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 June 30, 2006March 31, 2007

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*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 August 7, 2006:May 15, 2007: 100

* Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation meetsmeet the conditions set forth in General Instruction H(1)(a) and (b) to Form 10-Q and isare 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 June 30, 2006March 31, 2007

Table of Contents

PART I. FINANCIAL INFORMATION
Page 
  
Item 1.  Report of Independent Registered Public Accounting Firm
4
Financial Statements - Charter Communications Holdings, LLC and Subsidiaries
 
Condensed Consolidated Balance Sheets as of June 30, 2006March 31, 2007 
and December 31, 2005200654
Condensed Consolidated Statements of Operations for the three and six 
months ended June 30,March 31, 2007 and 2006 and 200565
Condensed Consolidated Statements of Cash Flows for the 
sixthree months ended June 30,March 31, 2007 and 2006 and 200576
Notes to Condensed Consolidated Financial Statements87
  
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3.Quantitative and Qualitative Disclosures about Market Risk
41 23
  
Item 4. Controls and Procedures
42 33
  
PART II. OTHER INFORMATION 
  
Item 1.  Legal Proceedings
4334 
  
Item 1A. Risk Factors4334 
  
Item 6. Exhibits
5238 
  
SIGNATURES53S-1
  
EXHIBIT INDEX54E-1

This quarterly report on Form 10-Q is for the three and six months ended June 30, 2006.March 31, 2007. 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”"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 our 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;
·competition from other distributors, including incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers and DSL providers;
·difficulties in introducing and operating our telephone services, such as our ability to adequately meet customer expectations for the reliability of voice services, and our ability to adequately meet demand for installations and customer service;
 ·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 stableour customer base, particularly in the face of increasingly aggressive competition from other service providers;competition;
 ·our ability to obtain programming at reasonable prices or to passadequately raise prices to offset the effects of higher programming cost increases on to our customers;costs;
 ·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.


3


PART I. FINANCIAL INFORMATION.


Item 1.Financial Statements.




Report of Independent Registered Public Accounting Firm

The Board of Directors
Charter Communications Holdings, LLC:
We have reviewed the condensed consolidated balance sheet of Charter Communications Holdings, LLC and subsidiaries (the Company) as of June 30, 2006, the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2006 and 2005, and the related condensed consolidated statements of cash flows for the six-month periods ended June 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 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, 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
August 7, 2006
4



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

 
June 30,
 
December 31,
  
March 31,
 
December 31,
 
 
2006
 
2005
  
2007
 
2006
 
 
(Unaudited)
    
(Unaudited)
   
ASSETS
          
CURRENT ASSETS:            
Cash and cash equivalents $48 $14 
Cash and cash equivalents, including restricted cash of $110 and $0, respectively $184 $38 
Accounts receivable, less allowance for doubtful accounts of              
$19 and $17, respectively  178  212 
$16 and $16, respectively  156  194 
Prepaid expenses and other current assets  20  22   25  23 
Assets held for sale  768  -- 
Total current assets  1,014  248   365  255 
              
INVESTMENT IN CABLE PROPERTIES:              
Property, plant and equipment, net of accumulated              
depreciation of $7,014 and $6,712, respectively  5,354  5,800 
depreciation of $7,925 and $7,602, respectively  5,143  5,181 
Franchises, net  9,280  9,826   9,218  9,223 
Total investment in cable properties, net  14,634  15,626   14,361  14,404 
              
OTHER NONCURRENT ASSETS  294  318   288  275 
              
Total assets $15,942 $16,192  $15,014 $14,934 
              
LIABILITIES AND MEMBER’S DEFICIT
              
CURRENT LIABILITIES:              
Accounts payable and accrued expenses $1,129 $1,096  $1,346 $1,181 
Payables to related party  90  83   120  118 
Liabilities held for sale  20  -- 
Total current liabilities  1,239  1,179   1,466  1,299 
              
LONG-TERM DEBT  19,012  18,525   18,866  18,654 
LOANS PAYABLE - RELATED PARTY  3  22   4  3 
DEFERRED MANAGEMENT FEES - RELATED PARTY  14  14   14  14 
OTHER LONG-TERM LIABILITIES  359  392   366  362 
MINORITY INTEREST  631  622   194  192 
              
MEMBER’S DEFICIT:       
MEMBER’S DEFICIT       
Member’s deficit  (5,318) (4,564)  (5,894) (5,591)
Accumulated other comprehensive income  2  2 
Accumulated other comprehensive income (loss)  (2) 1 
              
Total member’s deficit  (5,316) (4,562)  (5,896) (5,590)
              
Total liabilities and member’s deficit $15,942 $16,192  $15,014 $14,934 

The accompanying notes are an integral part of these condensed consolidated financial statements.
54


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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
  
Three Months Ended March 31,
 
 
2006
 
2005
 
2006
 
2005
  
2007
 
2006
 
              
REVENUES $1,383 $1,266 $2,703 $2,481  $1,425 $1,320 
                    
COSTS AND EXPENSES:                    
Operating (excluding depreciation and amortization)  611  546  1,215  1,081   631  604 
Selling, general and administrative  279  250  551  483   303  272 
Depreciation and amortization  340  364  690  730   331  350 
Asset impairment charges  --  8  99  39   --  99 
Other operating (income) expenses, net  7  (2) 10  6 
Other operating expenses, net  4  3 
                    
  1,237  1,166  2,565  2,339   1,269  1,328 
                    
Operating income from continuing operations  146  100  138  142 
Operating income (loss) from continuing operations  156  (8)
                    
OTHER INCOME AND (EXPENSES):                    
Interest expense, net  (456) (431) (907) (855)  (454) (450)
Other income (expenses), net  (26) 14  (19) 45 
Other income (expense), net  (4) 10 
                    
  (482) (417) (926) (810)  (458) (440)
                    
Loss from continuing operations before income taxes  (336) (317) (788) (668)  (302) (448)
                    
INCOME TAX EXPENSE  (2) (2) (4) (8)  (2) (2)
                    
Loss from continuing operations  (338) (319) (792) (676)  (304) (450)
                    
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX
  23  10  38  19   --  15 
                    
Net loss $(315)$(309)$(754)$(657) $(304)$(435)

The accompanying notes are an integral part of these condensed consolidated financial statements.
65


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

 
Six Months Ended June 30,
  
Three Months Ended March 31,
 
 
2006
 
2005
  
2007
 
2006
 
          
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $(754)$(657) $(304)$(435)
Adjustments to reconcile net loss to net cash flows from operating activities:              
Depreciation and amortization  698  759   331  358 
Asset impairment charges  99  39   --  99 
Noncash interest expense  74  128   7  46 
Deferred income taxes  --  5 
Other, net  27  (42)  13  (6)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:              
Accounts receivable  29  --   38  60 
Prepaid expenses and other assets  --  (21)  (4) (2)
Accounts payable, accrued expenses and other  28  (19)  189  87 
Receivables from and payables to related party, including management fees  3  (28)
Receivables from and payables to related party, including deferred management
fees
  (4) (2)
              
Net cash flows from operating activities  204  164   266  205 
              
CASH FLOWS FROM INVESTING ACTIVITIES:              
Purchases of property, plant and equipment  (539) (542)  (298) (241)
Change in accrued expenses related to capital expenditures  (9) 48   (32) (7)
Proceeds from sale of assets  9  8 
Purchase of cable system  (42) --   --  (42)
Proceeds from investments  28  16 
Other, net  --  (2)  9  14 
              
Net cash flows from investing activities  (553) (472)  (321) (276)
              
CASH FLOWS FROM FINANCING ACTIVITIES:              
Borrowings of long-term debt  5,830  635   911  415 
Borrowings from related parties  --  140 
Repayments of long-term debt  (5,838) (819)  (691) (759)
Repayments to related parties  (20) (107)
Proceeds from issuance of debt  440  --   --  440 
Payments for debt issuance costs  (29) (3)  (20) (10)
Distributions  --  (60)
Contributions  1  -- 
              
Net cash flows from financing activities  383  (214)  201  86 
              
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  34  (522)
NET INCREASE IN CASH AND CASH EQUIVALENTS  146  15 
CASH AND CASH EQUIVALENTS, beginning of period  14  546   38  14 
              
CASH AND CASH EQUIVALENTS, end of period $48 $24  $184 $29 
              
CASH PAID FOR INTEREST $765 $707  $304 $240 
              
NONCASH TRANSACTIONS:              
Issuance of debt by Charter Communications Operating, LLC $37 $333  $-- $37 
Retirement of Renaissance Media Group LLC debt $(37)$--  $-- $(37)
Retirement of Charter Communications Holdings, LLC debt $-- $(346)
Transfer of property, plant and equipment from parent company $-- $139 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
76

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

Organization and Basis of Presentation

1.     Organization and Basis of Presentation
Charter Communications Holdings, LLC ("Charter Holdings") is a holding company whose principal assets at June 30, 2006March 31, 2007 are the equity interests in its operating subsidiaries. Charter Holdings is a subsidiary of CCHC, LLC ("CCHC"(“CCHC”) which is a subsidiary of Charter Communications HoldingHoldings Company, LLC ("Charter Holdco"), which is a subsidiary of Charter Communications, Inc. ("Charter"(“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 Holdings’ notes for CCH I notes, 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 CCHC obtained the CC VIII interest. 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 itsto residential and commercial 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, Charter OnDemand™, and digital video on demand,recorder service, and, telephone.in many of our markets, telephone service. 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-deliveredcable 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 Holdings’ 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 20052006 amounts have been reclassified to conform with the 2006 presentation.2007 presentation, including discontinued operations as discussed in Note 3.

2.Liquidity and Capital Resources

The Company hadincurred net losslosses of $315$304 million and $309$435 million for the three months ended June 30,March 31, 2007 and 2006, and 2005, respectively, and $754 million and $657 million for the six months ended June 30, 2006 and 2005, respectively. The Company’s net cash flows from operating activities were $204$266 million and $164$205 million for the sixthree months ended June 30,March 31, 2007 and 2006, and 2005, respectively.

Recent Financing Transactions

The Company has a significant level of debt. The Company's long-term financing as of March 31, 2007 consists of $5.6 billion of credit facility debt and $13.3 billion accreted value of high-yield notes. For the remaining three quarterly periods of 2007, $105 million of the Company’s debt matures, which was paid on April 2, 2007 upon maturity of Charter Holdings’ 8.250% senior notes. In January 2006, CCH II, LLC ("CCH II")2008, $55 million of the Company’s debt matures, and CCH II Capital Corp. issued $450in 2009, $469 million matures. Of the debt that was scheduled to mature in debt securities, the proceeds of which were provided, directly or indirectly, 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.

In April 2006, Charter Operating completed a $6.85 billion refinancing of its credit facilities including a new $3502009, $187 million revolving/term facility (which convertswas subject 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
call redemption
 
87

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

The Company has a significant level of debt. The Company's long-term financing as of June 30, 2006 consists of $5.8 billion of credit facility debt and $13.2 billion accreted value of high-yield notes. For the remainder of 2006, none of the Company’s debt matures, andthat closed in April 2007, and 2008, $130$40 million and $50 million mature, respectively.was repurchased in a tender offer that closed in April 2007. In 20092010 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 sixthree months ended June 30, 2006,March 31, 2007, the Company generated $204$266 million of net cash flows from operating activities, after paying cash interest of $765$304 million. In addition, the Company used approximately $539$298 million for purchases of property, plant and equipment. Finally, the Company hadgenerated net cash flows from financing activities of $383 million.$201 million, as a result of refinancing transactions completed during the period.

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 2007.2008.  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 20082009, and will not be sufficient to fund such needs in 2009,2010 and beyond. The Company has been advised that Charter continues to work with its financial advisors inconcerning its approach to addressing liquidity, debt maturities, and its overall balance sheet leverage.

Debt CovenantsCredit Facility Availability

The Company’s ability to operate depends upon, among other things, its continued access to capital, including credit under the Charter Communications Operating, LLC (“Charter Operating”) credit facilities. The Charter Operating credit facilities, along with the Company’s indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facilities, contain certain restrictive covenants, some of which require the Company to maintain specified financialleverage ratios, and meet financial tests, and to provide annual audited financial statements with an unqualified opinion from the Company’s independent auditors. As of June 30, 2006,March 31, 2007, the Company iswas 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 June 30, 2006,March 31, 2007, the Company’s potential availability under its revolving credit facilitiesfacility totaled approximately $900 million,$1.4 billion, none of which was limited by covenant restrictions. In the past, the Company’s actual availability under its credit facilities has been limited by covenant restrictions. There can be no assurance that the Company’s actual availability under its credit facilities will not be limited by covenant restrictions in the future. However, pro forma for the closing of the asset sales on July 1, 2006, and the related application of net proceeds to repay amounts outstanding under the Company’s revolving credit facility, potential availability under the Company’s credit facilities as of June 30, 2006 would have been approximately $1.7 billion, although actual availability would have been limited to $1.3 billion 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.leverage ratio. If any eventsevent of non-compliance were to 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'sCompany’s business and have a material adverse effect on the Company’s business and results of operations.

Limitations on Distributions

As long as Charter’s convertible notes remain outstanding and are not otherwise converted into shares of common stock, Charter must pay interest on the convertible senior notes and repay the principal amount in November 2009. 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, net of $450 million of convertible senior notes held by CCHC, 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 March 31, 2007, Charter Holdco was owed $4 million in intercompany loans from its subsidiaries and had $8 million in cash, which were available to pay interest and principal on Charter's convertible senior notes.  In addition, Charter has $50 million of U.S. government securities pledged as security for the semi-
 
98

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

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 $863 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 June 30, 2006, Charter Holdco was owed $3 million in intercompany loans from its subsidiaries, which were available to pay interest and principal on Charter's convertible senior notes. In addition, Charter has $74 million of U.S. government securities pledged as security for the next three scheduled semi-annualannual interest payments on Charter’s 5.875%convertible senior notes scheduled in 2007.  As long as CCHC continues to hold the $450 million of Charter’s convertible senior notes, CCHC will receive interest payments from the government securities pledged for Charter’s convertible senior notes.  The cumulative amount of interest payments expected to be received by CCHC is $40 million and may be available to be distributed to pay semiannual interest due in 2008 and May 2009 on the outstanding principal amount of $413 million of Charter’s convertible senior notes, 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 CIHCCH I Holdings, LLC (“CIH”) notes, CCH I notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, and Charter Operating notes and under the CCO Holdings credit facilities unless there is no default under the applicable indenture and credit facilities, and each applicable subsidiary’s leverage ratio test is met at the time of such distribution and, in the case of Charter’s convertible senior notes, other specified tests are met.distribution. For the quarter ended June 30, 2006,March 31, 2007, there was no default under any of these indentures and each such subsidiary met itsor credit facilities. However, certain of the Company’s subsidiaries did not meet their applicable leverage ratio tests based on June 30, 2006March 31, 2007 financial results. SuchAs 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 however, if any such subsidiary fails to meet theseunless those tests at such time. In the past, certain subsidiaries have from time to time failed to meet their leverage ratio test. There can be no assurance that they will satisfy these tests at the time of such distribution.are met. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in theits 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. However, distributions for payment of interest on Charter’s convertible senior notes are further limited to when each applicable subsidiary’s leverage ratio test is metindentures and other specified tests are met. There can be no assurance that the subsidiary will satisfy these tests at the time of such distribution.

Specific LimitationsCCO Holdings credit facilities.

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 June 30, 2006,March 31, 2007, there was no default under Charter Holdings’ indentures and the other specified tests were met. However, Charter Holdings met itsdid not meet the leverage ratio test of 8.75 to 1.0 based on June 30, 2006March 31, 2007 financial results. SuchAs a result, distributions from Charter Holdings to Charter or Charter Holdco would have been restricted at such time and will continue to be restricted however, if Charter Holdings fails to meet these tests at such time. In the past, Charter Holdings has from time to time failed to meet this leverage ratio test. There can be no assuranceunless that Charter Holdings will satisfy these tests at the time of such distribution.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.  

3.Recent Financing Transactions
Sale of Assets

In March 2007, Charter Operating entered into an Amended and Restated Credit Agreement (the “Charter Operating Credit Agreement”) which provides for a $1.5 billion senior secured revolving line of credit, a continuation of the existing $5.0 billion term loan facility (which was refinanced with new term loans in April 2007), and a $1.5 billion new term loan facility, which was funded in March and April 2007. In March 2007, CCO Holdings entered into a credit agreement which consisted of a $350 million term loan facility funded in March and April 2007. In April 2007, Charter Holdings completed a cash tender offer to purchase up to $100 million, including premiums and accrued interest, of its outstanding notes. In addition, Charter Holdings redeemed $187 million of its 8.625% senior notes due April 1, 2009 and CCO Holdings redeemed $550 million of its senior floating rate notes due December 15, 2010. These redemptions closed in April 2007. See Note 6.
3.     Sale of Assets
In 2006, the Company signed three separate definitive agreements to sellsold 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 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 six months ended June 30, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction. In the third quarter of 2006, the Company expects to record a gain of approximately $200 million on the Cebridge Transaction. In addition, assets and liabilities to be sold have been presented as held for sale. Assets held for sale on the Company's balance sheet as of June 30, 2006 included current assets of approximately $6 million, property, plant and equipment of
 
109

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
approximately $319 million and franchises(the “Orange Transaction”) for a total sales price of approximately $443$971 million. LiabilitiesThe 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 onsale. As such, the Company's balance sheet as of June 30,assets were written down to fair value less estimated costs to sell resulting in asset impairment charges during the three months ended March 31, 2006 included current liabilities of approximately $7$99 million related to the New Wave Transaction and other long-term liabilities of approximately $13 million.

During the second quarter of 2006, theOrange Transaction. 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 have been presented as discontinued operations, net of tax for the three and six months ended June 30, 2006 and all prior periods presented herein have been reclassified to conform to the current presentation.March 31, 2006.

Summarized consolidated financial information for the three and six months ended June 30,March 31, 2006 and 2005 for the West Virginia and Virginia cable systems is as follows:

 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
 
2006
 
2005
 
2006
 
2005
  
Three Months Ended March 31, 2006
 
            
Revenues $55 $57 $109 $113  $54 
Income (loss) before income taxes $23 $10 $38 $19 
Net income $15 
 
In July 2006, the Company closed the Cebridge Transaction4.     Franchises and New Wave Transaction for net proceeds of approximately $896 million. The Company used the net proceeds from the asset sales to repay (but not reduce permanently) amounts outstanding under the Company’s revolving credit facility. The Orange Transaction is scheduled to close in the third quarter of 2006.Goodwill

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 six months ended June 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 three and six months ended June 30, 2005 of approximately $8 million and $39 million, respectively.

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.

As of March 31, 2007 and December 31, 2006, indefinite-lived and finite-lived intangible assets are presented in the following table:

  
March 31, 2007
 
December 31, 2006
 
  
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated Amortization
 
Net
Carrying
Amount
 
Indefinite-lived intangible assets:
             
Franchises with indefinite lives $9,203 $-- $9,203 $9,207 $-- $9,207 
Goodwill  61  --  61  61  --  61 
                    
  $9,264 $-- 
$
9,264
 
$
9,268
 $-- $9,268 
Finite-lived intangible assets:
                   
Franchises with finite lives 
$
23
 $8 $15 
$
23
 $7 $16 

For the three months ended March 31, 2007, the net carrying amount of indefinite-lived and finite-lived franchises was reduced by $4 million, related to cable asset sales completed in the first quarter of 2007. 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 months ended March 31, 2007 was approximately $1 million. The Company expects that amortization expense on franchise assets will be approximately $3 million annually for each of the next five years. Actual amortization expense in future
10

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
periods could differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives and other relevant factors.

5.Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of March 31, 2007 and December 31, 2006:

  
March 31,
 2007
 
December 31,
2006
 
      
Accounts payable - trade $141 $81 
Accrued capital expenditures  65  97 
Accrued expenses:       
Interest  538  395 
Programming costs  311  268 
Franchise-related fees  43  68 
Compensation  56  74 
Other  192  198 
        
  $1,346 $1,181 
6.     Long-Term Debt
Long-term debt consists of the following as of March 31, 2007 and December 31, 2006:
  
March 31, 2007
 
December 31, 2006
 
  
Principal Amount
 
Accreted Value
 
Principal Amount
 
Accreted Value
 
Long-Term Debt
         
Charter Communications Holdings, LLC:         
8.250% senior notes due April 1, 2007 $105 $105 $105 $105 
8.625% senior notes due April 1, 2009  187  187  187  187 
10.000% senior notes due April 1, 2009  105  105  105  105 
10.750% senior notes due October 1, 2009  71  71  71  71 
9.625% senior notes due November 15, 2009  52  52  52  52 
10.250% senior notes due January 15, 2010  32  32  32  32 
11.750% senior discount notes due January 15, 2010  21  21  21  21 
11.125% senior discount notes due January 15, 2011  52  52  52  52 
13.500% senior discount notes due January 15, 2011  62  62  62  62 
9.920% senior discount notes due April 1, 2011  63  63  63  63 
10.000% senior notes due May 15, 2011  71  71  71  71 
11.750% senior discount notes due May 15, 2011  55  55  55  55 
12.125% senior discount notes due January 15, 2012  91  91  91  91 
CCH I Holdings, LLC:             
11.125% senior notes due January 15, 2014  151  151  151  151 
13.500% senior discount notes due January 15, 2014  581  581  581  581 
9.920% senior discount notes due April 1, 2014  471  471  471  471 
10.000% senior notes due May 15, 2014  299  299  299  299 
11.750% senior discount notes due May 15, 2014  815  815  815  815 
12.125% senior discount notes due January 15, 2015  217  217  217  216 
CCH I, LLC:             
11

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

11.000% senior notes due October 1, 2015  3,987  4,089  3,987  4,092 
CCH II, LLC:             
10.250% senior notes due September 15, 2010  2,198  2,190  2,198  2,190 
10.250% senior notes due October 1, 2013  250  261  250  262 
CCO Holdings, LLC:             
Senior floating notes due December 15, 2010  550  550  550  550 
8¾% senior notes due November 15, 2013  800  795  800  795 
Charter Communications Operating, LLC:             
8.000% senior second lien notes due April 30, 2012  1,100  1,100  1,100  1,100 
8 3/8% senior second lien notes due April 30, 2014  770  770  770  770 
Credit Facilities  5,610  5,610  5,395  5,395 
  $18,766 $18,866 $18,551 $18,654 
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 and Charter convertible notes in 2006 and 2005 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 June 30, 2006 and DecemberMarch 31, 2005, indefinite-lived and finite-lived intangible assets are presented in2007, the following table:

  
June 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 $9,263 $-- $9,263 $9,806 $-- $9,806 
Goodwill  61  --  61  52  --  52 
                    
  $9,324 $-- 
$
9,324
 
$
9,858
 $-- $9,858 
Finite-lived intangible assets:
                   
Franchises with finite lives 
$
23
 $6 $17 
$
27
 $7 $20 

For the six months ended June 30, 2006, the net carrying amount of indefinite-lived and finite-lived franchises was reduced by $441 million and $2 million, respectively, related to franchises reclassified as assets held for sale. For the six months ended June 30, 2006, franchises with indefinite lives also decreased $3 million related to a cable asset sale completed in the first quarter of 2006 and $99 million as a result of the asset impairment charges recorded related to assets held for sale (see Note 3). Franchise amortization expense for the three and six months ended June 30, 2006 was approximately $1 million and $1 million, respectively, and $1 million and $2 million for the three and six months ended June 30, 2005, respectively, which represents the amortization relating to franchises that did not qualify for indefinite-life treatment under SFAS No. 142, including costs associated with franchise renewals. 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 six months ended June 30, 2006, the net carrying amount of goodwill increased $9 million as a resultaccreted value of the Company’s purchase of certain cable systems in Minnesota from Seren Innovations, Inc. in January 2006.
Accounts Payable and Accrued Expenses
Accounts payabledebt for legal purposes and accrued expenses consist of the following as of June 30, 2006 and December 31, 2005:notes indenture purposes is approximately $18.6 billion.

  
June 30,
2006
 
December 31,
2005
 
      
Accounts payable - trade $74 $102 
Accrued capital expenditures  64  73 
Accrued expenses:       
Interest  394  329 
Programming costs  297  272 
Franchise-related fees  55  67 
Compensation  64  60 
Other  181  193 
        
  $1,129 $1,096 
In March 2007, Charter Operating entered into the Charter Operating Credit Agreement which provides for a $1.5 billion senior secured revolving line of credit, a continuation of the existing $5.0 billion term loan facility (the “Existing Term Loan”), and a $1.5 billion new term loan facility (the “New Term Loan”), which was funded in March and April 2007. Borrowings under the Charter Operating Credit Agreement bear interest at a variable interest rate based on either LIBOR or a base rate, plus in either case, an applicable margin. The applicable margin for LIBOR loans under the New Term Loan and revolving loans is 2.00% above LIBOR. The revolving line of credit commitments terminate in March 2013. The Existing Term Loan and the New Term Loan are subject to amortization at 1% of their initial principal amount per annum. The New Term Loan amortization commences on March 31, 2008. The remaining principal amount of the New Term Loan will be due in March 2014.

The terms of the Existing Term Loan were amended in March 2007. The refinancing of the $5.0 billion Existing Term Loan with new term loans was permitted under the Charter Operating Credit Agreement and occurred in April 2007, with pricing (LIBOR plus 2.00%) and amortization profile of such term loan matching the New Term Loan described above. The Charter Operating Credit Agreement also modified the quarterly consolidated leverage ratio to be less restrictive.

In March 2007, CCO Holdings entered into a credit agreement (the “CCO Holdings Credit Agreement”) which consisted of a $350 million term loan facility (the “Term Facility”). The Term Facility matures in September 2014 (the “Maturity Date”). The CCO Holdings Credit Agreement also provides for additional incremental term loans (the “Incremental Loans”) maturing on the dates set forth in the notices establishing such term loans, but no earlier than the Maturity Date. Borrowings under the CCO Holdings Credit Agreement bear interest at a variable interest rate based on either LIBOR or a base rate plus, in either case, an applicable margin. The applicable margin for LIBOR term loans, other than Incremental Loans, is 2.50% above LIBOR. The applicable margin with respect to Incremental Loans is to be agreed upon by CCO Holdings and the lenders when the Incremental Loans are established. The CCO Holdings Credit Agreement is secured by the equity interests of Charter Operating, and all proceeds thereof.

As part of the refinancing, the existing $350 million revolving/term credit facility was terminated. A $1 million loss was recognized related to the write-off of unamortized deferred debt financing costs related to this facility.

Prior to March 31, 2007, $110 million was transferred to the trustee for use to pay off the remaining principal and interest of the Charter Holdings 8.250% senior notes due April 1, 2007. Such amount was not funded to bond holders
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 consistsuntil April 2, 2007. The cash held by the trustee was reflected as restricted cash at March 31, 2007. In April 2007, Charter Holdings completed a tender offer, in which $97.0 million of the following as of June 30, 2006 and December 31, 2005:

  
June 30, 2006
 
December 31, 2005
 
  
Principal Amount
 
Accreted Value
 
Principal Amount
 
Accreted Value
 
Long-Term Debt
             
Charter Communications Holdings, LLC:             
8.250% senior notes due 2007 $105 $105 $105 $105 
8.625% senior notes due 2009  292  292  292  292 
9.920% senior discount notes due 2011  198  198  198  198 
10.000% senior notes due 2009  154  154  154  154 
10.250% senior notes due 2010  49  49  49  49 
11.750% senior discount notes due 2010  43  43  43  43 
10.750% senior notes due 2009  131  131  131  131 
11.125% senior notes due 2011  217  217  217  217 
13.500% senior discount notes due 2011  94  94  94  94 
9.625% senior notes due 2009  107  107  107  107 
10.000% senior notes due 2011  137  136  137  136 
11.750% senior discount notes due 2011  125  125  125  120 
12.125% senior discount notes due 2012  113  106  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  203  217  192 
CCH I, LLC:             
11.000% senior notes due 2015  3,525  3,678  3,525  3,683 
CCH II, LLC:             
10.250% senior notes due 2010  2,051  2,042  1,601  1,601 
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% 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  5,800  5,800  5,731  5,731 
  $18,895 $19,012 $18,453 $18,525 

The accreted values presented above generally represent the principal amount of theCharter Holdings’ notes less the original issue discount at the time of sale plus the accretion to the balance sheet date except as follows. The accreted value of the CIH notes issuedwere accepted in exchange for $100 million of total consideration, including premiums and accrued interest. In addition, Charter Holdings notes and the portionredeemed $187 million of the CCH I notes issued in 2005 in exchange for theits 8.625% Charter Holdingssenior notes due April 1, 2009 are recorded at the historical book values of the Charterand CCO Holdings notes for financial reporting purposes as opposed to 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 June 30, 2006,
13

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
the accreted value of the Company’s debt for legal purposes and notes indenture purposes is approximately $18.6 billion.

In January 2006, CCH II and CCH II Capital Corp. issued $450redeemed $550 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 discountfloating rate notes due 2008 for $37 million principal amount of new Charter Operating 8 3/8% senior second-lien notes due 2014 issuedDecember 15, 2010. These redemptions closed in a private transaction under Rule 144A. 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.April 2007.

Gain (loss) on extinguishment of debt7.

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. The refinancing resulted in a loss on extinguishment of debt for the three and six months ended June 30, 2006 of approximately $27 million included in other income (expenses), net on the Company’s condensed consolidated statements of operations.

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 loss on extinguishment of debt of approximately $1 million for the three months ended June 30, 2005 and a gain on extinguishment of debt of approximately $10 million for the six months ended June 30, 2005 included in other income (expenses), net on the Company’s condensed consolidated statements of operations. The Charter Holdings notes received in the exchange were thereafter distributed to Charter Holdings and cancelled.

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 six months ended June 30, 2005 of approximately $5 million included in other income (expenses), net on the Company’s condensed consolidated statements of operations. Following such redemption, CC V Holdings, LLC and its subsidiaries (other than non-guarantor subsidiaries) became guarantors under the Charter Operating credit facilities and granted a lien on their assets to the same extent as granted by the other guarantors under the credit facility.
Minority Interest

Minority interest on the Company’s condensed consolidated balance sheets as of June 30, 2006at March 31, 2007 and December 31, 20052006 primarily represents preferred membership interests in CC VIII, LLC ("CC VIII"), an indirect subsidiary of Charter Holdings, of $631$194 million and $622$192 million, respectively. As more fully described in Note 18, thisThis preferred interest is held by Mr. Allen, Charter’s Chairman and controlling shareholder, and CCHC. Minority interest in the accompanying condensed consolidated statements of operations includes the 2% accretion of the preferred membership interests plus approximately 18.6%shareholder. Approximately 5.6% of CC VIII’s income net of accretion.is allocated to minority interest.
 
14

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES8.     Comprehensive Loss
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)

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, theThe 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.income (loss). Comprehensive loss was $307 million and $436 million for the three months ended June 30,March 31, 2007 and 2006, and 2005 was $314 million and $308 million, respectively, and $754 million and $647 million for the six months ended June 30, 2006 and 2005, respectively.

9.
9.     Accounting for Derivative Instruments and Hedging Activities

The Company uses interest rate risk management derivative instruments, such asincluding but not limited to 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 its exposure to fluctuations in interest costs usingrates by maintaining a mix of fixed and variable rate debt.debt within a targeted range. Using interest rate swap agreements, the Company has agreed to exchange, at specified intervals through 2007,2013, 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.amounts.

The CompanyCompany’s hedging policy does not permit it to 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 each of the three months ended June 30,March 31, 2007 and 2006, and 2005, other income (expense), net includes $0 and gains of $0, and for the six months ended June 30, 2006 and 2005, other income includes gains of $2 million and $1 million, respectively, which represent cash flow hedge ineffectiveness on interest rate hedge agreements arisingagreements. This ineffectiveness arises 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-ratefloating rate debt obligations that meet the effectiveness criteria of SFAS No. 133 are reported in accumulated other comprehensive loss.income (loss). For the three months ended June 30,March 31, 2007 and 2006, and 2005, a gainlosses of $1$2 million and $0, respectively, and for the six months ended June 30, 2006 and 2005, a gain of $0 and $9$1 million, respectively, related to derivative instruments designated as cash flow hedges, waswere recorded in accumulated other comprehensive loss.income (loss). The amounts are subsequently reclassified into interest expense as a yield adjustment in the same periodperiods 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 (expense) in the Company’s condensed consolidated statements of operations. For the three months ended June 30,March 31, 2007 and 2006, and 2005, other income (expense), net, includes gains of $3 million and losses of $1 million respectively, and for the six months ended June 30, 2006 and 2005, other income includes gains of $9 million and $25$6 million, respectively, forresulting from interest rate derivative instruments not designated as hedges.

13

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
As of June 30, 2006March 31, 2007 and December 31, 2005,2006, the Company had outstanding $1.8$3.4 billion and $1.8$1.7 billion, and $20 million and $20 million, respectively, in notional amounts of interest rate swaps and collars, respectively.swaps. 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 SUBSIDIARIES10.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSOther Operating Expenses, Net
(UNAUDITED)
(dollars in millions, except where indicated)


10.
Revenues
Revenues consist of the following for the three and six months ended June 30, 2006 and 2005:

  
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
  
2006
 
2005
 
2006
 
2005
 
          
Video $853 $821 $1,684 $1,623 
High-speed Internet  261  218  506  425 
Telephone  29  8  49  14 
Advertising sales  79  73  147  135 
Commercial  76  66  149  128 
Other  85  80  168  156 
              
  $1,383 $1,266 $2,703 $2,481 

11.
Operating Expenses

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

  
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
  
2006
 
2005
 
2006
 
2005
 
          
Programming $379 $336 $755 $678 
Service  205  186  408  356 
Advertising sales  27  24  52  47 
              
  $611 $546 $1,215 $1,081 

12.
Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of the following for the three and six months ended June 30, 2006 and 2005:

  
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
  
2006
 
2005
 
2006
 
2005
 
          
General and administrative $236 $220 $471 $418 
Marketing  43  30  80  65 
              
  $279 $250 $551 $483 

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 (Income) Expenses, Net
Other operating (income) expenses, net consist of the following for the three and six months ended June 30, 2006March 31, 2007 and 2005:2006:

 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
  
Three Months
Ended March 31,
 
 
2006
 
2005
 
2006
 
2005
  
2007
 
2006
 
              
Loss on sale of assets, net $-- $-- $-- $4  $3 $-- 
Special charges, net  7  (2) 10  2   1  3 
                    
 $7 $(2)$10 $6  $4 $3 

Special charges, net for the three and six months ended June 30,March 31, 2007 and 2006 primarily represent severance associated with the closing of call centers and divisional restructuring. Special charges for the six months ended June 30, 2005 primarily represent severance costs as a result of reducing workforce, consolidating administrative offices and executive severance.

For the three and six months ended June 30, 2005, special charges 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.11.     Other Income (Expense), Net

14.
Other Income (Expenses), Net

Other income (expenses)(expense), net consists of the following for the three and six months ended June 30, 2006March 31, 2007 and 2005:2006:

 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
  
Three Months
Ended March 31,
 
 
2006
 
2005
 
2006
 
2005
  
2007
 
2006
 
              
Gain (loss) on derivative instruments and
hedging activities, net
 $3 $(1)$11 $26  $(1)$8 
Gain (loss) on extinguishment of debt  (27) (2) (27) 4 
Loss on extinguishment of debt  (1) -- 
Minority interest  (6) (3) (10) (6)  (2) -- 
Gain on investments  5  20  4  21 
Loss on investments  --  (1)
Other, net  (1) --  3  --   --  3 
                    
 $(26)$14 $(19)$45  $(4)$10 

Gain on investments for the three and six months ended June 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.

12.     Income Taxes
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 March 31, 2007 and December 31, 2006, the Company had net deferred income tax liabilities of approximately $200 million. The deferred tax liabilities relate to certain of the Company’s indirect subsidiaries, which file separate income tax returns.
 
1714

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

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

During the three and six months ended June 30,March 31, 2007 and 2006, the Company recorded $2 million and $4 million of income tax expense, respectively, and during the three and six months ended June 30, 2005, the Company recorded $2 million and $8 million of income tax expense, respectively.  The incomeexpense. 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, 20022003 and 2003.2002. 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)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.

13.    Contingencies
 
16.
Contingencies
The Company and its parents are defendants or co-defendants 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 aand its parents are party to other lawsuits and claims that arise in the ordinary course of conducting its business. The ultimate outcome of all 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.
14.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 the 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 During the three months ended June 30, 2006 and 2005, respectively: risk-free interest rates of 5.0% and 3.8%; expected volatility of 91.0% and 70.1%; and expected lives of 6.25 years and 4.5 years, respectively. The following weighted average assumptions were used for grants during the six months ended June 30, 2006 and 2005, respectively: risk-free interest rates of 4.6% and 3.8%; expected volatility of 91.6% and 71.3%; and expected lives of 6.25 years and 4.5 years, respectively. The valuations assume no dividends are paid. During the three and six months ended June 30, 2006,March 31, 2007, Charter granted 0.1 million and 4.93.8 million stock options respectively, with a weighted average exercise price of $1.02 and $1.07, respectively. As of June 30, 2006, Charter had 28.66.7 million and 10.7 million options outstanding and exercisable, respectively, with weighted average exercise prices of $3.97 and $7.27, 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.performance units under Charter’s Long-Term Incentive Program. The Company recorded $3$5 million and $4 million of optionstock compensation expense which is included in selling, general, and administrative expense for the three months ended March 31, 2007 and 2006, respectively.

15.    Consolidating Schedules

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Affiliates Whose Securities Collateralize an Issue Registered or Being Registered. This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.
 
1815

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
 
is included in general and administrative expense for the three months ended June 30, 2006 and 2005, respectively, and $7 million and $8 million for the six months ended June 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 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 six months ended June 30, 2006, Charter granted an additional 8.0 million performance shares under the LTIP. The impacts of such grant and the modification of the 2005 awards was $1 million for the six months ended June 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 acquisitionSeptember 2006 exchange of the cable systems owned by Bresnan Communications Company Limited PartnershipCharter Holdings notes for CCH I notes, CCHC contributed its 70% interest in February 2000, CC VIII, LLC, Charter Holdings’ indirect limited liability company subsidiary, issued, after adjustments, 24,273,943the Class A preferred membership units (collectively, the "CC VIII interest") with an initial value and an initial capital accountequity interests 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 holderto CCH I. The contribution of the CC VIII interest indirectly through an affiliate. In the event ofwas accounted for as 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, LLCtransaction among entities under common control, 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 directorsaccordingly financial statements of Charter formed a Special Committee of independent directors to investigateHoldings reflect 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"contribution as if it had occurred in February 2000 in connection withon 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
19

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
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 termsdate of the settlement for no additional monetary consideration. Charter Holdco contributed the 62.6% interest to CCHC.

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.

Charter’s Board of Directors has determined that the transferred CC VIII interest will remain at CCHC for the present time, but there are currently no contractual or other obligations of CCHC that would prevent the contribution of those assets to a subsidiary of CCHC.

19.
Recently Issued Accounting Standards

In June 2006, the FASB issued 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. 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 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 new notes are unsecured obligations of CIH and CCH I, 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 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.Paul Allen.

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 March 31, 2007 and December 31, 2006 and for the quarters ended March 31, 2007 and 2006 follow.

16

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 March 31, 2007
 
                
  
Charter Holdings
 
CIH
 
CCH I
 
CCH II
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
                
ASSETS
               
                
CURRENT ASSETS:               
Cash and cash equivalents $111 $3 $3 $4 $63 $-- $184 
Accounts receivable, net  --  --  --  --  156  --  156 
Receivables from related party  22  --  --  --  --  (22) -- 
Prepaid expenses and other current assets  --  --  --  --  25  --  25 
Total current assets  133  3  3  4  244  (22) 365 
                       
INVESTMENT IN CABLE PROPERTIES:                      
Property, plant and equipment, net  --  --  --  --  5,143  --  5,143 
Franchises, net  --  --  --  --  9,218  --  9,218 
Total investment in cable properties, net  --  --  --  --  14,361  --  14,361 
                       
INVESTMENT IN SUBSIDIARIES  --  --  1,280  3,521  --  (4,801) -- 
                       
OTHER NONCURRENT ASSETS  5  19  47  24  193  --  288 
                       
Total assets $138 $22 $1,330 $3,549 $14,798 $(4,823)$15,014 
                       
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
                      
                       
CURRENT LIABILITIES:                      
Accounts payable and accrued expenses $39 $96 $219 $23 $969 $-- $1,346 
Payables to related party  --  2  5  4  131  (22) 120 
Total current liabilities  39  98  224  27  1,100  (22) 1,466 
                       
LONG-TERM DEBT  967  2,534  4,089  2,451  8,825  --  18,866 
LOANS PAYABLE (RECEIVABLE) - RELATED PARTY  (113) --  --  (209) 326  --  4 
DEFERRED MANAGEMENT FEES - RELATED PARTY  --  --  --  --  14  --  14 
OTHER LONG-TERM LIABILITIES  --  --  --  --  366  --  366 
MINORITY INTEREST  --  --  (452) --  646  --  194 
LOSSES IN EXCESS OF INVESTMENT  5,141  2,531  --  --  --  (7,672) -- 
MEMBER’S EQUITY (DEFICIT)  (5,896) (5,141) (2,531) 1,280  3,521  2,871  (5,896)
                       
Total liabilities and member’s equity (deficit) $138 $22 $1,330 $3,549 $14,798 $(4,823)$15,014 


17

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, 2006
 
                
  
Charter Holdings
 
CIH
 
CCH I
 
CCH II
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
                
ASSETS
               
                
CURRENT ASSETS:               
Cash and cash equivalents $-- $3 $3 $4 $28 $-- $38 
Accounts receivable, net  --  --  --  --  194  --  194 
Receivables from related party  28  --  --  8  --  (36) -- 
Prepaid expenses and other current assets  --  --  --  --  23  --  23 
Total current assets  28  3  3  12  245  (36) 255 
                       
INVESTMENT IN CABLE PROPERTIES:                      
Property, plant and equipment, net  --  --  --  --  5,181  --  5,181 
Franchises, net  --  --  --  --  9,223  --  9,223 
Total investment in cable properties, net  --  --  --  --  14,404  --  14,404 
                       
INVESTMENT IN SUBSIDIARIES  --  --  1,553  3,847  --  (5,400) -- 
                       
OTHER NONCURRENT ASSETS  6  20  48  25  176  --  275 
                       
Total assets $34 $23 $1,604 $3,884 $14,825 $(5,436)$14,934 
                       
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
                      
                       
CURRENT LIABILITIES:                      
Accounts payable and accrued expenses $25 $71 $110 $74 $901 $-- $1,181 
Payables to related party  --  3  4  --  147  (36) 118 
Total current liabilities  25  74  114  74  1,048  (36) 1,299 
                       
LONG-TERM DEBT  967  2,533  4,092  2,452  8,610  --  18,654 
LOANS PAYABLE (RECEIVABLE) - RELATED PARTY  (105) --  --  (195) 303  --  3 
DEFERRED MANAGEMENT FEES - RELATED PARTY  --  --  --  --  14  --  14 
OTHER LONG-TERM LIABILITIES  --  --  --  --  362  --  362 
MINORITY INTEREST  --  --  (449) --  641  --  192 
LOSSES IN EXCESS OF INVESTMENT  4,737  2,153  --  --  --  (6,890) -- 
MEMBER’S EQUITY (DEFICIT)  (5,590) (4,737) (2,153) 1,553  3,847  1,490  (5,590)
                       
Total liabilities and member’s equity (deficit) $34 $23 $1,604 $3,884 $14,825 $(5,436)$14,934 


18

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 three months ended March 31, 2007
 
                
  
Charter Holdings
 
CIH
 
CCH I
 
CCH II
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
                
REVENUES 
$
--
 
$
--
 
$
--
 
$
--
 $1,425 $-- $1,425 
                       
COSTS AND EXPENSES:                      
Operating (excluding depreciation and amortization)  
--
  
--
  
--
  
--
  
631
  --  631 
Selling, general and administrative  
--
  
--
  
--
  
--
  
303
  --  303 
Depreciation and amortization  
--
  
--
  
--
  
--
  
331
  --  331 
Other operating expenses, net  
--
  
--
  
--
  
--
  
4
  --  4 
                       
    --  
--
  
--
  
--
  
1,269
  --  1,269 
                       
Income from operations  
--
  
--
  
--
  
--
  
156
  --  156 
                       
OTHER INCOME AND (EXPENSES):                      
Interest expense, net  
(22
)
 
(74
)
 
(108
)
 
(60
)
 
(190
)
 --  (454)
Other income (expense), net  
--
  
--
  
3
  
--
  
(7
)
 --  (4)
Equity in losses of subsidiaries  (282) 
(208
)
 
(103
)
 
(43
)
 
--
  636  -- 
                       
   (304) (282) 
(208
)
 
(103
)
 
(197
)
 636  (458)
                       
Loss from continuing operations before income taxes  
(304
)
 
(282
)
 
(208
)
 
(103
)
 
(41
)
 636  (302)
                       
INCOME TAX EXPENSE  
--
  
--
  
--
  
--
  
(2
)
 --  (2)
                       
Net loss 
$
(304
)
$
(282
)
$
(208
)
$
(103
)
$
(43
)
$636 $(304)


19

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 three months ended March 31, 2006
 
                
  
Charter Holdings
 
CIH
 
CCH I
 
CCH II
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
                
REVENUES 
$
--
 
$
--
 
$
--
 
$
--
 $1,320 $-- $1,320 
                       
COSTS AND EXPENSES:                      
Operating (excluding depreciation and amortization)  
--
  
--
  
--
  
--
  
604
  --  604 
Selling, general and administrative  
--
  
--
  
--
  
--
  
272
  --  272 
Depreciation and amortization  
--
  
--
  
--
  
--
  
350
  --  350 
Asset impairment charges  
--
  
--
  
--
  
--
  
99
  --  99 
Other operating expenses, net  
--
  
--
  
--
  
--
  
3
  --  3 
                       
   
--
  
--
  
--
  
--
  
1,328
  --  1,328 
                       
Income from operations  
--
  
--
  
--
  
--
  
(8
)
 --  (8)
                       
OTHER INCOME AND (EXPENSES):                      
Interest expense, net  
(45
)
 
(71
)
 
(95
)
 
(47
)
 
(192
)
 --  (450)
Other income, net  
--
  
--
  
4
  
--
  
6
  --  10 
Equity in losses of subsidiaries  (390) 
(319
)
 
(228
)
 
(181
)
 
--
  1,118  -- 
                       
   (435) (390) 
(319
)
 
(228
)
 
(186
)
 1,118  (440)
                       
Loss from continuing operations before income taxes  (435) (390) 
(319
)
 
(228
)
 
(194
)
 1,118  (448)
                       
INCOME TAX EXPENSE  
--
  
--
  
--
  
--
  
(2
)
 --  (2)
                       
Loss from continuing operations  (435) (390) 
(319
)
 
(228
)
 
(196
)
 1,118  (450)
                       
INCOME FROM DISCONTINUED
OPERATIONS, NET OF TAX
  
--
  
--
  
--
  
--
  
15
  --  15 
                       
Net loss 
$
(435
)
$(390)
$
(319
)
$
(228
)
$(181)$1,118 $(435)


20

CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except where indicated)
CCH I as if the respective entities existed for all periods presented. Condensed consolidating financial statements as of June 30, 2006 and December 31, 2005 and for the six months ended June 30, 2006 and 2005 follow.


Charter Holdings
 
Condensed Consolidating Balance Sheet
 
As of June 30, 2006
 
              
  
Charter Holdings
 
CIH
 
CCH I
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
              
ASSETS
             
              
CURRENT ASSETS:                   
Cash and cash equivalents $-- $2 $2 $44 $-- $48 
Accounts receivable, net  --  --  --  178  --  178 
Receivables from related party  128  --  --  --  (128) -- 
Prepaid expenses and other current assets  --  --  --  20  --  20 
Assets held for sale  --  --  --  768  --  768 
Total current assets  128  2  2  1,010  (128) 1,014 
                    
INVESTMENT IN CABLE PROPERTIES:                   
Property, plant and equipment, net  --  --  --  5,354  --  5,354 
Franchises, net  --  --  --  9,280  --  9,280 
Total investment in cable properties, net  --  --  --  14,634  --  14,634 
                    
INVESTMENT IN SUBSIDIARIES  --  --  2,648  --  (2,648) -- 
                    
OTHER NONCURRENT ASSETS  13  21  43  217  --  294 
                    
Total assets $141 $23 $2,693 $15,861 $(2,776)$15,942 
                    
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
                   
                    
CURRENT LIABILITIES:                   
Accounts payable and accrued expenses $46 $69 $97 $917 $-- $1,129 
Payables to related party  --  2  4  106  (22) 90 
Liabilities held for sale  --  --  --  20  --  20 
Total current liabilities  46  71  101  1,043  (22) 1,239 
                    
LONG-TERM DEBT  1,757  2,520  3,678  11,057  --  19,012 
LOANS PAYABLE - RELATED PARTY  --  --  --  109  (106) 3 
DEFERRED MANAGEMENT FEES - RELATED PARTY  --  --  --  14  --  14 
OTHER LONG-TERM LIABILITIES  --  --  --  359  --  359 
LOSSES IN EXCESS OF INVESTMENT  3,654  1,086  --  --  (4,740) -- 
MINORITY INTEREST  --  --  --  631  --  631 
                    
MEMBER’S EQUITY (DEFICIT):                   
Member’s equity (deficit)  (5,316) (3,654) (1,086) 2,646  2,092  (5,318)
Accumulated other comprehensive income  --  --  --  2  --  2 
                    
Total member’s equity (deficit)  (5,316) (3,654) (1,086) 2,648  2,092  (5,316)
                    
Total liabilities and member’s equity (deficit) $141 $23 $2,693 $15,861 $(2,776)$15,942 
Charter Holdings
 
Condensed Consolidating Statement of Cash Flows
 
For the three months ended March 31, 2007
 
                
  
Charter Holdings
 
CIH
 
CCH I
 
CCH II
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
                
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss 
$
(304
)
$(282)$(208)$(103)$(43)$636 $(304)
Adjustments to reconcile net loss to net cash flows from operating activities:                      
Depreciation and amortization  --  --  --  --  331  --  331 
Noncash interest expense  1  1  (1) 2  4  --  7 
Equity in losses of subsidiaries  282  208  103  43  --  (636) -- 
Other, net  2  --  (4) (1) 16  --  13 
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:                      
Accounts receivable  --  --  --  --  38  --  38 
Prepaid expenses and other assets  --  --  --  --  (4) --  (4)
Accounts payable, accrued expenses and other  12  25  110  (50) 92  --  189 
Receivables from and payables to related party, including deferred
management fees
  (2) --  --  (4) 2  --  (4)
                       
Net cash flows from operating activities  (9) (48) --  (113) 436  --  266 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:                      
Purchases of property, plant and equipment  --  --  --  --  (298) --  (298)
Change in accrued expenses related to capital expenditures  --  --  --  --  (32) --  (32)
Other, net  --  --  --  --  9  --  9 
                       
Net cash flows from investing activities  --  --  --  --  (321) --  (321)
                       
CASH FLOWS FROM FINANCING ACTIVITIES:                      
Borrowings of long-term debt  --  --  --  --  911  --  911 
Repayments of long-term debt  --  --  --  --  (691) --  (691)
Payments for debt issuance costs  --  --  --  --  (20) --  (20)
Net contributions (distributions)  120  48  --  113  (280) --  1 
                       
Net cash flows from financing activities  120  48  --  113  (80) --  201 
                       
NET INCREASE IN CASH AND CASH EQUIVALENTS  111  --  --  --  35  --  146 
CASH AND CASH EQUIVALENTS, beginning of period  --  3  3  4  28  --  38 
                       
CASH AND CASH EQUIVALENTS, end of period $111 $3 $3 $4 $63 $-- $184 


21

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
 
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  --  --  3,402  --  (3,402) -- 
                    
OTHER NONCURRENT ASSETS  14  21  45  238  --  318 
                    
Total assets $38 $24 $3,455 $16,101 $(3,426)$16,192 
                    
LIABILITIES AND MEMBER’S EQUITY (DEFICIT)
                   
                    
CURRENT LIABILITIES:                   
Accounts payable and accrued expenses $42 $24 $107 $923 $-- $1,096 
Payables to related party  --  2  3  102  (24) 83 
Total current liabilities  42  26  110  1,025  (24) 1,179 
                    
LONG-TERM DEBT  1,746  2,472  3,683  10,624  --  18,525 
LOANS PAYABLE - RELATED PARTY  --  --  --  22  --  22 
DEFERRED MANAGEMENT FEES - RELATED PARTY  --  --  --  14  --  14 
OTHER LONG-TERM LIABILITIES  --  --  --  392  --  392 
LOSSES IN EXCESS OF INVESTMENT  2,812  338  --  --  (3,150) -- 
MINORITY INTEREST  --  --  --  622  --  622 
                    
MEMBER’S EQUITY (DEFICIT):                   
Member’s equity (deficit)  (4,562) (2,812) (338) 3,400  (252) (4,564)
Accumulated other comprehensive income  --  --  --  2  --  2 
                    
Total member’s equity (deficit)  (4,562) (2,812) (338) 3,402  (252) (4,562)
                    
Total liabilities and member’s equity (deficit) $38 $24 $3,455 $16,101 $(3,426)$16,192 
Charter Holdings
 
Condensed Consolidating Statement of Cash Flows
 
For the three months ended March 31, 2006
 
                
  
Charter Holdings
 
CIH
 
CCH I
 
CCH II
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
                
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss 
$
(435
)
$(390)$(319)$(228)$(181)$1,118 $(435)
Adjustments to reconcile net loss to net cash flows from operating activities:                      
Depreciation and amortization  --  --  --  --  358  --  358 
Asset impairment charges  --  --  --  --  99  --  99 
Noncash interest expense  7  32  (2) 1  8  --  46 
Equity in losses of subsidiaries  390  319  228  181  --  (1,118) -- 
Other, net  --  --  (4) --  (2) --  (6)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:                      
Accounts receivable  --  --  --  --  60  --  60 
Prepaid expenses and other assets  --  --  --  1  (3) --  (2)
Accounts payable, accrued expenses and other  19  38  82  (41) (11) --  87 
Receivables from and payables to related party, including deferred
management fees
  1  --  --  2  (5) --  (2)
                       
Net cash flows from operating activities  (18) (1) (15) (84) 323  --  205 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of property, plant and equipment  --  --  --  --  (241) --  (241)
Change in accrued expenses related to capital expenditures  --  --  --  --  (7) --  (7)
Purchase of cable system  --  --  --  --  (42) --  (42)
Other, net  --  --  --  --  14  --  14 
                       
Net cash flows from investing activities  --  --  --  --  (276) --  (276)
                  
CASH FLOWS FROM FINANCING ACTIVITIES:                      
Borrowings of long-term debt  --  --  --  --  415  --  415 
Borrowings (loans) from related parties  --  --  --  (300) 300  --  -- 
Repayments of long-term debt  --  --  --  --  (759) --  (759)
Proceeds from issuance of debt  --  --  --  440  --  --  440 
Payments for debt issuance costs  --  --  --  (10) --  --  (10)
Net contributions (distributions)  18  --  8  (44) 18  --  -- 
                      
Net cash flows from financing activities  18  --  8  86  (26) --  86 
                  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  --  (1) (7) 2  21  --  15 
CASH AND CASH EQUIVALENTS, beginning of period  --  3  8  --  3  --  14 
                       
CASH AND CASH EQUIVALENTS, end of period $-- $2 $1 $2 $24 $-- $29 


22

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 six months ended June 30, 2006
 
              
  
Charter Holdings
 
CIH
 
CCH I
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
              
REVENUES $-- $-- $-- $2,703 $-- $2,703 
                    
COSTS AND EXPENSES:                   
Operating (excluding depreciation and amortization)  --  --  --  1,215  --  1,215 
Selling, general and administrative  --  --  --  551  --  551 
Depreciation and amortization  --  --  --  690  --  690 
Asset impairment charges  --  --  --  99  --  99 
Other operating expenses, net  --  --  --  10  --  10 
                    
   --  --  --  2,565  --  2,565 
                    
Operating income from continuing operations  --  --  --  138  --  138 
                    
OTHER INCOME AND (EXPENSES):                   
Interest expense, net  (88) (141) (190) (488) --  (907)
Other expense, net  --  --  --  (19) --  (19)
Equity in losses of subsidiaries  (666) (525) (335) --  1,526  -- 
                    
   (754) (666) (525) (507) 1,526  (926)
                    
Loss from continuing operations before income taxes  (754) (666) (525) (369) 1,526  (788)
                    
INCOME TAX EXPENSE  --  --  --  (4) --  (4)
                    
Loss from continuing operations  (754) (666) (525) (373) 1,526  (792)
                    
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX
  --  --  --  38  --  38 
                    
Net loss $(754)$(666)$(525)$(335)$1,526 $(754)



23

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 six months ended June 30, 2005
 
              
  
Charter Holdings
 
CIH
 
CCH I
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
              
REVENUES $-- $-- $-- $2,481 $-- $2,481 
                    
COSTS AND EXPENSES:                   
Operating (excluding depreciation and amortization)  --  --  --  1,081  --  1,081 
Selling, general and administrative  --  --  --  483  --  483 
Depreciation and amortization  --  --  --  730  --  730 
Asset impairment charges  --  --  --  39  --  39 
Other operating expenses, net  --  --  --  6  --  6 
                    
   --  --  --  2,339  --  2,339 
                    
Operating income from continuing operations  --  --  --  142  --  142 
                    
OTHER INCOME AND (EXPENSES):                   
Interest expense, net  (447) --  --  (408) --  (855)
Other income, net  10  --  --  35  --  45 
Equity in losses of subsidiaries  (220) (220) (220) --  660  -- 
                    
   (657) (220) (220) (373) 660  (810)
                    
Loss from continuing operations before income taxes  (657) (220) (220) (231) 660  (668)
                    
INCOME TAX EXPENSE  --  --  --  (8) --  (8)
                    
Loss from continuing operations  (657) (220) (220) (239) 660  (676)
                    
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX
  --  --  --  19  --  19 
                   
Net loss $(657)$(220)$(220)$(220)$660 $(657)
 



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 Cash Flows
 
For the six months ended June 30, 2006
 
              
  
Charter Holdings
 
CIH
 
CCH I
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
              
CASH FLOWS FROM OPERATING ACTIVITIES:                   
Net loss 
$
(754
)
$(666)$(525)$(335)$1,526 $(754)
Adjustments to reconcile net loss to net cash flows from operating activities:                   
Depreciation and amortization  --  --  --  698  --  698 
Asset impairment charges  --  --  --  99  --  99 
Noncash interest expense  12  49  (3) 16  --  74 
Equity in losses of subsidiaries  666  525  335  --  (1,526) -- 
Other, net  --  --  --  27  --  27 
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:                   
Accounts receivable  --  --  --  29  --  29 
Accounts payable, accrued expenses and other  4  44  (10) (10) --  28 
Receivables from and payables to related party, including deferred management fees  2  --  --  1  --  3 
                    
Net cash flows from operating activities  (70) (48) (203) 525  --  204 
                    
CASH FLOWS FROM INVESTING ACTIVITIES:                   
Purchases of property, plant and equipment  --  --  --  (539) --  (539)
Change in accrued expenses related to capital expenditures  --  --  --  (9) --  (9)
Proceeds from sale of assets  --  --  --  9  --  9 
Purchase of cable system  --  --  --  (42) --  (42)
Proceeds from investments  --  --  --  28  --  28 
                    
Net cash flows from investing activities  --  --  --  (553) --  (553)
                    
CASH FLOWS FROM FINANCING ACTIVITIES:                   
Borrowings of long-term debt  --  --  --  5,830  --  5,830 
Repayments of long-term debt  --  --  --  (5,838) --  (5,838)
Repayments to related parties  --  --  --  (20) --  (20)
Proceeds from issuance of debt  --  --  --  440  --  440 
Payments for debt issuance costs  --  --  --  (29) --  (29)
Distributions  70  47  197  (314) --  -- 
                    
Net cash flows from financing activities  70  47  197  69  --  383 
                    
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  --  (1) (6) 41  --  34 
CASH AND CASH EQUIVALENTS, beginning of period  --  3  8  3  --  14 
                    
CASH AND CASH EQUIVALENTS, end of period $-- $2 $2 $44 $-- $48 

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 Cash Flows
 
For the six months ended June 30, 2005
 
              
  
Charter Holdings
 
CIH
 
CCH I
 
All Other Subsidiaries
 
Eliminations
 
Charter Holdings Consolidated
 
              
CASH FLOWS FROM OPERATING ACTIVITIES:                   
Net loss 
$
(657
)
$(220)$(220)$(220)$660 $(657)
Adjustments to reconcile net loss to net cash flows from operating activities:                   
Depreciation and amortization  --  --  --  759  --  759 
Asset impairment charges  --  --  --  39  --  39 
Noncash interest expense  114  --  --  14  --  128 
Deferred income taxes  --  --  --  5  --  5 
Equity in losses of subsidiaries  220  220  220  --  (660) -- 
Other, net  (11) --  --  (31) --  (42)
Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:                   
Accounts receivable  10  --  --  (10) --  -- 
Prepaid expenses and other assets  --  --  --  (21) --  (21)
Accounts payable, accrued expenses and other  27  --  --  (46) --  (19)
Receivables from and payables to related party, including deferred management fees  (8) --  --  (20) --  (28)
                    
Net cash flows from operating activities  (305) --  --  469  --  164 
                    
CASH FLOWS FROM INVESTING ACTIVITIES:                   
Purchases of property, plant and equipment  --  --  --  (542) --  (542)
Change in accrued expenses related to capital expenditures  --  --  --  48  --  48 
Proceeds from sale of assets  --  --  --  8  --  8 
Proceeds from investments  --  --  --  16  --  16 
Other, net  --  --  --  (2) --  (2)
                    
Net cash flows from investing activities  --  --  --  (472) --  (472)
                    
CASH FLOWS FROM FINANCING ACTIVITIES:                   
Borrowings of long-term debt  --  --  --  635  --  635 
Borrowings from related parties  --  --  --  140  --  140 
Repayments of long-term debt  --  --  --  (819) --  (819)
Repayments to parent companies  --  --  --  (107) --  (107)
Payments for debt issuance costs  --  --  --  (3) --  (3)
Distributions  307  --  --  (367) --  (60)
                    
Net cash flows from financing activities  307  --  --  (521) --  (214)
                    
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  2  --  --  (524) --  (522)
CASH AND CASH EQUIVALENTS, beginning of period  --  --  --  546     546 
                    
CASH AND CASH EQUIVALENTS, end of period $2 $-- 
$
--
 $22 $-- $24 



26



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 June 30, 2006at March 31, 2007 are the equity interests in its operating subsidiaries. Charter Holdings is a subsidiary of CCHC, LLC ("CCHC"(“CCHC”), which is a subsidiary of Charter Communications Holding Company, LLC ("Charter Holdco"), which is a subsidiary of Charter Communications, Inc. ("Charter"(“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 residential and commercial customers traditional cable video programming (analog and digital video)video, which we refer to as well as“video service”), high-speed Internet services, and, in some areas, advanced broadband cable services such(such as Charter OnDemand™ video service (“OnDemand”), high definition television service, and digital video on demand,recorder (“DVR”) service) and, in many of our markets, telephone and interactive television.service. 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 June 30,March 31, 2007 and 2006:

  
Approximate as of
 
  
March 31,
 
March 31,
 
  
2007 (a)
 
2006 (a)
 
      
Video Cable Services:
     
Analog Video:
     
Residential (non-bulk) analog video customers (b)  5,146,700  5,640,200 
Multi-dwelling (bulk) and commercial unit customers (c)  268,700  273,700 
Total analog video customers (b)(c)  5,415,400  5,913,900 
        
Digital Video:
       
Digital video customers (d)  2,862,900  2,866,400 
        
Non-Video Cable Services:
       
Residential high-speed Internet customers (e)  2,525,900  2,322,400 
Residential telephone customers (f)  572,600  191,100 

After giving effect to sales of certain non-strategic cable systems in the third quarter of 2006 and 2005:in January 2007, analog video customers, digital video customers, high-speed Internet customers and telephone customers would have been 5,478,600, 2,683,500, 2,203,000 and 191,100, respectively, as of March 31, 2006.

  
Approximate as of
 
  
June 30,
 
June 30,
 
  
2006 (a)
 
2005 (a)
 
      
Cable Video Services:
       
Analog Video:
       
Residential (non-bulk) analog video customers (b)  5,600,300  5,683,400 
Multi-dwelling (bulk) and commercial unit customers (c)  275,800  259,700 
Total analog video customers (b)(c)  5,876,100  5,943,100 
        
Digital Video:
       
Digital video customers (d)  2,889,000  2,685,600 
        
Non-Video Cable Services:
       
Residential high-speed Internet customers (e)  2,375,100  2,022,200 
Residential telephone customers (f)  257,600  67,800 

 (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 June 30,March 31, 2007 and 2006, and 2005, "customers" include approximately 55,90031,700 and 45,10048,500 persons whose accounts were over 60 days past due in payment, approximately 14,3004,100 and 8,20011,900 persons whose accounts were over 90 days past due in payment, and approximately 8,9002,000 and 4,5007,800 of which were over 120 days past due in payment, respectively.

(b) (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 296,500 and 248,400 customers at June 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.services.

 (c)
Included within "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 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.used consistently.

2723

 
 (d)"Digital video customers" include all households that have one or more digital set-top terminals. Included in "digital video customers" on June 30, 2006 and 2005 are approximately 8,400 and 9,700 customers, respectively, that receive digital video service directly through satellite transmission.boxes or cable cards deployed.

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

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

Overview
For the three months ended March 31, 2007, our operating income from continuing operations was $156 million, and for the three months ended March 31, 2006, our operating loss from continuing operations was $8 million. We had an operating margin of Operations11% for the three months ended March 31, 2007 and a negative operating margin of 1% for the three months ended March 31, 2006. The increase in operating income from continuing operations and operating margins for the three months ended March 31, 2007 compared to the three months ended, March 31, 2006 was principally due to asset impairment charges during 2006, which did not recur in 2007, combined with revenues increasing at a faster rate than expenses, reflecting increased operational efficiencies, improved geographic footprint, and benefits from improved third party contracts. 

We have a history of net losses. Further, we 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 costsexpenses and interest costsexpenses 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 $754 million and $657 million for the six months ended June 30, 2006 and 2005, respectively.
For the three months ended June 30, 2006 and 2005, our operating income from continuing operations was $146 million and $100 million, respectively, and for the six months ended June 30, 2006 and 2005, our operating income from continuing operations was $138 million and $142 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 11% and 8% for the three months ended June 30, 2006 and 2005, respectively, and 5% and 6% for the six months ended June 30, 2006 and 2005, respectively. The increase in operating income from continuing operations and operating margins for the three months ended June 30, 2006 compared to 2005 was principally due to lower asset impairment charges and a decrease in depreciation and amortization expense. We incurred asset impairment charges of $8 million during the three months ended June 30, 2005 that did not recur during the three months ended June 30, 2006. Depreciation and amortization decreased during the three months ended June 30, 2006 compared to the corresponding prior period primarily as a result of assets becoming fully depreciated. 
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."significant.

Sale of Assets

In 2006, we signed three separate definitive agreements to sell certainsold 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 sixthree months ended June 30,March 31, 2006 of approximately $99 million related to the New Wave Transaction and the Orange Transaction. In the third quarter of 2006, we expect to record a gain of approximately $200 million on the Cebridge Transaction. In addition, assets and liabilities to be sold have been presented as held for sale. 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, themillion. The results of operations for the West Virginia and Virginia cable systems have been presented as discontinued operations, net of tax for the three and six months ended June 30, 2006 and all prior periods presented herein have been reclassified to conform to the current presentation.March 31, 2006.


28


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 20052006 Annual Report on Form 10-K.

24

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006March 31, 2007 Compared to Three Months Ended June 30, 2005March 31, 2006

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 June 30,
  
Three Months Ended March 31,
 
 
2006
 
2005
  
2007
 
2006
 
                  
Revenues $1,383  100%$1,266  100% $1,425  100%$1,320  100%
                          
Costs and expenses:                          
Operating (excluding depreciation and amortization)  611  44% 546  43%  631  44% 604  46%
Selling, general and administrative  279  20% 250  19%  303  21% 272  21%
Depreciation and amortization  340  25% 364  29%  331  24% 350  26%
Asset impairment charges  --  --  8  1%  --  --  99  8%
Other operating (income) expenses, net  7  --  (2) -- 
Other operating expenses, net  4  --  3  -- 
                          
  1,237  89% 1,166  92%  1,269  89% 1,328  101%
                          
Operating income from continuing operations  146  11% 100  8%
Operating income (loss) from continuing operations  156  11% (8) (1)%
                          
Interest expense, net  (456)    (431)     (454)    (450)   
Other income (expenses), net  (26)    14    
Other income (expense), net  (4)    10    
                          
  (482)    (417)     (458)    (440)   
                          
Loss from continuing operations before income taxes  (336)    (317)     (302)    (448)   
                          
Income tax expense  (2)    (2)     (2)    (2)   
                          
Loss from continuing operations  (338)    (319)     (304)    (450)   
                          
Income from discontinued operations, net of tax  23     10      --     15    
                          
Net loss $(315)   $(309)    $(304)   $(435)   

Revenues. The overall increase in revenues from continuing operations in 2006 compared to 2005 is principally the result of an increase from June 30, 2005 of 343,800 high-speed Internet customers, 194,300 digital video customers and 189,800 telephone customers, as well as price increases for video and high-speed Internet services, and is offset partially by a decrease of 41,400 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 $81.54$88 for the three months ended June 30, 2006March 31, 2007 from $74.07$78 for the three months ended June 30, 2005March 31, 2006 primarily as a result of incremental revenues from advancedOnDemand, DVR, and high-definition television services and price increases.rate adjustments. 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.


29


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

 
Three Months Ended June 30,
  
Three Months Ended March 31,
 
 
2006
 
2005
 
2006 over 2005
  
2007
 
2006
 
2007 over 2006
 
 
 
Revenues
 
% of
Revenues
 
 
Revenues
 
% of
Revenues
 
 
Change
 
% Change
  
 
Revenues
 
% of
Revenues
 
 
Revenues
 
% of
Revenues
 
 
Change
 
% Change
 
                          
Video $853 62%$821 65%
$
32
 4% $838 59%$831 63%
$
7
 1%
High-speed Internet  261 19% 218 17% 43 20%  296 21% 245 19% 51 21%
Telephone  29 2% 8 1% 21 263%  63 4% 20 1% 43 215%
Advertising sales  79 6% 73 6% 6 8%  63 4% 68 5% (5) (7%)
Commercial  76 5% 66 5% 10 15%  81 6% 73 6% 8 11%
Other  85  6% 80  6% 5  6%  84  6% 83  6% 1  1%
                                
 $1,383  100%$1,266  100%$117  9% $1,425  100%$1,320  100%$105  8%

25

Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers. Approximately $28 millionAnalog video customers decreased by 255,900 customers from March 31, 2006, 192,700 of thewhich was related to asset sales, compared to March 31, 2007, while digital video customers increased by 116,400, offset by a loss of 62,900 customers related to asset sales. The increase was the result of price increases and incrementalin video revenues is attributable to the following (dollars in millions):

  
2007 compared to 2006
Increase / (Decrease)
 
    
Rate adjustments and incremental video services $23 
Increase in digital video customers  16 
Decrease in analog video customers  (10)
System sales  (22)
     
  $7 

High-speed Internet customers grew by 285,600 customers, offset by a loss of 37,200 customers related to asset sales, from existing customers and approximately $14 million was the result of anMarch 31, 2006 to March 31, 2007. The increase in digital video customers. The increases were offset by decreases of approximately $10 million related to a decrease in analog video customers.

Approximately $37 million of the increase inhigh-speed Internet revenues from high-speed Internet services provided to our non-commercial customers relatedis attributable to the increasefollowing (dollars in the average number of customers receiving high-speed Internet services, whereas approximately $6 million related to the increase in average price of the service.millions):

  
2007 compared to 2006
Increase / (Decrease)
 
    
Increase in high-speed Internet customers $37 
Price increases  18 
System sales  (4)
     
  $51 

Revenues from telephone services increased primarily as a result of an increase of 189,800381,500 telephone customers in 2006.from March 31, 2006 to March 31, 2007.

Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors. Advertising sales revenues increaseddecreased primarily as a result of an increasea decrease in localnational advertising sales. For the three months ended June 30,March 31, 2007 and 2006, and 2005, we received $4 million and $3$6 million, respectively, in advertising sales revenues from programmers.

Commercial revenues consist primarily of revenues from cable 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.revenues offset by a decrease of $3 million related to asset sales.

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 June 30,March 31, 2007 and 2006, and 2005, franchise fees represented approximately 52%51% and 54%53%, respectively, of total other revenues. The increase in other revenues was primarily the result of an increaseincreases in franchise fees of $2 million, installation revenue of $2 million and wire maintenance fees of $2 million.fees.


3026


Operating Expensesexpenses. Programming costs represented 62% ofThe increase in operating expenses for each ofis attributable to the three months ended June 30, 2006 and 2005, respectively. Key expense components as a percentage of revenues were as followsfollowing (dollars in millions):

  
Three Months Ended June 30, 2006,
 
  
2006
 
2005
 
2006 over 2005
 
  
 
Expenses
 
% of
Revenues
 
 
Expenses
 
% of
Revenues
 
 
Change
 
% Change
 
              
Programming $379  27%$336  26%$43  13%
Service  205  15% 186  15% 19  10%
Advertising sales  27  2% 24  2% 3  13%
                    
  $611  44%
$
546
  43%$65  12%
  
2007 compared to 2006
Increase / (Decrease)
 
    
Programming costs $28 
Costs of providing high-speed Internet and telephone services  9 
Maintenance costs  4 
Advertising sales costs  2 
Other, net  1 
System sales  (18)
     
  $26 

Programming costs were approximately $393 million and $376 million, representing 62% of total operating expenses for the three months ended March 31, 2007 and 2006, respectively. Programming costs consist primarily of costs paid to programmers for analog, premium, digital, channels, VODOnDemand, and pay-per-view programming. The increase in programming costs wasis primarily a result of contractual rate increases and increases in digital customers.increases. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $4$5 million and $9 million for each of the three months ended June 30,March 31, 2007 and 2006, and 2005, respectively.

Our cable programming costs have increased in every year we have operated in excess of customary inflationary and cost-of-living increases. We expect themprogramming expenses to continue to increase due to a variety of factors, including annual increases imposed by programmers, and additional programming, including high-definition and OnDemand programming, being provided to customers as a result of system rebuilds and 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 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, franchise fees, system utilities, costs of providing high-speed Internet service and telephone service, maintenance and pole rent expense. The increase in service costs resulted primarily from increased costs of providing high-speed Internet and telephone service of $7 million, increased labor and maintenance costs to support improved service levels and our advanced products of $4 million, higher fuel and utility prices of $4 million and franchise fees of $2 million. 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 salary, benefit and commission costs.
Selling, Generalgeneral and Administrative Expenses.administrative expenses. Key components of expense as a percentage of revenues were as followsThe increase in selling, general and administrative expenses is attributable to the following (dollars in millions):

  
Three Months Ended June 30,
 
  
2006
 
2005
 
2006 over 2005
 
  
 
Expenses
 
% of
Revenues
 
 
Expenses
 
% of
Revenues
 
 
Change
 
 
% Change
 
              
General and administrative $236  17%
$
220
  17%$16  7%
Marketing  43  3% 30  2% 13  43%
                    
  $279  20%$250  19%$29  12%

General and administrative expenses consist primarily of salaries and benefits, rent expense, billing costs, customer care center costs, internal network costs, bad debt expense and property taxes. The increase in general and administrative expenses resulted primarily from a rise in salaries and benefits of $12 million, bad debt expense of $5

31

million, billing costs of $5 million, computer maintenance of $3 million and telephone expense of $2 million offset by decreases in consulting services of $8 million and property taxes of $1 million.

Marketing expenses increased as a result of increased spending in targeted marketing campaigns consistent with management’s strategy to increase revenues.
  
2007 compared to 2006
Increase / (Decrease)
 
    
Customer care costs $18 
Marketing costs  18 
Employee costs  7 
Professional service costs  (8)
Other, net  1 
System sales  (5)
     
  $31 

Depreciation and Amortization.amortization. Depreciation and amortization expense decreased by $24$19 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The decrease in depreciationand was primarily the result of systems sales and certain assets becoming fully depreciated.

Asset Impairment Charges.impairment charges. Asset impairment charges for the three months ended June 30, 2005March 31, 2006 represent the write-down of assets related to cable asset sales to fair value less costs to sell. See Note 3 to the accompanying condensed consolidated financial statements.statements contained in “Item 1. Financial Statements.”

Other Operating (Income) Expenses, Net.operating expenses, net. OtherThe increase in other operating expenses, increased $9 million from other operating income of $2 million fornet is attributable to the three months ended June 30, 2005following (dollars in millions):

  
2007 compared
to 2006
 
    
Increase in losses on sales of assets $3 
Decrease in special charges, net  (2)
     
  $1 
27

For more information, see Note 10 to other operating expense of $7 million for the three months ended June 30, 2006 as a result of a $9 million increaseaccompanying condensed consolidated financial statements contained in special charges primarily related to severance associated with closing call centers and divisional restructuring.“Item 1. Financial Statements.”

Interest Expense, Netexpense, net..Net interest expense increased by $25$4 million, or 6%, for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The increase in net interest expensewhich was a result of an increase in our average borrowing rate from 9.06% in the three months ended June 30, 2005 to 9.55% in the three months ended June 30, 2006 and an increase of $622 million in average debt outstanding from $18.3$18.6 billion for the three months ended June 30, 2005 comparedfirst quarter of 2006 to $18.9$18.8 billion for the three months ended June 30, 2006.first quarter of 2007. Our average borrowing rate decreased from 9.6% in the first quarter of 2006 to 9.5% in the first quarter of 2007.

Other Income (Expenses)income (expense), Net.net. OtherThe change in other income decreased from $14 million for the three months ended June 30, 2005 to other expense of $26 million for the three months ended June 30, 2006 primarily as a result of a $27 million loss on extinguishment of debt for the three months ended June 30, 2006 related(expense), net is attributable to the Charter Operating credit facility refinancingfollowing (dollars in April 2006. In addition,millions):

  
2007 compared
to 2006
 
    
Decrease in gain on derivative instruments and
hedging activities, net
 $(9)
Increase in loss on extinguishment of debt  (1)
Increase in minority interest  (2)
Decrease in loss on investments  1 
Other, net  (3)
     
  $(14)

For more information, see Note 11 to the three months ended June 30, 2005 included a $20 million gain on investments recognized as a result of a gain realized on an exchange of our interest in an equity investee for an investment in a larger enterprise which did not recur in 2006. See Note 6 to theaccompanying condensed consolidated financial statements. Other income also includes the 2% accretion of the preferred membership interestsstatements contained in our indirect subsidiary, CC VIII, and the pro rata share of the profits and losses of CC VIII.“Item 1. Financial Statements.”

Income Tax Expense. 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, Netfrom discontinued operations, net of Tax. tax. Income from discontinued operations, net of tax increased from $10 million fordecreased in the three months ended June 30, 2005first quarter of 2007 compared to $23 million for the three months ended June 30,first quarter of 2006 primarily due to a decrease in depreciation for the three months ended June 30, 2006 as we ceased recognizing depreciation onsale of the West Virginia and Virginia cable systems when we classified them as assets held for sale in July 2006. For more information, see Note 3 to the first quarter of 2006.accompanying condensed consolidated financial statements contained in “Item 1. Financial Statements.”

Net Lossloss.. NetThe impact to net loss increased by $6 million, or 2%, forin the three months ended June 30,March 31, 2007 and 2006 compared to the three months ended June 30, 2005 as a result of the factors described above.


32


Six Months Ended June 30, 2006 Compared to Six Months Ended June 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 and share data):

  
Six Months Ended June 30,
 
  
2006
 
2005
 
          
Revenues $2,703  100%$2,481  100%
              
Costs and expenses:             
Operating (excluding depreciation and amortization)  1,215  45% 1,081  44%
Selling, general and administrative  551  20% 483  19%
Depreciation and amortization  690  26% 730  29%
Asset impairment charges  99  4% 39  2%
Other operating expenses, net  10  --  6  -- 
              
   2,565  95% 2,339  94%
              
Operating income from continuing operations  138  5% 142  6%
              
Interest expense, net  (907)    (855)   
Other income (expenses), net  (19)    45    
              
   (926)    (810)   
              
Loss before income taxes  (788)    (668)   
              
Income tax expense  (4)    (8)   
              
Loss from continuing operations  (792)    (676)   
              
Income from discontinued operations, net of tax  38     19    
              
Net loss $(754)   $(657)   

Revenues. The overall increase in revenues from continuing operations in 2006 compared to 2005 is principally the result of an increase from June 30, 2005 of 343,800 high-speed Internet customers, 194,300 digital video customers and 189,800 telephone customers, as well as price increases for video and high-speed Internet services, and is offset partially by a decrease of 41,400 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 $79.73 for the six months ended June 30, 2006 from $72.47 for the six months ended June 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 six months ended during the respective period, divided by six, divided by the average number of analog video customers during the respective period.


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

  
Six Months Ended June 30,
 
  
2006
 
2005
 
2006 over 2005
 
  
 
Revenues
 
% of
Revenues
 
 
Revenues
 
% of
Revenues
 
 
Change
 
% Change
 
              
Video $1,684  62%$1,623  66%
$
61
  4%
High-speed Internet  506  19% 425  17% 81  19%
Telephone  49  2% 14  1% 35  250%
Advertising sales  147  5% 135  5% 12  9%
Commercial  149  6% 128  5% 21  16%
Other  168  6% 156  6% 12  8%
                    
  $2,703  100%$2,481  100%$222  9%

Video revenues consist primarily of revenues from analog and digital video services provided to our non-commercial customers. Approximately $58 million of the increase was the result of price increases and incremental video revenues from existing customers and approximately $24 million was the result of an increase in digital video customers. The increases were offset by decreases of approximately $21 million related to a decrease in analog video customers.

Approximately $73 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 $8 million related to the increase in average price of the service.

Revenues from telephone services increased primarily as a result of an increase of 189,800 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 advertising sales and a one-time ad buy by a programmer. For the six months ended June 30, 2006 and 2005, we received $10 million and $6 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 six months ended June 30, 2006 and 2005, franchise fees represented approximately 53% of total other revenues. The increase in other revenues was primarily the result of an increase in franchise fees of $5 million, installation revenue of $3 million and wire maintenance fees of $4 million.


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Operating Expenses. Programming costs represented 62% and 63% of operating expenses for the six months ended June 30, 2006 and 2005, respectively. Key expense components as a percentage of revenues were as follows (dollars in millions):

  
Six Months Ended June 30,
 
  
2006
 
2005
 
2006 over 2005
 
  
 
Expenses
 
% of
Revenues
 
 
Expenses
 
% of
Revenues
 
 
Change
 
% Change
 
              
Programming $755  28%$678  27%$77  11%
Service  408  15% 356  15% 52  15%
Advertising sales  52  2% 47  2% 5  11%
                    
  $1,215  45%
$
1,081
  44%$134  12%

Programming costs consist primarily of costs paid to programmers for analog, premium, digital channels, VOD and pay-per-view programming. The increase in programming costs was primarily a result of rate increases and increases in digital video customers. Programming costs were offset by the amortization of payments received from programmers in support of launches of new channels of $8 million and $17 million for the six months ended June 30, 2006 and 2005, respectively.

Our cable programming costs have increased in every year we have operated 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 system rebuilds and 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 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, franchise fees, system utilities, costs of providing high-speed Internet service and telephone service, maintenance and pole rent expense. The increase in service costs resulted primarily from increased costs of providing high-speed Internet and telephone service of $16 million, an increase in service personnel salaries and benefits of $14 million, higher fuel and utility prices of $8 million, increased labor and maintenance costs to support improved service levels and our advanced products of $7 million and franchise fees of $5 million. 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 salary, benefit and commission costs.
Selling, General and Administrative Expenses. Key components of expense as a percentage of revenues were as follows (dollars in millions):

  
Six Months Ended June 30,
 
  
2006
 
2005
 
2006 over 2005
 
  
 
Expenses
 
% of
Revenues
 
 
Expenses
 
% of
Revenues
 
 
Change
 
 
% Change
 
              
General and administrative $471  17%
$
418
  17%$53  13%
Marketing  80  3% 65  2% 15  23%
                    
  $551  20%$483  19%$68  14%

General and administrative expenses consist primarily of salaries and benefits, rent expense, billing costs, customer care center costs, internal network costs, bad debt expense and property taxes. The increase in general and administrative expenses resulted primarily from a rise in salaries and benefits of $34 million, increases in billing
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costs of $7 million, computer maintenance of $5 million, bad debt expense of $5 million, telephone expense of $4 million, contractor labor of $3 million and property and casualty insurance of $2 million partially offset by decreases in consulting services of $8 million.

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 $40 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. The decrease in depreciation was primarily the result of assets becoming fully depreciated.

Asset Impairment Charges. Assetasset impairment charges for the six months ended June 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 increased $4 million as a result of an $8 million increase in special charges primarily related to severance associated with closing call centers and divisional restructuring and a $4 million decrease related to losses on sales of assets.

Interest Expense, Net. Net interest expense increased by $52 million, or 6%, for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. The increase in net interest expense was a result of an increase in our average borrowing rate from 9.04% in the six months ended June 30, 2005 to 9.58% in the six months ended June 30, 2006 and an increase of $286 million in average debt outstanding from $18.4 billion for the six months ended June 30, 2005 compared to $18.7 billion for the six months ended June 30, 2006.

Other Income (Expenses), Net. Other income decreased $64 million from other income of $45 million for the six months ended June 30, 2005 to other expense of $19 million for the six months ended June 30, 2006 primarily as a result of a $35 million decrease in the gain (loss) on extinguishment of debt, from a $4was to increase net loss by approximately $1 million gain for the six months ended June 30, 2005 to a loss of $27and $99 million, for the six months ended June 30, 2006. See Note 6 to the condensed consolidated financial statements. Other income also decreased as a result of a $15 million decrease in net gains on derivative instruments and hedging activities as a result of decreases in gains on interest rate agreements that do not qualify for hedge accounting under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities. In addition, the six months ended June 30, 2005 included a $20 million gain on investments for the six months ended June 30, 2005 recognized as a result of a gain realized on an exchange of our interest in an equity investee for an investment in a larger enterprise.Other income also includes the 2% accretion of the preferred membership interests in our indirect subsidiary, CC VIII, and the pro rata share of the profits and losses of CC VIII.

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 $19 million for the six months ended June 30, 2005 to $38 million for the six months ended June 30, 2006 primarily due to a decrease in depreciation for the six months ended June 30, 2006 as we ceased recognizing depreciation on the West Virginia and Virginia cable systems when we classified them as assets held for sale in the first quarter of 2006.

Net Loss. Net loss increased by $97 million, or 15%, for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 as a result of the factors described above.respectively. 

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.
 
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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, directly or indirectly, 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.

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.

We have a significant level of debt. Our long-term financing as of June 30, 2006March 31, 2007 consists of $5.8$5.6 billion of credit facility debt and $13.2$13.3 billion accreted value of high-yield notes. For the remainderremaining three quarterly periods of 2006, none2007, $105 million of the Company’sour debt matures, which was paid on April 2, 2007 upon maturity of Charter Holdings’ 8.250% senior notes. In 2008, $55 million of our debt matures, and in 2009, $469 million matures. Of the debt that was scheduled to mature in 2009, $187 million was subject to a call redemption that closed in April 2007, and 2008, $130$40 million and $50 million mature, respectively.was repurchased in a tender offer that closed in April 2007. In 20092010 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 sixthree months ended June 30, 2006,March 31, 2007, we generated $204$266 million of net cash flows from operating activities after paying cash interest of $765$304 million. In addition, we used approximately $539$298 million for purchases of property, plant and equipment. Finally,
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we had net cash flows fromprovided by financing activities of $383$201 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 and equity 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 2007.2008.  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 20082009 and will not be sufficient to fund such needs in 20092010 and beyond. We have been advised that Charter continues to work with its financial advisors inconcerning its approach to addressing liquidity, debt maturities and its overall balance sheet leverage.

Debt CovenantsCredit Facility Availability

Our ability to operate depends upon, among other things, our continued access to capital, including credit under the Charter Communications Operating, LLC (“Charter Operating”) credit facilities. The Charter Operating credit facilities, along with our indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facilities, contain certain restrictive covenants, some of which require us to maintain specified financialleverage ratios and meet financial tests and to provide annual audited financial statements with an unqualified opinion from our independent auditors. As of June 30, 2006,March 31, 2007, 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 June 30, 2006,March 31, 2007, our potential availability under our revolving credit facilitiesfacility totaled approximately $900 million,$1.4 billion, none of which was limited by covenant restrictions. In the past, our actual availability under our credit facilities has been limited 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. However, pro forma for the closing of the asset sales on July 1, 2006, and the related application of net proceeds to repay amounts outstanding under our revolving credit facility, potential availability under our credit facilities as of June 30, 2006 would have been approximately $1.7 billion, although actual availability would have been limited to $1.3 billion 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.leverage ratio. If any events of non-compliance occur, funding under the credit facilities may not be available and defaults on some or potentially all of our debt obligations could occur. An event of default
37

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.

Limitations on Distributions

As long as Charter’s convertible notes remain outstanding and are not otherwise converted into shares of common stock, Charter must pay interest on the convertible senior notes and repay the principal amount in November 2009. 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 $863$413 million, net of $450 million of convertible senior notes held by CCHC, 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 June 30, 2006,March 31, 2007, Charter Holdco was owed $3$4 million in intercompany loans from its subsidiaries and had $8 million in cash, which were available to pay interest and principal on Charter’sCharter's convertible senior notes.  In addition, Charter has $74$50 million of U.S. government securities pledged as security for the next three scheduled semi-annual interest payments on Charter’s 5.875%convertible senior notes scheduled in 2007.  As long as CCHC continues to hold the $450 million of Charter’s convertible senior notes, CCHC will receive interest payments from the government securities pledged for the convertible senior notes.  The cumulative amount of interest payments expected to be received by CCHC is $40 million and may be available to be distributed to pay semiannual interest due in 2008 and May 2009 on the outstanding principal amount of $413 million of Charter’s convertible senior notes, 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 CIHCCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, and Charter Operating notes and under the CCO Holdings credit facilities unless there is no default under the
29

applicable indenture and credit facilities, and each applicable subsidiary’s leverage ratio test is met at the time of such distribution and, in the case of Charter’s convertible senior notes, other specified tests are met.distribution. For the quarter ended June 30, 2006,March 31, 2007, there was no default under any of these indentures and each such subsidiary met itsor credit facilities. However, certain of our subsidiaries did not meet their applicable leverage ratio tests based on June 30, 2006March 31, 2007 financial results. SuchAs 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 however, if any such subsidiary fails to meet theseunless those tests at such time. In the past, certain subsidiaries have from time to time failed to meet their leverage ratio test. There can be no assurance that they will satisfy these tests at the time of such distribution.are met. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in theits 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. However, distributions for payment of interest on Charter’s convertible senior notes are further limited to when each applicable subsidiary’s leverage ratio test is metindentures and other specified tests are met. There can be no assurance that the subsidiary will satisfy these tests at the time of such distribution.

Specific LimitationsCCO Holdings Credit facilities.

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 June 30, 2006,March 31, 2007, there was no default under Charter Holdings’ indentures and the other specified tests were met. However, Charter Holdings met itsdid not meet the leverage ratio test of 8.75 to 1.0 based on June 30, 2006March 31, 2007 financial results. SuchAs a result, distributions from Charter Holdings to Charter or Charter Holdco would have been restricted at such time and will continue to be restricted however, if Charter Holdings fails to meet these tests at such time. In the past, Charter Holdings has from time to time failed to meet this leverage ratio test. There can be no assuranceunless that Charter Holdings will satisfy these tests at the time of such distribution.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.  

In addition to the limitation on distributions under the various indentures discussed above, distributions by our subsidiaries may be limited by applicable law. See “Risk Factors — 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 or our various debt issuers.”

Access to Capital

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:
issuing equity at the Charter or Charter Holdco level, the proceeds of which could be loaned or contributed to us;

38


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;
revenue and grow operating cash flows;
 selling assets; or
 requesting waivers or amendments with respect to our credit facilities, the availabilitywhich may not be available on acceptable terms; and terms of which wouldcannot be subject to market conditions.assured.

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 AssetsRecent Financing Transactions

In July 2006, we closedOn March 6, 2007, Charter Operating entered into an Amended and Restated Credit Agreement among Charter Operating, CCO Holdings, the Cebridge Transactionseveral lenders from time to time that are parties thereto, JPMorgan Chase Bank, N.A., as administrative agent, and certain other agents (the “Charter Operating Credit Agreement”).
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The Charter Operating Credit Agreement provides for a $1.5 billion senior secured revolving line of credit, a continuation of the existing $5.0 billion term loan facility (which was refinanced with new term loans in April 2007), and a $1.5 billion new term loan facility (the “New Term Loan”) which was funded in March and April 2007. Borrowings under the Charter Operating Credit Agreement bear interest at a variable interest rate based on either LIBOR or a base rate, plus in either case, an applicable margin. The applicable margin for LIBOR loans under the New Wave TransactionTerm Loan and revolving loans is 2.00% above LIBOR. The revolving line of credit commitments terminate on March 6, 2013. The Existing Term Loan and the New Term Loan are subject to amortization at 1% of their initial principal amount per annum. The New Term Loan amortization commences on March 31, 2008. The remaining principal amount of the New Term Loan will be due on March 6, 2014.

The terms of the Existing Term Loan have been amended effective March 6, 2007. The refinancing of the $5.0 billion Existing Term Loan with new term loans (“Replacement Existing Term Loan”) was permitted under the Charter Operating Credit Agreement and occurred in April 2007, with pricing (LIBOR plus 2.00%) and amortization profile of the Replacement Existing Term Loan matching the New Term Loan described above. The Charter Operating Credit Agreement contains financial covenants requiring Charter Operating to maintain a quarterly consolidated leverage ratio not to exceed 5 to 1 and a first lien leverage ratio not to exceed 4 to 1.

On March 6, 2007, CCO Holdings entered into a credit agreement among CCO Holdings, the several lenders from time to time that are parties thereto, Bank of America, N.A., as administrative agent, and certain other agents (the “CCO Holdings Credit Agreement”). The CCO Holdings Credit Agreement consists of a $350 million term loan facility (the “Term Facility”). The term loan matures on September 6, 2014 (the “Maturity Date”). The CCO Holdings Credit Agreement also provides for netadditional incremental term loans (the “Incremental Loans”) maturing on the dates set forth in the notices establishing such term loans, but no earlier than the Maturity Date. Borrowings under the CCO Holdings Credit Agreement bear interest at a variable interest rate based on either LIBOR or a base rate plus, in either case, an applicable margin. The applicable margin for LIBOR term loans, other than Incremental Loans, is 2.50% above LIBOR. The applicable margin with respect to Incremental Loans is to be agreed upon by CCO Holdings and the lenders when the Incremental Loans are established. The CCO Holdings Credit Agreement is secured by the equity interests of Charter Operating, and all proceeds of approximately $896 million. thereof.

We used a portion of the netadditional proceeds from the asset salesCharter Operating Credit Agreement and CCO Holdings Credit Agreement to repay (but not reduce permanently) amountsredeem $550 million of CCO Holdings’ outstanding under our revolving credit facility. The Orange Transaction is scheduledfloating rate notes due 2010, to close in the third quarterredeem approximately $187 million of 2006.

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 closedCharter Holdings’ outstanding 8.625% senior notes due 2009, to fund the purchase of notes in a tender offer for total consideration (including premiums and accrued interest) of $100 million of certain cable systemsCharter Holdings’ notes outstanding at Charter Holdings, and to repay $105 million of Charter Holdings’ notes maturing 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 customersApril 2007. The remainder will be used for a total purchase price of approximately $42 million.other general corporate purposes.

Historical Operating, Financing and Investing Activities

Our cash flows for the three months ended March 31, 2006 include the cash flows related to our discontinued operations for all periods presented.operations.

We held $48$184 million in cash and cash equivalents as of June 30, 2006March 31, 2007, of which $110 million was held by the trustee and restricted for payment of bonds due April 1, 2007, compared to $14$38 million as of December 31, 2005.2006. For the sixthree months ended June 30, 2006,March 31, 2007, we generated $204$266 million of net cash flows from operating activities after paying cash interest of $765$304 million. In addition, we used approximately $539$298 million for purchases of property, plant and equipment. Finally, we had net cash flows fromprovided by financing activities of $383$201 million.
 
Operating Activities. Net cash provided by operating activities increased $40$61 million, or 24%30%, from $164$205 million for the sixthree months ended June 30, 2005March 31, 2006 to $204$266 million for the sixthree months ended June 30, 2006.March 31, 2007. For the sixthree months ended June 30, 2006,March 31, 2007, net cash provided by operating activities increased primarily as a result of revenues increasing at a faster rate than cash expenses and changes in operating assets and liabilities that provided $128$76 million more cash during the sixthree months ended June 30, 2006March 31, 2007 than the corresponding period in 2005 coupled with an increase in revenue over cash costs2006, offset by an increase of $43 million in interest on cash interest expense of $106 million overpay obligations during the corresponding priorsame period.

Investing Activities. Net cash used by investing activities was $321 million for the sixthree months ended June 30, 2006 and 2005 was $553March 31, 2007 compared to net cash used by investing activities of $276 million and $472 million, respectively. Investing activities used $81 million more cash duringfor the sixthree months ended June 30,March 31, 2006, than the corresponding period in 2005which was primarily as a result of increased cash used for the purchase of cable systems discussed above coupled with a decrease in our liabilities related to capital expenditures.an increase in purchases of property, plant, and equipment.
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Financing Activities. Net cash provided by financing activities was $383$201 million and $86 million for the sixthree months ended June 30,March 31, 2007 and 2006, and net cash used in financing activities was $214 million for the six months ended June 30, 2005.respectively. The increase in cash provided during the sixthree months ended June 30, 2006March 31, 2007 as compared to the corresponding period in 2005,2006, was primarily the result of proceeds from the issuanceincreased borrowings of debt.long-term debt and a decrease in repayments.


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Capital Expenditures 

We have significant ongoing capital expenditure requirements. Capital expenditures were $539$298 million and $542$241 million for the sixthree months ended June 30,March 31, 2007 and 2006, and 2005, respectively. Capital expenditures decreasedincreased as a result of decreases in expenditures related to line extensions and support capital partially offset by increased spending on customer premise equipment to meet increased customer growth and increases in scalable infrastructure as a result of increases in digital video, high-speed Internetdata network upgrades and telephone customers.headend equipment. 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 sixthree months ended June 30,March 31, 2007 and 2006, and 2005, our liabilities related to capital expenditures decreased $9$32 million and increased $48$7 million, respectively.

During 2006,2007, we expect capital expenditures to be approximately $1.0 billion to $1.1$1.2 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 20062007 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,us, 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 six months ended June 30,March 31, 2007 and 2006 and 2005 (dollars in millions):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
  
Three Months Ended
March 31,
 
 
2006
 
2005
 
2006
 
2005
  
2007
 
2006
 
              
Customer premise equipment (a) $128 $142 $258 $228  $161 $130 
Scalable infrastructure (b)  63  47  97  89   49  34 
Line extensions (c)  33  48  59  77   24  26 
Upgrade/Rebuild (d)  14  12  23  22   12  9 
Support capital (e)  60  82  102  126   52  42 
                    
Total capital expenditures $298 $331 $539 $542  $298 $241 

(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).
 

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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 June 30, 2006 and December 31, 2005, our long-term debt totaled approximately $19.0 billion and $18.5 billion, respectively. This debt was comprised of approximately $5.8 billion and $5.7 billion of credit facilities debt and $13.2 billion and $12.8 billion accreted amount of high-yield notes, respectively.

As of June 30, 2006 and December 31, 2005, the weighted average interest rate on the credit facility debt was approximately 8.0% 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 76% of the total principal amount of our debt was effectively fixed, including the effects of our interest rate hedge agreements as of June 30, 2006 and December 31, 2005. The fair value of our high-yield notes was $11.0 billion and $10.4 billion at June 30, 2006 and December 31, 2005, respectively. The fair value of our credit facilities is $5.8 billion and $5.7 billion at June 30, 2006 and December 31, 2005, respectively. The fair value of high-yield and convertible 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 each of the three months ended June 30, 2006 and 2005, other income includes gains of $0, and for the six months ended June 30, 2006 and 2005, other income includes gains of $2 million and $1 million, respectively, 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 June 30, 2006 and 2005, a gain of $1 million and $0, respectively, and for the six months ended June 30, 2006 and 2005, a gain of $0 and $9 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 June 30, 2006 and 2005, other income includes gains of $3 million and losses of $1 million, respectively, and for the six months ended June 30, 2006 and 2005, other income includes gains of $9 million and $25 million, respectively, for interest rate derivative instruments not designated as hedges.


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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 June 30, 2006 (dollars in millions):
  
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
Thereafter
 
Total
 
Fair Value at June 30, 2006
 
                    
Debt:     
  
  
  
  
  
  
  
 
 Fixed Rate  $--   $105    $--   $684  $2,143  $771  $8,842  $12,545  $10,430 
 Average Interest Rate   --   8.25%   --   9.50%   10.28%   11.01%   10.38%   10.34%     
                             
 Variable Rate  $ --   $25   $50   $50  600   $850  $4,775  $6,350   $6,359  
 Average Interest Rate   --   8.21%   8.14%   8.22%   9.64%   8.66%   8.39%   8.75%     
                             
 Interest Rate Instruments:                            
 Variable to Fixed Swaps  $ 898    $875   $--  --   $--   $--  --   $1,773  $ 
 Average Pay Rate   7.70%   7.58%   --   --   --   --   --   7.64%     
 Average Receive Rate  8.33%   8.31%    --   --   --   --   --   8.32%      

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 June 30, 2006.

At June 30, 2006 and December 31, 2005, we had outstanding $1.8 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 affidavitscertifications 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 June 30, 2006March 31, 2007 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 and our parent companies are defendants or co-defendants 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 and our parent companies are party to other lawsuits and claims that have arisenarise in the ordinary course of conducting our business. The ultimate outcome of all 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.

Our Annual Report on Form 10-K for the year ended December 31, 2006 includes “Risk Factors” under Item 1A of Part I. Except for the updated risk factors described below, there have been no material changes from the risk factors described in our Form 10-K. The information below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.

Risks Related to Significant Indebtedness of Us and CharterOur Subsidiaries 

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 March 31, 2007, our total debt was approximately $18.9 billion, our member’s deficit was approximately $5.9 billion and the deficiency of earnings to cover fixed charges for the three months ended March 31, 2007 was $300 million.

As of March 31, 2007, approximately $413 million aggregate principal amount of Charter’s convertible notes were outstanding, which matures in 2009. Charter will need to raise additional capital and/or receive distributions or payments from its subsidiaries in order to satisfy this debt obligation. An additional $450 million aggregate principal amount of Charter’s convertible notes was held by CCHC.

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 subsidiaries to make distributions or payments to us and our parent companies is subject to availability of funds and restrictions under our and our subsidiaries’ applicable debt instruments and under applicable law. 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.

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;
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·place us at a disadvantage as compared to our competitors that have proportionately less debt;
·make us vulnerable to interest rate increases, because approximately 15% 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;
·adversely affect our relationship with customers and suppliers;
·limit our and our parent companies’ ability to borrow additional funds in the future, due to applicable financial and restrictive covenants in our debt;
·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; and
·limit future increases in the value, or cause a decline in the value of Charter’s equity, which could limit Charter’s ability to raise additional capital by issuing equity.
A default by us or one of our parent companies under our and their debt obligations could result in the acceleration of those obligations, which in turn could trigger cross defaults under other agreements governing our and our parent companies’ long-term indebtedness. In addition, the secured lenders under our credit facilities and the holders of the Charter Operating senior second-lien notes could foreclose on their collateral, which includes equity interest in our subsidiaries, and exercise other rights of secured creditors. Any default under those credit facilities or the indentures governing Charter’s convertible notes or our and our parent companies’ debt could adversely affect our growth, our financial condition, our results of operations, and our ability to make payments on our convertible notes, our credit facilities, and other debt of our subsidiaries, and could force us to seek the protection of the bankruptcy laws. We and our parent companies may incur significant additional debt in the future. If current debt levels increase, the related risks that we now face will intensify.

We may not generate (or,be able to access funds under the Charter Operating credit facilities if we fail to satisfy the covenant restrictions in general,such 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 parent company debt, and we expect such reliance to continue in the future. Our total potential borrowing availability under our revolving credit facility was approximately $1.4 billion as of March 31, 2007, none of which is limited 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 our credit facilities is the absence of a default under such facilities, including as a result of any failure to comply with the covenants under the facilities. Among other covenants, the Charter Operating credit facilities require us to maintain specific leverage ratios. The Charter Operating credit 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.

An event of default under the credit facilities or indentures, if not waived, could result in the acceleration of those debt obligations and, consequently, could trigger cross defaults under other agreements governing our and our parent companies may not have availablecompanies’ 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 interest 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, our results of operations, and our ability to make payments on our convertible notes, our credit facilities, and other debt of our subsidiaries, and could force us to seek the applicable obligor)protection of the bankruptcy laws, which could materially adversely impact our ability to operate our business and to make payments under our debt instruments.

We depend on generating sufficient cash flow or haveand having access to additional external liquidity sources to fund our capital expenditures, ongoing operations and our and our parent companies’ debt obligations.obligations, capital expenditures, and ongoing operations.

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 and our parent
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companies’ ability to generate cash flow and our and our parent companies’ access to additional external liquidity sources, and in general oursources. 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;competition from other distributors, including incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers and DSL providers;
·  ·unforeseen difficulties we may encounter in our continued introduction of our telephone services such as our ability to meet heightened customer expectations for the demand for our products and services;

·general economic conditions and conditions affecting customer and advertiser spending;

·competitionreliability of voice services compared to other services we provide, and our ability to stabilizemeet heightened demand for installations and customer losses;service;
·  our ability to sustain and grow revenues 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

·  ·legal and regulatory factors affectingthe effects of governmental regulation, including but not limited to local franchise authorities, on our business.

Some of these factors are beyond our control. If we and our parent companies’companies are unable to generate sufficient cash flow or access additional external liquidity sources, we and our parent companies’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 2006we and our subsidiary, Charter Operating, completed a $6.85 billion refinancingparent companies have been able to raise funds through issuances of its credit facilitiesdebt in April 2006,the past, we or our parent companies 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 2007.2008. 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 20082009 and will not be sufficient to fund such needs in 20092010 and beyond. See “Item“Part I. Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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 company debt, and we expect such reliance to continue in the future. Our total potential borrowing availability under the Charter Operating credit facilities was approximately $900 million as of June 30, 2006, none of which was limited by covenant restrictions. In the past, our actual availability under our credit facilities has been limited 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. However, pro forma for the closing of the asset sales on July 1, 2006, and the related application of net proceeds to repay amounts outstanding under our revolving credit facility, potential
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availability under our credit facilities as of June 30, 2006 would have been approximately $1.7 billion, although actual availability would have been limited to $1.3 billion because of limits imposed by covenant restrictions.

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 debt instruments. In addition, an event of default under the credit facilities, such as the failure to maintain the applicable required financial ratios, would prevent additional borrowing under our credit facilities, which could materially adversely affect 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.us or our various parent companies who are debt issuers.

Our soleprimary 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 dividendsmake distributions to us if they have “surplus” as defined in the act. Under fraudulent transfer laws, our subsidiaries may not pay dividendsmake distributions to us or the applicable debt issuers to service debt obligations 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 ourthese 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 and guarantors under the Charter Operating and CCO Holdings credit facilities. Several of our subsidiaries are also obligors and guarantors under other senior high yield notes. See “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 June 30, 2006,March 31, 2007, our total debt was
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approximately $19.0$18.9 billion, of which approximately $17.3$17.9 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 holderswhose interests are secured by substantially all of our subsidiaries’ other debt instrumentsoperating assets, 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 ourand 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 June 30, 2006, our total debt was approximately $19.0 billion, our member’s deficit was approximately $5.3 billion and the deficiency of earnings to cover fixed charges for the three and six months ended June 30, 2006 was $307 million and $740 million, respectively.

As of June 30, 2006, Charter had outstanding approximately $863 million aggregate principal amount of convertible notes. 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 us and our subsidiaries to make distributions or payments to our and their respective parent companies is subject to
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availability of funds and restrictions under our and our subsidiaries’ applicable debt instruments. If we were to engage in a recapitalization or other similar transaction, our noteholders might not receive principal and interest to which they are contractually entitled.

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;

·adversely affect our relationship with customers and suppliers;

·limit our and our parent companies’ ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our and our parent companies’ 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 its debt obligations could result in the acceleration of those obligations and the obligations under our and our parent companies’ other notes. 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.
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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 or our parent companies’ 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’ notes 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 and our parent companies’ 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 governing our and our parent companies’ notes, upon the occurrence of specified change of control events, each such 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
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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.

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 terminals. 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 $315 million and $309 million for the three months ended June 30, 2006 and 2005, respectively, and $754 million and $657 million for the six months ended June 30, 2006 and 2005, respectively. 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
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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 July 7, 2006, approximately 11% 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 13% and 11% in the three and six months ended June 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 and 2007 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 six months ended June 30, 2006, we spent approximately $298 million and $539 million, respectively, on capital expenditures. During 2006, we expect capital expenditures to be approximately $1.0 billion to $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 and 2007 if there is accelerated growth in high-speed 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
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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 June 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.

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.

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;
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·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 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 systemssystem franchises are operated under non-exclusive franchises granted by local franchising authorities.non-exclusive. 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.

Different legislativeLegislative 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 at least fivenumerous states, in whichincluding states where we have operations and onesignificant operations. Although most of these newly enacted statutes is subject to court challenge.  Although various legislative proposals providestates have provided some regulatory relief for incumbent cable operators, some of these proposals are generally viewed as being more favorable to new entrants due to a number of factors, including provisions withholdingefforts to withhold streamlined cable franchising from incumbents until after the expiration of their existing franchises.franchises, and the potential for new entrants to serve only higher-income areas of a particular community. 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 atIn March 2007, the Federal Communications Commission ("FCC'')FCC released a ruling designed to determine whetherstreamline competitive cable franchising. Among other things, the FCC prohibited local franchising authorities are impeding the deployment of competitive cable services through unreasonable franchisingfrom imposing “unreasonable” build-out requirements and whether such impediments should be preempted.  We areestablished a mechanism whereby competing providers can secure “interim authority” to offer cable service if the local franchising authority has not yet able to determine what impact such proceeding mayacted on a franchise application within 90 days (in the case of competitors with existing right of way authority) or 180 days (in the case of competitors without existing right of way authority). Local regulators have on us.appealed the FCC’s ruling.

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 June 30, 2006,March 31, 2007, we are aware of traditional overbuild situations impacting approximately 8%9% of our estimated homes passed, and potential traditional overbuild situations in areas servicing approximately an additional 5%4% 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.


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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.

We may be required to provide access to our networks to other Internet service providers or restrictions could be imposed on our ability to manage our broadband infrastructure, either of 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 internetInternet content providers and consumer groups for new federal laws or regulations to adopt so-called
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“net neutrality” principles limiting the ability of broadband network owners (like Charter)us) 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. In April 2007, the FCC issued a notice of inquiry regarding the marketing practices of broadband providers as a precursor to considering the need for any FCC regulation of internet service providers.

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 would impair our ability to use our bandwidth in ways that would generate maximum revenues.


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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 wouldmight 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 has been appealed.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 declaredis in the process of initiating a new rulemaking to explore the cable industry’s carriage obligations once the broadcast industry transition from analog to digital transmission is completed in February 2009. It is possible that certain VoIP services are not subject to traditional state public utility regulation.  The full extent of the FCC preemptionwill rule in favor of state and local regulation of VoIP services is not yet clear. Expanding our offering of these services may require us to obtaindual carriage and/or multicast carriage in 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.  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.  circumstances.

Item 6.Exhibits.

The index to the exhibits begins on page 54E-1 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 theirits behalf by the undersigned, thereunto duly authorized.

CHARTER COMMUNICATIONS HOLDINGS, LLC
Registrant
By: CHARTER COMMUNICATIONS INC., Sole Manager

Dated: August 10, 2006By: /s/ Kevin D. Howard
Dated: May 15, 2007By: /s/ Kevin D. Howard
Name:Kevin D. Howard
Title:
Name: Kevin D. Howard
Title: Vice President and
Chief Accounting Officer



CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
CORPORATION
Registrant

Dated: August 10, 2006              By: /s/ Kevin D. Howard
Dated: May 15, 2007By: /s/ Kevin D. Howard
Name:Kevin D. Howard
Title:
Vice President and
Chief Accounting Officer
Name: Kevin D. Howard
Title: Vice President and
Chief Accounting Officer

53S-1


EXHIBIT INDEX

Exhibit
Number
Description of Document
3.1Certificate of Formation of Charter Communications Holdings, LLC (incorporated by reference to Exhibit 3.3 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)).
3.2(a)3.2Amended and Restated Limited Liability Company Agreement of Charter Communications Holdings, LLC, dated as of October 30, 2001 (incorporated by reference to Exhibit 3.2 to the annual report on Form 10-K of Charter Communications Holdings, LLC and Charter Communications Holding Capital Corporation on March 29, 2002 (File No. 333-77499)).
3.2(b)Second Amended and Restated Limited Liability Company Agreement for Charter Communications Holdings, LLC, dated as of October 31, 2005 (incorporated by reference to Exhibit 10.21 to the quarterly report on Form 10-Q of Charter Communications, Inc. filed on November 2, 2005 (File No. 000-27927)).
3.3Certificate of Incorporation of Charter Communications Holdings Capital Corporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)).
3.4(a)By-laws of Charter Communications Holdings Capital Corporation (incorporated by reference to Exhibit 3.4 to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499)).
3.4(b)Amendment to By-Laws of Charter Communications Holdings Capital Corporation, dated as of October 30, 2001 (incorporated by reference to Exhibit 3.4(b) to the annual report on Form 10-K of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation on March 29, 2002 (File No. 333-77499)).
10.1Amended and Restated Credit Agreement, dated as of April 28, 2006,March 6, 2007, among Charter Communications Operating, LLC, CCO Holdings, LLC, the lenders from time to time parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 onto the current report on Form 8-K of Charter Communications, Inc. filed April 28, 2006on March 9, 2007 (File No. 000-27927)).
10.2+10.2Amended and Restated Guarantee and Collateral Agreement made by CCO Holdings, LLC, Charter Communications Inc. 2005 Executive Cash Award Plan,Operating, LLC and certain of its subsidiaries in favor of JPMorgan Chase Bank, N.A. ,as administrative agent, dated as of March 18, 1999, as amended for 2006and restated as of March 6, 2007 (incorporated by reference to Exhibit 10.1 on10.2 to the current report on Form 8-K of Charter Communications, Inc. filed April 17, 2006on March 9, 2007 (File No. 000-27927)).
15.1*10.3Letter re Unaudited Interim Financial Statements.Credit Agreement, dated as of March 6, 2007, among CCO Holdings, LLC, the lenders from time to time parties thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.3 to the current report on Form 8-K of Charter Communications, Inc. filed on March 9, 2007 (File No. 000-27927)).
10.4Pledge Agreement made by CCO Holdings, LLC in favor of Bank of America, N.A., as Collateral Agent, dated as of March 6, 2007 (incorporated by reference to Exhibit 10.4 to the current report on Form 8-K of Charter Communications, Inc. filed on March 9, 2007 (File No. 000-27927)).
10.5+Separation Agreement and Release for Sue Ann R. Hamilton (incorporated by reference to Exhibit 99.1 to the current report on Form 8-K of Charter Communications, Inc. filed on March 14, 2007 (File No. 000-27927)).
12.1*Computation of Ratio of Earnings to Fixed Charges
31.1*Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the 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

 
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