Edgar Filing: CHARTER COMMUNICATIONS, INC. /MO/

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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 March 31, 2011

[ ] 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)

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 oNo 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 March 31, 2011: 110,035,469

Charter Communications, Inc.

Quarterly Report on Form 10-Q for the Period ended March 31, 2011

Table of Contents

PART I. FINANCIAL INFORMATION	Page

Item 1. Financial Statements - Charter Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets as of March 31, 2011
and December 31, 2010	4
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2011 and 2010	5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2011 and 2010	6
Notes to Condensed Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures about Market Risk	33

Item 4. Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	36

Item 1A. Risk Factors	37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6. Exhibits	39

SIGNATURES	S-1

EXHIBIT INDEX	E-1

This quarterly report on Form 10-Q is for the three months ended March 31, 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:

our ability to sustain and grow revenues and free cash flow by offering video, high-speed Internet, telephone 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, and digital subscriber line ( “DSL”) providers and competition from 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 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.

PART I. FINANCIAL INFORMATION.

Item 1. Financial Statements.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	26		$	4
Restricted cash and cash equivalents		28			28
Accounts receivable, less allowance for doubtful accounts of $16 and $17, respectively		223			247
Prepaid expenses and other current assets		56			47
Total current assets		333			326

INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated depreciation		6,870			6,819
Franchises		5,257			5,257
Customer relationships, net		1,923			2,000
Goodwill		951			951
Total investment in cable properties, net		15,001			15,027

OTHER NONCURRENT ASSETS		371			354

Total assets	$	15,705		$	15,707

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	1,028		$	1,049
Total current liabilities		1,028			1,049

LONG-TERM DEBT		12,554			12,306
OTHER LONG-TERM LIABILITIES		941			874

SHAREHOLDERS’ EQUITY:
Class A common stock; $.001 par value; 900 million shares authorized;
114,711,944 and 112,494,166 shares issued, respectively		--			--
Class B common stock; $.001 par value; 25 million shares authorized;
no shares and 2,241,299 shares issued and outstanding, respectively		--			--
Preferred stock; $.001 par value; 250 million shares
authorized; no non-redeemable shares issued and outstanding		--			--
Additional paid-in capital		1,786			1,776
Accumulated deficit		(345	)		(235	)
Treasury stock at cost; 4,676,475 and 176,475 shares, respectively		(213	)		(6	)
Accumulated other comprehensive loss		(46	)		(57	)
Total shareholders’ equity		1,182			1,478

Total liabilities and shareholders’ equity	$	15,705		$	15,707

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

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Unaudited

	Three Months Ended March 31,
	2011			2010

REVENUES	$	1,770		$	1,735

COSTS AND EXPENSES:
Operating (excluding depreciation and amortization)		768			756
Selling, general and administrative		345			347
Depreciation and amortization		383			369
Other operating expenses, net		5			12

		1,501			1,484

Income from operations		269			251

OTHER EXPENSES:
Interest expense, net		(233	)		(204	)
Loss on extinguishment of debt		(67	)		(1	)
Other expenses, net		--			(3	)

		(300	)		(208	)

Income (loss) before income taxes		(31	)		43

INCOME TAX EXPENSE		(79	)		(19	)

Net income (loss)	$	(110	)	$	24

EARNINGS (LOSS) PER COMMON SHARE:
Basic	$	(0.97	)	$	0.21
Diluted	$	(0.97	)	$	0.21
Weighted average common shares outstanding, basic		113,224,303			113,020,967
Weighted average common shares outstanding, diluted		113,224,303			114,883,134

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

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS)

Unaudited

	Three Months Ended March 31,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(110	)	$	24
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		383			369
Noncash interest expense		12			18
Loss on extinguishment of debt		67			1
Deferred income taxes		77			16
Other, net		7			6
Changes in operating assets and liabilities:
Accounts receivable		24			25
Prepaid expenses and other assets		(9	)		--
Accounts payable, accrued expenses and other		(4	)		71

Net cash flows from operating activities		447			530

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(356	)		(310	)
Change in accrued expenses related to capital expenditures		(19	)		(15	)
Other, net		(6	)		(5	)

Net cash flows from investing activities		(381	)		(330	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt		1,846			--
Repayments of long-term debt		(1,666	)		(667	)
Payments for debt issuance costs		(22	)		(31	)
Purchase of treasury stock		(207	)		--
Other, net		5			(2	)

Net cash flows from financing activities		(44	)		(700	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		22			(500	)
CASH AND CASH EQUIVALENTS, beginning of period		32			754

CASH AND CASH EQUIVALENTS, end of period	$	54		$	254

CASH PAID FOR INTEREST	$	202		$	152

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

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), high-speed 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, high-speed 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 March 31, 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 $12 million of restricted cash held in an escrow account established in bankruptcy proceedings was used to pay for professional services for the three months ended March 31, 2010.

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 March 31, 2011 and December 31, 2010, indefinite-lived and finite-lived intangible assets are presented in the following table:

	March 31, 2011						December 31, 2010
	Gross				Net			Gross				Net
	Carrying		Accumulated		Carrying			Carrying		Accumulated		Carrying
	Amount		Amortization		Amount			Amount		Amortization		Amount

Indefinite-lived intangible assets:
Franchises	$	5,257	$	--	$	5,257		$	5,257	$	--	$	5,257
Goodwill		951		--		951			951		--		951
Trademarks		158		--		158			158		--		158

	$	6,366	$	--	$	6,366		$	6,366	$	--	$	6,366

Finite-lived intangible assets:
Customer relationships	$	2,358	$	435	$	1,923		$	2,358	$	358	$	2,000
Other intangible assets		60		9		51			53		7		46
	$	2,418	$	444	$	1,974		$	2,411	$	365	$	2,046

Amortization expense related to customer relationships and other intangible assets for the three months ended March 31, 2011 and 2010 was approximately $79 million and $86 million, respectively.

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

9 months ended December 31, 2011	$	235
2012		288
2013		261
2014		235
2015		209
2016		182
Thereafter		564

	$	1,974

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.

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 March 31, 2011 and December 31, 2010:

	March 31, 2011		December 31, 2010

Accounts payable – trade	$	166	$	168
Accrued capital expenditures		35		54
Accrued expenses:
Interest		181		162
Programming costs		296		282
Compensation		106		124
Franchise-related fees		46		53
Other		198		206

	$	1,028	$	1,049

4. Long-Term Debt

Long-term debt consists of the following as of March 31, 2011 and December 31, 2010:

	March 31, 2011				December 31, 2010
	Principal Amount		Accreted Value		Principal Amount		Accreted Value
CCH II, LLC:
13.500% senior notes due November 15, 2016	$	1,766	$	2,047	$	1,766	$	2,057
CCO Holdings, LLC:
7.25% senior notes due October 30, 2017		1,000		1,000		1,000		1,000
7.875% senior notes due April 30, 2018		900		900		900		900
7.00% senior notes due January 15, 2019		1,400		1,390		--		--
8.125% senior notes due April 30, 2020		700		700		700		700
Credit facility due September 6, 2014		350		317		350		314
Charter Communications Operating, LLC:
8.00% senior second-lien notes due April 30, 2012		1,100		1,110		1,100		1,112
10.875% senior second-lien notes due September 15, 2014		546		589		546		591
Credit facilities		4,744		4,501		5,954		5,632
Long-Term Debt	$	12,506	$	12,554	$	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 $957 million as of March 31, 2011, and as such, debt maturing in the next twelve months is classified as long-term.

In January 2011, CCO Holdings, LLC (“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. The net proceeds of the issuances were contributed by CCO Holdings to Charter Communications Operating, LLC (“Charter Operating”) as a capital contribution and were used to repay indebtedness under the Charter Operating credit facilities. The Company

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

recorded a loss on extinguishment of debt of approximately $67 million for the three months ended March 31, 2011 related to these transactions.

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 three months ended March 31, 2010 of approximately $1 million.

5. 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 shares are reflected on the Company’s condensed consolidated balance sheets as treasury stock.

During the year ended December 31, 2010, the Company withheld 176,475 shares of its common stock in payment of income tax withholding owed by employees upon vesting of restricted shares. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity.

6. Comprehensive Income (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 income (loss). Comprehensive loss was $99 million for the three months ended March 31, 2011. Comprehensive income was $24 million for the three months ended March 31, 2010. Comprehensive loss for the three months ended March 31, 2011 included an $11 million gain on the change in the fair value of interest rate swap agreements designated as cash flow hedges. There were no cash flow hedges outstanding for the three months ended March 31, 2010.

7. 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 months ended March 31, 2011, there was no cash flow hedge ineffectiveness on interest rate swap agreements.

Interest rate swap agreements are included in other long-term liabilities at fair value of $46 million and $57 million as of March 31, 2011 and December 31, 2010, respectively. 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 income (loss). For the three months ended March 31, 2011, gains of $11 million related to derivative instruments designated as cash flow hedges, were recorded in other comprehensive income (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). For the three months ended March 31, 2011, $10 million was reclassified from accumulated other comprehensive loss into interest expense. No interest rate swaps were outstanding during the three months ended March 31, 2010.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

As of March 31, 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.

8. Fair Value Measurements

Financial Assets and Liabilities

The Company has estimated the fair value of its financial instruments as of March 31, 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 debt at March 31, 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 debt at March 31, 2011 and December 31, 2010 is as follows:

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Debt
CCH II, LLC notes	$	2,047	$	2,130	$	2,057	$	2,113
CCO Holdings notes		3,990		4,216		2,600		2,709
Charter Operating notes		1,699		1,769		1,703		1,774
Credit facilities		4,818		5,075		5,946		6,252

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 $46 million and $57 million liabilities as of March 31, 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% at March 31, 2011 and December 31, 2010 (exclusive of applicable spread).

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

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded in the three months ended March 31, 2011 and 2010.

9. Other Operating Expenses, Net

Other operating expenses, net consist of the following for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011		2010

Loss on sales of assets, net	$	--	$	1
Special charges, net		5		11

	$	5	$	12

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 months ended March 31, 2011 primarily includes severance charges and for the three months ended March 31, 2010 primarily includes net amounts of litigation settlements and severance charges.

10. Other Expenses, Net

Other expenses, net for the three months ended March 31, 2010 consisted primarily of reorganization items which represent items of income, expense, gain or loss that were realized or incurred by the Company because it was in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items consisted of $4 million in professional fees for the three months ended March 31, 2010. Post-emergence professional fees relate to claim settlements, Plan implementation and other transition costs related to the Plan.

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 months ended March 31, 2011 and 2010, the Company recorded $79 million and $19 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 three months ended March 31, 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 March 31, 2011 and December 31, 2010, the Company had net deferred income tax liabilities of approximately $838 million and $762 million, respectively. Included in these net deferred tax liabilities is approximately $229 million and $225 million of net deferred tax liabilities at March 31, 2011 and December 31, 2010, respectively, relating to certain indirect subsidiaries of Charter Holdco that file separate income tax returns. The remainder of the

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

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. Earnings (Loss) Per Share

Basic earnings (loss) per share is based on the average number of shares of common stock outstanding during the period. Diluted earnings per share is based on the average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of restricted stock, convertible redeemable preferred stock, warrants and exchangeable Charter Holdco membership units. Basic loss per share equals diluted loss per share for the three months ended March 31, 2011 as the effect of stock options and other dilutive securities are anti-dilutive because the Company incurred a net loss.

	Three Months Ended March 31, 2010
	Earnings		Shares		Earnings Per Share

Basic earnings per share	$	24		113,020,967	$	0.21

Effect of Charter Holdco units		--		89,901		--
Allen warrants		--		1,772,266		--

Diluted earnings per share	$	24		114,883,134	$	0.21

The shares of Class B common stock held by Mr. Allen had a 35% voting interest in Charter, on a fully diluted basis, and were exchangeable at any time on a one-for-one basis for shares of Charter’s Class A common stock. Such Class B common stock was included in basic shares outstanding for the three months ended March 31, 2010. 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.

Charter Holdco units represent the effect of shares issued to Mr. Allen on February 8, 2010 upon exchange of the remaining 0.19% Charter Holdco interest for 212,923 shares of Charter’s Class A common stock had they been exchanged at the beginning of 2010. The Allen warrants represent shares issuable upon the exercise of warrants held by Mr. Allen.

The 1.3 million Charter Holdings warrants and 6.4 million CCH I Holdings, LLC warrants were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares during the three months ended March 31, 2010. Restricted stock was also not included in the computation of diluted earnings per share because the effect would have been antidilutive.

13. 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 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

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

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.

Franklin Stock Repurchase

See “Note 5. Treasury Stock” for the description of Charter’s purchase of 4.5 million shares of its Class A common stock from Franklin Advisers, Inc.

14. 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 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.

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

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

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 pending 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 parties. The appeals of the securities plaintiffs have been briefed but have not been argued to, or ruled upon by the District Court for the Southern District of New York. The Company cannot predict the ultimate outcome of the appeals.

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.

15. 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 months ended March 31, 2011 and 2010, the Company granted 12,500 and 39,900 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 months ended March 31, 2011, the Company granted 14,300 stock options. Stock options vest annually over four years from the grant date and expire ten years from the grant date. As of March 31, 2011, total unrecognized compensation remaining to be recognized in future periods totaled $28 million for restricted stock and $15 million for stock options and the weighted average period over which it is expected to be recognized is 2 years for restricted stock and 3 years for stock options.

The Company recorded $6 million and $5 million of stock compensation expense for the three months ended March 31, 2011 and 2010, respectively, which is included in selling, general, and administrative expense.

On April 26, 2011, the Company granted 2 million stock options and 0.2 million shares of restricted stock units.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in millions, except per share amounts and where indicated)

16. 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 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 March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010 follow.

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 March 31, 2011

	Charter		Intermediate Holding Companies		CCH II		CCO Holdings		Charter Operating and Subsidiaries		Eliminations			Charter Consolidated
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1	$	--	$	--	$	2	$	23	$	--		$	26
Restricted cash and cash equivalents		--		--		--		--		28		--			28
Accounts receivable, net		--		--		--		--		223		--			223
Receivables from related party		62		176		2		2		--		(242	)		--
Prepaid expenses and other current assets		2		17		--		--		37		--			56
Total current assets		65		193		2		4		311		(242	)		333

INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net		--		34		--		--		6,836		--			6,870
Franchises		--		--		--		--		5,257		--			5,257
Customer relationships, net		--		--		--		--		1,923		--			1,923
Goodwill		--		--		--		--		951		--			951
Total investment in cable properties, net		--		34		--		--		14,967		--			15,001

CC VIII PREFERRED INTEREST		82		190		--		--		--		(272	)		--

INVESTMENT IN SUBSIDIARIES		1,656		1,168		2,987		7,281		--		(13,092	)		--

LOANS RECEIVABLE – RELATED PARTY		--		43		256		59		--		(358	)		--

OTHER NONCURRENT ASSETS		--		160		--		63		150		(2	)		371

Total assets	$	1,803	$	1,788	$	3,245	$	7,407	$	15,428	$	(13,966	)	$	15,705

LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	9	$	128	$	30	$	113	$	748	$	--		$	1,028
Payables to related party		--		--		--		--		242		(242	)		--
Total current liabilities		9		128		30		113		990		(242	)		1,028

LONG-TERM DEBT		--		--		2,047		4,307		6,200		--			12,554
LOANS PAYABLE – RELATED PARTY		--		--		--		--		358		(358	)		--
OTHER LONG-TERM LIABILITIES		610		4		--		--		327		--			941

Shareholders’/Member’s equity		1,184		1,656		1,168		2,987		7,281		(13,094	)		1,182
Noncontrolling interest		--		--		--		--		272		(272	)		--
Total shareholders’/member’s equity		1,184		1,656		1,168		2,987		7,553		(13,366	)		1,182

Total liabilities and shareholders’/member’s equity	$	1,803	$	1,788	$	3,245	$	7,407	$	15,428	$	(13,966	)	$	15,705

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, net		--		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

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 three months ended March 31, 2011

	Charter			Intermediate Holding Companies			CCH II			CCO Holdings			Charter Operating and Subsidiaries			Eliminations			Charter Consolidated

REVENUES	$	10		$	29		$	--		$	--		$	1,770		$	(39	)	$	1,770

COSTS AND EXPENSES:
Operating (excluding depreciation and amortization)		--			--			--			--			768			--			768
Selling, general and administrative		10			29			--			--			345			(39	)		345
Depreciation and amortization		--			--			--			--			383			--			383
Other operating expenses, net		--			--			--			--			5			--			5

		10			29			--			--			1,501			(39	)		1,501

Income from operations		--			--			--			--			269			--			269

OTHER INCOME (EXPENSES):
Interest expense, net		--			--			(48	)		(76	)		(109	)		--			(233	)
Loss on extinguishment of debt		--			--			--			--			(67	)		--			(67	)
Equity in income (losses) of subsidiaries		(40	)		(47	)		1			77			--			9			--

		(40	)		(47	)		(47	)		1			(176	)		9			(300	)

Income (loss) before income taxes		(40	)		(47	)		(47	)		1			93			9			(31	)

INCOME TAX EXPENSE		(73	)		--			--			--			(6	)		--			(79	)

Consolidated net income (loss)		(113	)		(47	)		(47	)		1			87			9			(110	)