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CHTR > SEC Filings for CHTR > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for CHARTER COMMUNICATIONS, INC. /MO/

Form 10-Q for CHARTER COMMUNICATIONS, INC. /MO/


30-Apr-2014

Quarterly Report


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.


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.


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.


(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


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


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


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, . . .

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