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Charter Pledges to Trim Its Debt Load

8/11/2002 8:00 PM Eastern

Battered by questions surrounding some of its accounting methods and its heavy debt load, Charter Communications Inc. last week attempted to silence some critics on its second-quarter conference call.

The St. Louis-based MSO provided more detailed information on accounting and pledged to its investors that it would reduce leverage.

Charter carries about $18 billion in debt, or about 8.7 times its estimated 2003 cash flow. In a conference call with analysts last Tuesday, the company said it would work to reduce that ratio to between five and six times cash flow by 2004 and 2005.

"This is not a level of debt that we've arrived at without a great deal of thought and planning, nor is it a level of debt that has crept up on us as a result of poor operating performance," Charter CEO Carl Vogel said on the call. "This level of debt was designed to enhance our equity returns over time, a strategy that is now out of favor. We will take every opportunity going forward to reduce debt as we progress to free cash flow."

Charter also answered concerns regarding its decision to count as many as 40,000 cable-modem-only customers as basic subscribers, explaining that the company charges them an additional $10 per month for access to a broadcast-basic TV service.

Q2 NUMBERS

On the whole, the quarter was a good one, with operating cash-flow growth of 14.3 percent on revenue growth of 13.8 percent, year-over-year.

But Charter warned that its decline in basic subscribers was likely to continue.

Year-over-year, basic subscribers dropped by 42,500 customers in the period, some of which can be attributed to seasonal disconnects on the part of students leaving school for the summer or customers who left their homes for summer residences.

"We're not satisfied with the loss," Charter chief operating officer Dave Barford told analysts. "It will be difficult to get them all back."

Barford explained that Charter could spend marketing dollars to bring those customers back into the fold, but instead will focus on retaining and attracting higher paying subscribers.

That seems to be showing results. Charter added 156,000 high-speed-data customers in the second quarter, its highest quarterly growth rate yet. The MSO added 172,000 digital-cable customers, to end the period with 2.4 million digital subscribers. Charter's digital penetration, at 35 percent, is the highest in the industry.

Barford also addressed published reports last week that Charter was counting cable-modem-only subscribers as video subscribers.

Although he said Charter does count about 40,000 modem-only customers as basic subscribers, Charter makes non-video customers pay an additional $10 per month for broadcast basic video service.

Vogel also confirmed the company has hired an adviser regarding the possible sale of cable systems in non-strategic areas.

MANAGEMENT ROLE

Although Vogel wouldn't provide details, published reports have said the MSO hired Daniels & Associates to broker the sale of systems in Utah, Arizona, Colorado, Kansas, Nebraska, New Mexico, Oklahoma, Texas and Nevada, with about 600,000 subscribers.

Vogel said Charter would want at least $3,000 per subscriber for the systems or it would pull them off the block.

In any transaction, Vogel said, Charter would seek to retain a minority interest and management control of the assets.

That might make a deal difficult, but most observers believe the systems — scattered all over the country — might be attractive to private-equity firms looking to assemble cable assets.

According to those same observers, private equity firms might be more open to allowing Charter to continue to run the systems.

Charter also said it would step up its video-on-demand launch, held back due to the bankruptcy of its service provider, Diva Systems Inc., in late May.

The company said it has successfully transitioned its existing VOD customers to a new provider, and plans to make the service available to 40 percent of its customer base by the end of the year.

In the fall, Barford said Charter would offer a suite of services including free-on-demand, subscription VOD and a more robust VOD service to customers.

September