Charter 2009 Annual Report Download

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CCH II, LLC
CCH II Capital Corp.
Annual Report
For the year ended December 31, 2009

Table of contents

  • Page 1
    CCH II, LLC CCH II Capital Corp. Annual Report For the year ended December 31, 2009

  • Page 2
    ...Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 19 20 44 45 45 45 45 Business Risk Factors Properties Legal Proceedings 1 4 15 15 This Annual Report is for the year...

  • Page 3
    ... set forth in this annual report and in other reports or documents, and include, but are not limited to: • our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed Internet, telephone and other services to residential and commercial customers...

  • Page 4
    ..., reducing our parent companies' consolidated interest expense by approximately $830 million annually. Our principal executive offices are located at Charter Plaza, 12405 Powerscourt Drive, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555, and Charter has a website accessible at www...

  • Page 5
    ... shares of Charter Class A and Class B common stock were cancelled. In addition, as part of the Plan, the holders of CCH I notes received and transferred to Mr. Paul G. Allen, Charter' s principal stockholder, $85 million of new CCH II notes. The consummation of the Plan was funded with cash...

  • Page 6
    ... stock, preferred stock and warrants Paul G. Allen Beneficially owns 39.91% voting interest Charter Communications, Inc. ("CCI") CCI Exchange I, Inc. .81% common equity interest Charter Investment, Inc. ("CII") 99% common equity interest Charter Communications Holding Company, LLC ("Charter...

  • Page 7
    ... projections filed with the Bankruptcy Court. In connection with the Plan, Charter was required to prepare projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon emergence from bankruptcy. Charter filed projected...

  • Page 8
    ... factors, including: • our ability to sustain and grow revenues and cash flows from operating activities by offering video, highspeed Internet, telephone and other services to residential and commercial customers, and to maintain and grow our customer base, particularly in the face of increasingly...

  • Page 9
    ... telephone companies, direct broadcast satellite operators, wireless broadband providers and DSL providers and competition from video provided over the Internet; general business conditions, economic uncertainty or downturn and the significant downturn in the housing sector and overall economy...

  • Page 10
    ... expanded their activities in the MDU market. The cable industry, including us, has lost a significant number of video customers to DBS competition, and we face serious challenges in this area in the future. Telephone companies, including two major telephone companies, AT&T and Verizon, offer video...

  • Page 11
    ...-speed data and network and transport services to businesses and have increased our focus on growing this business. In order to grow our commercial business, we expect to increase expenditures on technology, equipment and personnel focused on the commercial business. Commercial business customers...

  • Page 12
    ... our programming costs. Federal law allows commercial television broadcast stations to make an election between "must-carry" rights and an alternative "retransmission-consent" regime. When a station opts for the latter, cable operators are not allowed to carry the station' s signal without the...

  • Page 13
    ...in costs of serving those customers, could adversely affect our growth, financial condition and results of operations. For tax purposes, Charter experienced a deemed ownership change upon emergence from Chapter 11 bankruptcy, resulting in an annual limitation on Charter's ability to use its existing...

  • Page 14
    ..., would prevent an ownership change from occurring. If we are unable to attract new key employees, the ability of our parent companies to manage our business could be adversely affected. Our operational results during the recent prolonged economic downturn and our bankruptcy have depended, and...

  • Page 15
    ... our inside wiring; rules, regulations, and regulatory policies relating to provision of voice communications and high-speed Internet service; rules for franchise renewals and transfers; and other requirements covering a variety of operational areas such as equal employment opportunity, technical...

  • Page 16
    ... Local franchising authorities who are certified to regulate rates in the communities where they operate generally have the power to reduce rates and order refunds on the rates charged for basic service and equipment. Further regulation of the cable industry could cause us to delay or cancel service...

  • Page 17
    ... for new legislation could impose additional obligations on high-speed Internet providers. Any such rules or statutes could limit our ability to manage our cable systems (including use for other services), to obtain value for use of our cable systems and respond to competitive competitions. Changes...

  • Page 18
    ... or leased parcels of land, and we generally own the towers on which our equipment is located. Charter Holdco owns the land and building for our principal executive office. The physical components of our cable systems require maintenance as well as periodic upgrades to support the new services and...

  • Page 19
    ... broadband, system and other types of technicians who are or were employed by Charter or Charter LLC in the states of Michigan, Minnesota, Missouri or California. Plaintiffs allege that Charter and Charter LLC violated certain wage and hour statutes of those four states by failing to pay technicians...

  • Page 20
    ... a cable-ready television. Defendants' response to the Second Amended Complaint is currently due on April 2, 2010. In June 2009, Derrick Lebryk and Nichols Gladson filed a putative class action against Charter, Charter Communications Holding Company, LLC, CCHC, LLC and Charter Communications Holding...

  • Page 21
    could have in the aggregate a material adverse effect on our consolidated financial condition, results of operations, or liquidity. Whether or not we ultimately prevail in any particular lawsuit or claim, litigation can be time consuming and costly and injure our reputation. 18

  • Page 22
    .... (D) Securities Authorized for Issuance Under Equity Compensation Plans All shares issued or granted by Charter and not yet vested were cancelled on November 30, 2009 along with the 2001 Stock Incentive Plan. The 2009 Stock Incentive Plan was adopted by Charter' s board of directors. The following...

  • Page 23
    ... broadband services (such as OnDemand, high definition television service and DVR). Approximately 88% and 86% of our revenues for the years ended December 31, 2009 and 2008, respectively, are attributable to monthly subscription fees charged to customers for our video, high-speed Internet, telephone...

  • Page 24
    ...service related expenses, advertising sales costs and franchise fees. Selling, general and administrative expenses primarily include salaries and benefits, rent expense, billing costs, call center costs, internal network costs, bad debt expense, and property taxes. We control our costs of operations...

  • Page 25
    ... who assist in connecting and activating the new service, and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service at a customer' s dwelling or reconnecting service to a previously installed dwelling are charged to operating expense...

  • Page 26
    ... the study is completed. In connection with the application of fresh start accounting as of December 1, 2009, management made assumptions regarding remaining useful lives of our existing property, plant and equipment and evaluated the appropriateness of useful lives to be applied to future additions...

  • Page 27
    ... allow access to homes in cable service areas. Franchises are tested for impairment annually, or more frequently as warranted by events or changes in circumstances. Franchises are aggregated into essentially inseparable units of accounting to conduct the valuations. The units of accounting generally...

  • Page 28
    ..., high-speed Internet, and telephone; revenue growth rates; operating margins; and capital expenditures. The assumptions are derived based on Charter' s and its peers' historical operating performance adjusted for current and expected competitive and economic factors surrounding the cable industry...

  • Page 29
    ..., as of December 31, 2009, Charter had state tax net operating losses, resulting in a gross deferred tax asset (net of federal tax benefit) of approximately $209 million, generally expiring in years 2010 through 2028. Due to uncertainties in projected future taxable income, valuation allowances...

  • Page 30
    ...million at December 31, 2009 and 2008, respectively. No tax years for Charter or Charter Holdco, our indirect parent companies, are currently under examination by the Internal Revenue Service. Tax years ending 2006 through 2009 remain subject to examination and assessment. Years prior to 2006 remain...

  • Page 31
    ... in the number of telephone, high-speed Internet, and digital video customers, price increases, and incremental video revenues from OnDemand, DVR, and high-definition television services, offset by a decrease in basic video customers. Asset sales, net of acquisitions, in 2007, 2008, and 2009 reduced...

  • Page 32
    ..., in advertising sales revenues from vendors. Other revenues consist of franchise fees, regulatory fees, customer installations, home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues. For the years ended December 31, 2009, 2008, and 2007, franchise fees represented...

  • Page 33
    ... increases (decreases) in selling, general and administrative expenses are attributable to the following (dollars in millions): 2009 compared to 2008 Marketing costs Bad debt and collection costs Stock compensation costs Employee costs Customer care costs Other, net Asset sales, net of acquisitions...

  • Page 34
    ... items, net of $591 million for the year ended December 31, 2009 represent items of income, expense, gain or loss that we realized or incurred because we were in reorganization under Chapter 11 of the Bankruptcy Code. For more information, see Note 16 to the accompanying condensed consolidated...

  • Page 35
    ... structure or investment activities. Adjusted EBITDA is used by management and Charter' s board of directors to evaluate the performance of our business. For this reason, it is a significant component of Charter' s annual incentive compensation program. However, this measure is limited in that it...

  • Page 36
    ... 2009 Consolidated net income (loss) Plus: Interest expense, net Income tax (benefit) expense Depreciation and amortization Impairment of franchises and asset impairment charges Stock compensation expense Gain due to bankruptcy related items Other, net Adjusted EBITDA Liquidity and Capital Resources...

  • Page 37
    ... Credit facility Charter Communications Operating, LLC: 8.000% senior second-lien notes due 2012 8 3/8% senior second-lien notes due 2014 10.875% senior second-lien notes due 2014 Credit facilities $ Accreted Value (a) 2,092 812 304 1,120 779 601 7,614 13,322 Semi-Annual Interest Payment Dates 2/15...

  • Page 38
    ... rent utility poles used in our operations. Generally, pole rentals are cancelable on short notice, but we anticipate that such rentals will recur. Rent expense incurred for pole rental attachments for each of the years ended December 31, 2009, 2008, and 2007, was $47 million. We pay franchise fees...

  • Page 39
    ...billion for the year ended December 31, 2008, primarily as a result of revenue growth from high-speed Internet and telephone driven by bundled services, as well as improved cost efficiencies, offset by an increase of $43 million in interest on cash pay obligations and changes in operating assets and...

  • Page 40
    ... 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...

  • Page 41
    ..."Paul Allen Group") ceasing to have the power, directly or indirectly, to vote at least 35% of the ordinary voting power for the management of Charter Operating on a fully diluted basis; • the consummation of any transaction resulting in any person or group (other than the Paul Allen Group) having...

  • Page 42
    ... all of Charter Operating' s and the guarantors' assets (other than the assets of CCO Holdings) in which security interests may be perfected under the Uniform Commercial Code by filing a financing statement (including capital stock and intercompany obligations), including, but not limited to: 39

  • Page 43
    ... using a discount rate equal to the Treasury Rate on such date plus 0.50%, over (b) the outstanding principal amount of such Note. Charter Operating may redeem the outstanding 10.875% senior second-lien notes due 2014, at their option, on or after varying dates, in each case at a premium, plus...

  • Page 44
    ... not otherwise allocated as indicated below: • CCH II: $1 billion • CCO Holdings: $9.75 billion • Charter Operating: $6.8 billion up to $75 million of debt incurred to finance the purchase or capital lease of new assets; up to $300 million of additional debt for any purpose; and other items of...

  • Page 45
    ... Holdings and Charter Operating and their respective restricted subsidiaries may make distributions or restricted payments: (i) so long as certain defaults do not exist and even if the applicable leverage test referred to above is not met, to enable certain of its parents to pay interest on certain...

  • Page 46
    ... (subject to specified limitations in the case of Charter Operating), liens securing the purchase price of financed new assets, liens securing indebtedness of up to $50 million and other specified liens. Restrictions on the Sale of Assets; Mergers The note issuers are generally not permitted to sell...

  • Page 47
    ... credit facility, Charter Operating notes or the Charter Operating credit facilities could cause cross-defaults under our indentures. Recently Issued Accounting Standards In October 2009, the FASB issued guidance included in ASC 605-25, Revenue Recognition - Multiple-Element Arrangements ("ASC 605...

  • Page 48
    ... of our management, including our Interim 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 annual report. The evaluation...

  • Page 49
    ...Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2009 and 2008 Consolidated Statements of Operations for the One Month Ended December 31, 2009, Eleven Months Ended November 30, 2009 and Years Ended December 31, 2008, and 2007...

  • Page 50
    ..., CCH II, LLC' s ultimate parent, Charter Communications, Inc. and its subsidiaries, including CCH II, LLC (collectively, Charter), filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on March 27, 2009. Charter' s plan of reorganization became effective and...

  • Page 51
    ... AND MEMBER'S EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses Payables to related party Current portion of long-term debt Total current liabilities LONG-TERM DEBT LOANS PAYABLE - RELATED PARTY DEFERRED MANAGEMENT FEES - RELATED PARTY OTHER LONG-TERM LIABILITIES TEMPORARY...

  • Page 52
    ... 2009 REVENUES COSTS AND EXPENSES: Operating (excluding depreciation and amortization) Selling, general and administrative Depreciation and amortization Impairment of franchises Asset impairment charges Other operating (income) expenses, net $ 572 $ 6,183 Predecessor Year Ended December 31, 2008...

  • Page 53
    ...Distributions to parent company Changes in fair value of interest rate agreements Net income (loss) BALANCE, December 31, 2008, Predecessor Changes in fair ... 30, 2009, Predecessor SUCCESSOR: Issuance of new equity BALANCE, November 30, 2009, Successor Net income BALANCE, December 31, 2009, Successor ...

  • Page 54
    ... and other assets Accounts payable, accrued expenses and other Receivables from and payables to related party, including deferred management fees Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Change in accrued expenses...

  • Page 55
    ...Company offers to residential and commercial customers traditional cable video programming (basic and digital video), high-speed Internet services, and telephone services, as well as advanced broadband services such as high definition television, Charter OnDemandâ„¢, and digital video recorder ("DVR...

  • Page 56
    ... s ownership to Charter. In connection with the Plan, Mr. Allen transferred his preferred equity interest in CC VIII, LLC ("CC VIII") to Charter. Mr. Allen has the right to elect up to four of Charter's eleven board members. Fresh Start Accounting - Upon the Company' s emergence from bankruptcy, the...

  • Page 57
    ... on Charter' s and its peers' historical operating performance adjusted for current and expected competitive and economic factors surrounding the cable industry. The DCF analysis was completed using discount rates ranging from 10.5% to 11.5% based on Charter' s cost of equity and after-tax cost of...

  • Page 58
    ... such as economics of the industry or geographic area, or change in ordinances. The cost approach relies on management' s assumptions regarding current material and labor costs required to rebuild and repurchase significant components of the Company' s property, plant and equipment along with...

  • Page 59
    ...cash and cash equivalents Accounts receivable, less allowance for doubtful accounts Prepaid expenses and other current assets Total current assets INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment, net of accumulated depreciation Franchises, net Customer relationships, net Goodwill Total...

  • Page 60
    ... the Company' s parent company and the payment of certain bankruptcy obligations on November 30, 2009. Cash of $26 million reclassified to restricted cash represents amounts held in escrow accounts pending final resolution from the Bankruptcy Court. (3) Represents payment of the Charter Operating...

  • Page 61
    ... parent companies Total reorganization value - CCH II Less: Working capital deficit (excluding debt) Other long term liabilities (excluding taxes) Loans payable - related party Fair value of debt Member' s equity Less: Noncontrolling interest Total CCH II member' s equity (9) As a result of the Plan...

  • Page 62
    ... with the activities of the Company' s personnel who assist in connecting and activating the new service and consist of compensation and indirect costs associated with these support functions. Indirect costs primarily include employee benefits and payroll taxes, direct variable costs associated with...

  • Page 63
    ... for indefinite-life treatment. Customer Relationships Customer relationships represent the value attributable to the Company' s business relationships with its current customers including the right to deploy and market additional services to these customers. Customer relationships are amortized on...

  • Page 64
    ... Company has various contracts to obtain basic, digital and premium video programming from program suppliers whose compensation is typically based on a flat fee per customer. The cost of the right to exhibit network programming under such arrangements is recorded in operating expenses in the month...

  • Page 65
    ... ended December 31, 2009, eleven months ended November 30, 2009 and years ended December 31, 2008, and 2007, respectively. Advertising Costs Advertising costs associated with marketing the Company' s products and services are generally expensed as costs are incurred. Such advertising expense was $20...

  • Page 66
    ... services, means for delivery, similarity in type of customers, the use of a unified network and other considerations across its geographic operating structure, management has determined that the Company has one reportable segment, broadband services. 4. Allowance for Doubtful Accounts Activity...

  • Page 67
    ... allow access to homes in cable service areas. Franchises are tested for impairment annually, or more frequently as warranted by events or changes in circumstances. Franchises are aggregated into essentially inseparable units of accounting to conduct the valuations. The units of accounting generally...

  • Page 68
    ... connection with the application of fresh start accounting on the Effective Date. Customer relationships will be amortized on an accelerated method over useful lives of 11-15 years based on the period over which current customers are expected to generate cash flows. As of December 31, 2009 and 2008...

  • Page 69
    ... and accrued expenses consist of the following as of December 31, 2009 and 2008: Successor December 31, 2009 Accounts payable - trade Accrued capital expenditures Accrued expenses: Interest Programming costs Franchise related fees Compensation Other $ 102 46 88 270 53 59 138 $ 756 $ $ Predecessor...

  • Page 70
    ... that is currently payable if the debt becomes immediately due is equal to the principal amount of notes. As of December 31, 2008, the accreted values presented above generally represented the principal amount of the notes less the original issue discount at the time of sale, plus the accretion...

  • Page 71
    ... second lien notes redeemed plus in each case accrued and unpaid interest. In March 2008, Charter Operating issued $546 million principal amount of 10.875% senior second-lien notes due 2014, guaranteed by CCO Holdings and certain other subsidiaries of Charter Operating, in a private transaction. Net...

  • Page 72
    ...their assets or merge with or into other companies; sell assets; enter into sale-leasebacks; in the case of restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to the bond issuers, guarantee their parent companies debt, or issue specified equity interests...

  • Page 73
    ...the "Paul Allen Group") ceasing to have the power, directly or indirectly, to vote at least 35% of the ordinary voting power for the management of Charter Operating on a fully diluted basis, the consummation of any transaction resulting in any person or group (other than the Paul Allen Group) having...

  • Page 74
    ..., 2008, AND 2007 (dollars in millions, except where indicated) • management of Charter Operating on a fully diluted basis, unless the Paul Allen Group holds a greater share of ordinary voting power for the management of Charter Operating, and Charter Operating ceasing to be a wholly-owned direct...

  • Page 75
    ... VIII plus approximately 18.6% of CC VIII' s income, inclusive of Mr. Allen' s previous 5.6% membership interest accounted for as temporary equity as of December 31, 2008. 12. Comprehensive Income (Loss) The Company reports changes in the fair value of interest rate agreements designated as hedging...

  • Page 76
    ... into fixed payments. For qualifying hedges, derivative gains and losses offset related results on hedged items in the consolidated statements of operations. The Company formally documented, designated and assessed the effectiveness of transactions that received hedge accounting. Changes in the...

  • Page 77
    ... appropriate and consistent with other market peers. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value estimate as of the Company' s reporting date. The accounting guidance establishes a three-level...

  • Page 78
    ...is evidence that an impairment may exist. During 2009, the Company recorded an impairment on its franchise assets of $2.2 billion and reflected its franchises, property, plant and equipment, customer relationships and goodwill at fair value based on applying fresh start accounting. The fair value of...

  • Page 79
    ..., 2008, AND 2007 (dollars in millions, except where indicated) Reorganization items, net consisted of the following items: Successor One Month Ended December 31, 2009 Penalty interest, net Loss on debt at allowed claim amount Professional fees Paul Allen management fee settlement - related party...

  • Page 80
    .... Directors, officers and other employees of Charter and its subsidiaries and affiliates, as well as others performing consulting services for the Company and its parent companies, are eligible for grants under the 2009 Stock Plan. Prior to the Company' s emergence from bankruptcy, Charter had stock...

  • Page 81
    ...-$ 15,787 $ 0.90 4.53 $ 13,119 $ 1.86 5.88 A summary of the activity for Charter' s restricted Class A common stock for the one month ended December 31, 2009, eleven months ended November 30, 2009 and years ended December 31, 2008, and 2007, is as follows (amounts in thousands, except per share...

  • Page 82
    ..., 2009 and years ended December 31, 2008, and 2007, the Company recorded deferred income tax expense and benefits as shown below. The income tax expense is recognized through increases in deferred tax liabilities and current federal and state income taxes primarily related to fresh start accounting...

  • Page 83
    ... recorded by the Company in prior periods. The Company' s effective tax rate differs from that derived by applying the applicable federal income tax rate of 35% for the one month ended December 31, 2009, eleven months ended November 30, 2009 and years ended December 31, 2008, and 2007, respectively...

  • Page 84
    ... (generally expiring in years 2010 through 2028) are subject to certain limitations. A valuation allowance of $31 million exists with respect to these carry forwards as of December 31, 2009. No tax years for Charter or Charter Holdco, the Company' s indirect parent companies, are currently under...

  • Page 85
    ...) processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Costs associated with providing these services are charged directly to the Company' s operating subsidiaries and are...

  • Page 86
    ... 12 $ 14 --14 $ (1) The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the one month ended December 31, 2009 and eleven months ended November 30, 2009 and years ended December 31, 2008, and 2007, were $2 million...

  • Page 87
    ... broadband, system and other types of technicians who are or were employed by Charter or Charter LLC in the states of Michigan, Minnesota, Missouri or California. Plaintiffs allege that Charter and Charter LLC violated certain wage and hour statutes of those four states by failing to pay technicians...

  • Page 88
    ...' s operations, including, without limitation, additional regulatory requirements the Company may be required to comply with as it offers new services such as telephone. 22. Employee Benefit Plan The Company' s employees may participate in the Charter Communications, Inc. 401(k) Plan. Employees that...

  • Page 89
    ... to Charter. In June 2009, the FASB issued guidance included in ASC 105-10, Generally Accepted Accounting Principles - Overall ("ASC 105-10"). ASC 105-10 is intended to be the source of GAAP and reporting standards as issued by the FASB. Its primary purpose is to improve clarity and use of existing...

  • Page 90
    ... companies Contributions from parent Payments for debt issuance costs Net cash flows from financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of year CASH AND CASH EQUIVALENTS, end of year $ $ 6 (5) --(22) 21 --$ Predecessor Eleven Months...