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CCH Form 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
FORM 10-Q
 

     (Mark One) 
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

or

[  ]      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:    333-77499
                                                    333-77499-01 
 
Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation *
(Exact name of registrants as specified in their charters) 

  Delaware
 Delaware
  
43-1843179
43-1843177
 (State or other jurisdiction of incorporation or organization) 
  
(I.R.S. Employer Identification Number)

12405 Powerscourt Drive
St. Louis, Missouri   63131
(Address of principal executive offices including zip code) 

(314) 965-0555
(Registrants’ telephone number, including area code) 

Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

                      Large accelerated filer o             Accelerated filer o             Non-accelerated filer þ

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Act). Yes oNo þ 

Number of shares of common stock of Charter Communications Holdings Capital Corporation outstanding as of November 8, 2006: 100

* Charter Communications Holdings Capital Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) to Form 10-Q and is therefore filing with the reduced disclosure format.
 


Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
Quarterly Report on Form 10-Q for the Period ended September 30, 2006

Table of Contents

PART I. FINANCIAL INFORMATION
Page 
   
4
   
Financial Statements - Charter Communications Holdings, LLC and Subsidiaries
  
 
5
 
6
 
7
8
   
29
   
43
   
44
   
PART II. OTHER INFORMATION
  
   
45
   
45
   
55
   
56
   
57

This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2006. The Securities and Exchange Commission ("SEC") allows us to "incorporate by reference" information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this quarterly report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this quarterly report. In this quarterly report, "we," "us" and "our" refer to Charter Communications Holdings, LLC and its subsidiaries.




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:

This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the "Results of Operations" and "Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this quarterly report. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under "Risk Factors" under Part II, Item 1A. 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" and "potential" among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in this quarterly report and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

  ·
the availability, in general, of funds to meet interest payment obligations under our and our parent companies’ debt and to fund our operations and necessary capital expenditures, either through cash flows from operating activities, further borrowings or other sources and, in particular, our and our parent companies’ ability to be able to provide under the applicable debt instruments such funds (by dividend, investment or otherwise) to the applicable obligor of such debt;
 
·
 our and our parent companies’ ability to comply with all covenants in our and our parent companies’ indentures and credit facilities, any violation of which would result in a violation of the applicable facility or indenture and could trigger a default of other obligations under cross-default provisions;
 
·
our and our parent companies’ ability to pay or refinance debt prior to or when it becomes due and/or to take advantage of market opportunities and market windows to refinance that debt through new issuances, exchange offers or otherwise, including restructuring our and our parent companies’ balance sheet and leverage position;
 
·
our ability to sustain and grow revenues and cash flows from operating activities by offering video, high-speed Internet, telephone and other services and to maintain and grow a stable customer base, particularly in the face of increasingly aggressive competition from other service providers;
 
·
our ability to obtain programming at reasonable prices or to pass programming cost increases on to our customers;
 
·
general business conditions, economic uncertainty or slowdown; and
 
·
the effects of governmental regulation, including but not limited to local franchise authorities, on our business.
 
All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.



PART I. FINANCIAL INFORMATION.


Item 1. Financial Statements.
 
 
Report of Independent Registered Public Accounting Firm
 
 
The Manager and the Member of
Charter Communications Holdings, LLC:
 
We have reviewed the condensed consolidated balance sheet of Charter Communications Holdings, LLC and subsidiaries (the Company) as of September 30, 2006; the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2006 and 2005; and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2006 and 2005. These condensed consolidated financial statements are the responsibility of the Company’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2005, and the related consolidated statements of operations, changes in member’s equity (deficit), and cash flows for the year then ended (not presented herein), and in our report dated February 27, 2006, except as to Notes 4 and 26, which are as of August 8, 2006, and September 14, 2006, respectively, which includes explanatory paragraphs regarding the adoption, effective September 30, 2004, of EITF Topic D-108, Use of the Residual Method to Value Acquired Assets Other than Goodwill, and, effective January 1, 2003, of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 

/s/ KPMG LLP

St. Louis, Missouri
October 30, 2006


 
4
 
 
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
 

   
September 30,
  
December 31,
  
   
2006
  
2005
  
   
(Unaudited)
      
ASSETS
          
CURRENT ASSETS:
              
Cash and cash equivalents
  
$
75
  
$
14
  
Accounts receivable, less allowance for doubtful accounts of
              
$17 and $17, respectively
    
185
    
212
  
Prepaid expenses and other current assets
    
31
    
22
  
Total current assets
    
291
    
248
  
               
INVESTMENT IN CABLE PROPERTIES:
              
Property, plant and equipment, net of accumulated
              
depreciation of $7,285 and $6,712, respectively
    
5,226
    
5,800
  
Franchises, net
    
9,221
    
9,826
  
Total investment in cable properties, net
    
14,447
    
15,626
  
               
OTHER NONCURRENT ASSETS
    
282
    
318
  
               
Total assets
  
$
15,020
  
$
16,192
  
               
LIABILITIES AND MEMBER’S DEFICIT
              
CURRENT LIABILITIES:
              
Accounts payable and accrued expenses
  
$
1,252
  
$
1,096
  
Payables to related party
    
108
    
83
  
Total current liabilities
    
1,360
    
1,179
  
               
LONG-TERM DEBT
    
18,392
    
18,525
  
LOANS PAYABLE - RELATED PARTY
    
4
    
22
  
DEFERRED MANAGEMENT FEES - RELATED PARTY
    
14
    
14
  
OTHER LONG-TERM LIABILITIES
    
352
    
392
  
MINORITY INTEREST
    
191
    
188
  
               
MEMBER’S DEFICIT:
              
Member’s deficit
    
(5,294
)
  
(4,130
)
Accumulated other comprehensive income
   
1
    
2
  
               
Total member’s deficit
    
(5,293
)
  
(4,128
)
               
Total liabilities and member’s deficit
  
$
15,020
  
$
16,192
  
 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Unaudited
 
   
Three Months Ended September 30,
  
Nine Months Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
REVENUES
  
$
1,388
  
$
1,265
  
$
4,091
  
$
3,746
  
                           
COSTS AND EXPENSES:
                          
Operating (excluding depreciation and amortization)
    
615
    
564
    
1,830
    
1,645
  
Selling, general and administrative
    
309
    
263
    
860
    
746
  
Depreciation and amortization
    
334
    
362
    
1,024
    
1,092
  
Asset impairment charges
    
60
    
--
    
159
    
39
  
Other operating expenses, net
    
4
    
22
    
14
    
28
  
                           
     
1,322
    
1,211
    
3,887
    
3,550
  
                           
Operating income from continuing operations
    
66
    
54
    
204
    
196
  
                           
OTHER INCOME AND (EXPENSES):
                          
Interest expense, net
    
(449
)
  
(442
)
  
(1,356
)
  
(1,297
)
Other income, net
    
111
    
504
    
101
    
549
  
                           
     
(338
)
  
62
    
(1,255
)
  
(748
)
                           
Income (loss) from continuing operations before income taxes
   
(272
)
  
116
    
(1,051
)
  
(552
)
                           
INCOME TAX EXPENSE
    
(1
)
  
(2
)
  
(5
)
  
(10
)
                           
Income (loss) from continuing operations
    
(273
)
  
114
    
(1,056
)
  
(562
)
                           
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
    
200
    
9
    
238
    
28
  
                           
Net income (loss)
  
$
(73
)
$
123
  
$
(818
)
$
(534
)
                           

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
Unaudited

   
Nine Months Ended September 30,
  
   
2006
  
2005
  
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net loss
  
$
(818
)
$
(534
)
Adjustments to reconcile net loss to net cash flows from operating activities:
              
Depreciation and amortization
    
1,032
    
1,134
  
Asset impairment charges
    
159
    
39
  
Noncash interest expense
    
89
    
195
  
Deferred income taxes
    
--
    
6
  
(Gain) loss on sale of assets, net
    
(198
)
  
5
  
Option compensation expense, net
    
10
    
11
  
Gain on derivative instruments and hedging activities, net
    
(8
)
  
(43
)
Gain on extinguishment of debt
    
(81
)
  
(501
)
Other, net
    
(12
)
  
7
  
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
              
Accounts receivable
    
44
    
(5
)
Prepaid expenses and other assets
    
(11
)
  
(7
)
Accounts payable, accrued expenses and other
    
119
    
(121
)
Receivables from and payables to a related party, including management fees
    
19
    
(65
)
               
Net cash flows from operating activities
    
344
    
121
  
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Purchases of property, plant and equipment
    
(795
)
  
(815
)
Change in accrued expenses related to capital expenditures
    
4
    
39
  
Proceeds from sales of assets, including cable systems
    
988
    
38
  
Purchase of cable system
    
(42
)
  
--
  
Purchase of investments
    
--
    
(1
)
Proceeds from investments
    
42
    
16
  
Other, net
    
(1
)
  
(2
)
               
Net cash flows from investing activities
    
196
    
(725
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Borrowings of long-term debt
    
5,970
    
897
  
Borrowings from related parties
    
--
    
140
  
Repayments of long-term debt
    
(6,826
)
  
(1,014
)
Repayments to related parties
    
(20
)
  
(112
)
Proceeds from issuance of debt
    
440
    
294
  
Payments for debt issuance costs
    
(40
)
  
(67
)
Distributions
    
(3
)
  
(60
)
               
Net cash flows from financing activities
    
(479
)
  
78
  
               
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
61
    
(526
)
CASH AND CASH EQUIVALENTS, beginning of period
    
14
    
546
  
               
CASH AND CASH EQUIVALENTS, end of period
  
$
75
  
$
20
  
               
CASH PAID FOR INTEREST
  
$
1,088
  
$
1,139
  
               
NONCASH TRANSACTIONS:
              
Issuance of debt by CCH I Holdings, LLC
  
$
--
  
$
2,423
  
Issuance of debt by CCH I, LLC
  
$
419
  
$
3,686
  
Issuance of debt by CCH II, LLC
  
$
410
  
$
--
  
Issuance of debt by Charter Communications Operating, LLC
  
$
37
  
$
333
  
Retirement of Charter Communications Holdings, LLC debt
  
$
(796
)
$
(7,000
)
Retirement of Renaissance Media Group LLC debt
  
$
(37
)
$
--
  
Distribution of Charter Communication Inc. convertible notes and accrued interest
  
$
(343
)
$
--
  
Transfer of property, plant and equipment from parent company
  
$
--
  
$
139
  
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

 
1.     Organization and Basis of Presentation
 
Charter Communications Holdings, LLC ("Charter Holdings") is a holding company whose principal assets at September 30, 2006 are the equity interests in its operating subsidiaries. Charter Holdings is a subsidiary of CCHC, LLC (“CCHC”) which is a subsidiary of Charter Communications Holdings Company, LLC ("Charter Holdco"), which is a subsidiary of Charter Communications, Inc. (“Charter”). The condensed consolidated financial statements include the accounts of Charter Holdings and all of its subsidiaries where the underlying operations reside, which are collectively referred to herein as the "Company." As part of the September 2006 exchange of Charter Holding notes for CCH I notes (see Note 2), CCHC contributed its 70% interest in the Class A preferred equity interests of CC VIII, LLC (“CC VIII”) to CCH I, LLC (“CCH I”). The contribution of the CC VIII interest was accounted for as a transaction among entities under common control, and accordingly financial statements of Charter Holdings reflect the contribution as if it had occurred on the date of a settlement with Paul Allen (see Note 18). All significant intercompany accounts and transactions among consolidated entities have been eliminated. The Company is a broadband communications company operating in the United States. The Company offers its customers traditional cable video programming (analog and digital video) as well as high-speed Internet services and, in some areas, advanced broadband services such as high definition television, video on demand, and telephone. The Company sells its cable video programming, high-speed Internet, telephone and advanced broadband services on a subscription basis. The Company also sells local advertising on satellite-delivered networks.

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, certain information and footnote disclosures typically included in Charter Holding’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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs; depreciation and amortization costs; impairments of property, plant and equipment, franchises and goodwill; income taxes; and contingencies. Actual results could differ from those estimates.
 
Reclassifications
 
Certain 2005 amounts have been reclassified to conform with the 2006 presentation, including discontinued operations as discussed in Note 3.

2.     Liquidity and Capital Resources

The Company incurred net loss of $73 million for the three months ended September 30, 2006, and $818 million and $534 million for the nine months ended September 30, 2006 and 2005, respectively. The Company had net income of $123 million for the three months ended September 30, 2005. The Company’s net cash flows from operating activities were $344 million and $121 million for the nine months ended September 30, 2006 and 2005, respectively.

Recent Financing Transactions

In January 2006, CCH II, LLC ("CCH II") and CCH II Capital Corp. issued $450 million in debt securities, the proceeds of which were provided to Charter Communications Operating, LLC ("Charter Operating"), which used such funds to reduce borrowings, but not commitments, under the revolving portion of its credit facilities.
 
 
8
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
In April 2006, Charter Operating completed a $6.85 billion refinancing of its credit facilities including a new $350 million revolving/term facility (which converts to a term loan no later than April 2007), a $5.0 billion term loan due in 2013 and certain amendments to the existing $1.5 billion revolving credit facility. In addition, the refinancing reduced margins on Eurodollar rate term loans to 2.625% from a weighted average of 3.15% previously and margins on base rate term loans to 1.625% from a weighted average of 2.15% previously. Concurrent with this refinancing, the CCO Holdings, LLC ("CCO Holdings") bridge loan was terminated.

In September 2006, Charter Holdings and its wholly owned subsidiaries, CCH I and CCH II, completed the exchange of approximately $797 million in total principal amount of outstanding debt securities of Charter Holdings. Holders of Charter Holdings notes due in 2009-2010 tendered $308 million principal amount of notes for $250 million principal amount of new 10.25% CCH II notes due 2013 and $37 million principal amount of 11% CCH I notes due 2015. Holders of Charter Holdings notes due 2011-2012 tendered $490 million principal amount of notes for $425 million principal amount of 11% CCH I notes due 2015. The Charter Holdings notes received in the exchanges were thereafter distributed to Charter Holdings and retired. Also in September 2006, CCHC and CCH II completed the exchange of $450 million principal amount of Charter’s outstanding 5.875% senior convertible notes due 2009 for $188 million in cash, 45 million shares of Charter’s Class A Common Stock and $146 million principal amount of 10.25% CCH II notes due 2010. The convertible notes received in the exchange are held by CCHC.

The Company has a significant level of debt. The Company's long-term financing as of September 30, 2006 consists of $5.1 billion of credit facility debt and $13.3 billion accreted value of high-yield notes. For the remainder of 2006, none of the Company’s debt matures, and in 2007 and 2008, $130 million and $50 million mature, respectively. In 2009 and beyond, significant additional amounts will become due under the Company’s remaining long-term debt obligations.

The Company requires significant cash to fund debt service costs, capital expenditures and ongoing operations. The Company has historically funded these requirements through cash flows from operating activities, borrowings under its credit facilities, equity contributions from Charter Holdco, sales of assets, issuances of debt securities and cash on hand. However, the mix of funding sources changes from period to period. For the nine months ended September 30, 2006, the Company generated $344 million of net cash flows from operating activities, after paying cash interest of $1.1 billion. In addition, the Company received proceeds from the sale of assets of approximately $988 million and used approximately $795 million for purchases of property, plant and equipment. Finally, the Company had net cash flows used in financing activities of $479 million.

The Company expects that cash on hand, cash flows from operating activities, proceeds from sales of assets, and the amounts available under its credit facilities will be adequate to meet its and its parent companies’ cash needs through 2007. The Company believes that cash flows from operating activities and amounts available under the Company’s credit facilities may not be sufficient to fund the Company’s operations and satisfy its and its parent companies’ interest and principal repayment obligations in 2008, and will not be sufficient to fund such needs in 2009 and beyond. The Company has been advised that Charter continues to work with its financial advisors in its approach to addressing liquidity, debt maturities and its overall balance sheet leverage.

Debt Covenants

The Company’s ability to operate depends upon, among other things, its continued access to capital, including credit under the Charter Operating credit facilities. The Charter Operating credit facilities, along with the Company’s indentures, contain certain restrictive covenants, some of which require the Company to maintain specified financial ratios, and meet financial tests and to provide annual audited financial statements with an unqualified opinion from the Company’s independent auditors. As of September 30, 2006, the Company is in compliance with the covenants under its indentures and credit facilities, and the Company expects to remain in compliance with those covenants for the next twelve months. As of September 30, 2006, the Company’s potential availability under its credit facilities totaled approximately $1.6 billion, although the actual availability at that time was only $695 million because of limits imposed by covenant restrictions. Continued access to the Company’s credit facilities is subject to the Company remaining in compliance with these covenants, including covenants tied to the Company’s operating performance.
 
 
9
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
If any events of non-compliance occur, funding under the credit facilities may not be available and defaults on some or potentially all of the Company’s debt obligations could occur. An event of default under any of the Company’s debt instruments could result in the acceleration of its payment obligations under that debt and, under certain circumstances, in cross-defaults under its other debt obligations, which could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

Parent Company Debt Obligations

Any financial or liquidity problems of the Company’s parent companies could cause serious disruption to the Company's business and have a material adverse effect on the Company’s business and results of operations.

Charter’s ability to make interest payments on its convertible senior notes, and, in 2009, to repay the outstanding principal of its convertible senior notes of $413 million, will depend on its ability to raise additional capital and/or on receipt of payments or distributions from Charter Holdco and its subsidiaries.  As of September 30, 2006, Charter Holdco was owed $3 million in intercompany loans from its subsidiaries and had $7 million in cash, which were available to pay interest and principal on Charter's convertible senior notes.  In addition, Charter has $75 million of U.S. government securities pledged as security for the semi-annual interest payments on Charter’s convertible senior notes scheduled in November 2006 and in 2007.  CCHC also holds $450 million of Charter’s convertible senior notes.  As a result, if CCHC continues to hold those notes, CCHC will receive interest payments on Charter’s convertible senior notes from the pledged government securities.  The cumulative amount of interest payments expected to be received by CCHC may be available to be distributed to pay interest on the outstanding $413 million of Charter’s convertible senior notes due in 2008 and May 2009, although CCHC may use those amounts for other purposes.

Distributions by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco, CCHC and Charter Holdings) for payment of principal on parent company notes are restricted under the indentures governing the CIH notes, CCH I notes, CCH II notes, CCO Holdings notes, and Charter Operating notes unless there is no default under the applicable indenture and each applicable subsidiary’s leverage ratio test is met at the time of such distribution. For the quarter ended September 30, 2006, there was no default under any of these indentures. However, certain of the Company’s subsidiaries did not meet their applicable leverage ratio tests based on September 30, 2006 financial results. As a result, distributions from certain of the Company’s subsidiaries to their parent companies would have been restricted at such time and will continue to be restricted unless those tests are met. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in the credit facilities. 

Distributions by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company for payment of parent company interest are permitted if there is no default under the aforementioned indentures.

Specific Limitations

The indentures governing the Charter Holdings notes permit Charter Holdings to make distributions to Charter Holdco for payment of interest or principal on Charter’s convertible senior notes, only if, after giving effect to the distribution, Charter Holdings can incur additional debt under the leverage ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures, and other specified tests are met. For the quarter ended September 30, 2006, there was no default under Charter Holdings’ indentures and the other specified tests were met. However, Charter Holdings did not meet the leverage ratio test of 8.75 to 1.0 based on September 30, 2006 financial results. As a result, distributions from Charter Holdings to Charter or Charter Holdco would have been restricted at such time and will continue to be restricted unless that test is met. During periods in which distributions are restricted, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments (that are not restricted payments) in Charter Holdco or Charter up to an amount determined by a formula, as long as there is no default under the indentures.  


10
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
3.     Sale of Assets

In 2006, the Company sold certain cable television systems serving a total of approximately 356,000 analog video customers in 1) West Virginia and Virginia to Cebridge Connections, Inc. (the “Cebridge Transaction”); 2) Illinois and Kentucky to Telecommunications Management, LLC, doing business as New Wave Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total sales price of approximately $971 million. The Company used the net proceeds from the asset sales to reduce borrowings, but not commitments, under the revolving portion of the Company’s credit facilities. These cable systems met the criteria for assets held for sale. As such, the assets were written down to fair value less estimated costs to sell resulting in asset impairment charges during the nine months ended September 30, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction. Also in the third quarter of 2006, the Company recorded asset impairment charges of $60 million related to other cable systems meeting the criteria of assets held for sale.

During the second quarter of 2006, the Company determined, based on changes in the Company’s organizational and cost structure, that its asset groupings for long lived asset accounting purposes are at the level of their individual market areas, which are at a level below the Company’s geographic clustering. As a result, the Company has determined that the West Virginia and Virginia cable systems comprise operations and cash flows that for financial reporting purposes meet the criteria for discontinued operations. Accordingly, the results of operations for the West Virginia and Virginia cable systems, including a gain of $200 million on the closing of the transaction, have been presented as discontinued operations, net of tax for the three and nine months ended September 30, 2006 and all prior periods presented herein have been reclassified to conform to the current presentation.

Summarized consolidated financial information for the three and nine months ended September 30, 2006 and 2005 for the West Virginia and Virginia cable systems is as follows:

   
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Revenues
  
$
--
  
$
53
  
$
109
  
$
166
  
Net income
  
$
200
  
$
9
  
$
238
  
$
28
  

In 2005, the Company closed the sale of certain cable systems in Texas, West Virginia and Nebraska representing a total of approximately 33,000 analog video customers. During the nine months ended September 30, 2005, certain of those cable systems met the criteria for assets held for sale. As such, the assets were written down to fair value less estimated costs to sell resulting in asset impairment charges during the nine months ended September 30, 2005 of approximately $39 million.
 
4.     Franchises and Goodwill
 
Franchise rights represent the value attributed to agreements with local authorities that allow access to homes in cable service areas acquired through the purchase of cable systems. Management estimates the fair value of franchise rights at the date of acquisition and determines if the franchise has a finite life or an indefinite-life as defined by Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Franchises that qualify for indefinite-life treatment under SFAS No. 142 are tested for impairment annually each October 1 based on valuations, or more frequently as warranted by events or changes in circumstances. Franchises are aggregated into essentially inseparable asset groups to conduct the valuations. The asset groups generally represent geographical clustering of the Company’s cable systems into groups by which such systems are managed. Management believes such grouping represents the highest and best use of those assets.


11
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
As of September 30, 2006 and December 31, 2005, indefinite-lived and finite-lived intangible assets are presented in the following table:

   
September 30, 2006
  
December 31, 2005
  
   
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
Carrying
Amount
  
Gross
Carrying
Amount
  
Accumulated Amortization
  
Net
Carrying
Amount
  
Indefinite-lived intangible assets:
                          
Franchises with indefinite lives
  
$
9,204
  
$
--
  
$
9,204
  
$
9,806
  
$
--
  
$
9,806
  
Goodwill
    
61
    
--
    
61
    
52
    
--
    
52
  
                                       
   
$
9,265
  
$
--
  
$
9,265
  
$
9,858
  
$
--
  
$
9,858
  
Finite-lived intangible assets:
                                      
Franchises with finite lives
  
$
23
  
$
6
  
$
17
  
$
27
  
$
7
  
$
20
  

For the nine months ended September 30, 2006, the net carrying amount of indefinite-lived and finite-lived franchises was reduced by $455 million and $2 million, respectively, related to cable asset sales completed in the first and third quarter of 2006 and $147 million as a result of the asset impairment charges recorded related to these cable asset sales (see Note 3). Franchise amortization expense represents the amortization relating to franchises that did not qualify for indefinite-life treatment under SFAS No. 142, including costs associated with franchise renewals. Franchise amortization expense for the three and nine months ended September 30, 2006 was approximately $0 and $1 million, respectively, and for the three and nine months ended September 30, 2005 was approximately $1 million and $3 million, respectively. The Company expects that amortization expense on franchise assets will be approximately $2 million annually for each of the next five years. Actual amortization expense in future periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives and other relevant factors.

For the nine months ended September 30, 2006, the net carrying amount of goodwill increased $9 million as a result of the Company’s purchase of certain cable systems in Minnesota from Seren Innovations, Inc. in January 2006.

5.     Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of September 30, 2006 and December 31, 2005:

   
September 30,
2006
  
December 31,
2005
  
           
Accounts payable - trade
  
$
72
  
$
102
  
Accrued capital expenditures
    
77
    
73
  
Accrued expenses:
              
Interest
    
503
    
329
  
Programming costs
    
273
    
269
  
Franchise-related fees
    
58
    
67
  
Compensation
   
71
    
60
  
Other
   
198
    
196
  
               
   
$
1,252
  
$
1,096
  


12
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
6.     Long-Term Debt
 
Long-term debt consists of the following as of September 30, 2006 and December 31, 2005:

   
September 30, 2006
  
December 31, 2005
  
   
Principal Amount
  
Accreted Value
  
Principal Amount
  
Accreted Value
  
Long-Term Debt
                          
8.250% senior notes due 2007
  
$
105
  
$
105
  
$
105
  
$
105
  
8.625% senior notes due 2009
    
187
    
187
    
292
    
292
  
9.920% senior discount notes due 2011
    
63
    
63
    
198
    
198
  
10.000% senior notes due 2009
    
105
    
105
    
154
    
154
  
10.250% senior notes due 2010
    
32
    
32
    
49
    
49
  
11.750% senior discount notes due 2010
    
21
    
21
    
43
    
43
  
10.750% senior notes due 2009
    
71
    
71
    
131
    
131
  
11.125% senior notes due 2011
    
52
    
52
    
217
    
217
  
13.500% senior discount notes due 2011
    
62
    
62
    
94
    
94
  
9.625% senior notes due 2009
    
52
    
52
    
107
    
107
  
10.000% senior notes due 2011
    
71
    
71
    
137
    
136
  
11.750% senior discount notes due 2011
    
55
    
55
    
125
    
120
  
12.125% senior discount notes due 2012
    
91
    
88
    
113
    
100
  
CCH I Holdings, LLC:
                          
11.125% senior notes due 2014
    
151
    
151
    
151
    
151
  
9.920% senior discount notes due 2014
    
471
    
471
    
471
    
471
  
10.000% senior notes due 2014
    
299
    
299
    
299
    
299
  
11.750% senior discount notes due 2014
    
815
    
815
    
815
    
781
  
13.500% senior discount notes due 2014
    
581
    
581
    
581
    
578
  
12.125% senior discount notes due 2015
    
217
    
210
    
217
    
192
  
CCH I, LLC:
                          
11.000% senior notes due 2015
    
3,987
    
4,094
    
3,525
    
3,683
  
CCH II, LLC:
                          
10.250% senior notes due 2010
    
2,198
    
2,190
    
1,601
    
1,601
  
10.250% senior notes due 2013
    
250
    
262
    
--
    
--
  
CCO Holdings, LLC:
                          
8¾% senior notes due 2013
    
800
    
795
    
800
    
794
  
Senior floating notes due 2010
    
550
    
550
    
550
    
550
  
Charter Communications Operating, LLC:
                          
8.000% senior second lien notes due 2012
    
1,100
    
1,100
    
1,100
    
1,100
  
8 3/8% senior second lien notes due 2014
    
770
    
770
    
733
    
733
  
Renaissance Media Group LLC:
                          
10.000% senior discount notes due 2008
    
--
    
--
    
114
    
115
  
Credit Facilities
                          
Charter Operating
    
5,140
    
5,140
    
5,731
    
5,731
  
   
$
18,296
  
$
18,392
  
$
18,453
  
$
18,525
  

The accreted values presented above generally represent the principal amount of the notes less the original issue discount at the time of sale plus the accretion to the balance sheet date except as follows. Certain of the CIH notes, CCH I notes and CCH II notes issued in exchange for Charter Holdings notes in 2005 and 2006 are recorded for financial reporting purposes at values different from the current accreted value for legal purposes and notes indenture purposes (the amount that is currently payable if the debt becomes immediately due). As of September 30, 2006, the accreted value of the Company’s debt for legal purposes and notes indenture purposes is approximately $18.0 billion.
 
 
13
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

In January 2006, CCH II and CCH II Capital Corp. issued $450 million in debt securities, the proceeds of which were provided, directly or indirectly, to Charter Operating, which used such funds to reduce borrowings, but not commitments, under the revolving portion of its credit facilities.

In March 2006, the Company exchanged $37 million of Renaissance Media Group LLC 10% senior discount notes due 2008 for $37 million principal amount of new Charter Operating 8 3/8% senior second-lien notes due 2014 issued in a private transaction. The terms and conditions of the new Charter Operating 8 3/8% senior second-lien notes due 2014 are identical to Charter Operating’s currently outstanding 8 3/8% senior second-lien notes due 2014. In June 2006, the Company retired the remaining $77 million principal amount of Renaissance Media Group LLC’s 10% senior discount notes due 2008.

In April 2006, Charter Operating completed a $6.85 billion refinancing of its credit facilities including a new $350 million revolving/term facility (which converts to a term loan no later than April 2007), a $5.0 billion term loan due in 2013 and certain amendments to the existing $1.5 billion revolving credit facility. In addition, the refinancing reduced margins on Eurodollar rate term loans to 2.625% from a weighted average of 3.15% previously and margins on base rate term loans to 1.625% from a weighted average of 2.15% previously. Concurrent with this refinancing, the CCO Holdings bridge loan was terminated.

In September 2006, Charter Holdings, CCH I and CCH II, completed the exchange of approximately $797 million in total principal amount of outstanding debt securities of Charter Holdings for $250 million principal amount of new 10.25% CCH II notes due 2013 and $462 million principal amount of 11% CCH I notes due 2015. The Charter Holdings notes received in the exchange were thereafter distributed to Charter Holdings and cancelled.

Also in September 2006, CCHC and CCH II completed the exchange of $450 million principal amount of Charter’s outstanding 5.875% senior convertible notes due 2009 for $188 million in cash, 45 million shares of Charter’s Class A common stock valued at $68 million and $146 million principal amount of 10.25% CCH II notes due 2010. The convertible notes received in the exchange are held by CCHC.

7.     Minority Interest

Minority interest on the Company’s consolidated balance sheets as of September 30, 2006 and December 31, 2005 primarily represents preferred membership interests in CC VIII, an indirect subsidiary of Charter Holdings, of $191 million and $188 million, respectively. As more fully described in Notes 18 and 20, this preferred interest is held by Mr. Allen, Charter’s Chairman and controlling shareholder, and CCH I. Approximately 5.6% of CC VIII’s income is allocated to minority interest.
 
8.     Comprehensive Loss

Certain marketable equity securities are classified as available-for-sale and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive loss on the accompanying condensed consolidated balance sheets. Additionally, the Company reports changes in the fair value of interest rate agreements designated as hedging the variability of cash flows associated with floating-rate debt obligations, that meet the effectiveness criteria of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in accumulated other comprehensive loss. Comprehensive loss for the three months ended September 30, 2006 was $74 million and was $819 million and $519 million for the nine months ended September 30, 2006 and 2005, respectively. Comprehensive income for the three months ended September 30, 2005 was $128 million.

14
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

9.     Accounting for Derivative Instruments and Hedging Activities

The Company uses interest rate risk management derivative instruments, such as interest rate swap agreements and interest rate collar agreements (collectively referred to herein as interest rate agreements) to manage its interest costs. The Company’s policy is to manage interest costs using a mix of fixed and variable rate debt. Using interest rate swap agreements, the Company has agreed to exchange, at specified intervals through 2007, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Interest rate collar agreements are used to limit the Company’s exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates.

The Company does not hold or issue derivative instruments for trading purposes. The Company does, however, have certain interest rate derivative instruments that have been designated as cash flow hedging instruments. Such instruments effectively convert variable interest payments on certain debt instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows derivative gains and losses to offset related results on hedged items in the consolidated statement of operations. The Company has formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting. For the three months ended September 30, 2006 and 2005, other income, net includes gains of $0 and $1 million, respectively, and for each of the nine months ended September 30, 2006 and 2005, other income, net includes gains of $2 million which represent cash flow hedge ineffectiveness on interest rate hedge agreements arising from differences between the critical terms of the agreements and the related hedged obligations. Changes in the fair value of interest rate agreements designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations that meet the effectiveness criteria of SFAS No. 133 are reported in accumulated other comprehensive loss. For the three months ended September 30, 2006 and 2005, a loss of $1 million and a gain of $5 million, respectively, and for the nine months ended September 30, 2006 and 2005, a loss of $1 million and a gain of $14 million, respectively, related to derivative instruments designated as cash flow hedges, was recorded in accumulated other comprehensive loss. The amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the floating-rate debt obligations affects earnings (losses).

Certain interest rate derivative instruments are not designated as hedges as they do not meet the effectiveness criteria specified by SFAS No. 133. However, management believes 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 other income in the Company’s condensed consolidated statements of operations. For the three months ended September 30, 2006 and 2005, other income, net includes losses of $3 million and gains of $16 million, respectively, and for the nine months ended September 30, 2006 and 2005, other income, net includes gains of $6 million and $41 million, respectively, for interest rate derivative instruments not designated as hedges.

As of September 30, 2006 and December 31, 2005, the Company had outstanding $1.7 billion and $1.8 billion and $20 million and $20 million, respectively, in notional amounts of interest rate swaps and collars, respectively. 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 are determined by reference to the notional amount and the other terms of the contracts.


15
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

10.     Revenues

Revenues consist of the following for the three and nine months ended September 30, 2006 and 2005:

   
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Video
  
$
836
  
$
811
  
$
2,520
  
$
2,434
  
High-speed Internet
    
267
    
222
    
773
    
647
  
Telephone
    
37
    
9
    
86
    
23
  
Advertising sales
    
81
    
72
    
228
    
207
  
Commercial
    
78
    
68
    
227
    
196
  
Other
    
89
    
83
    
257
    
239
  
                           
   
$
1,388
  
$
1,265
  
$
4,091
  
$
3,746
  
 
11.     Operating Expenses

Operating expenses consist of the following for the three and nine months ended September 30, 2006 and 2005:

   
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Programming
 
$
371
  
$
343
  
$
1,126
  
$
1,021
  
Service
   
216
    
196
    
624
    
552
  
Advertising sales
    
28
    
25
    
80
    
72
  
                           
   
$
615
  
$
564
  
$
1,830
  
$
1,645
  
 
12.     Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist of the following for the three and nine months ended September 30, 2006 and 2005:

   
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
General and administrative
  
$
253
  
$
226
  
$
724
  
$
644
  
Marketing
    
56
    
37
    
136
    
102
  
                           
   
$
309
  
$
263
  
$
860
  
$
746
  

Components of selling expense are included in general and administrative and marketing expense.


16
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

13.     Other Operating Expenses, Net

Other operating expenses, net consist of the following for the three and nine months ended September 30, 2006 and 2005:

   
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Loss on sale of assets, net
  
$
2
  
$
1
  
$
2
  
$
5
  
Hurricane asset retirement loss
    
--
    
19
    
--
    
19
  
Special charges, net
    
2
    
2
    
12
    
4
  
                           
   
$
4
  
$
22
  
$
14
  
$
28
  

Special charges, net for the three and nine months ended September 30, 2006 primarily represent severance associated with the closing of call centers and divisional restructuring. Special charges, net for the three and nine months ended September 30, 2005 primarily represent severance costs as a result of reducing workforce, consolidating administrative offices and executive severance.

For the three and nine months ended September 30, 2005, hurricane asset retirement loss represents the write off of $19 million of the Company’s plants’ net book value as a result of significant plant damage suffered by certain of the Company’s cable systems in Louisiana as a result of hurricanes Katrina and Rita.

For the nine months ended September 30, 2005, special charges, net were offset by approximately $2 million related to an agreed upon discount in respect of the portion of settlement consideration payable under the settlement terms of class action lawsuits.
 
14.     Other Income, Net
 
Other income, net consists of the following for the three and nine months ended September 30, 2006 and 2005:

   
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Gain (loss) on derivative instruments and
hedging activities, net
  
$
(3
)
$
17
  
$
8
  
$
43
  
Gain on extinguishment of debt
    
108
    
490
    
81
    
494
  
Minority interest
    
(2
)
  
(3
)
  
(3
)
  
(9
)
Gain on investments
    
8
    
--
    
12
    
21
  
Other, net
    
--
    
--
    
3
    
--
  
                           
   
$
111
  
$
504
  
$
101
  
$
549
  

Gain on extinguishment of debt

The exchange in September 2006 between Charter Holdings and CCH I and CCH II resulted in a gain on extinguishment of debt for the three and nine months ended September 30, 2006 of approximately $108 million. See Note 6.
 
17
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
The Charter Operating refinancing in April 2006 resulted in a loss on extinguishment of debt for the nine months ended September 30, 2006 of approximately $27 million. See Note 6.

In September 2005, Charter Holdings and its wholly owned subsidiaries, CCH I and CIH, completed the exchange of approximately $6.8 billion total principal amount of outstanding debt securities of Charter Holdings for $3.5 billion principal amount of new 11% CCH I senior secured notes due 2015 and $2.5 billion principal amount of various series of new CIH notes. The exchanges resulted in a net gain on extinguishment of debt for the three and nine months ended September 30, 2005 of approximately $490 million.

In March and June 2005, Charter Operating consummated exchange transactions with a small number of institutional holders of Charter Holdings 8.25% senior notes due 2007 pursuant to which Charter Operating issued, in private placements, approximately $333 million principal amount of new notes with terms identical to Charter Operating's 8.375% senior second lien notes due 2014 in exchange for approximately $346 million of the Charter Holdings 8.25% senior notes due 2007. The exchanges resulted in a gain on extinguishment of debt of approximately $10 million for the nine months ended September 30, 2005.

In March 2005, Charter Holdings’ subsidiary, CC V Holdings, LLC, redeemed all of its 11.875% notes due 2008, at 103.958% of principal amount, plus accrued and unpaid interest to the date of redemption. The total cost of redemption was approximately $122 million and was funded through borrowings under the Charter Operating credit facilities. The redemption resulted in a loss on extinguishment of debt for the nine months ended September 30, 2005 of approximately $5 million.

Gain on investments

Gain on investments for the three and nine months ended September 30, 2006 represents gains realized on the sale of investments. Gain on investments for the nine months ended September 30, 2005 primarily represents a gain realized on an exchange of the Company’s interest in an equity investee for an investment in a larger enterprise.
 
15.     Income Taxes
 
Charter Holdings is a single member limited liability company not subject to income tax. Charter Holdings holds all operations through indirect subsidiaries. The majority of these indirect subsidiaries are limited liability companies that are also not subject to income tax. However, certain of Charter Holdings’ indirect subsidiaries are corporations that are subject to income tax.

As of September 30, 2006 and December 31, 2005, the Company had net deferred income tax liabilities of approximately $199 million and $213 million, respectively. The net deferred tax liabilities relate to certain of the Company’s indirect subsidiaries, which file separate income tax returns.

During the three and nine months ended September 30, 2006, the Company recorded $1 million and $5 million of income tax expense, respectively. During the three and nine months ended September 30, 2005, the Company recorded $2 million and $10 million of income tax expense, respectively. Income tax expense is recognized through current federal and state income tax expense as well as increases to the deferred tax liabilities of certain of the Company’s indirect corporate subsidiaries.

Charter Holdco is currently under examination by the Internal Revenue Service for the tax years ending December 31, 2003 and 2002. In addition, one of the Company’s indirect corporate subsidiaries is under examination by the Internal Revenue Service for the tax year ended December 31, 2004. The Company’s results (excluding the indirect corporate subsidiaries, with the exception of the indirect corporate subsidiary under examination) for these years are subject to this examination. Management does not expect the results of this examination to have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations.
 
 
18
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
16.     Contingencies
 
The Company is a defendant or co-defendant in several unrelated lawsuits claiming infringement of various patents relating to various aspects of its businesses. Other industry participants are also defendants in certain of these cases, and, in many cases, the Company expects that any potential liability would be the responsibility of its equipment vendors pursuant to applicable contractual indemnification provisions. In the event that a court ultimately determines that the Company infringes on any intellectual property rights, it 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. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, the lawsuits could be material to the Company’s consolidated results of operations of any one period, and 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 is a party to other lawsuits and claims that arise in the ordinary course of conducting its business. The ultimate outcome of these other legal matters pending against the Company or its subsidiaries 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.
 
17.     Stock Compensation Plans
 
Charter has stock option plans (the “Plans”) which provide for the grant of non-qualified stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock and/or shares of restricted stock (not to exceed 20,000,000 shares of Charter Class A common stock), as each term is defined in the Plans. Employees, officers, consultants and directors of Charter and its subsidiaries and affiliates are eligible to receive grants under the Plans. Options granted generally vest over four to five years from the grant date, with 25% generally vesting on the anniversary of the grant date and ratably thereafter. Generally, options expire 10 years from the grant date. The Plans allow for the issuance of up to a total of 90,000,000 shares of Charter Class A common stock (or units convertible into Charter Class A common stock).

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants during the three months ended September 30, 2006 and 2005, respectively: risk-free interest rates of 4.9% and 4.2%; expected volatility of 72.9% and 68.5%; and expected lives of 6.25 years and 4.5 years, respectively. The following weighted average assumptions were used for grants during the nine months ended September 30, 2006 and 2005, respectively: risk-free interest rates of 4.7% and 4.0%; expected volatility of 86.3% and 69.9%; and expected lives of 6.25 years and 4.5 years, respectively. The valuations assume no dividends are paid. During the three and nine months ended September 30, 2006, Charter granted 0.6 million and 5.5 million stock options, respectively, with a weighted average exercise price of $1.18 and $1.08, respectively. As of September 30, 2006, Charter had 27.5 million and 11.6 million options outstanding and exercisable, respectively, with weighted average exercise prices of $3.81 and $6.44, respectively, and weighted average remaining contractual lives of 8 years and 6 years, respectively.

On January 1, 2006, the Company adopted revised SFAS No. 123, Share - Based payment, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for (a) equity instruments of that company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Because the Company adopted the fair value recognition provisions of SFAS No. 123 on January 1, 2003, the revised standard did not have a material impact on its financial statements. The Company recorded $3 million of option compensation expense which is included in general and administrative expense for each of the three month periods ended September 30, 2006 and 2005 and $10 million and $11 million for the nine months ended September 30, 2006 and 2005, respectively.

In February 2006, the Compensation and Benefits Committee of Charter’s Board of Directors approved a modification to the financial performance measures under Charter's Long-Term Incentive Program ("LTIP") required to be met for
 
 
19
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
the performance shares to vest. After the modification, management believes that approximately 2.5 million of the performance shares are likely to vest. As such, expense of approximately $3 million will be amortized over the remaining two year service period. During the nine months ended September 30, 2006, Charter granted an additional 8.7 million performance shares under the LTIP. The impact of such grant and the modification of the 2005 awards was $3 million for the nine months ended September 30, 2006.
 
18.     Related Party Transactions
 
The following sets forth certain transactions in which the Company and the directors, executive officers and affiliates of the Company are involved. Unless otherwise disclosed, management believes that each of the transactions described below was on terms no less favorable to the Company than could have been obtained from independent third parties.

CC VIII, LLC

As part of the acquisition of the cable systems owned by Bresnan Communications Company Limited Partnership in February 2000, CC VIII, Charter Holdings’ indirect limited liability company subsidiary, issued, after adjustments, 24,273,943 Class A preferred membership units (collectively, the "CC VIII interest") with an initial value and an initial capital account of approximately $630 million to certain sellers affiliated with AT&T Broadband, subsequently owned by Comcast Corporation (the "Comcast sellers"). Mr. Allen granted the Comcast sellers the right to sell to him the CC VIII interest for approximately $630 million plus 4.5% interest annually from February 2000 (the "Comcast put right"). In April 2002, the Comcast sellers exercised the Comcast put right in full, and this transaction was consummated on June 6, 2003. Accordingly, Mr. Allen became the holder of the CC VIII interest, indirectly through an affiliate. In the event of a liquidation of CC VIII, the owners of the CC VIII interest would be entitled to a priority distribution with respect to a 2% priority return (which will continue to accrete). Any remaining distributions in liquidation would be distributed to CC V Holdings, LLC (“CC V”) and the owners of the CC VIII interest in proportion to their capital accounts (which would have equaled the initial capital account of the Comcast sellers of approximately $630 million, increased or decreased by Mr. Allen's pro rata share of CC VIII’s profits or losses (as computed for capital account purposes) after June 6, 2003). 

An issue arose as to whether the documentation for the Bresnan transaction was correct and complete with regard to the ultimate ownership of the CC VIII interest following consummation of the Comcast put right. Thereafter, the board of directors of Charter formed a Special Committee of independent directors to investigate the matter and take any other appropriate action on behalf of Charter with respect to this matter. After conducting an investigation of the relevant facts and circumstances, the Special Committee determined that a "scrivener’s error" had occurred in February 2000 in connection with the preparation of the last-minute revisions to the Bresnan transaction documents and that, as a result, Charter should seek the reformation of the Charter Holdco limited liability company agreement, or alternative relief, in order to restore and ensure the obligation that the CC VIII interest be automatically exchanged for Charter Holdco units.

As of October 31, 2005, Mr. Allen, the Special Committee, Charter, Charter Holdco and certain of their affiliates, agreed to settle the dispute, and execute certain permanent and irrevocable releases pursuant to the Settlement Agreement and Mutual Release agreement dated October 31, 2005 (the "Settlement"). Pursuant to the Settlement, Charter Investment, Inc. (“CII”) has retained 30% of its CC VIII interest (the "Remaining Interests"). The Remaining Interests are subject to certain transfer restrictions, including requirements that the Remaining Interests participate in a sale with other holders or that allow other holders to participate in a sale of the Remaining Interests, as detailed in the revised CC VIII Limited Liability Company Agreement. CII transferred the other 70% of the CC VIII interest directly and indirectly, through Charter Holdco, to a newly formed entity, CCHC (a direct subsidiary of Charter Holdco and the direct parent of Charter Holdings). Of the 70% of the CC VIII interest, 7.4% has been transferred by CII to CCHC for a subordinated exchangeable note with an initial accreted value of $48 million, accreting at 14% per annum, compounded quarterly, with a 15-year maturity (the "Note"). The remaining 62.6% has been transferred by CII to Charter Holdco, in accordance with the terms of the settlement for no additional monetary consideration. Charter Holdco contributed the 62.6% interest to CCHC.

 
20
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
 
As part of the Settlement, CC VIII issued approximately 49 million additional Class B units to CC V in consideration for prior capital contributions to CC VIII by CC V, with respect to transactions that were unrelated to the dispute in connection with CII’s membership units in CC VIII. As a result, Mr. Allen’s pro rata share of the profits and losses of CC VIII attributable to the Remaining Interests is approximately 5.6%.

The Note is exchangeable, at CII’s option, at any time, for Charter Holdco Class A Common units at a rate equal to the then accreted value, divided by $2.00 (the "Exchange Rate"). Customary anti-dilution protections have been provided that could cause future changes to the Exchange Rate. Additionally, the Charter Holdco Class A Common units received will be exchangeable by the holder into Charter common stock in accordance with existing agreements between CII, Charter and certain other parties signatory thereto. Beginning February 28, 2009, if the closing price of Charter common stock is at or above the Exchange Rate for a certain period of time as specified in the Exchange Agreement, Charter Holdco may require the exchange of the Note for Charter Holdco Class A Common units at the Exchange Rate.

CCHC has the right to redeem the Note under certain circumstances, for cash in an amount equal to the then accreted value. Such amount, if redeemed prior to February 28, 2009, would also include a make whole provision up to the accreted value through February 28, 2009. CCHC must redeem the Note at its maturity for cash in an amount equal to the initial stated value plus the accreted return through maturity.

As part of the debt exchange in September 2006 described in Note 6, CCHC contributed the CC VIII interest in the Class A preferred equity interests of CC VIII to CCH I. The CC VIII interest was pledged as security for all CCH I notes. The CC VIII preferred interests are entitled to a 2% accreting priority return on the priority capital.
 
19.     Recently Issued Accounting Standards
 
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company will adopt FIN 48 effective January 1, 2007. The Company is currently assessing the impact of FIN 48 on its financial statements.

20.     Consolidating Schedules

In September 2006, Charter Holdings, CCH I and CCH II, completed the exchange of approximately $797 million in total principal amount of outstanding debt securities of Charter Holdings for $250 million of new 10.25% CCH II notes due 2013 and $462 million principal amount of 11% CCH I notes due 2015 (the “Private Exchange”).

As part of the Private Exchange, CCHC contributed its 70% interest in the Class A preferred equity interests of CC VIII to CCH I. The contribution of the CC VIII interest was accounted for as a transaction among entities under common control, and accordingly financial statements of Charter Holdings reflect the contribution as if it had occurred on the date of the Settlement (as discussed in Note 18).

As discussed in Note 14, in September 2005, Charter Holdings’ subsidiaries, CIH and CCH I, issued $6.1 billion principal amount of new debt securities in exchange for $6.8 billion principal amount of old Charter Holdings notes.

The CCH II notes and CCH I notes issued as part of the September 2006 exchange offer described above, and the CIH notes and CCH I notes issued as part of the September 2005 exchange offer described above, are obligations of CIH, CCH I and CCH II, however, they are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by Charter Holdings. 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
 
 
21
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
 
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.

In 2005 and 2003, respectively, Charter Holdings entered into a series of transactions and contributions which had the effect of creating CIH, CCH I and CCH II as intermediate holding companies. The creation of these holding companies has each been accounted for as reorganizations of entities under common control. Accordingly, the accompanying financial schedules present the historical financial condition and results of operations of CIH, CCH I and CCH II as if the respective entities existed for all periods presented. Condensed consolidating financial statements as of September 30, 2006 and December 31, 2005 and for the nine months ended September 30, 2006 and 2005 follow.

22
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

 

 
Charter Holdings
  
Condensed Consolidating Balance Sheet
  
As of September 30, 2006
  
                               
   
Charter Holdings
  
CIH
 
CCH I
 
CCH II
  
All Other Subsidiaries
  
Eliminations
  
Charter Holdings Consolidated
  
                               
ASSETS
                              
                               
CURRENT ASSETS:
                                            
Cash and cash equivalents
  
$
--
  
$
2
  
$
3
  
$
5
  
$
65
  
$
--
  
$
75
  
Accounts receivable, net
   
--
    
--
    
--
    
--
    
185
    
--
    
185
  
Receivables from related party
    
25
    
--
    
--
    
6
    
--
    
(31
)
  
--
  
Prepaid expenses and other current assets
    
--
    
--
    
--
    
--
    
31
    
--
    
31
  
Total current assets
    
25
    
2
    
3
    
11
    
281
    
(31
)
  
291
  
                                             
INVESTMENT IN CABLE PROPERTIES:
                                            
Property, plant and equipment, net
   
--
    
--
    
--
    
--
    
5,226
    
--
    
5,226
  
Franchises, net
    
--
    
--
    
--
    
--
    
9,221
    
--
    
9,221
  
Total investment in cable properties, net
    
--
    
--
    
--
    
--
    
14,447
    
--
    
14,447
  
                                             
INVESTMENT IN SUBSIDIARIES
    
--
    
--
    
1,966
    
4,201
    
--
    
(6,167
)
  
--
  
                                             
OTHER NONCURRENT ASSETS
    
6
    
20
    
48
    
24
    
184
    
--
    
282
  
                                             
Total assets
  
$
31
  
$
22
  
$
2,017
  
$
4,236
  
$
14,912
  
$
(6,198
)
$
15,020
  
                                             
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
                                            
                                             
CURRENT LIABILITIES:
                                            
Accounts payable and accrued expenses
  
$
37
  
$
89
  
$
197
  
$
13
  
$
916
  
$
--
  
$
1,252
  
Payables to related party
    
--
    
2
    
3
    
--
    
134
    
(31
)
  
108
  
Total current liabilities
    
37
    
91
    
200
    
13
    
1,050
    
(31
)
  
1,360
  
                                             
LONG-TERM DEBT
    
964
    
2,527
    
4,094
    
2,452
    
8,355
    
--
    
18,392
  
LOANS PAYABLE - RELATED PARTY
    
(105
)
  
--
    
--
    
(195
)
  
304
    
--
    
4
  
DEFERRED MANAGEMENT FEES - RELATED PARTY
    
--
    
--
    
--
    
--
    
14
    
--
    
14
  
OTHER LONG-TERM LIABILITIES
    
--
    
--
    
--
    
--
    
352
    
--
    
352
  
MINORITY INTEREST
    
--
    
--
    
(445
)
  
--
    
636
    
--
    
191
  
LOSSES IN EXCESS OF INVESTMENT
    
4,428
    
1,832
    
--
    
--
    
--
    
(6,260
)
  
--
  
MEMBER’S EQUITY (DEFICIT)
    
(5,293
)
  
(4,428
)
  
(1,832
)
  
1,966
    
4,201
    
93
    
(5,293
)
                                             
Total liabilities and member’s equity (deficit)
  
$
31
  
$
22
  
$
2,017
  
$
4,236
  
$
14,912
  
$
(6,198
)
$
15,020
  


23
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

 
Charter Holdings
  
Condensed Consolidating Balance Sheet
  
As of December 31, 2005
  
                               
   
Charter Holdings
  
CIH
 
CCH I
 
CCH II
  
All Other Subsidiaries
  
Eliminations
  
Charter Holdings Consolidated
  
                               
ASSETS
                              
                               
CURRENT ASSETS:
                                            
Cash and cash equivalents
  
$
--
  
$
3
  
$
8
  
$
--
  
$
3
  
$
--
  
$
14
  
Accounts receivable, net
   
--
    
--
    
--
    
--
    
212
    
--
    
212
  
Receivables from related party
    
24
    
--
    
--
    
--
    
--
    
(24
)
  
--
  
Prepaid expenses and other current assets
    
--
    
--
    
--
    
--
    
22
    
--
    
22
  
Total current assets
    
24
    
3
    
8
    
--
    
237
    
(24
)
  
248
  
                                             
INVESTMENT IN CABLE PROPERTIES:
                                            
Property, plant and equipment, net
   
--
    
--
    
--
    
--
    
5,800
    
--
    
5,800
  
Franchises, net
    
--
    
--
    
--
    
--
    
9,826
    
--
    
9,826
  
Total investment in cable properties, net
    
--
    
--
    
--
    
--
    
15,626
    
--
    
15,626
  
                                             
INVESTMENT IN SUBSIDIARIES
    
--
    
96
    
3,402
    
5,044
    
--
    
(8,542
)
  
--
  
                                             
OTHER NONCURRENT ASSETS
    
14
    
21
    
45
    
14
    
224
    
--
    
318
  
                                             
Total assets
  
$
38
  
$
120
  
$
3,455
    
5,058
  
$
16,087
  
$
(8,566
)
$
16,192
  
                                             
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
                                            
                                             
CURRENT LIABILITIES:
                                            
Accounts payable and accrued expenses
  
$
42
  
$
24
  
$
107
  
$
48
  
$
875
  
$
--
  
$
1,096
  
Payables to related party
    
--
    
2
    
3
    
7
    
95
    
(24
)
  
83
  
Total current liabilities
    
42
    
26
    
110
    
55
    
970
    
(24
)
  
1,179
  
                                             
LONG-TERM DEBT
    
1,746
    
2,472
    
3,683
    
1,601
    
9,023
    
--
    
18,525
  
LOANS PAYABLE - RELATED PARTY
    
--
    
--
    
--
    
--
    
22
    
--
    
22
  
DEFERRED MANAGEMENT FEES - RELATED PARTY
    
--
    
--
    
--
    
--
    
14
    
--
    
14
  
OTHER LONG-TERM LIABILITIES
    
--
    
--
    
--
    
--
    
392
    
--
    
392
  
MINORITY INTEREST
    
--
    
--
    
(434
)
  
--
    
622
    
--
    
188
  
LOSSES IN EXCESS OF INVESTMENT
    
2,378
    
--
    
--
    
--
    
--
    
(2,378
)
  
--
  
MEMBER’S EQUITY (DEFICIT)
    
(4,128
)
  
(2,378
)
  
96
    
3,402
    
5,044
    
(6,164
)
  
(4,128
)
                                             
Total liabilities and member’s equity (deficit)
  
$
38
  
$
120
  
$
3,455
  
$
5,058
  
$
16,087
  
$
(8,566
)
$
16,192
  


24
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

 

 
Charter Holdings
  
Condensed Consolidating Statement of Operations
  
For the nine months ended September 30, 2006
  
   
                               
   
Charter Holdings
  
CIH
 
CCH I
 
CCH II
  
All Other Subsidiaries
  
Eliminations
  
Charter Holdings Consolidated
  
                               
REVENUES
  
$
--
  
$
--
  
$
--
  
$
--
  
$
4,091
  
$
--
  
$
4,091
  
                                             
COSTS AND EXPENSES:
                                            
Operating (excluding depreciation and amortization)
    
--
    
--
    
--
    
--
    
1,830
    
--
    
1,830
  
Selling, general and administrative
    
--
    
--
    
--
    
--
    
860
    
--
    
860
  
Depreciation and amortization
    
--
    
--
    
--
    
--
    
1,024
    
--
    
1,024
  
Asset impairment charges
    
--
    
--
    
--
    
--
    
159
    
--
    
159
  
Other operating expenses, net
    
--
    
--
    
--
    
--
    
14
    
--
    
14
  
                                             
 
    
-- 
    
--
    
--
    
--
    
3,887
    
--
    
3,887
  
                                             
Operating income from continuing operations
    
--
    
--
    
--
    
--
    
204
    
--
    
204
  
                                             
OTHER INCOME AND (EXPENSES):
                                            
Interest expense, net
    
(129
)
  
(217
)
  
(287
)
  
(149
)
  
(574
)
  
--
    
(1,356
)
Other income (expense), net
    
108
    
--
    
11
    
--
    
(18
)
  
--
    
101
  
Equity in losses of subsidiaries
    
(797
)
  
(580
)
  
(304
)
  
(155
)
  
--
    
1,836
    
--
  
                                             
     
(818
)
  
(797
)
  
(580
)
  
(304
)
  
(592
)
  
1,836
    
(1,255
)
                                             
Loss from continuing operations before income taxes
   
(818
)
  
(797
)
  
(580
)
  
(304
)
  
(388
)
  
1,836
    
(1,051
)
                                             
INCOME TAX EXPENSE
   
--
    
--
    
--
    
--
    
(5
)
  
--
    
(5
)
                                             
Loss from continuing operations
    
(818
)
  
(797
)
  
(580
)
  
(304
)
  
(393
)
  
1,836
    
(1,056
)
                                             
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX
    
--
    
--
    
--
    
--
    
238
    
--
    
238
  
                                             
Net loss
 
$
(818
)
$
(797
)
$
(580
)
$
(304
)
$
(155
)
$
1,836
  
$
(818
)


25
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


Charter Holdings
  
Condensed Consolidating Statement of Operations
  
For the nine months ended September 30, 2005
  
   
                               
   
Charter Holdings
  
CIH
 
CCH I
 
CCH II
  
All Other Subsidiaries
  
Eliminations
  
Charter Holdings Consolidated
  
                               
REVENUES
  
$
--
  
$
--
  
$
--
  
$
--
  
$
3,746
  
$
--
  
$
3,746
  
                                             
COSTS AND EXPENSES:
                                            
Operating (excluding depreciation and amortization)
    
--
    
--
    
--
    
--
    
1,645
    
--
    
1,645
  
Selling, general and administrative
    
--
    
--
    
--
    
--
    
746
    
--
    
746
  
Depreciation and amortization
    
--
    
--
    
--
    
--
    
1,092
    
--
    
1,092
  
Asset impairment charges
    
--
    
--
    
--
    
--
    
39
    
--
    
39
  
Other operating expenses, net
    
--
    
--
    
--
    
--
    
28
    
--
    
28
  
                                             
 
    
-- 
    
--
    
--
    
--
    
3,550
    
--
    
3,550
  
                                             
Operating income from continuing operations
    
--
    
--
    
--
    
--
    
196
    
--
    
196
  
                                             
OTHER INCOME AND (EXPENSES):
                                            
Interest expense, net
    
(665
)
  
(2
)
  
(3
)
  
(125
)
  
(502
)
  
--
    
(1,297
)
Other income (expense), net
    
520
    
(8
)
  
(12
)
  
--
    
49
    
--
    
549
  
Equity in losses of subsidiaries
    
(389
)
  
(379
)
  
(364
)
  
(239
)
  
--
    
1,371
    
--
  
                                             
     
(534
)
  
(389
)
  
(379
)
  
(364
)
  
(453
)
  
1,371
    
(748
)
                                             
Loss from continuing operations before income taxes
   
(534
)
  
(389
)
  
(379
)
  
(364
)
  
(257
)
  
1,371
    
(552
)
                                             
INCOME TAX EXPENSE
   
--
    
--
    
--
    
--
    
(10
)
  
--
    
(10
)
                                             
Loss from continuing operations
    
(534
)
  
(389
)
  
(379
)
  
(364
)
  
(267
)
  
1,371
    
(562
)
                                             
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX
    
--
    
--
    
--
    
--
    
28
    
--
    
28
  
                                             
Net loss
 
$
(534
)
$
(389
)
$
(379
)
$
(364
)
$
(239
)
$
1,371
  
$
(534
)




26
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


Charter Holdings
  
Condensed Consolidating Statement of Cash Flows
  
For the nine months ended September 30, 2006
  
                               
   
Charter Holdings
  
CIH
 
CCH I
 
CCH II
  
All Other Subsidiaries
  
Eliminations
  
Charter Holdings Consolidated
  
                               
CASH FLOWS FROM OPERATING ACTIVITIES:
                                            
Net loss
  
$
(818
)
$
(797
)
$
(580
)
$
(304
)
$
(155
)
$
1,836
  
$
(818
)
Adjustments to reconcile net loss to net cash flows from operating activities:
                                            
Depreciation and amortization
    
--
    
--
    
--
    
--
    
1,032
    
--
    
1,032
  
Asset impairment charges
    
--
    
--
    
--
    
--
    
159
    
--
    
159
  
Noncash interest expense
    
17
    
56
    
(6
)
  
4
    
18
    
--
    
89
  
Equity in losses of subsidiaries
    
797
    
580
    
304
    
155
    
--
    
(1,836
)
  
--
  
Other, net
    
(108
)
  
--
    
(10
)
  
--
    
(171
)
  
--
    
(289
)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
                                            
Accounts receivable
    
--
    
--
    
--
    
--
    
44
    
--
    
44
  
Prepaid expenses and other assets
    
--
    
--
    
--
    
--
    
(11
)
  
--
    
(11
)
Accounts payable, accrued expenses and other
    
18
    
66
    
74
    
(53
)
  
14
    
--
    
119
  
Receivables from and payables to related party, including deferred management fees
    
2
    
--
    
--
    
(13
)
  
30
    
--
    
19
  
                                             
Net cash flows from operating activities
    
(92
)
  
(95
)
  
(218
)
  
(211
)
  
960
    
--
    
344
  
                                             
CASH FLOWS FROM INVESTING ACTIVITIES:
                                            
Purchases of property, plant and equipment
    
--
    
--
    
--
    
--
    
(795
)
  
--
    
(795
)
Change in accrued expenses related to capital expenditures
    
--
    
--
    
--
    
--
    
4
    
--
    
4
  
Proceeds from sale of assets
    
--
    
--
    
--
    
--
    
988
    
--
    
988
  
Purchase of cable system
    
--
    
--
    
--
    
--
    
(42
)
  
--
    
(42
)
Proceeds from investments
   
--
    
--
    
--
    
--
    
42
    
--
    
42
  
Other, net
    
--
    
--
    
--
    
--
    
(1
)
  
--
    
(1
)
                                             
Net cash flows from investing activities
    
--
    
--
    
--
    
--
    
196
    
--
    
196
  
                                             
CASH FLOWS FROM FINANCING ACTIVITIES:
                                            
Borrowings of long-term debt
    
--
    
--
    
--
    
--
    
5,970
    
--
    
5,970
  
Borrowings from related parties
    
(105
)
  
--
    
--
    
(195
)
  
300
    
--
    
--
  
Repayments of long-term debt
    
--
    
--
    
--
    
(188
)
  
(6,638
)
  
--
    
(6,826
)
Repayments to related parties
    
--
    
--
    
--
    
--
    
(20
)
  
--
    
(20
)
Proceeds from issuance of debt
    
--
    
--
    
--
    
440
    
--
    
--
    
440
  
Payments for debt issuance costs
    
(2
)
  
--
    
(5
)
  
(14
)
  
(19
)
  
--
    
(40
)
Net Contributions (Distributions)
    
199
    
94
    
218
    
173
    
(687
)
  
--
    
(3
)
                                             
Net cash flows from financing activities
    
92
    
94
    
213
    
216
    
(1,094
)
  
--
    
(479
)
                                             
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
--
    
(1
)
  
(5
)
  
5
    
62
    
--
    
61
  
CASH AND CASH EQUIVALENTS, beginning of period
    
--
    
3
    
8
    
--
    
3
    
--
    
14
  
 
                                            
CASH AND CASH EQUIVALENTS, end of period
  
$
--
  
$
2
  
$
3
  
$
5
  
$
65
  
$
--
  
$
75
  


27
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)


Charter Holdings
  
Condensed Consolidating Statement of Cash Flows
  
For the nine months ended September 30, 2005
  
                               
   
Charter Holdings
  
CIH
 
CCH I
 
CCH II
  
All Other Subsidiaries
  
Eliminations
  
Charter Holdings Consolidated
  
                               
CASH FLOWS FROM OPERATING ACTIVITIES:
                                            
Net loss
  
$
(534
)
$
(389
)
$
(379
)
$
(364
)
$
(239
)
$
1,371
  
$
(534
)
Adjustments to reconcile net loss to net cash flows from operating activities:
                                            
Depreciation and amortization
    
--
    
--
    
--
    
--
    
1,134
    
--
    
1,134
  
Asset impairment charges
    
--
    
--
    
--
    
--
    
39
    
--
    
39
  
Noncash interest expense
    
170
    
2
    
--
    
2
    
21
    
--
    
195
  
Equity in losses of subsidiaries
    
389
    
379
    
364
    
239
    
--
    
(1,371
)
  
--
  
Other, net
    
(521
)
  
8
    
12
    
--
    
(14
)
  
--
    
(515
)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:
                                            
Accounts receivable
    
10
    
--
    
--
    
--
    
(15
)
  
--
    
(5
)
Prepaid expenses and other assets
    
--
    
--
    
--
    
--
    
(7
)
  
--
    
(7
)
Accounts payable, accrued expenses and other
    
(67
)
  
3
    
12
    
(41
)
  
(28
)
  
--
    
(121
)
Receivables from and payables to related party, including deferred management fees
    
1
    
1
    
1
    
--
    
(68
)
  
--
    
(65
)
                                             
Net cash flows from operating activities
    
(552
)
  
4
    
10
    
(164
)
  
823
    
--
    
121
  
                                             
CASH FLOWS FROM INVESTING ACTIVITIES:
                                            
Purchases of property, plant and equipment
    
--
    
--
    
--
    
--
    
(815
)
  
--
    
(815
)
Change in accrued expenses related to capital expenditures
    
--
    
--
    
--
    
--
    
39
    
--
    
39
  
Proceeds from sale of assets
    
--
    
--
    
--
    
--
    
38
    
--
    
38
  
Purchases of investments
    
--
    
--
    
--
    
--
    
(1
)
  
--
    
(1
)
Proceeds from investments
   
--
    
--
    
--
    
--
    
16
    
--
    
16
  
Other, net
    
--
    
--
    
--
    
--
    
(2
)
  
--
    
(2
)
                                             
Net cash flows from investing activities
    
--
    
--
    
--
    
--
    
(725
)
  
--
    
(725
)
                                             
CASH FLOWS FROM FINANCING ACTIVITIES:
                                            
Borrowings of long-term debt
    
--
    
--
    
--
    
--
    
897
    
--
    
897
  
Borrowings from related parties
    
--
    
--
    
--
    
--
    
140
    
--
    
140
  
Repayments of long-term debt
    
--
    
--
    
--
    
--
    
(1,014
)
  
--
    
(1,014
)
Repayments to related parties
    
--
    
--
    
--
    
--
    
(112
)
  
--
    
(112
)
Proceeds from issuance of debt
    
--
    
--
    
--
    
--
    
294
    
--
    
294
  
Payments for debt issuance costs
    
--
    
(8
)
  
(51
)
  
--
    
(8
)
  
--
    
(67
)
Net Contributions (Distributions)
    
552
    
7
    
49
    
164
    
(832
)
  
--
    
(60
)
                                             
Net cash flows from financing activities
    
552
    
(1
)
  
(2
)
  
164
    
(635
)
  
--
    
78
  
                                             
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
--
    
3
    
8
    
--
    
(537
)
  
--
    
(526
)
CASH AND CASH EQUIVALENTS, beginning of period
    
--
    
--
    
--
    
--
    
546
    
--
    
546
  
 
                                            
CASH AND CASH EQUIVALENTS, end of period
  
$
--
  
$
3
  
$
8
  
$
--
  
$
9
  
$
--
  
$
20
  

 
 
28
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

Charter Communications Holdings, LLC ("Charter Holdings") is a holding company whose principal assets as of September 30, 2006 are equity interests in its operating subsidiaries. Charter Holdings is a subsidiary of CCHC, LLC (“CCHC”) which is a subsidiary of Charter Communications Holdings Company, LLC ("Charter Holdco"), which is a subsidiary of Charter Communications, Inc. (“Charter”). "We," "us" and "our" refer to Charter Holdings and/or its subsidiaries.

We are a broadband communications company operating in the United States. We offer our customers traditional cable video programming (analog and digital video) as well as high-speed Internet services and, in some areas, advanced broadband services such as high definition television, video on demand, telephone and interactive television. We sell our cable video programming, high-speed Internet, telephone and advanced broadband services on a subscription basis.

The following table summarizes our customer statistics for analog and digital video, residential high-speed Internet and residential telephone as of September 30, 2006 and 2005:

   
Approximate as of
  
   
September 30,
  
September 30,
  
   
2006 (a)
  
2005 (a)
  
           
Video Cable Services:
              
Analog Video:
              
Residential (non-bulk) analog video customers (b)
    
5,216,900
    
5,636,100
  
Multi-dwelling (bulk) and commercial unit customers (c)
    
259,700
    
270,200
  
Total analog video customers (b)(c)
    
5,476,600
    
5,906,300
  
               
Digital Video:
              
Digital video customers (d)
   
2,767,900
    
2,749,400
  
               
Non-Video Cable Services:
              
Residential high-speed Internet customers (e)
    
2,343,200
    
2,120,000
  
Residential telephone customers (f)
    
339,600
    
89,900
  

After giving effect to the acquisition of cable systems in January 2006 and the sales of certain non-strategic cable systems in the third quarter of 2006, September 30, 2005 analog video customers, digital video customers, high-speed Internet customers and telephone customers would have been 5,523,500, 2,588,700, 2,023,900 and 104,700, respectively.

 
(a)
"Customers" include all persons our corporate billing records show as receiving service (regardless of their payment status), except for complimentary accounts (such as our employees). At September 30, 2006 and 2005, "customers" include approximately 51,200 and 49,300 persons whose accounts were over 60 days past due in payment, approximately 11,300 and 9,900 persons whose accounts were over 90 days past due in payment, and approximately 6,200 and 6,000 of which were over 120 days past due in payment, respectively.

 
(b)
"Analog video customers" include all customers who receive video services (including those who also purchase high-speed Internet and telephone services) but excludes approximately 289,700 and 261,800 customers at September 30, 2006 and 2005, respectively, who receive high-speed Internet service only or telephone service only and who are only counted as high-speed Internet customers or telephone customers.
 
 
(c)
Included within "analog video customers" are those in commercial and multi-dwelling structures, which are calculated on an equivalent bulk unit ("EBU") basis. EBU is calculated for a system by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service. The EBU method of estimating analog video customers is consistent with the methodology used in determining costs paid to programmers and has been consistently
 
 
29

 
 
 
applied year over year. As we increase our effective analog prices to residential customers without a corresponding increase in the prices charged to commercial service or multi-dwelling customers, our EBU count will decline even if there is no real loss in commercial service or multi-dwelling customers.
 
 
(d)
"Digital video customers" include all households that have one or more digital set-top terminals. Included in "digital video customers" on September 30, 2006 and 2005 are approximately 6,700 and 8,900 customers, respectively, that receive digital video service directly through satellite transmission.

 
(e)
"Residential high-speed Internet customers" represent those customers who subscribe to our high-speed Internet service.

 
(f)
"Residential telephone customers" include all households receiving telephone service.

 
Overview of Operations

We have a history of net losses. Our net losses are principally attributable to insufficient revenue to cover the combination of operating costs and interest costs we incur because of our high level of debt and depreciation expenses that we incur resulting from the capital investments we have made and continue to make in our cable properties. We expect that these expenses will remain significant, and we therefore expect to continue to report net losses for the foreseeable future. We had net losses of $73 million and $818 million for the nine months ended September 30, 2006 and 2005, respectively.
 
For the three months ended September 30, 2006 and 2005, our operating income from continuing operations was $66 million and $54 million, respectively, and for the nine months ended September 30, 2006 and 2005, our operating income from continuing operations was $204 million and $196 million, respectively. Operating income from continuing operations includes depreciation and amortization expense and asset impairment charges but excludes interest expense. We had operating margins of 5% and 4% for the three months ended September 30, 2006 and 2005, respectively, and 5% for each of the nine months ended September 30, 2006 and 2005. The increase in operating income from continuing operations and operating margins for the three months ended September 30, 2006 compared to 2005 was principally due to an increase in revenue over expenses as a result of increased customers for digital and advanced services as well as overall rate increases. 
 
Historically, our ability to fund operations and investing activities has depended on our continued access to credit under our credit facilities. We expect we will continue to borrow under our credit facilities from time to time to fund cash needs. The occurrence of an event of default under our credit facilities could result in borrowings from these credit facilities being unavailable to us and could, in the event of a payment default or acceleration, also trigger events of default under the indentures governing our outstanding notes and would have a material adverse effect on us. See "— Liquidity and Capital Resources."

Sale of Assets

In 2006, we sold certain cable television systems serving a total of approximately 356,000 analog video customers in 1) West Virginia and Virginia to Cebridge Connections, Inc. (the “Cebridge Transaction”); 2) Illinois and Kentucky to Telecommunications Management, LLC, doing business as New Wave Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total sales price of approximately $971 million. These cable systems met the criteria for assets held for sale. As such, the assets were written down to fair value less estimated costs to sell resulting in asset impairment charges during the nine months ended September 30, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction. Also, in the third quarter of 2006, we recorded asset impairment charges of $60 million related to other cable systems meeting the criteria of assets held for sale. In the third quarter of 2006 we have also determined that the West Virginia and Virginia cable systems comprise operations and cash flows that for financial reporting purposes meet the criteria for discontinued operations. Accordingly, the results of operations for the West Virginia and Virginia cable systems, including a gain of approximately $200 million on the transaction, have been presented as discontinued operations, net of tax for the three and nine months ended September 30, 2006 and all prior periods presented herein have been reclassified to conform to the current presentation.

30

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 2005 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

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):

   
Three Months Ended September 30,
  
   
2006
  
2005
  
                   
Revenues
  
$
1,388
    
100
%
$
1,265
    
100
%
                           
Costs and expenses:
                          
Operating (excluding depreciation and amortization)
    
615
    
44
%
  
564
    
45
%
Selling, general and administrative
    
309
    
22
%
  
263
    
21
%
Depreciation and amortization
    
334
    
24
%
  
362
    
29
%
Asset impairment charges
    
60
    
5
%
  
--
    
--
  
Other operating expenses, net
    
4
    
--
    
22
    
1
%
                           
     
1,322
    
95
%
  
1,211
    
96
%
                           
Operating income from continuing operations
    
66
    
5
%
  
54
    
4
%
                           
Interest expense, net
    
(449
)
        
(442
)
      
Other income, net
    
111
          
504
        
                           
     
(338
)
        
62
        
                           
Income (loss) from continuing operations before income taxes
   
(272
)
        
116
        
                           
Income tax expense
    
(1
)
        
(2
)
      
                           
Income (loss) from continuing operations
    
(273
)
        
114
        
                           
Income from discontinued operations, net of tax
    
200
          
9
        
                           
Net income (loss)
  
$
(73
)
      
$
123
        

Revenues. The overall increase in revenues from continuing operations in 2006 compared to 2005 is principally the result of an increase from September 30, 2005 of 299,100 high-speed Internet customers, 133,200 digital video customers and 234,900 telephone customers, as well as price increases for video and high-speed Internet services, and is offset partially by a decrease of 189,700 analog video customers. Our goal is to increase revenues by improving customer service, which we believe will stabilize our analog video customer base, implementing price increases on certain services and packages, and increasing the number of customers who purchase high-speed Internet services, digital video and advanced products and services such as telephone, video on demand ("VOD"), high definition television and digital video recorder service.

Average monthly revenue per analog video customer increased to $83.27 for the three months ended September 30, 2006 from $74.34 for the three months ended September 30, 2005 primarily as a result of incremental revenues from advanced services and price increases. Average monthly revenue per analog video customer represents total quarterly revenue, divided by three, divided by the average number of analog video customers during the respective period.
 
 
31

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

   
Three Months Ended September 30,
  
   
2006
  
2005
  
2006 over 2005
  
   
 
Revenues
  
% of
Revenues
  
 
Revenues
  
% of
Revenues
  
 
Change
  
% Change
  
                           
Video
  
$
836
    
60
%
$
811
    
64
%
$
25
    
3
%
High-speed Internet
    
267
    
19
%
  
222
    
18
%
  
45
    
20
%
Telephone
    
37
    
3
%
  
9
    
1
%
  
28
    
311
%
Advertising sales
    
81
    
6
%
  
72
    
6
%
  
9
    
13
%
Commercial
    
78
    
6
%
  
68
    
5
%
  
10
    
15
%
Other
    
89
    
6
%
  
83
    
6
%
  
6
    
7
%
                                       
   
$
1,388
    
100
%
$
1,265
    
100
%
$
123
    
10
%

Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers. Approximately $28 million of the increase was the result of price increases and incremental video revenues on advanced services from existing customers and approximately $15 million was the result of an increase in digital video customers. The increases were offset by decreases of approximately $6 million related to a decrease in analog video customers and approximately $12 million related to the cable asset sales described above in “Sale of Assets” (the “System Sales”).

Approximately $37 million of the increase in revenues from high-speed Internet services provided to our non-commercial customers related to the increase in the average number of customers receiving high-speed Internet services, whereas approximately $10 million related to the increase in average price of the service. The increases were offset by approximately $2 million related to the System Sales.

Revenues from telephone services increased primarily as a result of an increase of 234,900 telephone customers in 2006.

Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors. Advertising sales revenues increased primarily as a result of an increase in local and national advertising sales. For the three months ended September 30, 2006 and 2005, we received $3 million and $5 million, respectively, in advertising sales revenues from programmers.

Commercial revenues consist primarily of revenues from video and high-speed Internet services provided to our commercial customers. Commercial revenues increased primarily as a result of an increase in commercial high-speed Internet revenues.

Other revenues consist of revenues from franchise fees, equipment rental, customer installations, home shopping, dial-up Internet service, late payment fees, wire maintenance fees and other miscellaneous revenues. For the three months ended September 30, 2006 and 2005, franchise fees represented approximately 51% and 53%, respectively, of total other revenues. The increase in other revenues was primarily the result of an increase in installation revenue of $3 million and wire maintenance fees of $3 million.

32

Operating Expenses. Programming costs represented 61% of operating expenses for each of the three months ended September 30, 2006 and 2005, respectively. Key expense components as a percentage of revenues were as follows (dollars in millions):
 
   
Three Months Ended September 30,
  
   
2006
  
2005
  
2006 over 2005
  
   
 
Expenses
  
% of
Revenues
  
 
Expenses
  
% of
Revenues
  
 
Change
  
% Change
  
                           
Programming
 
$
371
    
27
%
$
343
    
27
%
$
28
    
8
%
Service
   
216
    
15
%
  
196
    
16
%
  
20
    
10
%
Advertising sales
    
28
    
2
%
  
25
    
2
%
  
3
    
12
%
                                       
   
$
615
    
44
%
$
564
    
45
%
$
51
    
9
%

Programming costs consist primarily of costs paid to programmers for analog, premium and digital channels, VOD and pay-per-view programming. The increase in programming costs was primarily a result of rate increases and was offset in part by approximately $5 million related to the System Sales. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $4 million and $9 million for the three months ended September 30, 2006 and 2005, respectively.

Our cable programming costs have increased in every year in excess of customary inflationary and cost-of-living increases. We expect them to continue to increase due to a variety of factors, including annual increases imposed by programmers and additional programming being provided to customers as a result of bandwidth reallocation, both of which increase channel capacity. In 2006, programming costs have increased and we expect will continue to increase at a higher rate than in 2005. These costs will be determined in part on the outcome of programming negotiations in 2006 and may be subject to offsetting events. Our increasing programming costs have resulted in declining operating margins on our video services because we have been unable to fully pass on all cost increases to our customers. We expect to partially offset the resulting margin compression on our traditional video services with revenue from advanced video services, increased telephone revenues, high-speed Internet revenues, advertising revenues and commercial service revenues.

Service costs consist primarily of service personnel salaries and benefits, costs of providing high-speed Internet service and telephone service, franchise fees, system utilities, maintenance and pole rent expense. The increase in service costs resulted primarily from increased costs of providing high-speed Internet and telephone service of $10 million, increased franchise fees of $3 million, increased labor and maintenance costs to improve service levels and to support our advanced products of $6 million, and higher fuel and utility prices of $1 million. The increases in service costs were offset in part by approximately $3 million related to the System Sales. Advertising sales expenses consist of costs related to traditional advertising services provided to advertising customers, including salaries, benefits and commissions. Advertising sales expenses increased primarily as a result of increased costs in these areas.
 
Selling, General and Administrative Expenses. Key components of expense as a percentage of revenues were as follows (dollars in millions):

   
Three Months Ended September 30,
  
   
2006
  
2005
  
2006 over 2005
  
   
 
Expenses
  
% of
Revenues
  
 
Expenses
  
% of
Revenues
  
 
Change
  
 
% Change
  
                           
General and administrative
  
$
253
    
18
%
$
226
    
18
%
$
27
    
12
%
Marketing
    
56
    
4
%
  
37
    
3
%
  
19
    
51
%
                                       
   
$
309
    
22
%
$
263
    
21
%
$
46
    
17
%

General and administrative expenses consist primarily of salaries and benefits, customer care center costs, billing costs, internal network costs, and bad debt expense. The increase in general and administrative expenses resulted
 
 
33
 
primarily from a rise in call center costs of $16 million, an increase in salaries and benefits of $8 million, property and casualty losses of $6 million, bad debt expense of $3 million, billing costs of $2 million, and computer maintenance of $2 million offset by decreases in consulting services of $10 million, approximately $2 million related to the System Sales.

Marketing expenses increased as a result of increased spending in targeted marketing campaigns consistent with management’s strategy to increase revenues.

Depreciation and Amortization. Depreciation and amortization expense decreased by $28 million for the three months ended September 30, 2006 compared to the three months ended September 30, 2005. The decrease in depreciation was primarily the result of assets becoming fully depreciated. Approximately $7 million of the decrease was related to the System Sales.

Asset Impairment Charges. Asset impairment charges for the three months ended September 30, 2006 represent the write-down of assets related to cable asset sales to fair value less costs to sell. See Note 3 to the condensed consolidated financial statements.

Other Operating Expenses, Net. Other operating expenses decreased $18 million from $22 million for the three months ended September 30, 2005 to $4 million for the three months ended September 30, 2006 primarily as a result of a $19 million hurricane asset retirement loss recognized during the three months ended September 30, 2005 which did not recur in 2006.

Interest Expense, Net. Net interest expense increased by $7 million, or 2%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005. The increase in net interest expense was a result of an increase in our average borrowing rate from 9.2% in the three months ended September 30, 2005 to 9.6% in the three months ended September 30, 2006 and an increase of $383 million in average debt outstanding from $18.3 billion for the three months ended September 30, 2005 to $18.7 billion for the three months ended September 30, 2006.

Other Income, Net. Other income decreased $393 million primarily as a result of a $382 million decrease in the gain on extinguishment of debt for the three months ended September 30, 2006 as compared to September 30, 2005. See Note 14 to the condensed consolidated financial statements. Other income also decreased as a result of a $20 million decrease in net gains on derivative instruments and hedging activities.

Income Tax Expense. Income tax expense was recognized through increases in deferred tax liabilities and current federal and state income tax expenses of certain of our indirect corporate subsidiaries.

Income From Discontinued Operations, Net of Tax. Income from discontinued operations, net of tax increased from $9 million for the three months ended September 30, 2005 to $200 million for the three months ended September 30, 2006 due to a gain of $200 million recognized on the sale of the West Virginia and Virginia systems.

Net Income (Loss). Net income was $123 million for the three months ended September 30, 2005 and net loss was $73 million for the three months ended September 30, 2006 as a result of the factors described above.


34

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

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):

   
Nine Months Ended September 30,
  
   
2006
  
2005
  
                   
Revenues
  
$
4,091
    
100
%
$
3,746
    
100
%
                           
Costs and expenses:
                          
Operating (excluding depreciation and amortization)
    
1,830
    
45
%
  
1,645
    
44
%
Selling, general and administrative
    
860
    
21
%
  
746
    
20
%
Depreciation and amortization
    
1,024
    
25
%
  
1,092
    
29
%
Asset impairment charges
    
159
    
4
%
  
39
    
1
%
Other operating expenses, net
    
14
    
--
    
28
    
1
%
                           
     
3,887
    
95
%
  
3,550
    
95
%
                           
Operating income from continuing operations
    
204
    
5
%
  
196
    
5
%
                           
Interest expense, net
    
(1,356
)
        
(1,297
)
      
Other income, net
    
101
          
549
        
                           
     
(1,255
)
        
(748
)
      
                           
Loss from continuing operations before income taxes
   
(1,051
)
        
(552
)
      
                           
Income tax expense
    
(5
)
        
(10
)
      
                           
Loss from continuing operations
    
(1,056
)
        
(562
)
      
                           
Income from discontinued operations, net of tax
    
238
          
28
        
                           
Net loss
  
$
(818
)
      
$
(534
)
      

Revenues. The overall increase in revenues from continuing operations in 2006 compared to 2005 is principally the result of an increase from September 30, 2005 of 299,100 high-speed Internet customers, 133,200 digital video customers and 234,900 telephone customers, as well as price increases for video and high-speed Internet services, and is offset partially by a decrease of 189,700 analog video customers. Our goal is to increase revenues by improving customer service, which we believe will stabilize our analog video customer base, implementing price increases on certain services and packages, and increasing the number of customers who purchase high-speed Internet services, digital video and advanced products and services such as telephone, VOD, high definition television and digital video recorder service.

Average monthly revenue per analog video customer increased to $81.21 for the nine months ended September 30, 2006 from $72.95 for the nine months ended September 30, 2005 primarily as a result of incremental revenues from advanced services and price increases. Average monthly revenue per analog video customer represents total revenue for the nine months ended during the respective period, divided by nine, divided by the average number of analog video customers during the respective period.

35


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

   
Nine Months Ended September 30,
  
   
2006
  
2005
  
2006 over 2005
  
   
 
Revenues
  
% of
Revenues
  
 
Revenues
  
% of
Revenues
  
 
Change
  
% Change
  
                           
Video
  
$
2,520
    
62
%
$
2,434
    
65
%
$
86
    
4
%
High-speed Internet
    
773
    
19
%
  
647
    
17
%
  
126
    
19
%
Telephone
    
86
    
2
%
  
23
    
1
%
  
63
    
274
%
Advertising sales
    
228
    
6
%
  
207
    
6
%
  
21
    
10
%
Commercial
    
227
    
5
%
  
196
    
5
%
  
31
    
16
%
Other
    
257
    
6
%
  
239
    
6
%
  
18
    
8
%
                                       
   
$
4,091
    
100
%
$
3,746
    
100
%
$
345
    
9
%

Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers. Approximately $77 million of the increase was the result of price increases and incremental video revenues on advanced services from existing customers and approximately $41 million was the result of an increase in digital video customers. The increases were offset by decreases of approximately $20 million related to a decrease in analog video customers and approximately $12 million related to the System Sales.

Approximately $112 million of the increase in revenues from high-speed Internet services provided to our non-commercial customers related to the increase in the average number of customers receiving high-speed Internet services, whereas approximately $16 million related to the increase in average price of the service. The increases were offset by approximately $2 million related to the System Sales.

Revenues from telephone services increased primarily as a result of an increase of 234,900 telephone customers in 2006.

Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors. Advertising sales revenues increased primarily as a result of an increase in local and national advertising sales. For the nine months ended September 30, 2006 and 2005, we received $13 million and $11 million, respectively, in advertising sales revenues from programmers.

Commercial revenues consist primarily of revenues from video and high-speed Internet services provided to our commercial customers. Commercial revenues increased primarily as a result of an increase in commercial high-speed Internet revenues.

Other revenues consist of revenues from franchise fees, equipment rental, customer installations, home shopping, dial-up Internet service, late payment fees, wire maintenance fees and other miscellaneous revenues. For the nine months ended September 30, 2006 and 2005, franchise fees represented approximately 52% and 53%, respectively, of total other revenues. The increase in other revenues was primarily the result of an increase in franchise fees of $6 million, installation revenue of $6 million and wire maintenance fees of $6 million.


36

Operating Expenses. Programming costs represented 62% of operating expenses for each of the nine months ended September 30, 2006 and 2005, respectively. Key expense components as a percentage of revenues were as follows (dollars in millions):

   
Nine Months Ended September 30,
 
   
2006
  
2005
  
2006 over 2005
  
   
 
Expenses
  
% of
Revenues
  
 
Expenses
  
% of
Revenues
  
 
Change
  
% Change
  
                           
Programming
 
$
1,126
    
28
%
$
1,021
    
27
%
$
105
    
10
%
Service
   
624
    
15
%
  
552
    
15
%
  
72
    
13
%
Advertising sales
    
80
    
2
%
  
72
    
2
%
  
8
    
11
%
                                       
   
$
1,830
    
45
%
$
1,645
    
44
%
$
185
    
11
%

Programming costs consist primarily of costs paid to programmers for analog, premium and digital channels, VOD and pay-per-view programming. The increase in programming costs was primarily a result of rate increases and was offset in part by approximately $5 million related to the System Sales. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $12 million and $27 million for the nine months ended September 30, 2006 and 2005, respectively.

Our cable programming costs have increased in every year in excess of customary inflationary and cost-of-living increases. We expect them to continue to increase due to a variety of factors, including annual increases imposed by programmers and additional programming being provided to customers as a result of bandwidth reallocation, both of which increase channel capacity. In 2006, programming costs have increased and we expect will continue to increase at a higher rate than in 2005. These costs will be determined in part on the outcome of programming negotiations in 2006 and may be subject to offsetting events. Our increasing programming costs have resulted in declining operating margins on our video services because we have been unable to fully pass on all cost increases to our customers. We expect to partially offset the resulting margin compression on our traditional video services with revenue from advanced video services, increased telephone revenues, high-speed Internet revenues, advertising revenues and commercial service revenues.

Service costs consist primarily of service personnel salaries and benefits, costs of providing high-speed Internet service and telephone service, franchise fees, system utilities, maintenance and pole rent expense. The increase in service costs resulted primarily from increased costs of providing high-speed Internet and telephone service of $22 million, increased labor and maintenance costs to improve service levels and to support our advanced products of $22 million, an increase in service personnel salaries and benefits of $13 million, franchise fees of $9 million, and higher fuel and utility prices of $4 million. The increases in service costs were offset in part by approximately $3 million related to the System Sales. Advertising sales expenses consist of costs related to traditional advertising services provided to advertising customers, including salaries, benefits and commissions. Advertising sales expenses increased primarily as a result of increased costs in these areas.
 
Selling, General and Administrative Expenses. Key components of expense as a percentage of revenues were as follows (dollars in millions):

   
Nine Months Ended September 30,
  
   
2006
  
2005
  
2006 over 2005
  
   
 
Expenses
  
% of
Revenues
  
 
Expenses
  
% of
Revenues
  
 
Change
  
 
% Change
  
                           
General and administrative
  
$
724
    
18
%
$
644
    
17
%
$
80
    
12
%
Marketing
    
136
    
3
%
  
102
    
3
%
  
34
    
33
%
                                       
   
$
860
    
21
%
$
746
    
20
%
$
114
    
15
%

General and administrative expenses consist primarily of salaries and benefits, customer care center costs, billing costs, internal network costs, and bad debt expense. The increase in general and administrative expenses resulted
 
 
37
 
primarily from a rise in salaries and benefits of $23 million, an increase in call center costs of $44 million, increases in billing costs of $9 million, computer maintenance of $7 million, bad debt expense of $8 million and property and casualty losses of $8 million partially offset by decreases in consulting services of $18 million and approximately $2 million related to the System Sales.

Marketing expenses increased as a result of increased spending in targeted marketing campaigns consistent with management’s strategy to increase revenues.

Depreciation and Amortization. Depreciation and amortization expense decreased by $68 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The decrease in depreciation was primarily the result of assets becoming fully depreciated. Approximately $7 million of the decrease was related to the System Sales.

Asset Impairment Charges. Asset impairment charges for the nine months ended September 30, 2006 and 2005 represent the write-down of assets related to cable asset sales to fair value less costs to sell. See Note 3 to the condensed consolidated financial statements.

Other Operating Expenses, Net. Other operating expenses, net decreased $14 million as a result of a $19 million hurricane asset retirement loss recognized during the nine months ended September 30, 2005 which did not recur in 2006 partially offset by an $8 million increase in special charges related to severance associated with closing call centers and divisional restructuring.

Interest Expense, Net. Net interest expense increased by $59 million, or 5%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The increase in net interest expense was a result of an increase in our average borrowing rate from 9.1% in the nine months ended September 30, 2005 to 9.6% in the nine months ended September 30, 2006 and an increase of $317 million in average debt outstanding from $18.3 billion for the nine months ended September 30, 2005 compared to $18.6 billion for the nine months ended September 30, 2006.

Other Income, Net. Other income decreased $448 million primarily as a result of a $413 million decrease in the gain on extinguishment of debt for the nine months ended September 30, 2006 as compared to September 30, 2005. See Note 14 to the condensed consolidated financial statements. Other income also decreased as a result of a $35 million decrease in net gains on derivative instruments and hedging activities.

Income Tax Expense. Income tax expense was recognized through increases in deferred tax liabilities and current federal and state income tax expenses of certain of our indirect corporate subsidiaries.  

Income From Discontinued Operations, Net of Tax. Income from discontinued operations, net of tax increased from $28 million for the nine months ended September 30, 2005 to $238 million for the nine months ended September 30, 2006 due to a gain of $200 million recognized on the sale of the West Virginia and Virginia systems.

Net Loss. Net loss increased by $284 million, or 53%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 as a result of the factors described above.

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.
 
Recent Financing Transactions 

In January 2006, CCH II, LLC ("CCH II") and CCH II Capital Corp. issued $450 million in debt securities, the proceeds of which were provided to Charter Communications Operating, LLC ("Charter Operating"), which used such funds to reduce borrowings, but not commitments, under the revolving portion of its credit facilities.
 
 
38

In April 2006, Charter Operating completed a $6.85 billion refinancing of its credit facilities including a new $350 million revolving/term facility (which converts to a term loan no later than April 2007), a $5.0 billion term loan due in 2013 and certain amendments to the existing $1.5 billion revolving credit facility. In addition, the refinancing reduced margins on Eurodollar rate term loans to 2.625% from a weighted average of 3.15% previously and margins on base rate term loans to 1.625% from a weighted average of 2.15% previously. Concurrent with this refinancing, the CCO Holdings, LLC ("CCO Holdings") bridge loan was terminated.

In September 2006, Charter Holdings and its wholly owned subsidiaries, CCH I, LLC (“CCH I”) and CCH II, completed the exchange of approximately $797 million in total principal amount of outstanding debt securities of Charter Holdings. Holders of Charter Holdings notes due in 2009-2010 tendered $308 million principal amount of notes for $250 million principal amount of new 10.25% CCH II notes due 2013 and $37 million principal amount of 11% CCH I notes due 2015. Holders of Charter Holdings notes due 2011-2012 tendered $490 million principal amount of notes for $425 million principal amount of 11% CCH I notes due 2015. The Charter Holdings notes received in the exchanges were thereafter distributed to Charter Holdings and retired. Also in September 2006, CCHC and CCH II completed the exchange of $450 million principal amount of Charter’s outstanding 5.875% senior convertible notes due 2009 for $188 million in cash, 45 million shares of Charter’s Class A Common Stock and $146 million principal amount of 10.25% CCH II notes due 2010. The convertible notes received in the exchange are held by CCHC.

We have a significant level of debt. Our long-term financing as of September 30, 2006 consists of $5.1 billion of credit facility debt and $13.3 billion accreted value of high-yield notes. For the remainder of 2006, none of our debt matures, and in 2007 and 2008, $130 million and $50 million mature, respectively. In 2009 and beyond, significant additional amounts will become due under our remaining long-term debt obligations.

Our business requires significant cash to fund debt service costs, capital expenditures and ongoing operations. We have historically funded these requirements through cash flows from operating activities, borrowings under our credit facilities, equity contributions from Charter Holdco, sales of assets, issuances of debt securities and cash on hand. However, the mix of funding sources changes from period to period. For the nine months ended September 30, 2006, we generated $344 million of net cash flows from operating activities after paying cash interest of $1.1 billion. In addition, we received proceeds from the sale of assets of approximately $988 million and used approximately $795 million for purchases of property, plant and equipment. Finally, we had net cash flows used in financing activities of $479 million. We expect that our mix of sources of funds will continue to change in the future based on overall needs relative to our cash flow and on the availability of funds under our credit facilities, our and our parent companies’ access to the debt markets, the timing of possible asset sales and our ability to generate cash flows from operating activities. We continue to explore asset dispositions as one of several possible actions that we could take in the future to improve our liquidity, but we do not presently believe unannounced future asset sales to be a significant source of liquidity.

We expect that cash on hand, cash flows from operating activities, proceeds from sale of assets and the amounts available under our credit facilities will be adequate to meet our and our parent companies’ cash needs through 2007. We believe that cash flows from operating activities and amounts available under our credit facilities may not be sufficient to fund our operations and satisfy our and our parent companies’ interest and principal repayment obligations in 2008 and will not be sufficient to fund such needs in 2009 and beyond. We have been advised that Charter continues to work with its financial advisors in its approach to addressing liquidity, debt maturities and its overall balance sheet leverage.

Debt Covenants

Our ability to operate depends upon, among other things, our continued access to capital, including credit under the Charter Operating credit facilities. The Charter Operating credit facilities, along with our indentures, contain certain restrictive covenants, some of which require us to maintain specified financial ratios and meet financial tests and to provide annual audited financial statements with an unqualified opinion from our independent auditors. As of September 30, 2006, we are in compliance with the covenants under our indentures and credit facilities, and we expect to remain in compliance with those covenants for the next twelve months. As of September 30, 2006, our potential availability under our credit facilities totaled approximately $1.6 billion, although the actual availability at that time was only $695 million because of limits imposed by covenant restrictions. Continued access to our credit facilities is subject to our remaining in compliance with these covenants, including covenants tied to our operating performance. If any events of non-compliance occur, funding under the credit facilities may not be available and
 
 
39
 
defaults on some or potentially all of our debt obligations could occur. An event of default under any of our debt instruments could result in the acceleration of our payment obligations under that debt and, under certain circumstances, in cross-defaults under our other debt obligations, which could have a material adverse effect on our consolidated financial condition and results of operations.

Parent Company Debt Obligations

Any financial or liquidity problems of our parent companies could cause serious disruption to our business and have a material adverse effect on our business and results of operations.

Charter’s ability to make interest payments on its convertible senior notes, and, in 2009, to repay the outstanding principal of its convertible senior notes of $413 million, will depend on its ability to raise additional capital and/or on receipt of payments or distributions from Charter Holdco and its subsidiaries.  As of September 30, 2006, Charter Holdco was owed $3 million in intercompany loans from its subsidiaries and had $7 million in cash, which were available to pay interest and principal on Charter's convertible senior notes.  In addition, Charter has $75 million of U.S. government securities pledged as security for the semi-annual interest payments on Charter’s convertible senior notes scheduled in November 2006 and in 2007.  CCHC also holds $450 million of Charter’s convertible senior notes.  As a result, if CCHC continues to hold those notes, CCHC will receive interest payments on Charter’s convertible senior notes from the pledged government securities.  The cumulative amount of interest payments expected to be received by CCHC may be available to be distributed to pay interest on the outstanding $413 million of Charter’s convertible senior notes due in 2008 and May 2009, although CCHC may use those amounts for other purposes.

Distributions by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco, CCHC and Charter Holdings) for payment of principal on parent company notes are restricted under the indentures governing the CIH notes, CCH I notes, CCH II notes, CCO Holdings notes and Charter Operating notes unless there is no default under the applicable indenture and each applicable subsidiary’s leverage ratio test is met at the time of such distribution. For the quarter ended September 30, 2006, there was no default under any of these indentures. However, certain of our subsidiaries did not meet their applicable leverage ratio tests based on September 30, 2006 financial results. As a result, distributions from certain of our subsidiaries to their parent companies would have been restricted at such time and will continue to be restricted unless those tests are met. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in the credit facilities.

Distributions by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company for payment of parent company interest are permitted if there is no default under the aforementioned indentures.

Specific Limitations

The indentures governing the Charter Holdings notes permit Charter Holdings to make distributions to Charter Holdco for payment of interest or principal on Charter’s convertible senior notes, only if, after giving effect to the distribution, Charter Holdings can incur additional debt under the leverage ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures and other specified tests are met. For the quarter ended September 30, 2006, there was no default under Charter Holdings’ indentures and the other specified tests were met. However, Charter Holdings did not meet the leverage ratio test of 8.75 to 1.0 based on September 30, 2006 financial results. As a result, distributions from Charter Holdings to Charter or Charter Holdco would have been restricted at such time and will continue to be restricted unless that test is met. During periods in which distributions are restricted, the indentures governing the Charter Holdings notes permit Charter Holdings and its subsidiaries to make specified investments (that are not restricted payments) in Charter Holdco or Charter up to an amount determined by a formula, as long as there is no default under the indentures.  

Our significant amount of debt could negatively affect our ability to access additional capital in the future. Additionally, our ability to incur additional debt may be limited by the restrictive covenants in our indentures and credit facilities. No assurances can be given that we will not experience liquidity problems if we do not obtain sufficient additional financing on a timely basis as our debt becomes due or because of adverse market conditions, increased competition or other unfavorable events. If, at any time, additional capital or borrowing capacity is required beyond amounts internally generated or available under our credit facilities or through additional debt or equity financings, we would consider:
 
 
40

 
 
•
issuing equity at the Charter or Charter Holdco level, the proceeds of which could be loaned or contributed to us;
     
 
•
issuing debt securities that may have structural or other priority over our existing notes;
     
 
•
further reducing our expenses and capital expenditures, which may impair our ability to increase revenue;
     
 
•
selling assets; or
     
 
•
requesting waivers or amendments with respect to our credit facilities, the availability and terms of which would be subject to market conditions.

If the above strategies are not successful, we could be forced to restructure our obligations or seek protection under the bankruptcy laws. In addition, if we find it necessary to engage in a recapitalization or other similar transaction, our noteholders might not receive principal and interest payments to which they are contractually entitled.

Sale of Assets

In the third quarter of 2006, we closed the Cebridge Transaction, New Wave Transaction and Orange Transaction for a total sales price of approximately $971 million. We used the net proceeds from the asset sales to reduce borrowings, but not commitments, under the revolving portion of our credit facilities. Also in the third quarter of 2006, we recorded asset impairment charges of $60 million related to other cable systems meeting the criteria of assets held for sale.

In July 2005, we closed the sale of certain cable systems in Texas and West Virginia and closed the sale of an additional cable system in Nebraska in October 2005 for a total sales price of approximately $37 million, representing a total of approximately 33,000 customers.

Acquisition

In January 2006, we closed the purchase of certain cable systems in Minnesota from Seren Innovations, Inc. We acquired approximately 17,500 analog video customers, 8,000 digital video customers, 13,200 high-speed Internet customers and 14,500 telephone customers for a total purchase price of approximately $42 million.

Historical Operating, Financing and Investing Activities

Our cash flows include the cash flows related to our discontinued operations for all periods presented.

We held $75 million in cash and cash equivalents as of September 30, 2006 compared to $14 million as of December 31, 2005. For the nine months ended September 30, 2006, we generated $344 million of net cash flows from operating activities after paying cash interest of $1.1 billion. In addition, we received proceeds from the sale of assets of approximately $988 million and used approximately $795 million for purchases of property, plant and equipment. Finally, we had net cash flows used in financing activities of $479 million.
 
Operating Activities. Net cash provided by operating activities increased $223 million, or 184%, from $121 million for the nine months ended September 30, 2005 to $344 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2006, net cash provided by operating activities increased primarily as a result of changes in operating assets and liabilities that provided $369 million more cash during the nine months ended September 30, 2006 than the corresponding period in 2005. The decrease in the cash used in operating assets and liabilities is primarily due to accelerated interest payments in the nine months ended September 30, 2005 as a result of the debt exchange in September 2005 coupled with the finalization of a class action settlement in the third quarter of 2005.
 
Investing Activities. Net cash provided by investing activities was $196 million for the nine months ended September 30, 2006 compared to net cash used by investing activities of $725 million for the nine months ended September 30, 2005, which was primarily related to $988 million of proceeds received from the sale of assets including cable systems.
 
 
41
 
Financing Activities. Net cash used by financing activities was $479 million for the nine months ended September 30, 2006 compared to net cash provided by financing activities of $78 million for the nine months ended September 30, 2005. The increase in cash used during the nine months ended September 30, 2006 as compared to the corresponding period in 2005, was primarily the result of an increase in net repayments of long-term debt coupled with a decrease in borrowings from related parties.

Capital Expenditures 

We have significant ongoing capital expenditure requirements. Capital expenditures were $795 million and $815 million for the nine months ended September 30, 2006 and 2005, respectively. Capital expenditures decreased as a result of decreases in expenditures related to line extensions and support capital partially offset by increased spending on customer premise equipment as a result of increases in digital video, high-speed Internet and telephone customers. See the table below for more details. 
 
Our capital expenditures are funded primarily from cash flows from operating activities, the issuance of debt and borrowings under credit facilities. In addition, during the nine months ended September 30, 2006 and 2005, our liabilities related to capital expenditures increased $4 million and $39 million, respectively.

During 2006, we expect capital expenditures to be approximately $1.1 billion. We expect that the nature of these expenditures will continue to be composed primarily of purchases of customer premise equipment related to telephone and other advanced services, support capital and for scalable infrastructure costs. We have and expect to continue to fund capital expenditures for 2006 primarily from cash flows from operating activities, proceeds from asset sales and borrowings under our credit facilities.
 
We have adopted capital expenditure disclosure guidance, which was developed by eleven publicly traded cable system operators, including Charter, with the support of the National Cable & Telecommunications Association ("NCTA"). The disclosure is intended to provide more consistency in the reporting of operating statistics in capital expenditures and customers among peer companies in the cable industry. These disclosure guidelines are not required disclosure under Generally Accepted Accounting Principles ("GAAP"), nor do they impact our accounting for capital expenditures under GAAP.

The following table presents our major capital expenditures categories in accordance with NCTA disclosure guidelines for the three and nine months ended September 30, 2006 and 2005 (dollars in millions):

   
Three Months Ended September 30,
  
Nine Months Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Customer premise equipment (a)
  
$
120
  
$
94
  
$
378
  
$
322
  
Scalable infrastructure (b)
    
49
    
49
    
146
    
138
  
Line extensions (c)
    
23
    
37
    
82
    
114
  
Upgrade/Rebuild (d)
    
13
    
13
    
36
    
35
  
Support capital (e)
    
51
    
80
    
153
    
206
  
                           
Total capital expenditures
 
$
256
  
$
273
  
$
795
  
$
815
  

(a)
Customer premise equipment includes costs incurred at the customer residence to secure new customers, revenue units and additional bandwidth revenues. It also includes customer installation costs in accordance with SFAS No. 51, Financial Reporting by Cable Television Companies, and customer premise equipment (e.g., set-top terminals and cable modems, etc.).
(b)
Scalable infrastructure includes costs, not related to customer premise equipment or our network, to secure growth of new customers, revenue units and additional bandwidth revenues 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.
 
 
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(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).
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk 

We are exposed to various market risks, including fluctuations in interest rates. We use interest rate risk management derivative instruments, such as interest rate swap agreements and interest rate collar agreements (collectively referred to herein as interest rate agreements) as required under the terms of the credit facilities of our subsidiaries. Our policy is to manage interest costs using a mix of fixed and variable rate debt. Using interest rate swap agreements, we agree to exchange, at specified intervals through 2007, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Interest rate collar agreements are used to limit our exposure to, and to derive benefits from, interest rate fluctuations on variable rate debt to within a certain range of rates. Interest rate risk management agreements are not held or issued for speculative or trading purposes.

As of September 30, 2006 and December 31, 2005, our long-term debt totaled approximately $18.4 billion and $18.5 billion, respectively. This debt was comprised of approximately $5.1 billion and $5.7 billion of credit facilities debt and $13.3 billion and $12.8 billion accreted amount of high-yield notes, respectively.

As of September 30, 2006 and December 31, 2005, the weighted average interest rate on the credit facility debt was approximately 7.9% and 7.8% and the weighted average interest rate on the high-yield notes was approximately 10.3% and 10.2%, respectively, resulting in a blended weighted average interest rate of 9.6% and 9.5%, respectively. The interest rate on approximately 78% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate hedge agreements as of September 30, 2006 and December 31, 2005. The fair value of our high-yield notes was $12.0 billion and $10.4 billion at September 30, 2006 and December 31, 2005, respectively. The fair value of our credit facilities is $5.2 billion and $5.7 billion at September 30, 2006 and December 31, 2005, respectively. The fair value of high-yield notes is based on quoted market prices and the fair value of the credit facilities is based on dealer quotations.

We do not hold or issue derivative instruments for trading purposes. We do, however, have certain interest rate derivative instruments that have been designated as cash flow hedging instruments. Such instruments effectively convert variable interest payments on certain debt instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows derivative gains and losses to offset related results on hedged items in the consolidated statement of operations. We have formally documented, designated and assessed the effectiveness of transactions that receive hedge accounting. For the three months ended September 30, 2006 and 2005, other income, net includes gains of $0 and $1 million, respectively, and for each of the nine months ended September 30, 2006 and 2005, other income, net includes gains of $2 million which represent cash flow hedge ineffectiveness on interest rate hedge agreements arising from differences between the critical terms of the agreements and the related hedged obligations. Changes in the fair value of interest rate agreements designated as hedging instruments of the variability of cash flows associated with floating-rate debt obligations that meet the effectiveness criteria of SFAS No. 133 are reported in accumulated other comprehensive loss. For the three months ended September 30, 2006 and 2005, a loss of $1 million and a gain of $5 million, respectively, and for the nine months ended September 30, 2006 and 2005, a loss of $1 million and a gain of $14 million, respectively, related to derivative instruments designated as cash flow hedges, was recorded in accumulated other comprehensive loss. The amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the floating-rate debt obligations affects earnings (losses).

Certain interest rate derivative instruments are not designated as hedges as they do not meet the effectiveness criteria specified by SFAS No. 133. However, management believes 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 other income in the Company’s condensed consolidated statements of operations. For the three months ended September 30, 2006 and 2005, other income, net includes losses of $3 million and gains of $16 million, respectively, and for the nine months ended September 30, 2006 and 2005, other income, net includes gains of $6 million and $41 million, respectively, for interest rate derivative instruments not designated as hedges.

 
43
 
 
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 September 30, 2006 (dollars in millions):
 
 
   
2006
  
2007
  
2008
  
2009
  
2010
  
2011
  
Thereafter
  
Total
  
Fair Value at September 30, 2006
  
                                       
Debt:
          
   
   
   
   
   
   
   
 
 Fixed Rate
    $ --     $ 105      $ --     $ 415    $ 2,251    $ 303    $ 9,532    $ 12,606    $ 11,456   
 Average Interest Rate
      --      8.25%      --      9.46%      10.26%      11.21%      10.13%      10.03%         
                                                         
 Variable Rate
    $  --     $ 25     $ 50     $ 50    $  600     $ 190    $ 4,775    $ 5,690    $ 5,729  
 Average Interest Rate
      --      7.79%      7.47%      7.57%      9.07%      8.04%      8.04%      8.14%         
                                                         
 Interest Rate Instruments:                                                        
 Variable to Fixed Swaps
    $  898      $ 775     $ --    $  --     $ --     $ --    $  --     $ 1,673    $ 2   
 Average Pay Rate
      7.66%      7.57%      --      --      --      --      --      7.62%         
 Average Receive Rate
     7.98%      7.92%       --      --      --      --      --      7.95%          
 
The notional amounts of interest rate 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 approximates the costs (proceeds) to settle the outstanding contracts. Interest rates on variable debt are estimated using the average implied forward London Interbank Offering Rate (LIBOR) rates for the year of maturity based on the yield curve in effect at September 30, 2006.

At September 30, 2006 and December 31, 2005, we had outstanding $1.7 billion and $1.8 billion and $20 million and $20 million, respectively, in notional amounts of interest rate swaps and collars, respectively. 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 are determined by reference to the notional amount and the other terms of the contracts.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, management, including our Chief Executive Officer and Chief Financial Officer, 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 affidavits 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 Commission’s rules and forms.

There was no change in our internal control over financial reporting during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, our management believes that our controls provide such reasonable assurances.

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PART II. OTHER INFORMATION.

Item 1.     Legal Proceedings.

We are a defendant or co-defendant in several unrelated lawsuits claiming infringement of various patents relating to various aspects of our businesses. Other industry participants are also defendants in certain of these cases, and, in many cases, we expect that any potential liability would be the responsibility of our equipment vendors pursuant to applicable contractual indemnification provisions. In the event that a court ultimately determines that we infringe on any intellectual property rights, we may be subject to substantial damages and/or an injunction that could require us or our vendors to modify certain products and services we offer to our subscribers. While we believe the lawsuits are without merit and intend to defend the actions vigorously, the lawsuits could be material to our consolidated results of operations of any one period, and no assurance can be given that any adverse outcome would not be material to our consolidated financial condition, results of operations or liquidity.

We are a party to other lawsuits and claims that arise in the ordinary course of conducting our business. The ultimate outcome of these other legal matters pending against us or our subsidiaries cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on our consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or liquidity.

Item 1A. Risk Factors.

Risks Related to Significant Indebtedness of Us and Charter

We may not generate (or, in general, we and our parent companies may not have available to the applicable obligor) sufficient cash flow or have access to additional external liquidity sources to fund our capital expenditures, ongoing operations and our and our parent companies’ debt obligations.

Our ability to service our and our parent companies’ debt and to fund our planned capital expenditures and ongoing operations will depend on both our ability to generate cash flow and our and our parent companies’ access to additional external liquidity sources, and in general our and our parent companies’ ability to provide (by dividend or otherwise), such funds to the applicable issuer of the debt obligation. Our ability to generate cash flow is dependent on many factors, including:
 
 
·
our future operating performance;
 
 
·
the demand for our products and services;
 
 
·
general economic conditions and conditions affecting customer and advertiser spending;
 
 
·
competition and our ability to stabilize customer losses; and

 
·
legal and regulatory factors affecting our business.

Some of these factors are beyond our control. If we and our parent companies are unable to generate sufficient cash flow or access additional external liquidity sources, we and our parent companies may not be able to service and repay our and our parent companies’ debt, operate our business, respond to competitive challenges or fund our and our parent companies’ other liquidity and capital needs. Although our subsidiaries, CCH II and CCH II Capital Corp., sold $450 million principal amount of 10.250% senior notes due 2010 in January 2006, our subsidiary, Charter Operating, completed a $6.85 billion refinancing of its credit facilities in April 2006 and we and certain of our parent companies and subsidiaries completed the exchange offers in September 2006, we may not be able to access additional sources of external liquidity on similar terms, if at all. We expect that cash on hand, cash flows from operating activities, proceeds from sales of assets and the amounts available under our credit facilities will be adequate to meet our and our parent companies’ cash needs through 2007. We believe that cash flows from operating activities and amounts available under our credit facilities may not be sufficient to fund our operations and satisfy our and our parent companies’ interest and principal repayment obligations in 2008 and will not be sufficient to fund such needs in 2009 and beyond. See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
 
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We may not be able to access funds under our credit facilities if we fail to satisfy the covenant restrictions in our credit facilities, which could adversely affect our financial condition and our ability to conduct our business.

We have historically relied on access to credit facilities in order to fund operations and to service our and our parent companies’ debt, and we expect such reliance to continue in the future. Our total potential borrowing availability under the Charter Operating credit facilities was approximately $1.6 billion as of September 30, 2006, although the actual availability at that time was only $695 million because of limits imposed by covenant restrictions. There can be no assurance that our actual availability under our credit facilities will not be limited by covenant restrictions in the future.

One of the conditions to the availability of funding under Charter Operating’s credit facilities is the absence of a default under the credit facilities, including as a result of any failure to comply with the covenants under the facilities. Among other covenants, the facilities require Charter Operating to maintain specific financial ratios. The facilities also provide that Charter Operating has to obtain an unqualified audit opinion from its independent accountants for each fiscal year. There can be no assurance that Charter Operating will be able to continue to comply with these or any other of the covenants under the credit facilities.

A failure by us to satisfy certain of our debt payment obligations or a bankruptcy filing with respect to indebtedness in an outstanding aggregate principal amount which exceeds $200 million would give the lenders under the Charter Operating credit facilities the right to accelerate the payment obligations under these facilities. Any such acceleration would be a default under the indentures governing our notes.

Furthermore, the Charter Operating credit facilities provide that an event of default would occur if certain of Charter Operating's parent companies have indebtedness in excess of $500 million aggregate principal amount which remains undefeased three months prior to its final maturity. The parent company indebtedness subject to this provision will mature in 2010. The inability of those parent companies to refinance or repay their indebtedness would result in a default under those credit facilities.

An event of default under the credit facilities or indentures, if not waived, could result in the acceleration of those debt obligations and, consequently, our and our parent companies’ other debt obligations. Such acceleration could result in exercise of remedies by our creditors and could force us to seek the protection of the bankruptcy laws, which could materially adversely impact our ability to operate our business and to make payments under our and our parent companies’ debt instruments.

Because of our holding company structure, our outstanding notes are structurally subordinated in right of payment to all liabilities of our subsidiaries. Restrictions in our subsidiaries’ debt instruments and under applicable law limit their ability to provide funds to us.

Our sole assets are our equity interests in our subsidiaries. Our operating subsidiaries are separate and distinct legal entities and are not obligated to make funds available to us for payments on our notes or other obligations in the form of loans, distributions or otherwise. Our subsidiaries’ ability to make distributions to us is subject to their compliance with the terms of their credit facilities and indentures and restrictions under applicable law. Under the Delaware limited liability company act, our subsidiaries may only pay dividends to us if they have “surplus” as defined in the act. Under fraudulent transfer laws, our subsidiaries may not pay dividends to us if they are insolvent or are rendered insolvent thereby. The measures of insolvency for purposes of these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if:

·  
the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets;
·  
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they became absolute and mature; or
·  
it could not pay its debts as they became due.

While we believe that our relevant subsidiaries currently have surplus and are not insolvent, there can be no assurance that these subsidiaries will be permitted to make distributions in the future in compliance with these restrictions in amounts needed to service our indebtedness. Our direct or indirect subsidiaries include the borrowers
 
 
46
 
and guarantors under the Charter Operating credit facilities. Several of our subsidiaries are also obligors under other senior high yield notes. See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt Covenants.” Our notes are structurally subordinated in right of payment to all of the debt and other liabilities of our subsidiaries. As of September 30, 2006, our total debt was approximately $18.4 billion, of which approximately $17.4 billion was structurally senior to the Charter Holdings notes.

In the event of bankruptcy, liquidation or dissolution of one or more of our subsidiaries, that subsidiary’s assets would first be applied to satisfy its own obligations, and following such payments, such subsidiary may not have sufficient assets remaining to make payments to us as an equity holder or otherwise. In that event:

 
·
the lenders under Charter Operating’s credit facilities and the holders of our subsidiaries’ other debt instruments will have the right to be paid in full before us from any of our subsidiaries’ assets; and
 
·
the holders of preferred membership interests in our subsidiary, CC VIII, would have a claim on a portion of its assets that may reduce the amounts available for repayment to holders of our outstanding notes.

In addition, our outstanding notes are unsecured and therefore will be effectively subordinated in right of payment to all existing and future secured debt we may incur to the extent of the value of the assets securing such debt.

We and our parent companies have a significant amount of existing debt and may incur significant additional debt, including secured debt, in the future, which could adversely affect our and our parent companies’ financial health and our and their ability to react to changes in our business.

We and our parent companies have a significant amount of debt and may (subject to applicable restrictions in their debt instruments) incur additional debt in the future. As of September 30, 2006, our total debt was approximately $18.4 billion, our member’s deficit was approximately $5.3 billion and the deficiency of earnings to cover fixed charges for the three and nine months ended September 30, 2006 was $70 million and $810 million, respectively.

As of September 30, 2006, approximately $413 million aggregate principal amount of Charter’s convertible notes were outstanding. In addition, $450 million of Charter's convertible notes are held by CCHC. Charter will need to raise additional capital and/or receive distributions or payments from its subsidiaries in order to satisfy its debt obligations in 2009. However, because of its and our significant indebtedness, the ability of Charter and our ability to raise additional capital at reasonable rates or at all is uncertain, and the ability of our and their subsidiaries to make distributions or payments to our and their respective parent companies is subject to availability of funds and restrictions under our and our subsidiaries’ applicable debt instruments.

To the extent we and our parent companies rely on receiving distributions from their subsidiaries, they are subject to compliance with the terms of our credit facilities and indentures and restrictions under applicable law. Under the Delaware limited liability company act, subsidiaries may only pay dividends to their parent if they have "surplus" as defined in the act. Under fraudulent transfer laws, subsidiaries may not pay dividends to their parent if they are insolvent or are rendered insolvent thereby. While we believe that Charter’s relevant subsidiaries currently have surplus and are not insolvent, there can be no assurance that these subsidiaries will be permitted to make distributions in the future in compliance with these restrictions in amounts needed to service parent company indebtedness.

Our and our parent companies’ significant amount of debt could have other important consequences. For example, the debt will or could:

 
·
require us to dedicate a significant portion of our cash flow from operating activities to make payments on our and our parent companies’ debt, which will reduce our funds available for working capital, capital expenditures and other general corporate expenses;
 
·
limit our flexibility in planning for, or reacting to, changes in our business, the cable and telecommunications industries and the economy at large;
 
·
place us at a disadvantage as compared to our competitors that have proportionately less debt;
 
·
make us vulnerable to interest rate increases, because a significant portion of our borrowings are, and will continue to be, at variable rates of interest;
 
·
expose us to increased interest expense as we refinance existing lower interest rate instruments;
 
 
 
47
 
 
·
adversely affect our relationship with customers and suppliers;
 
·
limit our and our parent companies’ ability to borrow additional funds in the future, if we or they need them, due to applicable financial and restrictive covenants in our debt; and
 
·
make it more difficult for us to satisfy our obligations to the holders of our notes and to the lenders under our credit facilities as well as our parent companies’ ability to satisfy their obligations to their noteholders.
 
A default by us or one of our parent companies under our or their debt obligations could result in the acceleration of those obligations and the obligations under our and our parent companies’ other notes. We may not have the ability to fund our obligations under our notes in the event of such a default. We and our parent companies may incur substantial additional debt in the future. If current debt levels increase, the related risks that we now face will intensify.

The agreements and instruments governing our and our parent companies’ debt contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our and our parent companies’ liquidity.

The Charter Operating credit facilities and the indentures governing our and our parent companies’ debt contain a number of significant covenants that could adversely affect our ability to operate our business, as well as significantly affect our and our parent companies’ liquidity, and therefore could adversely affect our results of operations. These covenants will restrict, among other things, our and our parent companies’ ability to:

 
 
·
incur additional debt;
 
 
·
repurchase or redeem equity interests and debt;

 
·
make certain investments or acquisitions;
 
 
·
pay dividends or make other distributions;
 
 
·
dispose of assets or merge;
 
 
·
enter into related party transactions;
 
 
·
grant liens and pledge assets.

Furthermore, Charter Operating’s credit facilities require our subsidiaries to, among other things, maintain specified financial ratios, meet specified financial tests and provide annual audited financial statements, with an unqualified opinion from our independent auditors. Charter Operating’s ability to comply with these provisions may be affected by events beyond our control.

The breach of any covenants or obligations in our foregoing indentures or credit facilities, not otherwise waived or amended, could result in a default under the applicable debt agreement or instrument and could trigger acceleration of the related debt, which in turn could trigger defaults under other agreements governing our and our parent companies’ long-term indebtedness. In addition, the secured lenders under the Charter Operating credit facilities and the holders of the Charter Operating senior second-lien notes could foreclose on their collateral, which includes equity interests in our subsidiaries, and exercise other rights of secured creditors. Any default under those credit facilities or the indentures governing our or our parent companies’ debt could adversely affect our growth, our financial condition and our results of operations and our ability to make payments on our notes and Charter Operating’s credit facilities and other debt of our subsidiaries.

All of our and our parent companies’ outstanding debt is subject to change of control provisions. We and our parent companies may not have the ability to raise the funds necessary to fulfill our obligations under our and our parent companies’ indebtedness following a change of control, which would place us and our parent companies in default under the applicable debt instruments.

We and our parent companies may not have the ability to raise the funds necessary to fulfill our obligations under our and our parent companies’ notes and our credit facilities following a change of control. Under the indentures
 
 
48
 
governing our and our parent companies’ notes, upon the occurrence of specified change of control events, the applicable note issuer is required to offer to repurchase all of its outstanding notes. However, we and our parent companies may not have sufficient funds at the time of the change of control event to make the required repurchase of the applicable notes, and all of the notes issuers are limited in their ability to make distributions or other payments to their respective parent company to fund any required repurchase. In addition, a change of control under our credit facilities would result in a default under those credit facilities. Because such credit facilities and our subsidiaries’ notes are obligations of our subsidiaries, the credit facilities and our subsidiaries’ notes would have to be repaid by our subsidiaries before their assets could be available to us or our parent companies to repurchase our and our parent companies’ notes. Any failure to make or complete a change of control offer would place the applicable issuer or borrower in default under its notes. The failure of our subsidiaries to make a change of control offer or repay the amounts accelerated under their credit facilities would place them in default.

Paul G. Allen and his affiliates are not obligated to purchase equity from, contribute to or loan funds to us or any of our parent companies.

Paul G. Allen and his affiliates are not obligated to purchase equity from, contribute to or loan funds to us or any of our parent companies.

Risks Related to Our Business 

We operate in a very competitive business environment, which affects our ability to attract and retain customers and can adversely affect our business and operations. We have lost a significant number of video customers to direct broadcast satellite competition and further loss of video customers could have a material negative impact on our business.

The industry in which we operate is highly competitive and has become more so in recent years. In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater personnel resources, greater brand name recognition and long-established relationships with regulatory authorities and customers. Increasing consolidation in the cable industry and the repeal of certain ownership rules may provide additional benefits to certain of our competitors, either through access to financing, resources or efficiencies of scale.

Our principal competitor for video services throughout our territory is direct broadcast satellite (“DBS”). Competition from DBS, including intensive marketing efforts and aggressive pricing has had an adverse impact on our ability to retain customers. DBS has grown rapidly over the last several years and continues to do so. The cable industry, including us, has lost a significant number of subscribers to DBS competition, and we face serious challenges in this area in the future. We believe that competition from DBS service providers may present greater challenges in areas of lower population density, and that our systems service a higher concentration of such areas than those of other major cable service providers.

Local telephone companies and electric utilities can offer video and other services in competition with us and they increasingly may do so in the future. Certain telephone companies have begun more extensive deployment of fiber in their networks that enable them to begin providing video services, as well as telephone and high bandwidth Internet access services, to residential and business customers and they are now offering such service in limited areas. Some of these telephone companies have obtained, and are now seeking, franchises or operating authorizations that are less burdensome than existing Charter franchises.

The subscription television industry also faces competition from free broadcast television and from other communications and entertainment media. Further loss of customers to DBS or other alternative video and Internet services could have a material negative impact on the value of our business and its performance.

With respect to our Internet access services, we face competition, including intensive marketing efforts and aggressive pricing, from telephone companies and other providers of DSL and “dial-up”. DSL service is competitive with high-speed Internet service over cable systems. In addition, DBS providers have entered into joint marketing arrangements with Internet access providers to offer bundled video and Internet service, which competes with our ability to provide bundled services to our customers. Moreover, as we expand our telephone offerings, we will face considerable competition from established telephone companies and other carriers, including VoIP providers.
 
 
49

 
In order to attract new customers, from time to time we make promotional offers, including offers of temporarily reduced-price or free service. These promotional programs result in significant advertising, programming and operating expenses, and also require us to make capital expenditures to acquire additional digital set-top boxes. Customers who subscribe to our services as a result of these offerings may not remain customers for any significant period of time following the end of the promotional period. A failure to retain existing customers and customers added through promotional offerings or to collect the amounts they owe us could have a material adverse effect on our business and financial results.

Mergers, joint ventures and alliances among franchised, wireless or private cable operators, satellite television providers, local exchange carriers and others, may provide additional benefits to some of our competitors, either through access to financing, resources or efficiencies of scale, or the ability to provide multiple services in direct competition with us.

We cannot assure you that our cable systems will allow us to compete effectively. Additionally, as we expand our offerings to include other telecommunications services, and to introduce new and enhanced services, we will be subject to competition from other providers of the services we offer. We cannot predict the extent to which competition may affect our business and operations in the future.

We have a history of net losses and expect to continue to experience net losses. Consequently, we may not have the ability to finance future operations.

We have had a history of net losses and expect to continue to report net losses for the foreseeable future. Our net losses are principally attributable to insufficient revenue to cover the combination of operating costs and interest costs we incur because of our high level of debt and the depreciation expenses that we incur resulting from the capital investments we have made in our cable properties. We expect that these expenses will remain significant, and we expect to continue to report net losses for the foreseeable future. We reported net losses of $73 million, $818 million and $534 million for the three months ended September 30, 2006 and for the nine months ended September 30, 2006 and 2005, respectively. We reported net income of $123 million for the three months ended September 30, 2005. Continued losses would reduce our cash available from operations to service our indebtedness, as well as limit our ability to finance our operations.

We may not have the ability to pass our increasing programming costs on to our customers, which would adversely affect our cash flow and operating margins.

Programming has been, and is expected to continue to be, our largest operating expense item. In recent years, the cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming. We expect programming costs to continue to increase because of a variety of factors, including inflationary or negotiated annual increases, additional programming being provided to customers and increased costs to purchase programming. The inability to fully pass these programming cost increases on to our customers has had an adverse impact on our cash flow and operating margins. As measured by programming costs and excluding premium services (substantially all of which were renegotiated and renewed in 2003), as of October 6, 2006, approximately 7% of our current programming contracts were expired, and approximately another 4% were scheduled to expire at or before the end of 2006. There can be no assurance that these agreements will be renewed on favorable or comparable terms. Our programming costs increased by approximately 8% and 10% in the three and nine months ended September 30, 2006 compared to the corresponding periods in 2005, respectively. We expect our programming costs in 2006 to continue to increase at a higher rate than in 2005. To the extent that we are unable to reach agreement with certain programmers on terms that we believe are reasonable we may be forced to remove such programming channels from our line-up, which could result in a further loss of customers.

If our required capital expenditures in 2006, 2007 and beyond exceed our projections, we may not have sufficient funding, which could adversely affect our growth, financial condition and results of operations.

During the three and nine months ended September 30, 2006, we spent approximately $256 million and $795 million, respectively, on capital expenditures. During 2006, we expect capital expenditures to be approximately $1.1 billion. The actual amount of our capital expenditures depends on the level of growth in high-speed Internet and telephone customers and in the delivery of other advanced services, as well as the cost of introducing any new services. We may need additional capital in 2006, 2007 and beyond if there is accelerated growth in high-speed
 
 
50
 
Internet customers, telephone customers or in the delivery of other advanced services. If we cannot obtain such capital from increases in our cash flow from operating activities, additional borrowings, proceeds from asset sales or other sources, our growth, financial condition and results of operations could suffer materially.

Our inability to respond to technological developments and meet customer demand for new products and services could limit our ability to compete effectively.

Our business is characterized by rapid technological change and the introduction of new products and services. We cannot assure you that we will be able to fund the capital expenditures necessary to keep pace with unanticipated technological developments or that we will successfully anticipate the demand of our customers for products and services requiring new technology. Our inability to maintain and expand our upgraded systems and provide advanced services in a timely manner, or to anticipate the demands of the marketplace, could materially adversely affect our ability to attract and retain customers. Consequently, our growth, financial condition and results of operations could suffer materially.

Malicious and abusive Internet practices could impair our high-speed Internet services.

Our high-speed Internet customers utilize our network to access the Internet and, as a consequence, we or they may become victim to common malicious and abusive Internet activities, such as unsolicited mass advertising (i.e., “spam”) and dissemination of viruses, worms and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers and damage to our or our customers’ equipment and data. Significant incidents could lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to us to service our customers and protect our network. Any significant loss of high-speed Internet customers or revenue or significant increase in costs of serving those customers could adversely affect our growth, financial condition and results of operations.

Risks Related to Mr. Allen’s Controlling Position 

The failure by Mr. Allen to maintain a minimum voting and economic interest in us could trigger a change of control default under our subsidiary’s credit facilities.

The Charter Operating credit facilities provide that the failure by (a) Mr. Allen, (b) his estate, spouse, immediate family members and heirs and (c) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners or other owners of which consist exclusively of Mr. Allen or such other persons referred to in (b) above or a combination thereof, to maintain a 35% direct or indirect voting interest in the applicable borrower would result in a change of control default. Such a default could result in the acceleration of repayment of our and our subsidiaries’ indebtedness, including borrowings under the Charter Operating credit facilities.

Mr. Allen controls us and may have interests that conflict with your interests.

Mr. Allen has the ability to control us. Through his control as of September 30, 2006 of approximately 90% of the voting power of the capital stock of our manager, Charter, Mr. Allen is entitled to elect all but one of Charter’s board members and effectively has the voting power to elect the remaining board member as well. Mr. Allen thus has the ability to control fundamental corporate transactions requiring equity holder approval, including, but not limited to, the election of all of Charter’s directors, approval of merger transactions involving us and the sale of all or substantially all of our assets.

Mr. Allen is not restricted from investing in, and has invested in, and engaged in, other businesses involving or related to the operation of cable television systems, video programming, high-speed Internet service, telephone or business and financial transactions conducted through broadband interactivity and Internet services. Mr. Allen may also engage in other businesses that compete or may in the future compete with us.

Mr. Allen’s control over our management and affairs could create conflicts of interest if he is faced with decisions that could have different implications for him, us and the holders of our notes. Further, Mr. Allen could effectively cause us to enter into contracts with another entity in which he owns an interest or to decline a transaction into which he (or another entity in which he owns an interest) ultimately enters.

 
51
 
Current and future agreements between us and either Mr. Allen or his affiliates may not be the result of arm’s-length negotiations. Consequently, such agreements may be less favorable to us than agreements that we could otherwise have entered into with unaffiliated third parties.

We are not permitted to engage in any business activity other than the cable transmission of video, audio and data unless Mr. Allen authorizes us to pursue that particular business activity, which could adversely affect our ability to offer new products and services outside of the cable transmission business and to enter into new businesses, and could adversely affect our growth, financial condition and results of operations.

Charter’s certificate of incorporation and Charter Holdco’s limited liability company agreement provide that Charter and Charter Holdco and their subsidiaries, including us, cannot engage in any business activity outside the cable transmission business except for specified businesses. This will be the case unless Mr. Allen consents to our engaging in the business activity. The cable transmission business means the business of transmitting video, audio (including telephone services), and data over cable television systems owned, operated or managed by us from time to time. These provisions may limit our ability to take advantage of attractive business opportunities.

The loss of Mr. Allen’s services could adversely affect our ability to manage our business.

Mr. Allen is Chairman of Charter’s board of directors and provides strategic guidance and other services to Charter. If Charter were to lose his services, our growth, financial condition and results of operations could be adversely impacted.

The recent issuance of Charter Class A common stock, as well as possible future conversions of Charter convertible notes, significantly increase the risk that Charter will experience an ownership change in the future for tax purposes, resulting in a material limitation on the use of a substantial amount of Charter’s existing net operating loss carryforwards.

As of September 30, 2006, Charter had approximately $6.4 billion of tax net operating losses (resulting in a gross deferred tax asset of approximately $2.6 billion) expiring in the years 2007 through 2026. Due to uncertainties in projected future taxable income, valuation allowances have been established against the gross deferred tax assets for book accounting purposes except for deferred benefits available to offset certain deferred tax liabilities. Currently, such tax net operating losses can accumulate and be used to offset any of Charter’s future taxable income. An “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended, would place significant limitations, on an annual basis, on the use of such net operating losses to offset any future taxable income Charter may generate. Such limitations, in conjunction with the net operating loss expiration provisions, could effectively eliminate Charter’s ability to use a substantial portion of its net operating losses to offset future taxable income.

The issuance of 45 million shares of Charter Class A common stock in connection with the September 2006 exchange offer, up to a total of 150 million shares of Charter Class A common stock (of which a total of 59.5 million are outstanding as of September 2006) offered pursuant to a share lending agreement executed by Charter in connection with the issuance of the 5.875% convertible senior notes in November 2004, as well as possible future conversions of Charter convertible notes, significantly increases the risk that Charter will experience an ownership change in the future for tax purposes, resulting in a material limitation on the use of a substantial amount of Charter’s existing net operating loss carryforwards. As of September 30, 2006, the issuance and return of shares associated with the share lending agreement did not result in Charter experiencing an ownership change. However, future transactions and the timing of such transactions could cause an ownership change. Such transactions include additional issuances of common stock by Charter (including but not limited to issuances upon future conversion of Charter’s 5.875% convertible senior notes), reacquisitions of the borrowed shares by Charter, or acquisitions or sales of shares by certain holders of Charter shares, including persons who have held, currently hold, or accumulate in the future five percent or more of Charter’s outstanding stock (including upon an exchange by Mr. Allen or his affiliates, directly or indirectly, of membership units of Charter Holdco into Charter Class A common stock). Many of the foregoing transactions are beyond our control.


52

Risks Related to Regulatory and Legislative Matters 

Our business is subject to extensive governmental legislation and regulation, which could adversely affect our business.

Regulation of the cable industry has increased cable operators’ administrative and operational expenses and limited their revenues. Cable operators are subject to, among other things:
 
 
·
rules governing the provision of cable equipment and compatibility with new digital technologies;
 
·
rules and regulations relating to subscriber privacy;
 
·
limited rate regulation;
 
·
requirements governing when a cable system must carry a particular broadcast station and when it must first obtain consent to carry a broadcast station;
 
·
rules and regulations relating to provision of voice communications; 
 
·
rules for franchise renewals and transfers; and 
 
· 
other requirements covering a variety of operational areas such as equal employment opportunity, technical standards and customer service requirements. 
 
Additionally, many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are also ongoing efforts to amend or expand the federal, state and local regulation of some of our cable systems, which may compound the regulatory risks we already face. Certain states and localities are considering new telecommunications taxes that could increase operating expenses.

Our cable systems are operated under franchises that are subject to non-renewal or termination. The failure to renew a franchise in one or more key markets could adversely affect our business.

Our cable systems generally operate pursuant to franchises, permits and similar authorizations issued by a state or local governmental authority controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, franchises have not been renewed at expiration, and we have operated and are operating under either temporary operating agreements or without a license while negotiating renewal terms with the local franchising authorities. Approximately 12% of our franchises, covering approximately 14% of our analog video customers, were expired as of September 30, 2006. Approximately 2% of additional franchises, covering approximately an additional 4% of our analog video customers, will expire on or before December 31, 2006, if not renewed prior to expiration.

We cannot assure you that we will be able to comply with all significant provisions of our franchise agreements and certain of our franchisors have from time to time alleged that we have not complied with these agreements. Additionally, although historically we have renewed our franchises without incurring significant costs, we cannot assure you that we will be able to renew, or to renew as favorably, our franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect our business in the affected geographic area.

Our cable systems are operated under franchises that are non-exclusive. Accordingly, local franchising authorities can grant additional franchises and create competition in market areas where none existed previously, resulting in overbuilds, which could adversely affect results of operations.

Our cable systems are operated under non-exclusive franchises granted by local franchising authorities. Consequently, local franchising authorities can grant additional franchises to competitors in the same geographic area or operate their own cable systems. In addition, certain telephone companies are seeking authority to operate in local communities without first obtaining a local franchise. As a result, competing operators may build systems in areas in which we hold franchises. In some cases municipal utilities may legally compete with us without obtaining a franchise from the local franchising authority.

 
53
 
 
Different legislative proposals have been introduced in the United States Congress and in some state legislatures that would greatly streamline cable franchising. This legislation is intended to facilitate entry by new competitors, particularly local telephone companies. Such legislation has passed in several states in which we have operations and one of these newly enacted statutes is subject to court challenge. Although various legislative proposals provide some regulatory relief for incumbent cable operators, these proposals are generally viewed as being more favorable to new entrants due to a number of factors, including provisions withholding streamlined cable franchising from incumbents until after the expiration of their existing franchises. To the extent incumbent cable operators are not able to avail themselves of this streamlined franchising process, such operators may continue to be subject to more onerous franchise requirements at the local level than new entrants. A proceeding is pending at the Federal Communications Commission ("FCC'') to determine whether local franchising authorities are impeding the deployment of competitive cable services through unreasonable franchising requirements and whether such impediments should be preempted. We are not yet able to determine what impact such proceeding may have on us.

The existence of more than one cable system operating in the same territory is referred to as an overbuild. These overbuilds could adversely affect our growth, financial condition and results of operations by creating or increasing competition. As of September 30, 2006, we are aware of overbuild situations impacting approximately 8% of our estimated homes passed, and potential overbuild situations in areas servicing approximately an additional 8% of our estimated homes passed. Additional overbuild situations may occur in other systems.

Local franchise authorities have the ability to impose additional regulatory constraints on our business, which could further increase our expenses.

In addition to the franchise agreement, cable authorities in some jurisdictions have adopted cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases the cost of operating our business. We cannot assure you that the local franchising authorities will not impose new and more restrictive requirements. Local franchising authorities also generally have the power to reduce rates and order refunds on the rates charged for basic services.

Further regulation of the cable industry could cause us to delay or cancel service or programming enhancements or impair our ability to raise rates to cover our increasing costs, resulting in increased losses.

Currently, rate regulation is strictly limited to the basic service tier and associated equipment and installation activities. However, the FCC and the U.S. Congress continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the FCC or the U.S. Congress will again restrict the ability of cable system operators to implement rate increases. Should this occur, it would impede our ability to raise our rates. If we are unable to raise our rates in response to increasing costs, our losses would increase.

There has been considerable legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an á la carte basis or to at least offer a separately available child-friendly “Family Tier.” It is possible that new marketing restrictions could be adopted in the future. Such restrictions could adversely affect our operations.

Actions by pole owners might subject us to significantly increased pole attachment costs.

Pole attachments are cable wires that are attached to poles. Cable system attachments to public utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates for attachments used to provide cable service. The FCC clarified that a cable operator’s favorable pole rates are not endangered by the provision of Internet access, and that approach ultimately was upheld by the Supreme Court of the United States. Despite the existing regulatory regime, utility pole owners in many areas are attempting to raise pole attachment fees and impose additional costs on cable operators and others. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies if the operator provides telecommunications services, in addition to cable service, over cable wires attached to utility poles. To date, Voice over Internet Protocol or VoIP service has not been classified as either a telecommunications service or cable service under the Communications Act. If VoIP were classified as a telecommunications service under the Communications Act by the FCC, a state Public Utility Commission, or an appropriate court, it might result in significantly increased pole attachment costs for us, which could adversely affect our financial condition and results of operations. Any significant increased costs could have a material adverse impact on our profitability and discourage system upgrades and the introduction of new products and services.
 
 
54

 
We may be required to provide access to our networks to other Internet service providers which could significantly increase our competition and adversely affect our ability to provide new products and services.

A number of companies, including independent Internet service providers, or ISPs, have requested local authorities and the FCC to require cable operators to provide non-discriminatory access to cable’s broadband infrastructure, so that these companies may deliver Internet services directly to customers over cable facilities. In a June 2005 ruling, commonly referred to as Brand X, the Supreme Court upheld an FCC decision (and overruled a conflicting Ninth Circuit opinion) making it less likely that any nondiscriminatory “open access” requirements (which are generally associated with common carrier regulation of “telecommunications services”) will be imposed on the cable industry by local, state or federal authorities. The Supreme Court held that the FCC was correct in classifying cable provided Internet service as an “information service,” rather than a “telecommunications service.” Notwithstanding Brand X, there has been increasing advocacy by certain internet content providers and consumer groups for new federal laws or regulations to limiting the ability of broadband network owners (like Charter) to manage and control their own networks. The proposals might prevent network owners, for example, from charging bandwidth intensive content providers, such as certain online gaming, music, and video service providers, an additional fee to ensure quality delivery of the services to consumers. If we were required to allocate a portion of our bandwidth capacity to other Internet service providers, or were prohibited from charging heavy bandwidth intensive services a fee for use of our networks, we believe that it could impair our ability to use our bandwidth in ways that would generate maximum revenues.

Changes in channel carriage regulations could impose significant additional costs on us.

Cable operators also face significant regulation of their channel carriage. They currently can be required to devote substantial capacity to the carriage of programming that they would not carry voluntarily, including certain local broadcast signals, local public, educational and government access programming, and unaffiliated commercial leased access programming. This carriage burden could increase in the future, particularly if cable systems were required to carry both the analog and digital versions of local broadcast signals (dual carriage) or to carry multiple program streams included with a single digital broadcast transmission (multicast carriage). Additional government-mandated broadcast carriage obligations could disrupt existing programming commitments, interfere with our preferred use of limited channel capacity and limit our ability to offer services that would maximize customer appeal and revenue potential. Although the FCC issued a decision in February 2005, confirming an earlier ruling against mandating either dual carriage or multicast carriage, that decision is subject to a petition for reconsideration which is pending. In addition, the FCC could reverse its own ruling or Congress could legislate additional carriage obligations.

Offering voice communications service may subject us to additional regulatory burdens, causing us to incur additional costs.

In 2002, we began to offer voice communications services on a limited basis over our broadband network. We continue to develop and deploy Voice over Internet Protocol or VoIP services. The FCC has declared that certain VoIP services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of state and local regulation of VoIP services is not yet clear. Expanding our offering of these services may require us to obtain certain authorizations, including federal and state licenses. We may not be able to obtain such authorizations in a timely manner, or conditions could be imposed upon such licenses or authorizations that may not be favorable to us. The FCC has extended certain traditional telecommunications requirements, such as E911 and Universal Service requirements, to many VoIP providers, such as Charter. The FCC has also required that these VoIP providers comply with obligations applied to traditional telecommunications carriers to ensure their networks can accommodate law enforcement wiretaps by May 2007, which requirement has been affirmed by the Court of Appeals for the D.C. Circuit. Telecommunications companies generally are subject to other significant regulation which could also be extended to VoIP providers. If additional telecommunications regulations are applied to our VoIP service, it could cause us to incur additional costs.

Item 6.     Exhibits.

The index to the exhibits begins on page 57 of this quarterly report.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation have duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHARTER COMMUNICATIONS HOLDINGS, LLC
Registrant

By: CHARTER COMMUNICATIONS, INC., Sole Manager

Dated: November 13, 2006
By: /s/ Kevin D. Howard
 
Name:
Kevin D. Howard
 
Title:
Vice President and
   
Chief Accounting Officer

CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
Registrant

Dated: November 13, 2006
By: /s/ Kevin D. Howard
 
Name:
Kevin D. Howard
 
Title:
Vice President and
   
Chief Accounting Officer

 


56

EXHIBIT INDEX


Exhibit
Number
Description of Document
10.1+
Employment Agreement dated as of August 1, 2006 by and between Marwan Fawaz and Charter Communications, Inc. (incorporated by reference to Exhibit 99.1 to the current report on Form 8-K of Charter Communications, Inc. filed on August 1, 2006 (File No. 000-27927)).
10.2
Indenture relating to the 10.25% Senior Notes due 2013, dated as of September 14, 2006, by and between CCH II, LLC, CCH II Capital Corp. as Issuers, Charter Communications Holdings, LLC as Parent Guarantor and The Bank of New York Trust Company, N.A. as trustee (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K of Charter Communications, Inc. on September 19, 2006)).
10.3
First Supplemental Indenture relating to the 11.00% Senior Notes due 2015, dated as of September 14, 2006, by and between CCH I, LLC, CCH I Capital Corp. as Issuers, Charter Communications Holdings, LLC as Parent Guarantor and The Bank of New York Trust Company, N.A. as trustee (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K of Charter Communications, Inc. on September 19, 2006)).
10.4
Amendment to the Pledge Agreement between CCH I, LLC in favor of The Bank of New York Trust Company, N.A., as Collateral Agent, dated as of September 14, 2006 (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K of Charter Communications, Inc. on September 19, 2006)).
10.5
Exchange and Registration Rights Agreement dated as of September 14, 2006 by CCH I, LLC, CCH I Capital Corp., CCH II, LLC, CCH II Capital Corp. and Charter Communications Holdings, LLC. (Incorporated by reference to Exhibit 10.5 to the current report on Form 8-K of Charter Communications, Inc. filed on September 19, 2006 (File No. 000-27927)).
15.1*
Letter re Unaudited Interim Financial Statements.
31.1*
Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) 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).

* Document attached

+ Management compensatory plan or arrangement

 

57


Exhibit 15.1

October 30, 2006


Charter Communications Holdings, LLC and Subsidiaries
12405 Powerscourt Drive
St. Louis, MO 63131

Re: Form 10-Q for the Quarterly Period Ended September 30, 2006


With respect to the Form 10-Q for the quarterly period ended September 30, 2006, we acknowledge our awareness of the use therein of our report dated October 30, 2006 related to our review of interim financial information.

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.


/s/ KPMG LLP

St. Louis, Missouri
Exhibit 31.1

Exhibit 31.1

I, Neil Smit, certify that:

1.
 
I have reviewed this Quarterly Report on Form 10-Q of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation;
 
    
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
    
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;
 
    
4.
 
The registrants’ other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have:

       
 
(a)
 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
      
 
(b)
  
[Reserved];
       
 
(c)
 
Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
      
 
(d)
 
Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and

     
5.
 
The registrants’ other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

       
 
(a)
 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and
 
      
 
(b)
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.

Date: November 13, 2006
 

 
/s/ Neil Smit
Neil Smit
President and Chief Executive Officer
 

 

 
Exhibit31.2
 
Exhibit 31.2
 
 
I, Jeffrey T. Fisher, certify that:
 

1.
 
I have reviewed this Quarterly Report on Form 10-Q of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation;
 
    
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
    
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;
 
    
4.
 
The registrants’ other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have:

       
 
(a)
 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
      
 
(b)
  
[Reserved];
       
 
(c)
 
Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
      
 
(d)
 
Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter (the registrants’ fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and

     
5.
 
The registrants’ other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

       
 
(a)
 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and
 
      
 
(b)
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.

 
Date: November 13, 2006

 
 
/s/ Jeffrey T. Fisher
Jeffrey T. Fisher
Chief Financial Officer
(Principal Financial Officer)

Exhibit 32.1
Exhibit 32.1
 

 

 
CERTIFICATION OF CHIEF EXECUTIVE
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
 

 
I, Neil Smit, the President and Chief Executive Officer of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation (the "Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2006 (the "Report") filed with the Securities and Exchange Commission:
 
·  
fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
 
·  
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
                                                    /s/ Neil Smit
                                                    Neil Smit
                                                    President and Chief Executive Officer
                                                    November 13, 2006
 
Exhibit 32.2
Exhibit 32.2
 

 

 
CERTIFICATION OF CHIEF FINANCIAL
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
 

 
I, Jeffrey T. Fisher, the Chief Financial Officer of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation (the "Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2006 (the "Report") filed with the Securities and Exchange Commission:
 
·  
fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
 
·  
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 

 
                                    /s/ Jeffrey T. Fisher
                                    Jeffrey T. Fisher
                                    Chief Financial Officer
                                    (Principal Financial Officer)
                                    November 13, 2006