691
)
Loss on extinguishment of debt

 

 
(123
)
 
(74
)
Gain (loss) on derivative instruments, net
(8
)
 

 
9

 

Other expense, net
(11
)
 

 
(14
)
 
(1
)
 
 
 
 
 
 
 
 
 
(233
)
 
(229
)
 
(763
)
 
(766
)
 
 
 
 
 
 
 
 
Loss before income taxes
(13
)
 
(18
)
 
(84
)
 
(56
)
 
 
 
 
 
 
 
 
Income tax expense
(57
)
 
(69
)
 
(124
)
 
(208
)
 
 
 
 
 
 
 
 
Net loss
$
(70
)
 
$
(87
)
 
$
(208
)
 
$
(264
)
 
 
 
 
 
 
 
 
LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(0.68
)
 
$
(0.87
)
 
$
(2.05
)
 
$
(2.65
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
102,924,443

 
99,694,672

 
101,293,696

 
99,542,021


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in millions)
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net loss
$
(70
)
 
$
(87
)
 
$
(208
)
 
$
(264
)
Net impact of gains (losses) on interest rate derivative instruments, net of tax
8

 
(7
)
 
27

 
(18
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(62
)
 
$
(94
)
 
$
(181
)
 
$
(282
)

The accompanying notes are an integral part of these condensed consolidated financial statements.
2



CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Unaudited
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(208
)
 
$
(264
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
1,354

 
1,247

Noncash interest expense
 
33

 
33

Loss on extinguishment of debt
 
123

 
74

Gain on derivative instruments, net
 
(9
)
 

Deferred income taxes
 
112

 
203

Other, net
 
69

 
25

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
 
Accounts receivable
 
10

 
18

Prepaid expenses and other assets
 
(13
)
 
(12
)
Accounts payable, accrued liabilities and other
 
92

 
67

Net cash flows from operating activities
 
1,563

 
1,391

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of property, plant and equipment
 
(1,259
)
 
(1,296
)
Change in accrued expenses related to capital expenditures
 
21

 
16

Sales (purchases) of cable systems, net
 
(673
)
 
19

Other, net
 
(15
)
 
(18
)
Net cash flows from investing activities
 
(1,926
)
 
(1,279
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings of long-term debt
 
6,569

 
4,353

Repayments of long-term debt
 
(6,177
)
 
(3,554
)
Payments for debt issuance costs
 
(50
)
 
(41
)
Purchase of treasury stock
 
(11
)
 
(4
)
Proceeds from exercise of options and warrants
 
67

 
13

Other, net
 
(1
)
 
(13
)
Net cash flows from financing activities
 
397

 
754

 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
34

 
866

CASH AND CASH EQUIVALENTS, beginning of period
 
7

 
2

CASH AND CASH EQUIVALENTS, end of period
 
$
41

 
$
868

 
 
 
 
 
CASH PAID FOR INTEREST
 
$
584

 
$
647



The accompanying notes are an integral part of these condensed consolidated financial statements.
3


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, 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 on the Internet and provides fiber connectivity to cellular towers.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) 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 and acquisition accounting for 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 2013 presentation.

Restricted cash and cash equivalents on the accompanying condensed consolidated balance sheets consist of amounts held in an escrow account pending final resolution from the Bankruptcy Court. See Note 13. In April 2013, the restrictions on the cash and cash equivalents were resolved.

2.     Acquisition of Bresnan

On July 1, 2013, Charter and Charter Communications Operating, LLC ("Charter Operating") acquired Bresnan Broadband Holdings, LLC and its subsidiaries (collectively, “Bresnan”) from a wholly owned subsidiary of Cablevision Systems Corporation, for $1.625 billion in cash, subject to a working capital adjustment, a reduction for certain funded indebtedness of Bresnan and payment of any post-closing refunds of certain Montana property taxes paid under protest by Bresnan prior to the closing. Bresnan manages cable operating systems in Montana, Wyoming, Colorado and Utah. Charter funded the purchase of Bresnan with a $1.5 billion term loan E (see Note 5) and borrowings under the Charter Operating credit facilities. The Company also incurred acquisition related costs of approximately $16 million, which are included in other expense, net and interest expense, net in the condensed consolidated statements of operations for the three and nine months ended September 30, 2013.

The Company applied acquisition accounting to Bresnan, and its results of operations are included in the Company's consolidated results of operations following the acquisition date. The total purchase price was allocated to the identifiable tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values using Level 3 inputs (see Note 8).



4


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The excess of the purchase price over those fair values was recorded as goodwill. The fair value assigned to certain identifiable tangible and intangible assets acquired and liabilities assumed were based upon a third party valuation using the assumptions developed by management and other information compiled by management including, but not limited to, future expected cash flows. Certain liabilities assumed were based upon quoted market prices.

The tables below present the calculation of the purchase price and the preliminary allocation of the purchase price to the assets and liabilities acquired.

Purchase Price:
Purchase price
$
1,625

Bresnan debt assumed (including accrued interest)
(962
)
Working capital adjustment
10

 
Cash purchase price, net of cash acquired
$
673

 
Preliminary Purchase Price Allocation:

Property, plant and equipment
$
515

Franchises
722

Customer relationships
249

Goodwill
206

Other noncurrent assets
4

Current assets
16

Current liabilities
(54
)
Long-term debt (including accrued interest)
(985
)
 
Cash purchase price, net of cash acquired
$
673


Concurrent with the closing of the acquisition, Charter Operating repaid $711 million principal amount outstanding under the Bresnan credit facility and purchased $250 million aggregate principal amount of the 8.00% senior notes due 2018 issued by Bresnan (the “2018 Notes”) pursuant to a tender offer for an amount, including approximately $23 million of tender premium, of $274 million. The 2018 Notes were initially recorded on the balance sheet at fair value, which approximated the principal amount plus the tender premium, with the offset to goodwill.

Charter condensed consolidated statements of operations for each of the three and nine months ended September 30, 2013 included $134 million of revenue and $16 million of net loss, including $16 million of acquisition related costs described above, from the acquisition of Bresnan.



5


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The following unaudited pro forma financial information of Charter is based on the historical consolidated financial statements of Charter and the historical consolidated financial statements of Bresnan and is intended to provide information about how the acquisition of Bresnan and related financing may have affected Charter's historical consolidated financial statements if they had closed as of January 1, 2012. The pro forma financial information below is based on available information and assumptions that the Company believes are reasonable. The pro forma financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what Charter's financial condition or results of operations would have been had the transactions described above occurred on the date indicated. The pro forma financial information also should not be considered representative of Charter's future financial condition or results of operations.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2013
 
2012
Revenues
$
2,009

 
$
6,271

 
$
5,972

Net loss
$
(103
)
 
$
(233
)
 
$
(319
)
Loss per common share, basic and diluted
$
(1.03
)
 
$
(2.30
)
 
$
(3.20
)

3.    Franchises, Goodwill and Other Intangible Assets

As of September 30, 2013 and December 31, 2012, indefinite lived and finite-lived intangible assets are presented in the following table:

 
 
September 30, 2013
 
December 31, 2012
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Franchises
 
$
6,009

 
$

 
$
6,009

 
$
5,287

 
$

 
$
5,287

Goodwill
 
1,159

 

 
1,159

 
953

 

 
953

Trademarks
 
158

 

 
158

 
158

 

 
158

Other intangible assets
 
4

 

 
4

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
7,330

 
$

 
$
7,330

 
$
6,398

 
$

 
$
6,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
2,617

 
$
1,152

 
$
1,465

 
$
2,368

 
$
944

 
$
1,424

Other intangible assets
 
126

 
40

 
86

 
105

 
29

 
76

 
 
$
2,743

 
$
1,192

 
$
1,551

 
$
2,473

 
$
973

 
$
1,500


Amortization expense related to customer relationships and other intangible assets for the three months ended September 30, 2013 and 2012 was $82 million and $74 million, respectively, and for the nine months ended September 30, 2013 and 2012 was $219 million and $222 million, respectively. Franchises, customer relationships and goodwill increased by $722 million, $249 million and $206 million, respectively, as a result of the acquisition of Bresnan completed during the three and nine months ended September 30, 2013 (See Note 2).
    


6


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The Company expects amortization expense on its finite-lived intangible assets will be as follows.

Three months ended December 31, 2013
 
$
80

2014
 
297

2015
 
264

2016
 
230

2017
 
197

Thereafter
 
483

 
 
 
 
 
$
1,551


Actual amortization expense in future periods will differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, impairments and other relevant factors.

4.    Accounts Payable and Accrued Liabilities

Accounts payable and accrued expenses consist of the following as of September 30, 2013 and December 31, 2012:

 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
Accounts payable – trade
 
$
81

 
$
107

Accrued capital expenditures
 
180

 
156

Deferred revenue
 
90

 
81

Accrued liabilities:
 
 
 
 
Interest
 
176

 
155

Programming costs
 
389

 
323

Franchise related fees
 
56

 
52

Compensation
 
143

 
145

Other
 
267

 
205

 
 
 
 
 
 
 
$
1,382

 
$
1,224




7


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


5.    Long-Term Debt

Long-term debt consists of the following as of September 30, 2013 and December 31, 2012:

 
September 30, 2013
 
December 31, 2012
 
Principal Amount
 
Accreted Value
 
Principal Amount
 
Accreted Value
CCO Holdings, LLC:
 
 
 
 
 
 
 
7.250% senior notes due October 30, 2017
$
1,000

 
$
1,000

 
$
1,000

 
$
1,000

7.875% senior notes due April 30, 2018

 

 
900

 
900

7.000% senior notes due January 15, 2019
1,400

 
1,393

 
1,400

 
1,392

8.125% senior notes due April 30, 2020
700

 
700

 
700

 
700

7.375% senior notes due June 1, 2020
750

 
750

 
750

 
750

5.250% senior notes due March 15, 2021
500

 
500

 

 

6.500% senior notes due April 30, 2021
1,500

 
1,500

 
1,500

 
1,500

6.625% senior notes due January 31, 2022
750

 
747

 
750

 
746

5.250% senior notes due September 30, 2022
1,250

 
1,239

 
1,250

 
1,238

5.125% senior notes due February 15, 2023
1,000

 
1,000

 
1,000

 
1,000

5.750% senior notes due September 1, 2023
500

 
500

 

 

5.750% senior notes due January 15, 2024
1,000

 
1,000

 

 

Credit facility due September 6, 2014
350

 
339

 
350

 
332

Charter Communications Operating, LLC:
 
 
 
 
 
 
 
Credit facilities
3,679

 
3,638

 
3,337

 
3,250

Long-Term Debt
$
14,379

 
$
14,306

 
$
12,937

 
$
12,808


The accreted values presented above represent the principal amount of the debt less the original issue discount at the time of sale, plus the accretion to the balance sheet date. 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 its credit facilities of approximately $978 million as of September 30, 2013 and as such, debt maturing in the next twelve months is classified as long-term.

In January 2012, CCO Holdings, LLC ("CCO Holdings") and CCO Holdings Capital Corp. closed on transactions in which they issued $750 million aggregate principal amount of 6.625% senior notes due 2022. The notes were issued at a price of 99.5% of the aggregate principal amount. The net proceeds of the notes were used, along with a draw on the $500 million delayed draw portion of the Charter Operating term loan A facility, to repurchase $300 million aggregate principal amount of Charter Operating's outstanding 8.000% senior second-lien notes due 2012, $294 million aggregate principal amount of Charter Operating's 10.875% senior second-lien notes due 2014 and $334 million aggregate principal amount of CCH II, LLC's ("CCH II") 13.500% senior notes due 2016, as well as to repay amounts outstanding under the Company's revolving credit facility. The tender offers closed in January and February 2012 and the Company recorded a loss on extinguishment of debt of approximately $15 million on this transaction for the nine months ended September 30, 2012.

In April 2012, Charter Operating entered into a senior secured term loan D facility pursuant to the terms of the Charter Operating credit agreement providing for $750 million of term loans with a final maturity date of May 15, 2019. Pricing on the new term loan D was set at LIBOR plus 3% with a LIBOR floor of 1%, and issued at a price of 99.5% of the aggregate principal amount. The proceeds were used to refinance Charter Operating's existing term loan B-1 and term loan B-2, both due 2014, with the remaining amount used to pay down a portion of its existing term loan C due 2016. Charter Operating concurrently amended and restated its existing $1.3 billion revolving credit facility with a new $1.15 billion revolving credit facility due 2017 at the interest rate of LIBOR plus 2.25% and amended and restated its existing credit agreement dated March 31, 2010. The Company recorded a loss on extinguishment of debt of approximately $59 million during the nine months ended September 30, 2012 related to these transactions.



8


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


In March 2013, CCO Holdings and CCO Holdings Capital Corp. closed on transactions in which they issued $500 million aggregate principal amount of 5.25% senior notes due 2021 (the "2021 Notes") and $500 million aggregate principal amount of 5.750% senior notes due 2023 (the "2023 Notes") (collectively, the "Notes"). The proceeds from the Notes were used for repaying amounts outstanding under the Charter Operating term loan C facility. The Company recorded a loss on extinguishment of debt of approximately $42 million for the nine months ended September 30, 2013 related to these transactions.

The 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 Notes are structurally subordinated to all obligations of subsidiaries of CCO Holdings, including the Charter Operating credit facilities. 

CCO Holdings may redeem some or all of the 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 2016 through 2019 (in regards to the 2021 Notes) or 2018 through 2021 (in regards to the 2023 Notes). 

In addition, at any time prior to March 15, 2016 (in regards to the 2021 Notes) or March 1, 2016 (in regards to the 2023 Notes), 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 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 March 2013, Charter Operating entered into an amendment to its credit agreement.  The amendment, among other things, eliminated the $7.5 billion cap on the incurrence of first lien debt; and eliminated the requirement for providing Charter Operating financial statements and instead allowing for Charter financial statements with consolidating information.

In April 2013, Charter Operating entered into an amendment to its credit agreement extending the maturity of its term loan A and revolver one year to 2018, decreasing the applicable LIBOR margin for the term loan A and revolver to 2%, decreasing the undrawn commitment fee on the revolver to 0.35% and increasing the revolver capacity to $1.3 billion. The Company recorded a loss on extinguishment of debt of approximately $2 million for the nine months ended September 30, 2013 related to these transactions.

In May 2013, Charter Operating entered into a new term loan F facility pursuant to the terms of the Charter Operating credit agreement providing for a $1.2 billion term loan maturing in 2021. Pricing on the new term loan F was set at LIBOR plus 2.25% with a LIBOR floor of 0.75%, and issued at a price of 99.75% of the aggregate principal amount. The Company used the proceeds to repay Charter Operating's existing term loan C due 2016 and term loan D due 2019. The Company recorded a loss on extinguishment of debt of approximately $14 million for the nine months ended September 30, 2013 related to these transactions.

In May 2013, CCO Holdings and CCO Holdings Capital Corp. closed on transactions in which they issued $1.0 billion aggregate principal amount of 5.75% senior notes due 2024 (the "2024 Notes"). Concurrently with the pricing of the 5.75% senior notes, a tender offer was launched to purchase any and all of the CCO Holdings 7.875% senior notes due 2018. The Company used the proceeds from the issuance to purchase the notes tendered in the tender offer. Any notes not tendered were subsequently called in June. The Company recorded a loss on extinguishment of debt of approximately $65 million for the nine months ended September 30, 2013 related to these transactions.

The 2024 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 2024 Notes are structurally subordinated to all obligations of subsidiaries of CCO Holdings, including the Charter Operating credit facilities. 

CCO Holdings may redeem some or all of the 2024 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 2018 through 2021. 



9


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


In addition, at any time prior to July 15, 2016, CCO Holdings may redeem up to 35% of the aggregate principal amount of the 2024 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 2024 Notes from the holders at a purchase price equal to 101% of the total principal amount of the 2024 Notes, plus any accrued and unpaid interest.

In June 2013, Charter Operating entered into an amendment to its credit agreement. The amendment, among other things: (i) modified the restricted payments covenant to permit expanded flexibility for acquisitions; (ii) modified the events of default under the credit agreement to permit change of control offers with respect to assumed indebtedness subject to certain restrictions; (iii) modified the transactions with affiliates covenant; (iv) permits the granting of equal and ratable security on certain assumed indebtedness subject to pro forma compliance with certain financial tests; (v) permits incremental term loans to amortize equivalent to the existing term loan A-1; and (vi) allows for an increase in revolving commitments based on Charter Operating's annualized operating cash flow.

In July 2013, Charter Operating activated the previously committed term loan E facility pursuant to the terms of the Charter Operating credit agreement providing for a $1.5 billion term loan maturing in seven years. Pricing on the new term loan E was set at LIBOR plus 2.25% with a LIBOR floor of 0.75%, and the term loan was issued at a price of 99.5% of the aggregate principal amount.

6.    Common Stock

In January 2012, the Company purchased, in a private transaction with a shareholder, 49,332 shares of its common stock at $55.18 for a total of $3 million. These shares were retired in January 2012.

During the three and nine months ended September 30, 2013, the Company withheld 7,245 and 113,345, respectively, shares of its common stock in payment of $1 million and $11 million income tax withholding owed by employees upon vesting of restricted shares, respectively. During the three and nine months ended September 30, 2012, the Company withheld 4,632 and 15,556 shares, respectively, of its common stock in payment of $1 million income tax withholding owed by employees upon vesting of restricted shares. In December 2012, Charter's board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2012. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders' equity.

In July 2013, the Company issued approximately 2.3 million shares of Charter Class A common stock to Paul G. Allen, the Company's former principal stockholder, pursuant to Mr. Allen's exercise of warrants with an exercise price of $19.80. The exercise resulted in proceeds to the Company of approximately $46 million. Mr. Allen had originally received the warrants pursuant to the Joint Plan of Reorganization (the "Plan") upon the Company's emergence from bankruptcy.
7.     Accounting for Derivative Instruments and Hedging Activities

The Company uses interest rate derivative instruments 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 derivative instruments, the Company agrees to exchange, at specified intervals through 2017, 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, until de-designating in the three months ended March 31, 2013, had certain interest rate derivative instruments that were designated as cash flow hedging instruments for GAAP purposes. Such instruments effectively converted 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 condensed consolidated statements of operations. The Company formally documented, designated and assessed the effectiveness of transactions that received hedge accounting.



10


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 interest rate derivative instruments on the Company’s condensed consolidated balance sheets is presented in the table below:

 
September 30, 2013
 
December 31, 2012
 
 
 
 
Other long-term liabilities:
 
 
 
Fair value of interest rate derivatives designated as hedges
$

 
$
67

Fair value of interest rate derivatives not designated as hedges
$
27

 
$

 
 
 
 
Accrued interest:
 
 
 
Fair value of interest rate derivatives designated as hedges
$

 
$
8

Fair value of interest rate derivatives not designated as hedges
$
12

 
$

 
 
 
 
Accumulated other comprehensive loss:
 
 
 
Fair value of interest rate derivatives designated as hedges
$

 
$
(75
)
Fair value of interest rate derivatives not designated as hedges
$
(48
)
 
$


Changes in the fair value of interest rate derivative instruments that were designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations, and that met effectiveness criteria were reported in accumulated other comprehensive loss. The amounts were 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).

Due to repayment of variable rate credit facility debt without a LIBOR floor, certain interest rate derivative instruments were de-designated as cash flow hedges during the three months ended March 31, 2013, as they no longer met the criteria for cash flow hedging specified by GAAP. In addition, on March 31, 2013, the remaining interest rate derivative instruments that continued to be highly effective cash flow hedges for GAAP purposes were electively de-designated. On the date of de-designation, the Company completed a final measurement test for each interest rate derivative instrument to determine any ineffectiveness and such amount was reclassified from accumulated other comprehensive loss into gain (loss) on derivative instruments, net in the Company's condensed consolidated statements of operations. While these interest rate derivative instruments are no longer designated as cash flow hedges for accounting purposes, management continues to believe such instruments are closely correlated with the respective debt, thus managing associated risk. Interest rate derivative instruments not designated as hedges are marked to fair value, with the impact recorded as a gain or loss on derivative instruments, net in the Company's condensed consolidated statements of operations. The balance that remains in accumulated other comprehensive loss for these interest rate derivative instruments will be amortized over the respective lives of the contracts and recorded as a loss within gain (loss) on derivative instruments, net in the Company's condensed consolidated statements of operations. The estimated net amount of existing losses that are reported in accumulated other comprehensive loss as of September 30, 2013 that is expected to be reclassified into earnings within the next twelve months is approximately $23 million.



11


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The effects of interest rate derivative instruments on the Company’s condensed consolidated statements of operations is presented in the table below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Gain (loss) on derivative instruments, net:
 
 
 
 
 
 
 
Change in fair value of interest rate derivative instruments not designated as cash flow hedges
$

 
$

 
$
29

 
$

Loss reclassified from accumulated other comprehensive loss into earnings as a result of cash flow hedge discontinuance
$
(8
)
 
$

 
$
(20
)
 
$

 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
Loss reclassified from accumulated other comprehensive loss into interest expense
$

 
$
(10
)
 
$
(10
)
 
$
(27
)

As of September 30, 2013 and December 31, 2012, the Company had $2.2 billion and $3.1 billion in notional amounts of interest rate derivative instruments outstanding. This includes $550 million in delayed start interest rate derivative instruments that become effective in March 2014 through March 2015.  In any future quarter in which a portion of these delayed start interest rate derivative instruments first becomes effective, an equal or greater notional amount of the currently effective interest rate derivative instruments are scheduled to mature.  Therefore, the $1.7 billion notional amount of currently effective interest rate derivative instruments will gradually step down over time as current interest rate derivative instruments mature and an equal or lesser amount of delayed start interest rate derivative instruments become effective.

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.

8.    Fair Value Measurements

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.

Financial Assets and Liabilities

The Company has estimated the fair value of its financial instruments as of September 30, 2013 and December 31, 2012 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.



12


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


The estimated fair value of the Company’s debt at September 30, 2013 and December 31, 2012 are based on quoted market prices and is classified within Level 1 of the valuation hierarchy.

A summary of the carrying value and fair value of the Company’s debt at September 30, 2013 and December 31, 2012 is as follows:

 
 
September 30, 2013
 
December 31, 2012
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt
 
 
 
 
 
 
 
 
CCO Holdings senior notes
 
$
10,329

 
$
10,356

 
$
9,226

 
$
9,933

Credit facilities
 
$
3,977

 
$
3,971

 
$
3,582

 
$
3,695


The interest rate derivative instruments were valued as $39 million and $75 million liabilities as of September 30, 2013 and December 31, 2012, 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 currently effective interest rate derivative instruments was 2.17% and 2.25% at September 30, 2013 and December 31, 2012, respectively (exclusive of applicable spreads).

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 during the three and nine months ended September 30, 2013 and 2012.

9.     Operating Costs and Expenses

Operating costs and expenses consist of the following for the years presented:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Programming
$
558

 
$
497

 
$
1,596

 
$
1,484

Franchise, regulatory and connectivity
100

 
92

 
285

 
277

Costs to service customers
399

 
356

 
1,131

 
1,006

Marketing
128

 
105

 
352

 
324

Other
212

 
192

 
586

 
541

 
 
 
 
 
 
 
 
 
$
1,397

 
$
1,242

 
$
3,950

 
$
3,632


Programming costs consist primarily of costs paid to programmers for basic, premium, digital, OnDemand, and pay-per-view programming. Franchise, regulatory and connectivity costs represent payments to franchise and regulatory authorities and costs directly related to providing Internet and telephone services. Costs to service customers include residential and commercial costs related to field operations, network operations and customer care including labor, reconnects, maintenance, billing, occupancy and vehicle costs. Marketing costs represents the costs of marketing to our current and potential commercial and residential customers including labor costs. Other includes bad debt and collections expense, corporate overhead, commercial and advertising sales expenses, property tax and insurance and stock compensation expense, among others.



13


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


10.     Other Operating Expenses, Net

Other operating expenses, net consist of the following for the years presented:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
(Gain)/loss on sale of assets, net
$
5

 
$
1

 
$
6

 
$
(12
)
Special charges, net
3

 
2

 
18

 
14

 
 
 
 
 
 
 
 
 
$
8

 
$
3

 
$
24

 
$
2


Gain (loss) on sale of assets, net

Gain (loss) on sale of assets represents the gain or loss recognized on the sales and disposals of fixed assets and cable systems.

Special charges, net

Special charges, net for the three and nine months ended September 30, 2013 and 2012 primarily include severance charges and net amounts of litigation settlements.

11.    Income Taxes

All of Charter’s 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 indirect 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 and its direct subsidiaries.

For the three and nine months ended September 30, 2013, the Company recorded $57 million and $124 million of income tax expense, respectively. For the three and nine months ended September 30, 2012, the Company recorded $69 million and $208 million of income tax expense, respectively. Income tax expense is recognized primarily through increases in deferred tax liabilities related to our investment in Charter Holdco, as well as through current federal and state income tax expense and increases in the deferred tax liabilities of certain of our indirect corporate subsidiaries. Income tax expense for the nine months ended September 30, 2013 decreased compared to the corresponding prior period, primarily as a result of a step-up in basis of indefinite-lived assets for tax, but not GAAP purposes, which decreased the Company's net deferred tax liability related to indefinite-lived assets by $58 million.

The step-up for tax purposes corresponds to gains recognized by corporate subsidiaries of Charter, which are partners in Charter Holdco, and resulted primarily from the repayment of Charter Operating credit facility debt with proceeds from the CCO Holdings notes issued in March 2013, see Note 5. The repayment of Charter Operating credit facility debt, which is not guaranteed by Charter, with proceeds from the Notes, which are guaranteed by Charter, had the effect of reducing the amount of debt allocable to the non-guarantor corporate subsidiaries of Charter. For partnership tax purposes, the reduction in the amount of non-guaranteed debt available to allocate to these corporate subsidiaries caused them to recognize gains due to limited basis in their partnership interests in Charter Holdco. The tax provision in future periods will vary based on various factors including changes in its deferred tax liabilities attributable to indefinite-lived intangibles, as well as future operating results, however the Company does not anticipate having such a large reduction in tax expense attributable to this item unless it enters into similar future financing transactions.

As of September 30, 2013 and December 31, 2012, the Company had net deferred income tax liabilities of approximately $1.4 billion and $1.3 billion, respectively. Net current deferred tax assets of $17 million and $18 million as of September 30, 2013 and December 31, 2012, respectively, are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets of the Company. Net deferred tax liabilities included approximately $221 million and $219 million at September 30, 2013 and December 31, 2012, respectively, relating to certain indirect subsidiaries of Charter Holdco that file


14


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


separate federal or state 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.

In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon examination, based on their technical merits. There is considerable judgment involved in determining whether positions taken on the tax return are “more likely than not” of being sustained.  A reconciliation of the beginning and ending amount of unrecognized tax benefits included in deferred income taxes on the accompanying consolidated balance sheets of the Company is as follows:  

Balance at December 31, 2012
 
$
202

Reductions due to tax positions related to prior year
 
(201
)
 
 
 
Balance at September 30, 2013
 
$
1


The Company's entire reserve for uncertain tax positions includes tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the character of the deductibility. The balance at September 30, 2013 reflects $201 million of net reductions related to losses which would be offset by gains discussed above. The change in character of the deduction would not impact the annual effective tax rate after consideration of the valuation allowance. The deductions for the uncertain tax positions are included with the loss carryforwards in the deferred tax assets and therefore there is no impact to the financial statements.

On May 1, 2013, Liberty Media Corporation (“Liberty Media”) completed its purchase of a 27% beneficial interest in Charter (see Note 12). Upon closing, Charter experienced a second “ownership change” as defined in Section 382 of the Internal Revenue Code resulting in a second set of limitations on Charter’s use of its existing federal and state net operating losses, capital losses, and tax credit carryforwards. The first ownership change limitations that applied as a result of our emergence from bankruptcy in 2009 will also continue to apply. Pursuant to these Section 382 limitations, approximately $1.1 billion, $2.0 billion, $2.1 billion and $300 million in the years 2013 to 2016, respectively, and $226 million annually in 2017 and thereafter, of Charter’s federal loss carryforwards become unrestricted and available for Charter's use. Since the limitation amounts accumulate for future use to the extent they are not utilized in any given year, Charter believes its loss carryforwards should become fully available to offset future taxable income, if any. Charter’s state loss carryforwards and indirect corporate subsidiaries’ loss carryforwards are subject to similar, but varying limitations on their future use. If the Company was to experience another “ownership change” in the future, its ability to use its loss carryforwards could be subject to further limitations.
No tax years for Charter or Charter Holdco are currently under examination by the IRS.  Tax years ending 2010 through 2012 remain subject to examination and assessment. Years prior to 2010 remain open solely for purposes of examination of Charter’s loss and credit carryforwards.

12.     Related Party Transactions

On May 1, 2013, Liberty Media completed its purchase from investment funds managed by, or affiliated with, Apollo Global Management, LLC, Oaktree Capital Management, L.P. and Crestview Partners of approximately 26.9 million shares and warrants to purchase approximately 1.1 million shares in Charter for approximately $2.6 billion (the "Liberty Media Transaction"), which represents an approximate 27% beneficial ownership in Charter and a price per share of $95.50.

In connection with the Liberty Media Transaction, Charter entered into a stockholders agreement with Liberty Media that, among other things, provided Liberty Media with the right to designate four directors for appointment to Charter's board of directors in connection with the closing. Liberty Media designated John Malone, Chairman of Liberty Media, Gregory Maffei, president and chief executive officer of Liberty Media, Balan Nair, executive vice president and chief technology officer of Liberty Global plc, and Michael Huseby, president of Barnes & Noble, Inc. Charter’s board of directors appointed these directors effective upon the resignations of Stan Parker, Darren Glatt, Bruce Karsh and Edgar Lee in connection with the closing of the Liberty Media Transaction on May 1, 2013. Subject to Liberty Media’s continued ownership level in Charter, the stockholders agreement also provides that Liberty Media can designate up to four directors as nominees for election to Charter’s board of directors at least through Charter’s 2015 annual meeting of stockholders, and that up to one of these individuals may serve on each of the Audit Committee, the Nominating and Corporate Governance Committee, and Compensation and Benefits Committee of Charter’s board of directors.


15


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


Consistent with these provisions, the board appointed Dr. Malone to serve on the Nominating and Corporate Governance Committee, Mr. Maffei to serve on the Finance Committee and the Compensation and Benefits Committee and Mr. Huseby to serve on the Audit Committee.

In addition, Liberty Media agreed to not increase its beneficial ownership in Charter above 35% until January 2016, at which point such limit increases to 39.99%. Liberty Media is also, subject to certain exceptions, subject to certain customary standstill provisions that prohibit Liberty Media from, among other things, engaging in proxy or consent solicitations relating to the election of directors. The standstill limitations apply through the 2015 shareholder meeting and continue to apply as long as Liberty Media's designees are nominated to the Charter board, unless the agreement is earlier terminated. Charter approved Liberty Media as an interested stockholder under the business combination provisions of the Delaware General Corporation Law.

The Company is aware that Dr. Malone may be deemed to have a 34.5% voting interest in Liberty Interactive Corp. (“Liberty Interactive”) and is Chairman of the board of directors, an executive officer position, of Liberty Interactive. Liberty Interactive owns 36.9% of the common stock of HSN, Inc. (“HSN”) and has the right to elect 20% of the board members of HSN. Liberty Interactive wholly owns QVC, Inc (“QVC”). The Company has programming relationships with HSN and QVC which pre-date the Liberty Media Transaction. For the three and six months ended September 30, 2013, the Company received payments in aggregate of approximately $3 million and $6 million, respectively, from HSN and QVC as part of channel carriage fees and revenue sharing arrangements for home shopping sales made to customers in Charter's footprint.
Dr. Malone also serves on the board of directors of Discovery Communications, Inc., (“Discovery”) and the Company is aware that Dr. Malone owns 4.3% in the aggregate of the common stock of Discovery and has a 29.2% voting interest in Discovery for the election of directors. In addition, Dr. Malone owns 9.2% in the aggregate of the common stock of Starz and has 42.8% of the voting power. Mr. Maffei is a non-executive Chairman of the board of Starz. The Company purchases programming from both Discovery and Starz pursuant to agreements entered into prior to the Liberty Media Transaction and Dr. Malone and Mr. Maffei joining Charter's board of directors. Based on publicly available information, the Company does not believe that either Discovery or Starz would currently be considered related parties. The amounts paid in aggregate to Discovery and Starz represent less than 3% of total operating costs and expenses for the three and six months ended September 30, 2013.
13.     Contingencies

On March 27, 2009, Charter filed a Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. On November 17, 2009, the Bankruptcy Court issued its Order and Opinion confirming the Plan over the objections of various objectors. Charter consummated the Plan on November 30, 2009.

Two appeals were pending relating to confirmation of the Plan, the appeals by (i) Law Debenture Trust Company of New York (“LDT”) (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 and the holders of which already received distributions of approximately $168 million pursuant to the Plan); and (ii) R2 Investments, LDC (“R2 Investments”) (a former equity interest holder in Charter). On January 10, 2013, R2 Investments and LDT filed a petition for a writ of certiorari with the United States Supreme Court, asking that court to review the 2nd Circuit's decision. On April 29, 2013, the Supreme Court issued its order that the writ of certiorari has been denied.

The Company is also a defendant or co-defendant in several lawsuits claiming infringement of various patents relating to various aspects of its businesses.  Other industry participants are also defendants in certain of these cases. In the event that a court ultimately determines that the Company infringes on any intellectual property rights, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the patents at issue.  While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company's consolidated financial condition, results of operations, or liquidity. The Company cannot predict the outcome of any such claims nor can it reasonably estimate a range of possible loss.

The Company is party to lawsuits and claims that arise in the ordinary course of conducting its business, including lawsuits claiming violation of wage and hour laws. 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


16


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)


effect on the Company’s consolidated financial condition, results of operations or liquidity. Whether or not the Company ultimately prevails in any particular lawsuit or claim, litigation can be time consuming and costly and injure the Company's reputation.

14.     Stock Compensation Plans

Charter’s 2009 Stock Incentive 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 Incentive Plan. In April 2013, Charter's board of directors and shareholders approved an additional 6 million shares of Charter Class A common stock (or units convertible into Charter Class A common stock) under the 2009 Stock Incentive Plan.

The Company granted the following equity awards for the years presented.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Stock options
71,600

 
121,500

 
225,200

 
575,200

Restricted stock

 

 
12,700

 
243,800

Restricted stock units
19,200

 
31,900

 
59,000

 
94,300


Stock options generally vest annually over four years from either the grant date or delayed vesting commencement dates. Stock options generally expire ten years from the grant date. Restricted stock vests annually over a one to four-year period beginning from the date of grant. A portion of stock options and restricted stock vest based on achievement of stock price hurdles. 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 September 30, 2013, total unrecognized compensation remaining to be recognized in future periods totaled $36 million for stock options, $21 million for restricted stock and $18 million for restricted stock units and the weighted average period over which they are expected to be recognized is 2 years for stock options, 2 years for restricted stock and 3 years for restricted stock units.

The Company recorded $11 million and $37 million of stock compensation expense for the three and nine months ended September 30, 2013, respectively, and $13 million and $37 million of stock compensation expense for the three and nine months ended September 30, 2012, respectively, which is included in operating costs and expenses.

15.     Consolidating Schedules

The CCO Holdings notes and the CCO Holdings credit facility are obligations of CCO Holdings. However, the CCO Holdings notes 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 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 September 30, 2013 and December 31, 2012 and for the nine months ended September 30, 2013 and 2012 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 September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4

 
$

 
$

 
$
37

 
$

 
$
41

Accounts receivable, net

 
6

 

 
229

 

 
235

Receivables from related party
62

 
164

 
8

 

 
(234
)
 

Prepaid expenses and other current assets
16

 
11

 

 
54

 

 
81

Total current assets
82

 
181

 
8

 
320

 
(234
)
 
357

 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net

 
30

 

 
7,808

 

 
7,838

Franchises

 

 

 
6,009

 

 
6,009

Customer relationships, net

 

 

 
1,465

 

 
1,465

Goodwill

 

 

 
1,159

 

 
1,159

Total investment in cable properties, net

 
30

 

 
16,441

 

 
16,471

 
 
 
 
 
 
 
 
 
 
 
 
CC VIII PREFERRED INTEREST
114

 
267

 

 

 
(381
)
 

INVESTMENT IN SUBSIDIARIES
1,086

 
245

 
10,486

 

 
(11,817
)
 

LOANS RECEIVABLE – RELATED PARTY

 
318

 
461

 

 
(779
)
 

OTHER NONCURRENT ASSETS

 
161

 
122

 
139

 

 
422

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,282

 
$
1,202

 
$
11,077

 
$
16,900

 
$
(13,211
)
 
$
17,250

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
11

 
$
110

 
$
164

 
$
1,097

 
$

 
$
1,382

Payables to related party

 

 

 
234

 
(234
)
 

Total current liabilities
11

 
110

 
164

 
1,331

 
(234
)
 
1,382

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT

 

 
10,668

 
3,638

 

 
14,306

LOANS PAYABLE – RELATED PARTY

 

 

 
779

 
(779
)
 

DEFERRED INCOME TAXES
1,210

 

 

 
222

 

 
1,432

OTHER LONG-TERM LIABILITIES

 
6

 

 
63

 

 
69

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’/Member’s equity
61

 
1,086

 
245

 
10,486

 
(11,817
)
 
61

Noncontrolling interest

 

 

 
381

 
(381
)
 

Total shareholders’/member’s equity
61

 
1,086

 
245

 
10,867

 
(12,198
)
 
61

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’/member’s equity
$
1,282

 
$
1,202

 
$
11,077

 
$
16,900

 
$
(13,211
)
 
$
17,250




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, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1

 
$

 
$

 
$
6

 
$

 
$
7

Restricted cash and cash equivalents

 

 

 
27

 

 
27

Accounts receivable, net
1

 
3

 

 
230

 

 
234

Receivables from related party
59

 
176

 
11

 

 
(246
)
 

Prepaid expenses and other current assets
16

 
8

 

 
38

 

 
62

Total current assets
77

 
187

 
11

 
301

 
(246
)
 
330

 
 
 
 
 
 
 
 
 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net

 
32

 

 
7,174

 

 
7,206

Franchises

 

 

 
5,287

 

 
5,287

Customer relationships, net

 

 

 
1,424

 

 
1,424

Goodwill

 

 

 
953

 

 
953

Total investment in cable properties, net

 
32

 

 
14,838

 

 
14,870

 
 
 
 
 
 
 
 
 
 
 
 
CC VIII PREFERRED INTEREST
104

 
242

 

 

 
(346
)
 

INVESTMENT IN SUBSIDIARIES
1,081

 
269

 
9,485

 

 
(10,835
)
 

LOANS RECEIVABLE – RELATED PARTY

 
309

 
359

 

 
(668
)
 

OTHER NONCURRENT ASSETS

 
163

 
118

 
115

 

 
396

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,262

 
$
1,202

 
$
9,973

 
$
15,254

 
$
(12,095
)
 
$
15,596

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
12

 
$
121

 
$
146

 
$
945

 
$

 
$
1,224

Payables to related party

 

 

 
246

 
(246
)
 

Total current liabilities
12

 
121

 
146

 
1,191

 
(246
)
 
1,224

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT

 

 
9,558

 
3,250

 

 
12,808

LOANS PAYABLE – RELATED PARTY

 

 

 
668

 
(668
)
 

DEFERRED INCOME TAXES
1,101

 

 

 
220

 

 
1,321

OTHER LONG-TERM LIABILITIES

 

 

 
94

 

 
94

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’/Member’s equity
149

 
1,081

 
269

 
9,485

 
(10,835
)
 
149

Noncontrolling interest

 

 

 
346

 
(346
)
 

Total shareholders’/member’s equity
149

 
1,081

 
269

 
9,831

 
(11,181
)
 
149

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’/member’s equity
$
1,262

 
$
1,202

 
$
9,973

 
$
15,254

 
$
(12,095
)
 
$
15,596




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 nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
$
18

 
$
133

 
$

 
$
6,007

 
$