CHTR 3.31.14 - 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 March 31, 2014
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
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 March 31, 2014: 108,222,226







CHARTER COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
MARCH 31, 2014

TABLE OF CONTENTS

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This quarterly report on Form 10-Q is for the three months ended March 31, 2014. The United States 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:

Risks Related to Comcast Transactions

the ultimate outcome of the proposed transactions between Charter and Comcast including the possibility that such transactions may not occur if closing conditions are not satisfied;

if any such transaction were to occur, the ultimate outcome and results of integrating operations, the ultimate outcome of Charter’s pricing and packaging and operating strategy applied to the acquired assets and the ultimate ability to realize synergies at the levels currently expected;

disruption in our business relationships as a result of the proposed transactions;

the impact of the proposed transaction on our stock price and future operating results, including due to transaction and integration costs, increased interest expenses, business disruption, and diversion of management time and attention;

the reduction in our current stockholders’ percentage ownership and voting interest as a result of the proposed transaction;

the increase in indebtedness as a result of the proposed transactions, which will increase interest expenses and may decrease our operating flexibility;

Risks Related to Business

our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, 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 including in connection with our plan to make our systems all-digital in 2014;

the effects of governmental regulation on our business or potential business combination transaction;


ii




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.


iii



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
4

 
$
21

Accounts receivable, less allowance for doubtful accounts of
 
 
 
$18 and $19, respectively
217

 
234

Prepaid expenses and other current assets
83

 
67

Total current assets
304

 
322

 
 
 
 
INVESTMENT IN CABLE PROPERTIES:
 
 
 
Property, plant and equipment, net of accumulated
 
 
 
depreciation of $4,948 and $4,787, respectively
8,079

 
7,981

Franchises
6,009

 
6,009

Customer relationships, net
1,317

 
1,389

Goodwill
1,177

 
1,177

Total investment in cable properties, net
16,582

 
16,556

 
 
 
 
OTHER NONCURRENT ASSETS
411

 
417

 
 
 
 
Total assets
$
17,297

 
$
17,295

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued liabilities
$
1,523

 
$
1,467

Total current liabilities
1,523

 
1,467

 
 
 
 
LONG-TERM DEBT
14,090

 
14,181

DEFERRED INCOME TAXES
1,492

 
1,431

OTHER LONG-TERM LIABILITIES
65

 
65

 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
Class A common stock; $.001 par value; 900 million shares authorized;
 
 
 
108,300,060 and 106,144,075 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
1,778

 
1,760

Accumulated deficit
(1,605
)
 
(1,568
)
Treasury stock at cost; 77,834 and 0 shares, respectively
(11
)
 

Accumulated other comprehensive loss
(35
)
 
(41
)
Total shareholders’ equity
127

 
151

 
 
 
 
Total liabilities and shareholders’ equity
$
17,297

 
$
17,295


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 March 31,
 
2014
 
2013
 
 
 
 
REVENUES
$
2,202

 
$
1,917

 
 
 
 
COSTS AND EXPENSES:
 
 
 
Operating costs and expenses (excluding depreciation and amortization)
1,447

 
1,258

Depreciation and amortization
505

 
425

Other operating expenses, net
7

 
11

 
 
 
 
 
1,959

 
1,694

 
 
 
 
Income from operations
243

 
223

 
 
 
 
OTHER EXPENSES:
 
 
 
Interest expense, net
(211
)
 
(210
)
Loss on extinguishment of debt

 
(42
)
Loss on derivative instruments, net
(2
)
 
(3
)
Other expense, net
(3
)
 
(1
)
 
 
 
 
 
(216
)
 
(256
)
 
 
 
 
Income (loss) before income taxes
27

 
(33
)
 
 
 
 
Income tax expense
(64
)
 
(9
)
 
 
 
 
Net loss
$
(37
)
 
$
(42
)
 
 
 
 
LOSS PER COMMON SHARE, BASIC AND DILUTED
$
(0.35
)
 
$
(0.42
)
 
 
 
 
Weighted average common shares outstanding, basic and diluted
106,439,198

 
100,327,418


CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in millions)
Unaudited
 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Net loss
$
(37
)
 
$
(42
)
Net impact of interest rate derivative instruments, net of tax
6

 
11

 
 
 
 
Comprehensive loss
$
(31
)
 
$
(31
)

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
 
 
Three Months Ended March 31,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(37
)
 
$
(42
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
505

 
425

Noncash interest expense
 
10

 
13

Loss on extinguishment of debt
 

 
42

Loss on derivative instruments, net
 
2

 
3

Deferred income taxes
 
62

 
2

Other, net
 
15

 
12

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
 
Accounts receivable
 
18

 
26

Prepaid expenses and other assets
 
(17
)
 
(16
)
Accounts payable, accrued liabilities and other
 
19

 
76

Net cash flows from operating activities
 
577

 
541

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of property, plant and equipment
 
(539
)
 
(412
)
Change in accrued expenses related to capital expenditures
 
36

 
(11
)
Other, net
 
4

 
(9
)
Net cash flows from investing activities
 
(499
)
 
(432
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings of long-term debt
 
293

 
1,315

Repayments of long-term debt
 
(388
)
 
(1,355
)
Payments for debt issuance costs
 

 
(12
)
Purchase of treasury stock
 
(11
)
 
(5
)
Proceeds from exercise of options and warrants
 
6

 
5

Other, net
 
5

 
1

Net cash flows from financing activities
 
(95
)
 
(51
)
 
 
 
 
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
(17
)
 
58

CASH AND CASH EQUIVALENTS, beginning of period
 
21

 
7

CASH AND CASH EQUIVALENTS, end of period
 
$
4

 
$
65

 
 
 
 
 
CASH PAID FOR INTEREST
 
$
225

 
$
120



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 voice services, as well as advanced video services such as OnDemand™, high definition television, and digital video recorder (“DVR”) service. The Company sells its cable video programming, Internet, voice, 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 disclosed in these footnotes have been reclassified to conform with the 2014 presentation.

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 and borrowings under the Charter Operating credit facilities.





4


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 March 31, 2013
Revenues
$
2,048

Net loss
$
(68
)
Loss per common share, basic and diluted
$
(0.68
)

3.    Franchises, Goodwill and Other Intangible Assets

As of March 31, 2014 and December 31, 2013, indefinite lived and finite-lived intangible assets are presented in the following table:

 
 
March 31, 2014
 
December 31, 2013
 
 
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

 
$
6,009

 
$

 
$
6,009

Goodwill
 
1,177

 

 
1,177

 
1,177

 

 
1,177

Trademarks
 
158

 

 
158

 
158

 

 
158

Other intangible assets
 
4

 

 
4

 
4

 

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
7,348

 
$

 
$
7,348

 
$
7,348

 
$

 
$
7,348

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

 
$
1,300

 
$
1,317

 
$
2,617

 
$
1,228

 
$
1,389

Other intangible assets
 
134

 
48

 
86

 
130

 
44

 
86

 
 
$
2,751

 
$
1,348

 
$
1,403

 
$
2,747

 
$
1,272

 
$
1,475


Amortization expense related to customer relationships and other intangible assets for the three months ended March 31, 2014 and 2013 was $76 million and $68 million, respectively.
    


5


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.

Nine months ended December 31, 2014
 
$
222

2015
 
265

2016
 
231

2017
 
198

2018
 
163

Thereafter
 
324

 
 
 
 
 
$
1,403


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 liabilities consist of the following as of March 31, 2014 and December 31, 2013:

 
 
March 31, 2014
 
December 31, 2013
 
 
 
 
 
Accounts payable – trade
 
$
125

 
$
91

Accrued capital expenditures
 
271

 
235

Deferred revenue
 
88

 
90

Accrued liabilities:
 
 
 
 
Interest
 
175

 
195

Programming costs
 
414

 
379

Franchise related fees
 
56

 
62

Compensation
 
119

 
156

Other
 
275

 
259

 
 
 
 
 
 
 
$
1,523

 
$
1,467




6


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 March 31, 2014 and December 31, 2013:

 
March 31, 2014
 
December 31, 2013
 
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

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

 
1,393

 
1,400

 
1,393

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

 
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

 
747

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

 
1,239

 
1,250

 
1,239

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

 
500

 
500

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

 
1,000

 
1,000

 
1,000

Credit facility due September 6, 2014
350

 
345

 
350

 
342

Charter Communications Operating, LLC:
 
 
 
 
 
 
 
Credit facilities
3,453

 
3,416

 
3,548

 
3,510

Long-Term Debt
$
14,153

 
$
14,090

 
$
14,248

 
$
14,181


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 $1.2 billion as of March 31, 2014 and as such, debt maturing in the next twelve months is classified as long-term.

In March 2013, CCO Holdings, LLC ("CCO Holdings") and CCO Holdings Capital Corp. closed on transactions in which they issued $500 million aggregate principal amount of 5.250% senior notes due 2021 and $500 million aggregate principal amount of 5.750% senior notes due 2023. The proceeds 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 three months ended March 31, 2013 related to these transactions.

6.    Common Stock

During the three months ended March 31, 2014 and 2013, the Company withheld 77,834 and 59,113, respectively, shares of its common stock in payment of $11 million and $5 million income tax withholding owed by employees upon vesting of restricted shares, respectively. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders' equity.

During the three months ended March 31, 2014, the Company issued approximately 2 million shares of Charter Class A common stock as a result of exercises by holders who received warrants pursuant to the Joint Plan of Reorganization (the "Plan") upon the Company's emergence from bankruptcy.



7


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


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.

The effect of interest rate derivatives on the Company’s condensed consolidated balance sheets is presented in the table below:

 
March 31, 2014
 
December 31, 2013
 
 
 
 
Accrued interest
$
11

 
$
8

Other long-term liabilities
$
15

 
$
22

Accumulated other comprehensive loss
$
(35
)
 
$
(41
)

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 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 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 March 31, 2014 that is expected to be reclassified into earnings within the next twelve months is approximately $16 million.



8


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 March 31,
 
2014
 
2013
 
 
 
 
Loss on derivative instruments, net:
 
 
 
Change in fair value of interest rate derivative instruments not designated as cash flow hedges
$
4

 
$
1

Loss reclassified from accumulated other comprehensive loss into earnings as a result of cash flow hedge discontinuance
(6
)
 
(4
)
 
$
(2
)
 
$
(3
)
 
 
 
 
Interest expense:
 
 
 
Loss reclassified from accumulated other comprehensive loss into interest expense
$

 
$
(10
)

As of March 31, 2014 and December 31, 2013, the Company had $1.7 billion and $2.2 billion, respectively, in notional amounts of interest rate derivative instruments outstanding. As of March 31, 2014, this includes $250 million in delayed start interest rate derivative instruments that become effective in September 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 $1.5 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 March 31, 2014 and December 31, 2013 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.



9


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 March 31, 2014 and December 31, 2013 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 March 31, 2014 and December 31, 2013 is as follows:

 
 
March 31, 2014
 
December 31, 2013
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Debt
 
 
 
 
 
 
 
 
CCO Holdings senior notes
 
$
10,329

 
$
10,687

 
$
10,329

 
$
10,384

Credit facilities
 
$
3,761

 
$
3,772

 
$
3,852

 
$
3,848


The fair value of interest rate derivative instruments were $26 million and $30 million and classified as liabilities as of March 31, 2014 and December 31, 2013, 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 2.04% and 2.17% at March 31, 2014 and December 31, 2013, 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 months ended March 31, 2014 and 2013.

9.     Operating Costs and Expenses

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

 
Three Months Ended March 31,
 
2014
 
2013
Programming
$
606

 
$
512

Franchise, regulatory and connectivity
107

 
95

Costs to service customers
400

 
373

Marketing
133

 
110

Other
201

 
168

 
 
 
 
 
$
1,447

 
$
1,258


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 voice services. Costs to service customers include residential and commercial costs related to field operations, network operations and customer care including labor, reconnects, maintenance, billing and collection, 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 expense, corporate overhead, commercial and advertising sales expenses, property tax and insurance and stock compensation expense, among others.



10


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 March 31,
 
2014
 
2013
 
 
 
 
Loss on sale of assets, net
$
3

 
$
1

Special charges, net
4

 
10

 
 
 
 
 
$
7

 
$
11


Loss on sale of assets, net

Loss on sale of assets represents the net loss recognized on the sales and disposals of fixed assets and cable systems.

Special charges, net

Special charges, net for the three months ended March 31, 2014 and 2013 primarily include severance charges and in 2013, 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 months ended March 31, 2014 and 2013, the Company recorded $64 million and $9 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. The three months ended March 31, 2013 included a step-up in basis of indefinite-lived assets for tax, but not GAAP purposes, resulting from the effects of partnership gains related to financing transactions (see Note 5), which decreased the Company's net deferred tax liability related to indefinite-lived assets resulting in a benefit of $57 million.

The tax provision in future periods will vary based on various factors including changes in the Company's 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 these items unless it enters into other restructuring transactions or similar future financing. The ultimate impact on the tax provision of such future financing and restructuring activities, if any, will be dependent on the underlying facts and circumstances at the time.

As of March 31, 2014 and December 31, 2013, the Company had net deferred income tax liabilities of approximately $1.5 billion and $1.4 billion, respectively. Net current deferred tax assets of $15 million and $16 million as of March 31, 2014 and December 31, 2013, 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 $227 million and $226 million at March 31, 2014 and December 31, 2013, respectively, relating to certain indirect subsidiaries of Charter Holdco that file 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 considers the need for and establishes a reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon


11


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


examination, based on their technical merits. There is considerable judgment involved in making such a determination.  As of March 31, 2014, the Company believes it is appropriate that no reserve has been recorded.

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 tax loss carryforwards. The first ownership change limitations that applied as a result of our emergence from bankruptcy in 2009 will also continue to apply.
No tax years for Charter or Charter Holdco, for income tax purposes, are currently under examination by the IRS.  Tax years ending 2010 through 2013 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 represented as of May 1, 2013, 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. 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, chief executive officer 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. 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 36.0% 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 37.6% 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 months ended March 31, 2014, the Company received payments in aggregate of approximately $3 million 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 4.5% in the aggregate of the common stock of Discovery and has a 28.9% voting interest in Discovery for the election of directors. In addition, Dr. Malone owns 10.1% in the aggregate of the common stock of Starz and has 45.5% 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 months ended March 31, 2014.


12


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



13.     Contingencies

The Montana Department of Revenue ("Montana DOR") generally assesses property taxes on cable companies at 3% and on telephone companies at 6%. Historically, Bresnan's cable and telephone operations have been taxed separately by the Montana DOR. In 2010, the Montana DOR assessed Bresnan as a single telephone business and retroactively assessed it as such for 2007 through 2009. Bresnan filed a declaratory judgment action against the Montana DOR in Montana State Court challenging its property tax classifications for 2007 through 2010. Under Montana law, a taxpayer must first pay a current assessment of disputed property tax in order to challenge such assessment. In accordance with that law, Bresnan paid the disputed 2010, 2011 and 2012 property tax assessments of approximately $5 million, $11 million and $9 million, respectively, under protest. No payments for additional tax for 2007 through 2009, which could be up to approximately $16 million cumulative, including interest, were made at that time. On September 26, 2011, the Montana State Court granted Bresnan's summary judgment motion seeking to vacate the Montana DOR's retroactive tax assessments for the years 2007, 2008 and 2009. The Montana DOR's assessment for 2010 was the subject of a trial, which took place the week of October 24, 2011. On July 6, 2012, the Montana State Court entered judgment in favor of Bresnan, ruling that the Montana's DOR 2010 assessment was invalid and contrary to law, vacating the 2010 assessment, and directing that the Montana DOR refund the amounts paid by Bresnan under protest, plus interest and certain costs. The Montana DOR filed a notice of appeal to the Montana Supreme Court on September 20, 2012. The appeal was fully briefed, and was argued to the Montana Supreme Court in September 2013. On December 2, 2013, the Montana Supreme Court reversed the trial court’s decision and remanded the matter to the trial court. Charter filed a petition for rehearing which was denied on January 7, 2014. At this point, there have been no further proceedings before the trial court, although Charter has filed pleadings to renew challenges to the Montana DOR’s assessments that had been mooted by the Montana State Court’s prior ruling. With respect to the Montana Supreme Court ruling, Charter’s primary remaining course of action is an appeal to the U.S. Supreme Court. A decision has not been made as to whether this appeal will be pursued. Pending entry of a final judgment, the Montana DOR continues to hold Charter's protest payments aggregating approximately $25 million in escrow and continues to assess the Company as a single telephone business. The Company will make additional protest payments until a final judgment is entered, including payments for 2007, 2008 and 2009. The prior years' assessments are accrued in the Company's financial statements.

The Company is a defendant, co-defendant or plaintiff seeking declaratory judgments in several lawsuits involving alleged infringement of various patents relating to various aspects of its businesses.  Other industry participants are also defendants or plaintiffs seeking declaratory judgments 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 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.



13


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


The Company granted the following equity awards for the years presented.

 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Stock options
1,174,800

 
102,500

Restricted stock

 

Restricted stock units
143,700

 
26,200


Stock options generally vest annually over three or 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 three or four years from either the grant date or delayed vesting commencement dates. As of March 31, 2014, total unrecognized compensation remaining to be recognized in future periods totaled $78 million for stock options, $15 million for restricted stock and $31 million for restricted stock units and the weighted average period over which they are expected to be recognized is 3 years for stock options, 2 years for restricted stock and 3 years for restricted stock units.

The Company recorded $12 million and $11 million of stock compensation expense for the three months ended March 31, 2014 and 2013, 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 March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 follow.


14


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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$

 
$
4

 
$

 
$
4

Accounts receivable, net
4

 
3

 

 
210

 

 
217

Receivables from related party
47

 
192

 
3

 

 
(242
)
 

Prepaid expenses and other current assets
14

 
13

 

 
56

 

 
83

Total current assets
65

 
208

 
3

 
270

 
(242
)
 
304

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

 
30

 

 
8,049

 

 
8,079

Franchises

 

 

 
6,009

 

 
6,009

Customer relationships, net

 

 

 
1,317

 

 
1,317

Goodwill

 

 

 
1,177

 

 
1,177

Total investment in cable properties, net

 
30

 

 
16,552

 

 
16,582

 
 
 
 
 
 
 
 
 
 
 
 
CC VIII PREFERRED INTEREST

 
403

 

 

 
(403
)
 

INVESTMENT IN SUBSIDIARIES
1,331

 
349

 
10,597

 

 
(12,277
)
 

LOANS RECEIVABLE – RELATED PARTY

 
326

 
472

 

 
(798
)
 

OTHER NONCURRENT ASSETS

 
160

 
115

 
136

 

 
411

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,396

 
$
1,476

 
$
11,187

 
$
16,958

 
$
(13,720
)
 
$
17,297

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
5

 
$
131

 
$
164

 
$
1,223

 
$

 
$
1,523

Payables to related party

 

 

 
242

 
(242
)
 

Total current liabilities
5

 
131

 
164

 
1,465

 
(242
)
 
1,523

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT

 

 
10,674

 
3,416

 

 
14,090

LOANS PAYABLE – RELATED PARTY

 

 

 
798

 
(798
)
 

DEFERRED INCOME TAXES
1,264

 

 

 
228

 

 
1,492

OTHER LONG-TERM LIABILITIES

 
14

 

 
51

 

 
65

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’/Member’s equity
127

 
1,331

 
349

 
10,597

 
(12,277
)
 
127

Noncontrolling interest

 

 

 
403

 
(403
)
 

Total shareholders’/member’s equity
127

 
1,331

 
349

 
11,000

 
(12,680
)
 
127

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’/member’s equity
$
1,396

 
$
1,476

 
$
11,187

 
$
16,958

 
$
(13,720
)
 
$
17,297




15


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, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
5

 
$

 
$
16

 
$

 
$
21

Accounts receivable, net
4

 
4

 

 
226

 

 
234

Receivables from related party
54

 
170

 
11

 

 
(235
)
 

Prepaid expenses and other current assets
14

 
10

 

 
43

 

 
67

Total current assets
72

 
189

 
11

 
285

 
(235
)
 
322

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

 
30

 

 
7,951

 

 
7,981

Franchises

 

 

 
6,009

 

 
6,009

Customer relationships, net

 

 

 
1,389

 

 
1,389

Goodwill

 

 

 
1,177

 

 
1,177

Total investment in cable properties, net

 
30

 

 
16,526

 

 
16,556

 
 
 
 
 
 
 
 
 
 
 
 
CC VIII PREFERRED INTEREST

 
392

 

 

 
(392
)
 

INVESTMENT IN SUBSIDIARIES
1,295

 
325

 
10,592

 

 
(12,212
)
 

LOANS RECEIVABLE – RELATED PARTY

 
318

 
461

 

 
(779
)
 

OTHER NONCURRENT ASSETS

 
160

 
119

 
138

 

 
417

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,367

 
$
1,414

 
$
11,183

 
$
16,949

 
$
(13,618
)
 
$
17,295

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

 
$
113

 
$
187

 
$
1,155

 
$

 
$
1,467

Payables to related party

 

 

 
235

 
(235
)
 

Total current liabilities
12

 
113

 
187

 
1,390

 
(235
)
 
1,467

 
 
 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT

 

 
10,671

 
3,510

 

 
14,181

LOANS PAYABLE – RELATED PARTY

 

 

 
779

 
(779
)
 

DEFERRED INCOME TAXES
1,204

 

 

 
227

 

 
1,431

OTHER LONG-TERM LIABILITIES

 
6

 

 
59

 

 
65

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’/Member’s equity
151

 
1,295

 
325

 
10,592

 
(12,212
)
 
151

Noncontrolling interest

 

 

 
392

 
(392
)
 

Total shareholders’/member’s equity
151

 
1,295

 
325

 
10,984

 
(12,604
)
 
151

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’/member’s equity
$
1,367

 
$
1,414

 
$
11,183

 
$
16,949

 
$
(13,618
)
 
$
17,295




16


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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
$
5

 
$
60

 
$

 
$
2,202

 
$
(65
)
 
$
2,202

 
 
 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses (excluding depreciation and amortization)
5

 
60

 

 
1,447

 
(65
)
 
1,447

Depreciation and amortization

 

 

 
505

 

 
505

Other operating expenses, net

 

 

 
7

 

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
5

 
60

 

 
1,959

 
(65
)
 
1,959

 
 
 
 
 
 
 
 
 
 
 
 
Income from operations

 

 

 
243

 

 
243

 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net

 
2

 
(171
)
 
(42
)
 

 
(211
)
Loss on derivative instruments, net

 

 

 
(2
)
 

 
(2
)
Other expense, net

 

 

 
(3
)
 

 
(3
)
Equity in income (loss) of subsidiaries
24

 
11

 
182

 

 
(217
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
24

 
13

 
11

 
(47
)
 
(217
)
 
(216
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
24

 
13

 
11

 
196

 
(217
)
 
27

 
 
 
 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
(61
)
 

 

 
(3
)
 

 
(64
)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
(37
)
 
13

 
11

 
193

 
(217
)
 
(37
)
 
 
 
 
 
 
 
 
 
 
 
 
Less: Net (income) loss – noncontrolling interest

 
11

 

 
(11
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(37
)
 
$
24

 
$
11

 
$
182

 
$
(217
)
 
$
(37
)



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 Statement of Operations
For the three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
$
5

 
$
46

 
$

 
$
1,917

 
$
(51
)
 
$
1,917

 
 
 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses (excluding depreciation and amortization)
5

 
46

 

 
1,258

 
(51
)
 
1,258

Depreciation and amortization

 

 

 
425

 

 
425

Other operating expenses, net

 

 

 
11

 

 
11

 
 
 
 
 
 
 
 
 
 
 
 
 
5

 
46

 

 
1,694

 
(51
)
 
1,694

 
 
 
 
 
 
 
 
 
 
 
 
Income from operations

 

 

 
223

 

 
223

 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net

 
2

 
(164
)
 
(48
)
 

 
(210
)
Loss on extinguishment of debt

 

 

 
(42
)
 

 
(42
)
Loss on derivative instruments, net

 

 

 
(3
)
 

 
(3
)
Other expense, net

 

 

 
(1
)
 

 
(1
)
Equity in income (loss) of subsidiaries
(37
)
 
(47
)
 
117

 

 
(33
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
(37
)
 
(45
)
 
(47
)
 
(94
)
 
(33
)
 
(256
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(37
)
 
(45
)
 
(47
)
 
129

 
(33
)
 
(33
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
(8
)
 

 

 
(1
)
 

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
(45
)
 
(45
)
 
(47
)
 
128

 
(33
)
 
(42
)
 
 
 
 
 
 
 
 
 
 
 
 
Less: Net (income) loss – noncontrolling interest
3

 
8

 

 
(11
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(42
)
 
$
(37
)
 
$
(47
)
 
$
117

 
$
(33
)
 
$
(42
)



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 Statement of Comprehensive Income (Loss)
For the three months ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(37
)
 
$
13

 
$
11

 
$
193

 
$
(217
)
 
$
(37
)
Net impact of interest rate derivative instruments, net of tax

 

 

 
6

 

 
6

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
(37
)
 
$
13

 
$
11

 
$
199

 
$
(217
)
 
$
(31
)

Charter Communications, Inc.
Condensed Consolidating Statement of Comprehensive Income (Loss)
For the three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(45
)
 
$
(45
)
 
$
(47
)
 
$
128

 
$
(33
)
 
$
(42
)
Net impact of interest rate derivative instruments, net of tax

 

 

 
11

 

 
11

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
(45
)
 
$
(45
)
 
$
(47
)
 
$
139

 
$
(33
)
 
$
(31
)



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 Cash Flows
For the three months ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(37
)
 
$
13

 
$
11

 
$
193

 
$
(217
)
 
$
(37
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 

 

 
505

 

 
505

Noncash interest expense

 

 
7

 
3

 

 
10

Loss on derivative instruments, net

 

 

 
2

 

 
2

Deferred income taxes
61

 

 

 
1

 

 
62

Equity in (income) losses of subsidiaries
(24
)
 
(11
)
 
(182
)
 

 
217

 

Other, net

 
(1
)
 

 
16

 

 
15

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

 
1

 

 
17

 

 
18

Prepaid expenses and other assets

 
(3
)
 

 
(14
)
 

 
(17
)
Accounts payable, accrued liabilities and other
(6
)
 
18

 
(24
)
 
31

 

 
19

Receivables from and payables to related party
6

 
(28
)
 
(3
)
 
25

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Net cash flows from operating activities

 
(11
)
 
(191
)
 
779

 

 
577

 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment

 

 

 
(539
)
 

 
(539
)
Change in accrued expenses related to capital expenditures

 

 

 
36

 

 
36

Distributions from subsidiary
5

 
25

 
196

 

 
(226
)
 

Other, net

 
(1
)
 

 
5

 

 
4

 
 
 
 
 
 
 
 
 
 
 
 
Net cash flows from investing activities
5

 
24

 
196

 
(498
)
 
(226
)
 
(499
)
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Borrowings of long-term debt

 

 

 
293

 

 
293

Repayments of long-term debt

 

 

 
(388
)
 

 
(388
)
Purchase of treasury stock
(11
)
 

 

 

 

 
(11
)
Proceeds from exercise of options and warrants
6

 

 

 

 

 
6

Distributions to parent

 
(25
)
 
(5
)
 
(196
)
 
226

 

Other, net

 
7

 

 
(2
)
 

 
5

 
 
 
 
 
 
 
 
 
 
 
 
Net cash flows from financing activities
(5
)
 
(18
)
 
(5
)
 
(293
)
 
226

 
(95
)
 
 
 
 
 
 
 
 
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS

 
(5
)
 

 
(12
)
 

 
(17
)
CASH AND CASH EQUIVALENTS, beginning of period

 
5

 

 
16

 

 
21

 
 
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
$

 
$

 
$

 
$
4

 
$

 
$
4



20


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


Charter Communications, Inc.
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Charter
 
Intermediate Holding Companies
 
CCO
Holdings
 
Charter Operating and Subsidiaries
 
Eliminations
 
Charter Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income (loss)
$
(45
)
 
$
(45
)
 
$
(47
)
 
$
128

 
$
(33
)
 
$
(42
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 

 

 
425

 

 
425

Noncash interest expense

 

 
6

 
7

 

 
13

Loss on extinguishment of debt

 

 

 
42

 

 
42

Loss on derivative instruments, net

 

 

 
3

 

 
3

Deferred income taxes
2

 

 

 

 

 
2

Equity in (income) losses of subsidiaries
37

 
47

 
(117
)
 

 
33

 

Other, net

 

 

 
12

 

 
12

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable

 
(4
)
 

 
30

 

 
26

Prepaid expenses and other assets

 

 

 
(16
)
 

 
(16
)
Accounts payable, accrued liabilities and other
(2
)
 
(10
)
 
76

 
12

 

 
76

Receivables from and payables to related party
15

 
13

 
(1
)
 
(27
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
Net cash flows from operating activities
7

 
1

 
(83
)
 
616

 

 
541

 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment

 

 

 
(412
)
 

 
(412
)
Change in accrued expenses related to capital expenditures

 

 

 
(11
)
 

 
(11
)
Contribution to subsidiary

 

 
(988
)
 

 
988

 

Distributions from subsidiary

 

 
84

 

 
(84
)
 

Other, net

 

 

 
(9
)
 

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
Net cash flows from investing activities

 

 
(904
)
 
(432
)
 
904

 
(432
)
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
 
Borrowings of long-term debt

 

 
1,000

 
315

 

 
1,315

Repayments of long-term debt

 

 

 
(1,355
)
 

 
(1,355
)
Payments for debt issuance costs

 

 
(12
)
 

 

 
(12
)
Purchase of treasury stock
(5
)
 

 

 

 

 
(5
)
Proceeds from exercise of options and warrants
5

 

 

 

 

 
5

Contributions from parent

 

 

 
988

 
(988
)
 

Distributions to parent

 

 

 
(84
)
 
84

 

Other, net

 

 

 
1

 

 
1

 
 
 
 
 
 
 
 
 
 
 
 
Net cash flows from financing activities

 

 
988

 
(135
)
 
(904
)
 
(51
)
 
 
 
 
 
 
 
 
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
7

 
1

 
1

 
49

 

 
58

CASH AND CASH EQUIVALENTS, beginning of period
1

 

 

 
6

 

 
7

 
 
 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
$
8

 
$
1

 
$
1

 
$
55

 
$

 
$
65





21


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


16.     Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of components of an Entity ("ASU 2014-08"). ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new guidance, a disposed component of an organization that represents a strategic shift that has (or will have) a major effect on its operations and financial results is a discontinued operation. For disposals of individually significant components that do not qualify for discontinued operations presentation, an entity must disclose pre-tax profit or loss of the disposed component. ASU 2014-08 requires prospective application to all disposals that are classified as held for sale and that occur within annual and interim periods beginning on or after December 15, 2015, with earlier application permitted for disposals that have not been reported in previously issued financial statements. The Company is currently evaluating the impact of ASU 2014-08 to its consolidated financial statements.

17.     Subsequent Events

On April 25, 2014, the Company entered into a binding definitive agreement (the “Agreement”) with Comcast Corporation (“Comcast”), which contemplates three transactions: (1) an asset purchase, (2) an asset exchange and (3) a contribution and spin-off transaction (collectively, the “Transactions”) as described in more detail below. The Transactions are expected to be executed substantially contemporaneously with each other and will be consummated as promptly as practicable following the merger of a subsidiary of Comcast with Time Warner Cable, Inc. (“TWC”) as previously announced by Comcast and TWC. The completion of the Transactions will result in the combined Comcast-TWC entity divesting approximately 3.9 million customers and Charter acquiring 1.4 million existing TWC customers, increasing its current video customer base from 4.4 million to approximately 5.7 million. Additionally, the Company will provide management services to the spun-off company, which will serve approximately 2.5 million customers, and the Company will be reimbursed the actual costs of such services, in addition to a fee of 4.25% of the spun-off company’s gross revenues.
Asset Purchase

At closing, the Company will acquire from Comcast systems currently owned by TWC serving approximately 1.4 million customers and all other assets and liabilities primarily related to such systems for cash consideration. The consideration for the assets purchased will be financed with new indebtedness of Charter and is currently estimated at approximately $7.3 billion. The Company will pay to Comcast the tax benefit of the step up it receives in the tax basis of the assets. Such tax benefit will be paid as realized by the Company over an eight year period, and an additional payment will be made at the end of such eight year period in the amount of any remaining tax benefit (on a present value basis).
Asset Exchange
At closing, the Company and Comcast will exchange certain systems serving approximately 1.6 million customers of each company and all other assets and liabilities primarily related to such systems in a tax-efficient like kind exchange, improving the geographic presence of both companies, leading to greater operational efficiencies, improved technology deployment and enhanced customer service.

Contribution and Spin-Off

CCH I, LLC (“CCH I”), a current subsidiary of Charter will form a new subsidiary which will merge with Charter, through a tax free reorganization. CCH I will become the new holding company (“New Charter”) that will own 100% of Charter, and acquire an approximate 33% stake in a new publicly-traded cable provider to be spun-off by Comcast serving approximately 2.5 million existing Comcast customers (“SpinCo”). New Charter will acquire its interest in SpinCo by issuing New Charter stock to Comcast shareholders (including former TWC shareholders). Comcast shareholders, including the former TWC shareholders, are expected to own approximately 67% of SpinCo, while New Charter is expected to directly own approximately 33% of SpinCo. SpinCo expects to incur leverage of approximately 5 times its estimated pro forma EBITDA to fund a distribution to Comcast. At closing, SpinCo will have a board of nine directors, separated into three classes, and will include six independent directors and three directors designated by Charter. Comcast will hold no ownership interest in SpinCo (or New Charter) and will have no role in managing SpinCo.



22


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


The asset purchase, asset exchange and the acquisition of interests in SpinCo will be valued at a 7.125 times 2014 EBITDA multiple (as defined by the parties), subject to certain post-closing adjustments.



23



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

General

Charter Communications, Inc. (“Charter”) is a holding company whose principal asset is a 100% common equity interest in Charter Communications Holding Company, LLC (“Charter Holdco”). Charter owns cable systems through its subsidiaries.

We are a cable operator providing services in the United States with approximately 6.1 million residential and commercial customers at March 31, 2014. We offer our customers traditional cable video programming, Internet services, and voice services, as well as advanced video services such as OnDemandTM (“OnDemand”), high definition (“HD”) television and digital video recorder (“DVR”) service. We also sell local advertising on cable networks and provide fiber connectivity to cellular towers.

Recent Events
On April 25, 2014, we entered into a binding definitive agreement (the “Agreement”) with Comcast Corporation (“Comcast”), which contemplates three transactions: (1) an asset purchase, (2) an asset exchange and (3) a contribution and spin-off transaction (collectively, the “Transactions”) as described in more detail below. The Transactions are expected to be executed substantially contemporaneously with each other and will be consummated as promptly as practicable following the merger of a subsidiary of Comcast with Time Warner Cable, Inc. (“TWC”) as previously announced by Comcast and TWC. The completion of the Transactions will result in the combined Comcast-TWC entity divesting approximately 3.9 million customers and Charter acquiring 1.4 million existing TWC customers, increasing our current video customer base from 4.4 million to approximately 5.7 million. Additionally, we will provide management services to the spun-off company, which will serve approximately 2.5 million customers, and we will be reimbursed the actual costs of such services, in addition to a fee of 4.25% of the spun-off company’s gross revenues.
Asset Purchase

At closing, we will acquire from Comcast systems currently owned by TWC serving approximately 1.4 million customers and all other assets and liabilities primarily related to such systems for cash consideration. The consideration for the assets purchased will be financed with new indebtedness of Charter and is currently estimated at approximately $7.3 billion. We will pay to Comcast the tax benefit of the step up we receive in the tax basis of the assets. Such tax benefit will be paid as realized by us over an eight year period, and an additional payment will be made at the end of such eight year period in the amount of any remaining tax benefit (on a present value basis).
Asset Exchange
At closing, we and Comcast will exchange certain systems serving approximately 1.6 million customers of each company and all other assets and liabilities primarily related to such systems in a tax-efficient like kind exchange, improving the geographic presence of both companies, leading to greater operational efficiencies, improved technology deployment and enhanced customer service.

Contribution and Spin-Off

CCH I, LLC (“CCH I”), a current subsidiary of Charter will form a new subsidiary which will merge with Charter, through a tax free reorganization. CCH I will become the new holding company (“New Charter”) that will own 100% of Charter, and acquire an approximate 33% stake in a new publicly-traded cable provider to be spun-off by Comcast serving approximately 2.5 million existing Comcast customers (“SpinCo”). New Charter will acquire its interest in SpinCo by issuing New Charter stock to Comcast shareholders (including former TWC shareholders). Comcast shareholders, including the former TWC shareholders, are expected to own approximately 67% of SpinCo, while New Charter is expected to directly own approximately 33% of SpinCo. SpinCo expects to incur leverage of approximately 5 times its estimated pro forma EBITDA to fund a distribution to Comcast. At closing, SpinCo will have a board of nine directors, separated into three classes, and will include six independent directors and three directors designated by Charter. Comcast will hold no ownership interest in SpinCo (or New Charter) and will have no role in managing SpinCo.

The asset purchase, asset exchange and the acquisition of interests in SpinCo will be valued at a 7.125 times 2014 EBITDA multiple (as defined by the parties), subject to certain post-closing adjustments.


24




Acquisition of Bresnan

In July 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 ("Cablevision"), for $1.625 billion in cash, subject to a working capital adjustment and a reduction for certain funded indebtedness of Bresnan (the "Bresnan Acquisition"). Bresnan manages cable operating systems in Colorado, Montana, Wyoming and Utah that pass approximately 670,000 homes and serve approximately 375,000 residential and commercial customer relationships.

Overview

Our business plans include goals for increasing customers and revenue. To reach our goals, we have actively invested in our network and operations, and have improved the quality and value of the products and packages that we offer. We have enhanced our video product by increasing digital and HD-DVR penetration, offering more HD channels, and deemphasizing our analog service. We simplified our offers and pricing and improved our packaging of products to bring more value to new and existing customers. As part of our effort to create more value for customers, we have focused on driving penetration of our triple play offering, which includes more than 100 HD channels, video on demand, Internet service, and fully-featured voice service. In addition, we have implemented a number of changes to our organizational structure, selling methods and operating tactics. We are increasingly insourcing our field operations, call center and direct sales workforces and modifying the way our sales workforce is compensated, which we believe positions us for better customer service and growth. We expect that our enhanced product set combined with improved customer service will lead to lower customer churn and longer customer lifetimes, allowing us to grow our customer base and revenue more quickly and economically. We expect our capital expenditures to remain elevated as we strive to increase digital and HD-DVR penetration, place higher levels of customer premise equipment per transaction and progressively move to an all-digital platform.

Total revenue growth was 15% for the three months ended March 31, 2014 compared to the corresponding period in 2013, due to the Bresnan Acquisition described above and growth in our video, Internet and commercial businesses. Total revenue growth on a pro forma basis for the Bresnan Acquisition as if it had occurred on January 1, 2013 was 8% for the three months ended March 31, 2014 compared to the corresponding period in 2013. For the three months ended March 31, 2014 and 2013, adjusted earnings (loss) before interest expense, income taxes, depreciation and amortization (“Adjusted EBITDA”) was $767 million and $670 million, respectively.  See “—Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow.  Adjusted EBITDA increased 14% for the three months ended March 31, 2014 compared to the corresponding period in 2013 as a result of the Bresnan Acquisition, which contributed $45 million, and an increase in residential and commercial revenues offset by increases in programming costs and marketing costs. For the three months ended March 31, 2014 and 2013, our income from operations was $243 million and $223 million, respectively. In addition to the factors discussed above, income from operations for the three months ended March 31, 2014 was affected by increases in depreciation and amortization primarily due to the Bresnan Acquisition.

We believe that continued competition and the prolonged recovery of economic conditions in the United States, including mixed recovery in the housing market and relatively high unemployment levels, have adversely affected consumer demand for our services, particularly video. Historically, our primary video competitors have often offered more HD channels and have typically only offered digital services which have a better picture quality compared to our legacy analog product. In response, Charter has promoted its digital product and initiated a transition from analog to digital transmission of all channels we distribute, which will result in substantially more HD channels and higher Internet speeds. In the current economic environment, customers have been more willing to consider our competitors' products, partially because of increased marketing highlighting perceived differences between competitive video products, especially when those competitors are often offering significant incentives to switch providers. We also believe some customers have chosen to receive video over the Internet rather than through our OnDemand and premium video services, thereby reducing our video revenues. We believe competition from wireless service operators and economic factors have contributed to an increase in the number of homes that replace their traditional telephone service with wireless service thereby impacting the growth of our telephone business.
  
If the economic and competitive conditions discussed above do not improve, we believe our business and results of operations may be adversely affected, which may contribute to future impairments of our franchises and goodwill.

We have a history of net losses.  Our net losses are principally attributable to insufficient revenue to cover the combination of operating expenses, interest expenses that we incur because of our debt, depreciation expenses resulting from the capital investments we have made and continue to make in our cable properties, amortization expenses related to our customer relationship intangibles and non-cash taxes resulting from increases in our deferred tax liabilities.


25



  
The following table summarizes our customer statistics for video, Internet and voice as of March 31, 2014 and 2013 (in thousands except revenue per customer relationship).

 
Approximate as of
 
March 31,
 
2014 (a)
 
2013 (a)
Residential
 
 
 
Video (b)
4,195

 
3,965

Internet (c)
4,519

 
3,884

Voice (d)
2,325

 
1,973

Residential PSUs (e)
11,039

 
9,822

 
 
 
 
Residential Customer Relationships (f)
5,673

 
5,091

Monthly Residential Revenue per Residential Customer (g)
$
110.29

 
$
107.25

 
 
 
 
Commercial
 
 
 
Video (b)(h)
160

 
159

Internet (c)
269

 
202

Voice (d)
152

 
112

Commercial PSUs (e)
581

 
473

 
 
 
 
Commercial Customer Relationships (f)(h)
379

 
323


After giving effect to the Bresnan Acquisition in July 2013 described above, March 31, 2013 residential video, Internet and phone customers would have been 4,261,000, 4,166,000 and 2,131,000, respectively, and commercial video, Internet and phone customers would have been 167,000, 220,000 and 123,000, respectively.

(a)
We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, at March 31, 2014 and 2013, customers include approximately 11,100 and 12,000 customers, respectively, whose accounts were over 60 days past due in payment, approximately 900 and 2,400 customers, respectively, whose accounts were over 90 days past due in payment, and approximately 800 and 1,300 customers, respectively, whose accounts were over 120 days past due in payment.

(b)
“Video customers” represent those customers who subscribe to our video cable services. Our methodology for reporting residential video customers generally excludes units under bulk arrangements, unless those units have a digital set-top box, thus a direct billing relationship. As we complete our all-digital transition, bulk units are supplied with digital set-top boxes adding to our bulk digital upgrade customers. First quarter 2014 and 2013 residential video net additions include 16,000 and 5,000, respectively, bulk video units as a result of adding digital set-top boxes to bulk units.

(c)
“Internet customers” represent those customers who subscribe to our Internet services.

(d)
“Voice customers” represent those customers who subscribe to our voice services.

(e)
“Primary Service Units” or “PSUs” represent the total of video, Internet and voice customers.

(f)
"Customer Relationships" include the number of customers that receive one or more levels of service, encompassing video, Internet and voice services, without regard to which service(s) such customers receive. This statistic is computed in accordance with the guidelines of the National Cable & Telecommunications Association ("NCTA"). Commercial customer relationships include video customers in commercial structures, which are calculated on an EBU basis (see footnote (h)) and non-video commercial customer relationships.

(g)
"Monthly Residential Revenue per Residential Customer" is calculated as total residential video, Internet and voice quarterly revenue divided by three divided by average residential customer relationships during the respective quarter.


26




(h)
Included within commercial video customers are those in commercial structures, which are calculated on an equivalent bulk unit (“EBU”) basis. We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service. This EBU method of estimating basic video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators. As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers. For example, commercial video customers decreased by 5,000 and 10,000 during the three months ended March 31, 2014 and 2013, respectively, due to published video rate increases and other revisions to customer reporting methodology.

Critical Accounting Policies and Estimates

For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report on Form 10-K.

Results of Operations

The following table sets forth the percentages of revenues that items in the accompanying condensed consolidated statements of operations constituted for the periods presented (dollars in millions, except per share data):

 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenues
$
2,202

 
100
%
 
$
1,917

 
100
%
 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Operating (excluding depreciation and amortization)
1,447

 
66
%
 
1,258

 
66
%
Depreciation and amortization
505

 
23
%
 
425

 
22
%
Other operating expenses, net
7

 
%
 
11

 
1
%
 
1,959

 
89
%
 
1,694

 
88
%
Income from operations
243

 
11
%
 
223

 
12
%
 
 
 
 
 
 
 
 
Other Expenses:
 
 
 
 
 
 
 
Interest expense, net
(211
)
 
 
 
(210
)
 
 
Loss on extinguishment of debt

 
 
 
(42
)
 
 
Loss on derivative instruments, net
(2
)
 
 
 
(3
)
 
 
Other expense, net
(3
)
 
 
 
(1
)
 
 
 
(216
)
 
 
 
(256
)
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
27

 
 
 
(33
)
 
 
 
 
 
 
 
 
 
 
Income tax expense
(64
)
 
 
 
(9
)
 
 
 
 
 
 
 
 
 
 
Net loss
$
(37
)
 
 
 
$
(42
)
 
 
 
 
 
 
 
 
 
 
LOSS PER COMMON SHARE, BASIC AND DILUTED:
$
(0.35
)
 
 
 
$
(0.42
)
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
106,439,198

 
 
 
100,327,418

 
 



27



Revenues. Total revenue grew $285 million or 15% for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Revenue growth primarily reflects increases in the number of residential Internet and triple play customers and in commercial business customers, growth in expanded basic and digital penetration, promotional and annual rate increases, and higher advanced services penetration offset by a decrease in basic video customers. The Bresnan Acquisition increased revenues for each of the three months ended March 31, 2014 as compared to the three months March 31, 2013 by approximately $137 million.
    

Revenues by service offering were as follows (dollars in millions):

 
Three Months Ended March 31,
 
 
 
 
 
2014
 
2013
 
2014 over 2013
 
Revenues
 
% of Revenues
 
Revenues
 
% of Revenues
 
Change
 
% Change
Video
$
1,090

 
50
%
 
$
958

 
50
%
 
$
132

 
14
 %
Internet
616

 
28
%
 
501

 
26
%
 
115

 
23
 %
Voice
150

 
7
%
 
171

 
9
%
 
(21
)
 
(12
)%
Commercial
234

 
11
%
 
181

 
9
%
 
53

 
29
 %
Advertising sales
68

 
3
%
 
60

 
3
%
 
8

 
13
 %
Other
44

 
2
%
 
46

 
2
%
 
(2
)
 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,202

 
100
%
 
$
1,917

 
100
%
 
$
285

 
15
 %

Video revenues consist primarily of revenues from basic and digital video services provided to our non-commercial customers, as well as franchise fees, equipment rental and video installation revenue. Residential basic video customers increased by 230,000 from March 31, 2013 to March 31, 2014, however customers decreased by 66,000 customers after giving effect to the Bresnan Acquisition.

The increase in video revenues is attributable to the following (dollars in millions):

 
 
Three months ended
March 31, 2014
compared to
three months ended
March 31, 2013
Increase / (Decrease)
 
 
 
Incremental video services, price adjustments and bundle revenue allocation
 
$
84

Decrease in basic video customers
 
(15
)
Decrease in premium purchases
 
(6
)
Bresnan Acquisition
 
69

 
 
 
 
 
$
132




28



Residential Internet customers grew by 635,000 customers from March 31, 2013 to March 31, 2014 or 353,000 customers after giving effect to the Bresnan Acquisition. The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions):

 
 
Three months ended
March 31, 2014
compared to
three months ended
March 31, 2013
Increase / (Decrease)
 
 
 
Increase in residential Internet customers
 
$
44

Service level changes and price adjustments
 
34

Bresnan Acquisition
 
37

 
 
 
 
 
$
115


Residential voice customers grew by 352,000 customers from March 31, 2013 to March 31, 2014 or 194,000 customers after giving effect to the Bresnan Acquisition. The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions):

 
 
Three months ended
March 31, 2014
compared to
three months ended
March 31, 2013
Increase / (Decrease)
 
 
 
Price adjustments and bundle revenue allocation
 
$
(44
)
Increase in residential voice customers
 
12

Bresnan Acquisition
 
11

 
 
 
 
 
$
(21
)

Commercial revenues consist primarily of revenues from services provided to our commercial customers. Commercial PSUs increased 108,000 from March 31, 2013 to March 31, 2014, or 71,000 customers after giving effect to the Bresnan Acquisition. The increase in commercial revenues is attributable to the following (dollars in millions):

 
 
Three months ended
March 31, 2014
compared to
three months ended
March 31, 2013
Increase / (Decrease)
 
 
 
Sales to small-to-medium sized business customers
 
$
26

Carrier site customers
 
5

Other
 
6

Bresnan Acquisition
 
16

 
 
 
 
 
$
53


Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors. Advertising sales revenues increased $8 million for the three months ended March 31, 2014 compared to the corresponding period


29



in 2013 as a result of an increase in revenue from the political sector and on-line advertising. For the three months ended March 31, 2014 and 2013, we received $4 million and $5 million, respectively, in advertising sales revenues from vendors. The Bresnan Acquisition increased advertising sales revenues for the three months ended March 31, 2014 as compared to the three months March 31, 2013 by approximately $3 million.

Other revenues consist of home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues. Other revenues decreased $2 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to a decrease in wire maintenance fees. The Bresnan Acquisition increased other revenues for the three months ended March 31, 2014 as compared to the three months March 31, 2013 by approximately $1 million.

Operating costs and expenses. The increases in our operating costs and expenses are attributable to the following (dollars in millions):

 
 
Three months ended
March 31, 2014
compared to
three months ended
March 31, 2013
Increase / (Decrease)
 
 
 
Programming
 
$
53

Franchise, regulatory and connectivity
 
3

Costs to service customers
 
4

Marketing
 
16

Other
 
21

Bresnan Acquisition
 
92

 
 
 
 
 
$
189


Programming costs were approximately $606 million and $512 million, representing 42% and 41% of total operating costs and expenses for the three months ended March 31, 2014 and 2013, respectively. Programming costs consist primarily of costs paid to programmers for basic, digital, premium, OnDemand, and pay-per-view programming. The increase in programming costs is primarily a result of annual contractual rate adjustments, including increases in amounts paid for retransmission consents and for new programming, offset in part by video customer losses. We expect programming expenses to continue to increase due to a variety of factors, including increased demands by owners of some broadcast stations for carriage of other services or payments to those broadcasters for retransmission consent, annual increases imposed by programmers with additional selling power as a result of media consolidation, and additional programming, including new sports services and non-linear programming for on-line and OnDemand programming. We have been unable to fully pass these increases on to our customers nor do we expect to be able to do so in the future without a potential loss of customers.

Costs to service customers include residential and commercial costs related to field operations, network operations and customer care including labor, reconnects, maintenance, billing and collection, occupancy and vehicle costs.

The increase in marketing costs for three months ended March 31, 2014 compared to the three months ended March 31, 2013 was the result of heavier sales activity and sales channel development.



30



The increases in other expense are attributable to the following (dollars in millions):

 
 
Three months ended
March 31, 2014
compared to
three months ended
March 31, 2013
Increase / (Decrease)
 
 
 
Administrative labor
 
$
9

Commercial sales expense
 
7

Advertising sales expense
 
3

Bad debt expense
 
2

 
 
 
 
 
$
21


The increase in administrative labor during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 relates primarily to increases in the number of employees. Commercial sales expenses increased during the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily related to growth in the business.
     
Depreciation and amortization. Depreciation and amortization expense increased by $80 million for the three months ended March 31, 2014 compared to the corresponding period in 2013, respectively, primarily representing depreciation on more recent capital expenditures and the Bresnan Acquisition, offset by certain assets becoming fully depreciated.

Other operating expenses, net. Other operating expenses, net decreased during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to a decrease in special charges. For more information, see Note 10 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”

Interest expense, net. For the three months ended March 31, 2014 compared to the corresponding period in 2013, net interest expense increased by $1 million. The average interest on our long-term debt decreased from 6.0% for the three months ended March 31, 2013 to 5.6% for the three months ended March 31, 2014, respectively, while our weighted average debt outstanding increased from $12.8 billion for the three months ended March 31, 2013 to $14.1 billion for the three months ended March 31, 2014 as a result of the Bresnan Acquisition.

Loss on extinguishment of debt. Loss on extinguishment of debt of $42 million for the three months ended March 31, 2013 was recorded as a result of repaying amounts outstanding under the Charter Operating term loan C facility from the issuance of the CCO Holdings, LLC ("CCO Holdings") $500 million aggregate principal amount of 5.25% senior notes due 2021 and $500 million aggregate principal amount of 5.750% senior notes due 2023. For more information, see Note 5 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”

Loss on derivative instruments, net. Interest rate derivative instruments are held to manage our interest costs and reduce our exposure to increases in floating interest rates. We recorded a loss of $2 million and $3 million during the three months ended March 31, 2014 and 2013, respectively, which primarily represents the amortization of accumulated other comprehensive loss for interest rate derivative instruments no longer designated as hedges for accounting purposes offset by their change in fair value. For more information, see Note 7 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”

Income tax expense. Income tax expense was recognized for the three months ended March 31, 2014 and 2013 primarily through increases in deferred tax liabilities related to our investment in Charter Holdco and certain of our indirect subsidiaries, in addition to $2 million and $6 million for the three months ended March 31, 2014 and 2013, respectively, of current federal and state income tax expense.  The three months ended March 31, 2013 included a step-up in basis of indefinite-lived assets for tax, but not GAAP purposes, resulting from the effects of partnership gains related to financing transactions, which decreased our net deferred tax liability related to indefinite-lived assets resulting in a benefit of $57 million. Our tax provision in future periods will vary based on various factors including changes in our deferred tax liabilities attributable to indefinite-lived intangibles, as well as future operating results, however we do not anticipate having such a large reduction in income tax expense attributable to these items unless we enter into restructuring transactions or similar future financing. The ultimate impact on the tax provision of such future financing and restructuring activities, if any, will be dependent on the underlying facts and circumstances at the time. For more


31



information, see Note 11 to the accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”
 
Net loss. Net loss decreased from $42 million for the three months ended March 31, 2013 to $37 million for the three months ended March 31, 2014 primarily as a result of the factors described above.

Loss per common share. During the three months ended March 31, 2014 compared to the corresponding period in 2013, net loss per common share decreased by $0.07 as a result of the factors described above.

Use of Adjusted EBITDA and Free Cash Flow

We use certain measures that are not defined by accounting principles generally accepted in the United States ("GAAP") to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net loss and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net loss and net cash flows from operating activities, respectively, below.

Adjusted EBITDA is defined as net loss plus net interest expense, income tax expense, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, loss on derivative instruments, net and other operating expenses, such as special charges and (gain) loss on sale or retirement of assets. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial measures.

Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.

Management and Charter's board of directors use adjusted EBITDA and free cash flow to assess Charter's performance and its ability to service its debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the United States Securities and Exchange Commission, the "SEC"). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which fees were in the amount of $64 million and $51 million for the three months ended March 31, 2014 and 2013, respectively.


32



 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Net loss
$
(37
)
 
$
(42
)
Plus: Interest expense, net
211

 
210

Income tax expense
64

 
9

Depreciation and amortization
505

 
425

Stock compensation expense
12

 
11

Loss on extinguishment of debt

 
42

Loss on derivative instruments, net
2

 
3

Other, net
10

 
12

 
 
 
 
Adjusted EBITDA
$
767

 
$
670

 
 
 
 
Net cash flows from operating activities
$
577

 
$
541

Less: Purchases of property, plant and equipment
(539
)
 
(412
)
Change in accrued expenses related to capital expenditures
36

 
(11
)
 
 
 
 
Free cash flow
$
74

 
$
118


Liquidity and Capital Resources

Introduction

This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.

Overview of Our Contractual Obligations and Liquidity

We have significant amounts of debt.  The principal amount of our debt as of March 31, 2014 was $14.2 billion, consisting of $3.8 billion of credit facility debt and $10.4 billion of high-yield notes. Our business requires significant cash to fund principal and interest payments on our debt.  As of March 31, 2014, $398 million of our debt matures in 2014, $65 million in 2015, $93 million in 2016, $1.1 billion in 2017, $594 million in 2018 and $11.9 billion thereafter. As of December 31, 2013, as shown in our annual report on Form 10-K, we had other contractual obligations, including interest on our debt, totaling $7.5 billion. During 2014, we currently expect capital expenditures to be approximately $2.2 billion, including approximately $400 million for completion of our 2014 all-digital plan.

Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. Free cash flow was $74 million and $118 million for the three months ended March 31, 2014 and 2013, respectively. We expect to generate positive free cash flow for 2014. As of March 31, 2014, the amount available under our credit facilities was approximately $1.2 billion. We expect to utilize free cash flow and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of or reduce the principal on our obligations. The timing and terms of any refinancing transactions will be subject to market conditions. Additionally, we may, from time to time, depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings, to retire our debt through open market purchases, privately negotiated purchases, tender offers, or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating's revolving credit facility as well as access to the capital markets to fund our projected operating cash needs.

We continue to evaluate the deployment of our anticipated future free cash flow including to reduce our leverage, and to invest in our business growth and other strategic opportunities, including mergers and acquisitions as well as stock repurchases and dividends. As possible acquisitions, swaps or dispositions arise in our industry, we actively review them against our objectives including, among other considerations, improving the operational efficiency and clustering of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities.


33



However, there can be no assurance that we will actually complete any acquisition, disposition or system swap or that any such transactions will be material to our operations or results.
    
Free Cash Flow

Free cash flow was $74 million and $118 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in free cash flow for the three months ended March 31, 2014 compared to the corresponding period in 2013 is primarily due to an increase of $127 million in capital expenditures and an increase of $105 million in cash paid for interest offset by an increase of $97 million in Adjusted EBITDA and changes in operating assets and liabilities that provided $81 million more cash during the three months ended March 31, 2014.

Limitations on Distributions

Distributions by Charter’s subsidiaries to a parent company for payment of principal on parent company notes are restricted under indentures and credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution. As of March 31, 2014, there was no default under any of these indentures or credit facilities and each subsidiary met its applicable leverage ratio tests based on March 31, 2014 financial results. Such distributions would be restricted, however, if any such subsidiary fails to meet these tests at the time of the contemplated distribution. In the past, certain subsidiaries have from time to time failed to meet their leverage ratio test. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on CCO Holdings notes and credit facility are further restricted by the covenants in its credit facilities.

In addition to the limitation on distributions under the various indentures discussed above, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act.

Historical Operating, Investing, and Financing Activities

Cash and Cash Equivalents. We held $4 million and $21 million in cash and cash equivalents as of March 31, 2014 and December 31, 2013, respectively.

Operating Activities. Net cash provided by operating activities increased $36 million from $541 million for the three months ended March 31, 2013 to $577 million for the three months ended March 31, 2014, primarily due to an increase in Adjusted EBITDA of $97 million and changes in operating assets and liabilities, excluding the change in accrued interest and accrued expenses related to capital expenditures, that provided $34 million more cash during the three months ended March 31, 2014 offset by a $105 million increase in our cash paid for interest.

Investing Activities. Net cash used in investing activities for the three months ended March 31, 2014 and 2013 was $499 million and $432 million, respectively. The increase is primarily due to higher in capital expenditures.

Financing Activities. Net cash used in financing activities was $95 million and $51 million for the three months ended March 31, 2014 and 2013, respectively. The increase in cash used was primarily the result of an increase in the amount by which repayments of long-term debt, including applicable premiums, exceeded borrowings.

Capital Expenditures

We have significant ongoing capital expenditure requirements.  Capital expenditures were $539 million and $412 million for the three months ended March 31, 2014 and 2013, respectively.  The increase was driven by our all-digital initiative, residential customer growth and the acquisition of Bresnan, offset by lower spending on equipment to support customer migration to Charter's new pricing and packaging. See the table below for more details.
 
During 2014, we currently expect capital expenditures to be approximately $2.2 billion. We anticipate 2014 capital expenditures to be driven by our all-digital transition including the deployment of additional set-top boxes in new and existing customer homes, growth in our commercial business, and further spend related to our efforts to insource our service operations as well as product development. The actual amount of our capital expenditures will depend on a number of factors including the growth rates of both our residential and commercial businesses, and the pace at which we progress to all-digital transmission, which we anticipate will comprise approximately $400 million of 2014 capital expenditures.


34




Our capital expenditures are funded primarily from cash flows from operating activities and borrowings on our credit facility. In addition, our liabilities related to capital expenditures increased by $36 million and decreased by $11 million for the three months ended March 31, 2014 and 2013, respectively.

The following table presents our major capital expenditures categories in accordance with NCTA disclosure guidelines for the three months ended March 31, 2014 and 2013. The disclosure is intended to provide more consistency in the reporting of capital expenditures among peer companies in the cable industry. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):

 
Three Months Ended March 31,
 
2014
 
2013
 
 
 
 
Customer premise equipment (a)
$
329

 
$
233

Scalable infrastructure (b)
87

 
54

Line extensions (c)
40

 
46

Upgrade/rebuild (d)
33

 
39

Support capital (e)
50

 
40

 
 
 
 
Total capital expenditures (f)
$
539

 
$
412


(a)
Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units. It also includes customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems).
(b)
Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment).
(c)
Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
(d)
Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.
(e)
Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).
(f)
Total capital expenditures include $119 million and $1 million related to our all-digital transition and $59 million and $61 million related to commercial services for the three months ended March 31, 2014 and 2013, respectively.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to various market risks, including fluctuations in interest rates. We use interest rate derivative instruments to manage our interest costs and reduce our exposure to increases in floating interest rates. We manage our exposure to fluctuations in interest rates by maintaining a mix of fixed and variable rate debt. Using interest rate derivative instruments, we agree to exchange, at specified intervals through 2017, the difference between fixed and variable interest amounts calculated by reference to agreed-upon notional principal amounts.

As of March 31, 2014 and December 31, 2013, the accreted value of our debt was approximately $14.1 billion and $14.2 billion, respectively.  As of March 31, 2014 and December 31, 2013, the weighted average interest rate on the credit facility debt, including the effects of our interest rate swap agreements, was approximately 3.5% and 3.6%, respectively, and the weighted average interest rate on the high-yield notes was approximately 6.4% and 6.4%, respectively, resulting in a blended weighted average interest rate of 5.6% and 5.6%, respectively. The interest rate on approximately 83% and 84% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate swap agreements, as of March 31, 2014 and December 31, 2013, respectively.

We do not hold or issue derivative instruments for speculative trading purposes. We, until de-designating in the first quarter of 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. We formally documented, designated and assessed the effectiveness of transactions that received hedge accounting.



35



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). For the three months ended March 31, 2013, a gain of $7 million related to derivative instruments designated as cash flow hedges was recorded in other comprehensive loss, respectively.

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, we 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 loss on derivative instruments, net in our condensed consolidated statements of operations. For the three months ended March 31, 2014 and March 31, 2013, a loss of $6 million and $4 million, respectively, related to the reclassification from accumulated other comprehensive loss into earnings as a result of cash flow hedge discontinuance was recorded in loss on derivative instruments, net. 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 our condensed consolidated statements of operations. For the three months ended March 31, 2014 and 2013, gains of $4 million and $1 million related to the change in fair value of interest rate derivative instruments not designated as cash flow hedges was recorded in loss on derivative instruments, net. 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 loss on derivative instruments, net in our condensed consolidated statements of operations. The estimated net amount of existing losses that are reported in accumulated other comprehensive loss as of March 31, 2014 that is expected to be reclassified into earnings within the next twelve months is approximately $16 million.
  
The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of March 31, 2014 (dollars in millions):
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
Fair Value
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate
$

 
$

 
$

 
$
1,000

 
$

 
$
9,350

 
$
10,350

 
$
10,687

Average Interest Rate
%
 
%
 
%
 
7.25
%
 
%
 
6.28
%
 
6.37
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable Rate
$
398

 
$
65

 
$
93

 
$
102

 
$
594

 
$
2,551

 
$
3,803

 
$
3,772

Average Interest Rate
2.74
%
 
2.84
%
 
3.84
%
 
4.77
%
 
5.32
%
 
6.24
%
 
5.58
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable to Fixed Rate
$
300

 
$
300

 
$
250

 
$
850

 
$

 
$

 
$
1,700

 
$
26

Average Pay Rate
4.82
%
 
4.99
%
 
3.89
%
 
3.84
%
 
%
 
%
 
4.23
%
 
 
Average Receive Rate
2.51
%
 
2.65
%
 
4.44
%
 
5.24
%
 
%
 
%
 
4.18
%
 
 

As of March 31, 2014, we had $1.7 billion in notional amounts of interest rate derivative instruments outstanding. This includes $250 million in delayed start interest rate derivative instruments that become effective in September 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 $1.5 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 derivative instruments do not represent amounts exchanged by the parties and, thus, are not a measure of our exposure to credit loss. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The estimated fair value is determined using a present value calculation based on an implied forward LIBOR curve (adjusted for Charter Operating’s or counterparties’ credit risk). Interest rates on variable debt are estimated using


36



the average implied forward LIBOR for the year of maturity based on the yield curve in effect at March 31, 2014 including applicable bank spread.

Item 4.     Controls and Procedures.

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this quarterly report. The evaluation was based in part upon reports and certifications provided by a number of executives. Based upon, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, we believe that our controls provide such reasonable assurances.

There was no change in our internal control over financial reporting during the first quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


37



PART II

Item 1.     Legal Proceedings.

Our Annual Report on Form 10-K for the year ended December 31, 2013 includes "Legal Proceedings" under Item 3 of Part I. There have been no material changes from the legal proceedings described in our Form 10-K, except as described below.

Patent Litigation

Ronald A. Katz Technology Licensing, L.P. v. Charter Communications, Inc. et. al.  As previously reported, in 2006, Ronald A. Katz Technology Licensing, L.P. filed a lawsuit against Charter and other parties in the U. S. District Court for the District of Delaware alleging that Charter and the other defendants infringed its interactive call processing patents.  The matter settled in March 2014 for an amount that is not material to Charter’s consolidated financial statements and the litigation was dismissed.

Item 1A.     Risk Factors.

Our Annual Report on Form 10-K for the year ended December 31, 2013 includes “Risk Factors” under Item 1A of Part I. Except for the updated risk factors described below, there have been no material changes from the risk factors described in our Form 10-K. The information below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.

Risks Related to the Transactions

Completion of the Transactions is subject to many conditions and if these conditions are not satisfied or waived, the Transactions will not be completed.

Our obligation and the obligation of Comcast to complete the Transactions are subject to satisfaction or waiver of a number of conditions, including, among others:

completion of Comcast’s acquisition of TWC;
receipt of certain regulatory approvals for the Transactions, in most cases without the imposition of a burdensome condition;
approval by our stockholders;
receipt of opinions of counsel as to the tax-free nature of certain of the Transactions;
absence of injunction or legal impediment on any of the Transactions;
approval for the listing on a stock exchange of the shares of SpinCo common stock to be issued in the Transactions;
effectiveness of a registration for New Charter shares to be issued in the Merger and approval for listing on NASDAQ of those shares;
accuracy of the representations and warranties with respect to each of the Transactions, subject to certain materiality thresholds;
performance of covenants with respect to each of the Transactions, subject to certain materiality thresholds;
with respect to our obligations, absence of a material adverse change with respect to the assets and liabilities transferred to SpinCo and the assets transferred by Comcast to us, taken as a whole, and with respect to Comcast’s obligations, absence of a material adverse change with respect to the assets and liabilities transferred by us to Comcast and absence of a material adverse effect with respect to us, and also with respect to our obligations, absence of the assertion by our financing sources of a material adverse effect with respect to us.

There can be no assurance that the conditions to closing of the Transactions will be satisfied or waived or that the Transactions will be completed.

In order to complete the Transactions, we along with Comcast must make certain governmental filings and obtain certain governmental authorizations, and if such filings and authorizations are not made or granted or are granted with conditions to the parties, completion of the Transactions may be jeopardized or the anticipated benefits of the Transactions could be reduced.

Completion of the Transactions is conditioned upon the expiration or early termination of the waiting periods relating to the Transactions under the Hart-Scott-Rodino Antitrust Improvement Act and the required governmental authorizations, including an order of the Federal Communications Commission, having been obtained and being in full force and effect. Although we and


38



Comcast have agreed in the Agreement to use reasonable best efforts, subject to certain limitations, to make certain governmental filings or obtain the required governmental authorizations, as the case may be, there can be no assurance that the relevant waiting periods will expire or that the relevant authorizations will be obtained. In addition, the governmental authorities with or from which these authorizations are required have broad discretion in administering the governing regulations. As a condition to authorization of the Transactions or related transactions, these governmental authorities may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of our business after completion of the Transactions. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Transactions or imposing additional material costs on or materially limiting the revenues of the combined company following the Transactions, or otherwise adversely affect our business and results of operations after completion of the Transactions. In addition, we can provide no assurance that these conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Transactions.

Our business relationships may be subject to disruption due to uncertainty associated with the Transactions.

Parties that we do business with may experience uncertainty associated with the Transactions, including with respect to current or future business relationships with us. Our business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. These disruptions could have an adverse effect on our business, financial condition, results of operations or prospects, including an adverse effect on our ability to realize the anticipated benefits of the Transactions. The risk, and adverse effect, of such disruptions could be exacerbated by a delay in completion of the Transactions or termination of the Agreement.

We have relied on publicly available information on the systems being acquired by Charter and by SpinCo.

We have relied on publicly available information regarding the systems being acquired by Charter and by SpinCo, and do not yet have full carveout or pro forma financial statements for such systems. The transaction terms accordingly provide for assumption by Charter and by SpinCo of only those liabilities that are primarily related to the systems acquired by each of them respectively, and for valuation terms that will depend on actual carveout 2014 EBITDA (as defined in the Agreement) produced by such systems, including true-up adjustment payments related to EBITDA and, in some cases, working capital. However, it is possible that significant liabilities, present, future or contingent, may be assumed by Charter or SpinCo that are not fully reflected in the valuation terms, and accordingly could have a material adverse effect on Charter and/or its investment in SpinCo. Similarly, it is possible that certain assets required to operate the systems acquired by SpinCo and Charter, such as licenses, technologies and/or employees, may not be transferred in the Transactions, requiring SpinCo and Charter to incur additional costs and invest additional resources to procure such assets and/or hire employees with expertise in the transferred business, which may adversely affect Charter’s ability to realize the anticipated benefits of the Transactions.

The integration of the business acquired in the Transactions with the businesses we operated prior to the Transactions may not be successful or the anticipated benefits from the Transactions may not be realized.

After consummation of the Transactions, we will have significantly more systems, assets, investments, businesses, subscribers and employees than we did prior to the Transactions. The process of integrating these assets with the businesses we operated prior to the Transactions will require us to expend significant capital and significantly expand the scope of our operations and financial systems. Our management will be required to devote a significant amount of time and attention to the process of integrating the operations of the acquired assets with our pre-Transactions operations. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include:

integrating the operations of the acquired assets while carrying on the ongoing operations of the businesses we operated prior to the Transactions;
integrating information, purchasing, provisioning, accounting, finance, sales, billing, payroll, reporting and regulatory compliance systems;
integrating and unifying the product offerings and services available to customers, including customer premise equipment and video user interfaces;
managing a significantly larger company than before consummation of the Transactions;
integrating separate business cultures;
attracting and retaining the necessary personnel associated with the acquired assets; and
creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters.



39



Charter and Comcast have agreed to provide each other with transition services in connection with the transferred systems and relevant assets. Providing such services could divert management attention and result in additional costs. In addition, the inability to procure such services on reasonable terms or at all could negatively impact our expected results of operations.

There is no assurance that the assets acquired in the Transactions will be successfully or cost-effectively integrated into the businesses we operated prior to the Transactions. The process of integrating the acquired assets into our pre-Transactions operations may cause an interruption of, or loss of momentum in, the activities of our business. If our management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and our liquidity, results of operations and financial condition may be materially adversely impacted.

Even if we are able to successfully integrate the new assets, it may not be possible to realize the benefits that are expected to result from the Transactions, or realize these benefits within the time frame that is expected. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Transactions may be offset by costs incurred or delays in integrating the companies. If we fail to realize the benefits we anticipate from the acquisition, our liquidity, results of operations or financial condition may be adversely affected.

Failure to complete the Transactions could negatively impact our stock price and our future business and financial results.

If the Transactions are not completed for any reason, including as a result of our stockholders failing to approve the necessary proposals, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Transactions, we would be subject to a number of risks:

We may experience negative reactions from the financial markets, including negative impacts on our stock price;
We may experience negative reactions from our customers, regulators and employees;
We may be required to pay certain costs relating to the Transactions, whether or not the Transactions are completed;
The Agreement places certain restrictions on the conduct of our business with respect to our assets being transferred to Comcast prior to completion of the Transactions. Such restrictions, the waiver of which is subject to the consent of the other party (in certain cases, not to be unreasonably withheld, conditioned or delayed), may prevent us from taking certain specified actions or otherwise pursuing business opportunities during the pendency of the Transactions; and
Matters relating to the Transactions (including integration planning) will require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.
 
If the Transactions are not completed, the risks described above may materialize and they may adversely affect our business, financial condition, financial results and stock price.

In addition, we could be subject to litigation related to any failure to complete the Transactions or related to any enforcement proceeding commenced against us to perform our obligations under the Agreement.

After the Transactions are complete, our stockholders will have a lower ownership and voting interest than they currently have.

Based on the number of shares of our common stock outstanding as of March 31, 2014, the trading price of our common stock as of April 25, 2014, and assumptions around the 2014 EBITDA of SpinCo and the amount of SpinCo indebtedness at the time of completion of the Transactions, it is expected that, immediately after completion of the Transactions, persons who hold our stock as of immediately prior to the Transactions will own approximately 87% of the outstanding shares of common stock of New Charter. Consequently, former stockholders will have less influence over our management and policies than they currently have. In addition, any changes to the number of shares outstanding, trading price of our common stock, EBITDA associated with SpinCo assets or the amount of SpinCo indebtedness at the time of completion of the Transactions will affect, and could significantly reduce, the number of outstanding shares of common stock of New Charter held by persons who hold our stock as of immediately prior to the closing. Similarly, if Charter exercises its option to increase the merger consideration to SpinCo holders as a result of insufficient debt tenders in the debt-for-debt exchange that are part of the Transactions, such option could significantly reduce, the number of outstanding shares of common stock of New Charter held by persons who hold our stock as of immediately prior to the closing.



40



We may not be able to obtain financing for the acquisition of systems contemplated by the Transactions, or may be able to obtain such financing only on unfavorable terms.

We plan to obtain financing commitments from several financial institutions to finance the acquisitions of systems contemplated by the Transactions. The terms of these commitments have not yet been determined, and if there are unfavorable developments in the credit markets or in Charter’s business, such commitments may not be available, or may be available only on unfavorable terms. Even if obtained on reasonable terms, the commitments may be contingent upon conditions related to the conduct and results of our business. If there are changes in the financial condition or results of operations of our company prior to the completion of the Transactions, our financing sources may not provide the funding under the commitment. Even if funding is not received, we may still be obligated to consummate the acquisitions of systems contemplated by the Transactions. In that event we may need to rely on alternative sources of financing, which we may not be able to obtain on reasonable terms, and/or may need to rely on our cash reserves, which may divert funding from other needs of our company. Additionally, the failure to obtain financing from our financing sources may cause our company not to be able to complete the Transactions and to be exposed to legal claims for specific performance or damages, any of which could have a material adverse effect on Charter.

As a result of the planned financing of the Transactions, our indebtedness following completion of the Transactions will be greater than our current indebtedness. This increased level of indebtedness could adversely affect us, including by decreasing our business flexibility, and increase interest expense.

We will have increased indebtedness following completion of the Transactions in comparison to our recent historical basis, which would have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing our interest expense. In addition, the amount of cash required to service our increased indebtedness levels following completion of the Transactions and thus the demands on our cash resources will be greater than the amount of cash flows required to service our indebtedness prior to the Transactions. The increased levels of indebtedness following completion of the Transactions could also reduce funds available for our investments in product development as well as capital expenditures, share repurchases and other activities and may create competitive disadvantages for us relative to other companies with lower debt levels.

In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations.

We will incur significant transaction-related costs in connection with the Transactions.

We expect to incur a number of non-recurring costs associated with the Transactions. The substantial majority of non-recurring expenses will be comprised of transaction costs related to the Transactions. We also will incur transaction fees and costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the Transactions and integration. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.

Sales of New Charter common stock after the Transactions may negatively affect the market price of New Charter common stock.

The shares of New Charter common stock to be issued in the Transactions to holders of SpinCo common stock will generally be eligible for immediate resale. The market price of New Charter common stock could decline as a result of sales of a large number of shares of New Charter common stock in the market after the consummation of the Transactions or even the perception that these sales could occur.

Currently, Comcast shareholders may include index funds that have performance tied to the Standard & Poor’s 500 Index or other stock indices, and institutional investors subject to various investing guidelines. Because New Charter may not be included in these indices following the consummation of the Transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may decide to or may be required to sell the New Charter common stock that they receive in the Transactions. These sales, or the possibility that these sales may occur, may also make it more difficult for New Charter to obtain additional capital by selling equity securities in the future at a time and at a price that it deems appropriate.



41



If the Contribution and the Spin-Off does not qualify as a tax-free reorganization under Sections 368(a)(1)(D) and  355 of the Code, including as a result of subsequent acquisitions of stock of SpinCo, then Comcast may recognize a very substantial amount of taxable gain and SpinCo (and in certain circumstances, Charter)  may be obligated to indemnify Comcast  for these taxes.

The completion of the Transactions is conditioned upon the receipt of opinions from counsel as to the tax free nature of certain of the Transactions, including the Spin-Off.  The opinions of counsel will be based on, among other things, current law and certain assumptions and representations as to factual matters made by Comcast, SpinCo and Charter.  Any change in currently applicable law, which may be retroactive, or the failure of any representation to be true, correct and complete, could adversely affect the conclusions reached by counsel in the opinions.  Moreover, the opinions will not be binding on the Internal Revenue Service (“IRS”) or the courts, and the IRS or the courts may not agree with the conclusions reached in the opinion. 

Even if the Spin-Off otherwise qualifies as a tax-free spin-off for U.S. federal income tax purposes, the Spin-Off will be taxable to Comcast pursuant to section 355(e) of the Internal Revenue Code (the “Code”) if 50% or more of the stock of either Comcast or SpinCo is acquired, directly or indirectly (taking into account the stock of SpinCo acquired by New Charter in the Merger and the stock of Comcast and SpinCo acquired by TWC shareholders in the transaction between Comcast and TWC and in the Spin-Off), as part of a plan or series of related transactions that includes the Spin-Off. Because SpinCo stockholders that are former Comcast shareholders (exclusive of former TWC shareholders) will own more than 50% of the common stock of SpinCo following the Merger, the Merger standing alone is not expected to cause the Spin-Off to be taxable to Comcast under section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of SpinCo common stock or Comcast common stock, either before or after the Spin-Off are part of a plan or series of related transactions that includes the Spin-Off, such determination could result in the recognition of gain by Comcast under section 355(e) of the Code. If section 355(e) of the Code applied, Comcast might recognize a very substantial amount of taxable gain.

Under the tax sharing agreement that will be entered into by Comcast, SpinCo and, to a limited extent, New Charter, in certain circumstances, and subject to certain limitations, SpinCo will be required to indemnify Comcast against taxes on the Spin-Off that arise as a result of certain actions or failures to act by SpinCo or as a result of certain changes in ownership of the stock of SpinCo after the completion of the Transactions. SpinCo will be unable to take certain actions after the Transactions because such actions could adversely affect the tax-free status of the Spin-Off, and such restrictions could be significant. If SpinCo is required to indemnify Comcast in the event the Spin-Off is taxable, this indemnification obligation would be substantial and could have a material adverse effect on SpinCo.

Moreover, under the tax sharing agreement, in certain circumstances, and subject to certain limitations, New Charter will be required to indemnify Comcast against taxes on the Spin-Off that arise from New Charter taking any actions that would result in New Charter holding SpinCo shares in excess of the percentage of SpinCo shares acquired in the Merger during the two year period following the Spin-Off.  If New Charter is required to indemnify Comcast in the event the Spin-Off is taxable, this indemnification obligation would be substantial and could have a material adverse effect on New Charter.

New Charter and SpinCo will be unable to take certain actions after the Transactions (potentially including certain desirable strategic transactions) because such actions could adversely affect the tax-free status of the Spin-Off, and such restrictions could be significant.

The tax sharing agreement will prohibit SpinCo and New Charter from taking actions that could cause the Spin-Off to be taxable to Comcast.

In particular, for two years after the completion of the Transactions, SpinCo and New Charter will not be permitted to take actions that would result in 50% or more of the stock of SpinCo to be acquired, directly or indirectly (taking into account the stock of SpinCo acquired by New Charter in the Merger and the stock of Comcast and SpinCo acquired by TWC shareholders in the transaction between Comcast and TWC and in the Spin-Off), as part of a plan or series of related transactions that includes the Spin-Off.  These actions could include entering into certain merger or consolidation transactions, certain stock issuances and certain other desirable strategic transactions.
   


42



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

(C) Purchases of Equity Securities by the Issuer

The following table presents Charter's purchases of equity securities completed during the first quarter of 2014.





Period



(a)
Total Number of Shares Purchased



(b)
Average Price Paid per Share
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2014
1,523 (1)
$
135.87

N/A
N/A
February 1 - 28, 2014
75,549 (1)
$
132.83

N/A
N/A
March 1 - 31, 2014
762 (1)
$
126.88

N/A
N/A

(1)
Represents shares of Charter common stock withheld for payment of income tax withholding owed by employees upon vesting of restricted shares and restricted stock units.

Item 6.     Exhibits.

The index to the exhibits begins on page E-1 of this quarterly report.


43



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications, Inc. has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

 
 
CHARTER COMMUNICATIONS, INC.,
 
 
Registrant
 
 
 
 
 
 
 
By:
 
/s/ Kevin D. Howard
 
 
 
 
Kevin D. Howard
 
 
 
 
Senior Vice President - Finance, Controller and
Date: April 30, 2014
 
 
 
Chief Accounting Officer



S- 1




Exhibit Index
Exhibit
 
Description
 
 
 
12.1*
 
Computation of Ratio of Earnings to Fixed Charges.
31.1*
 
Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the under the Securities Exchange Act of 1934.
31.2*
 
Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1*
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
32.2*
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
101
 
The following financial statements from Charter Communications, Inc.'s Quarterly Report on Form 10-Q for the three months ended March 31, 2014, filed with the Securities and Exchange Commission on April 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to the Condensed Consolidated Financial Statements.

_____________
*
Filed herewith.


E- 1