Charter Communications loss widens on big charge; company mum on debt reduction, Allen role

By Paul Deckelman

New York, Nov. 4 - Charter Communications Inc. posted a yawning third-quarter loss on Thursday, mostly due to the effects of a $2.9 billion after-tax charge connected with impairment of the value of the St. Louis-based cable and broadband operator's business.

Charter also said on a conference call following the release of its results that it was continuing to explore various options for bringing down the $18.5 billion of debt on its balance sheet - in fact, it said in its earnings release statement that it "will require additional funding to repay debt maturing in 2005 and 2006." But senior company executives pointedly declined to be any more specific about what form that might take.

"When we have a transaction to announce," interim co-chief financial officer Derek Chang told one analyst during the question-and-answer portion of the conference call, "we will."

Beyond that, Chang and the company's president and chief executive officer, Carl Vogel, tended to stick more to generalities. They specifically declined to address the recurring market rumors that Charter's principal owner and major debt holder, Microsoft Corp. co-founder and billionaire high-tech investor Paul Allen, might ride to the rescue of the underperforming company and pump additional money into it - or, conversely, a recent news report that suggested Allen had had enough and would invest no further in Charter.

Noting that the statement that Allen wanted to make no further equity investment in Charter had been attributed to an unidentified someone "in the Paul Allen camp," Vogel called it "a speculative comment" - and said he wasn't even sure that it had, in fact, originated with Allen or advisers in his "camp." Moreover, he said he was "not in a position" to speak for Allen on investment matters - and reiterated the mantra that "we are actively considering various options, and when he have something specific we'll follow through [on announcing it]."

Chang declared a blanket "no comment" on any kind of rumors of balance sheet transactions, whether they involve Allen or not.

Debt maturities ahead

As of the end of the third quarter on Sept. 30, Charter had outstanding $5.4 billion of credit facility debt, $12.3 billion principal amount of high-yield notes, and $744 million principal amount of convertible senior notes. About $7.5 million of Charter debt is scheduled to mature in the current (fourth) quarter, while an additional $618 million and $186 million of the debt will mature in 2005 and 2006, respectively.

In 2007 and beyond, "significant additional amounts will become due under the company's remaining long-term debt obligations," Charter said in its 10-Q quarterly filing with the Securities and Exchange Commission. Charter faces additional mandatory redemption of some debt should it manage to bring its leverage ratio of debt-to-earnings down below 8.75-to-1, a level it currently is above.

Chang was specifically asked by one analyst whether Charter has the ability right now to redeem its outstanding convertibles. He again was deliberately vague, saying only that when it came time to announce such a transaction, "you can be sure that we will have made sure that we are comfortable with what that debt transaction is and how it works through our various covenants."

Negative free cash flow in the most recent quarter was $128 million, a sharp increase from $41 million in the year-ago quarter. An analyst asked Chang that - in view of the fact that the company has shown continued negative free cash flow, and the fact that this stands only to get worse rather than better as time goes on and its cash interest costs rise with the switchover of some zero-coupon bonds to cash-pay status (they totaled $350 million in the latest quarter, up from $272 million a year ago) - why would Charter not simply "eliminate $2 to $3 billion, or $4 billion of debt off the balance sheet today, versus waiting two years or three years" for a recapitalization?

Besides again declining comment on what he termed speculation, the CFO said that "from a general standpoint, it continues to be a balance of what our board decides is the appropriate action with respect to our balance sheet." Discussions are ongoing, and decisions on sizing and timing will ultimately be made," he said, and then would be released at that time.

Avalon, Renaissance bonds discussed

Another analyst asked whether Charter had any plans to take out bonds originally issued by Avalon Cable and by Renaissance Media LLC, which were assumed when those companies were acquired several years ago by Charter when it embarked on an aggressive shopping spree, buying up smaller cable systems to grow its footprint in certain regions.

Chang said that Charter's obligation under the Avalon bonds' covenants is to retire those bonds when the leverage ratio drops below 8.75-to-1. He said that Charter does not have that same obligation under the Renaissance bonds' covenants and "will obviously evaluate whether or not [redeeming the Renaissance bonds is] the appropriate thing for us to do, if and when that happens."

Vogel acknowledged that with more than $18 billion of debt on the balance sheet, "no one on the financial team is going to tell you that we have a capital structure that's appropriate for the long term."

That having been said, though, he added that with all kinds of discussions going on about ways to raise revenue growth or undertake other strategic financial transactions or possibly, asset sales - to minimize the growing negative free cash flow trend - "it's a timing issue" and there was nothing to announce presently.

Equity investors show interest

Vogel noted that certain private equity investors had expressed interest in some of Charter's assets - but he declined to say who they were or which assets were involved.

"We obviously get approached all the time by people that may be interested in purchasing assets. So we don't have any specific or active conversations per se, but we have identified non-strategic assets that we would look at selling to reduce debt," he said. "We believe that that's not only a good balance sheet answer, but it's a good operating answer as well," in terms of Charter slimming down and concentrating on its core competencies within a more limited footprint.

Charter - which served 6.074 million analog video customers, 2.688 million digital video and 1.819 million residential high-speed data customers as of Sept 30, along with 40,200 telephone service customers, is the fourth-largest cable operator in the United States. But it has seen an erosion of subscriber numbers for its basic analog video service in recent quarters, which have only been partially offset by gains in the higher-margin, more technologically advanced digital video and high-speed data areas.

In the quarter ended Sept. 30, Charter had a net loss of $3.295 billion, or $10.89 per share, versus year-ago net income of $37 million, or $0.07 per diluted share. Most of the loss was attributable to the $2.9 billion after-tax franchise impairment charge that Charter recorded during the quarter, mostly reflecting the decreased value of the company's assets. That charge consisted of $2.1 billion of the impairment related to lower projected growth rates and $765 million related to the accounting changes. The charge was $3.3 billion before income tax effects of $345 million and minority interest effects of $54 million.

On an operating basis, Charter reported a loss of $2.344 billion, versus third quarter income from operations of $104 million on a pro forma basis and $117 million on an actual basis a year ago.

Charter had $129 million of cash on hand at the end of the quarter and $957 million of credit facility availability. The company said that it and its subsidiaries were in compliance with all financial covenants.

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