Charter 2003 Annual Report Download - page 130

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001
(dollars in millions, except where indicated)
14. Accounting for Derivative Instruments and Hedging Activities
The Company uses interest rate risk management derivative instruments, such as interest rate swap
agreements and interest rate collar agreements (collectively referred to herein as interest rate agreements) as
required under the terms of its credit facilities. The Company's policy is to manage interest costs using a mix
of Ñxed and variable rate debt. Using interest rate swap agreements, the Company agrees to exchange, at
speciÑed intervals through 2007, the diÅerence between Ñxed 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 beneÑts from interest rate Öuctuations on variable rate debt to within a certain
range of rates.
EÅective January 1, 2001, the Company adopted SFAS No. 133. Interest rate agreements are recorded in
the consolidated balance sheet at December 31, 2003 and 2002 as either an asset or liability measured at fair
value. In connection with the adoption of SFAS No. 133, the Company recorded a loss of $10 million
(approximately $24 million before minority interest eÅects) as the cumulative eÅect of change in accounting
principle. The eÅect of adoption was to increase net loss and loss per share by $10 million and $0.04 per share,
respectively, for the year ended December 31, 2001.
The Company does not hold or issue derivative instruments for trading purposes. The Company does
however have certain interest rate derivative instruments that have been designated as cash Öow hedging
instruments. Such instruments are those that eÅectively convert variable interest payments on certain debt
instruments into Ñxed payments. For qualifying hedges, SFAS No. 133 allows derivative gains and losses to
oÅset related results on hedged items in the consolidated statement of operations. The Company has formally
documented, designated and assessed the eÅectiveness of transactions that receive hedge accounting. For the
years ended December 31, 2003, 2002 and 2001, net gain (loss) on derivative instruments and hedging
activities includes gains of $8 million and losses of $14 million and $2 million, respectively, which represent
cash Öow hedge ineÅectiveness on interest rate hedge agreements arising from diÅerences 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 Öows associated with Öoating-rate debt
obligations are reported in accumulated other comprehensive loss. For the years ended December 31, 2003,
2002 and 2001, a gain of $48 million and losses of $65 million and $39 million, respectively, related to
derivative instruments designated as cash Öow hedges was recorded in accumulated other comprehensive loss
and minority interest. The amounts are subsequently reclassiÑed into interest expense as a yield adjustment in
the same period in which the related interest on the Öoating-rate debt obligations aÅects earnings (losses).
Certain interest rate derivative instruments are not designated as hedges as they do not meet the
eÅectiveness criteria speciÑed 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 gain (loss) on derivative
instruments and hedging activities in the Company's statement of operations. For the years ended Decem-
ber 31, 2003, 2002 and 2001, net gain (loss) on derivative instruments and hedging activities includes gains of
$57 million and losses of $101 million and $48 million, respectively, for interest rate derivative instruments not
designated as hedges.
As of December 31, 2003, 2002 and 2001, the Company had outstanding $3.0 billion, $3.4 billion and
$3.3 billion and $520 million, $520 million and $520 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.
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