Charter 2004 Annual Report Download - page 119

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
payment in full for the first six interest payments of the Certain provisions of the Company’s 5.875% convertible
convertible senior notes (see Note 9). These securities are senior notes issued in November 2004 were considered embed-
accounted for as held-to-maturity securities. At December 31, ded derivatives for accounting purposes and were required to be
2004, the carrying value and fair value of the securities was separately accounted for from the convertible senior notes. In
approximately $144 million with approximately $48 million accordance with SFAS No. 133, these derivatives are marked to
recorded in prepaid and other assets and approximately $96 mil- market with gains or losses recorded in interest expense on the
lion recorded in other assets in the Company’s consolidated Company’s consolidated statement of operations. For the year
balance sheet. ended December 31, 2004, the Company recognized $1 million
in losses related to these derivatives. At December 31, 2004,
Valuation of Property, Plant and Equipment $10 million is recorded in accounts payable and accrued
The Company evaluates the recoverability of property, plant expenses relating to the short-term portion of these derivatives
and equipment for impairment when events or changes in and $21 million is recorded in other long-term liabilities related
circumstances indicate that the carrying amount of an asset may to the long-term portion.
not be recoverable. Such events or changes in circumstances
could include such factors as impairment of the Company’s Revenue Recognition
indefinite life franchise under SFAS No. 142, changes in Revenues from residential and commercial video and high-speed
technological advances, fluctuations in the fair value of such data services are recognized when the related services are
assets, adverse changes in relationships with local franchise provided. Advertising sales are recognized at estimated realizable
authorities, adverse changes in market conditions or poor values in the period that the advertisements are broadcast. Local
operating results. If a review indicates that the carrying value of governmental authorities impose franchise fees on the Company
such asset is not recoverable from estimated undiscounted cash ranging up to a federally mandated maximum of 5% of gross
flows, the carrying value of such asset is reduced to its estimated revenues as defined in the franchise agreement. Such fees are
fair value. While the Company believes that its estimates of collected on a monthly basis from the Company’s customers
future cash flows are reasonable, different assumptions regarding and are periodically remitted to local franchise authorities.
such cash flows could materially affect its evaluations of asset Franchise fees are reported as revenues on a gross basis with a
recoverability. No impairment of property, plant and equipment corresponding operating expense.
occurred in 2004, 2003 and 2002.
Programming Costs
Derivative Financial Instruments The Company has various contracts to obtain analog, digital
The Company accounts for derivative financial instruments in and premium video programming from program suppliers
accordance with SFAS No. 133, Accounting for Derivative whose compensation is typically based on a flat fee per
Instruments and Hedging Activities, as amended. For those customer. The cost of the right to exhibit network programming
instruments which qualify as hedging activities, related gains or under such arrangements is recorded in operating expenses in
losses are recorded in accumulated other comprehensive the month the programming is available for exhibition. Program-
income. For all other derivative instruments, the related gains or ming costs are paid each month based on calculations per-
losses are recorded in the income statement. The Company uses formed by the Company and are subject to adjustment based on
interest rate risk management derivative instruments, such as periodic audits performed by the programmers. Certain pro-
interest rate swap agreements, interest rate cap agreements and gramming contracts contain launch incentives to be paid by the
interest rate collar agreements (collectively referred to herein as programmers. The Company receives these payments related to
interest rate agreements) as required under the terms of the the activation of the programmer’s cable television channel and
credit facilities of the Company’s subsidiaries. The Company’s recognizes the launch incentives on a straight-line basis over the
policy is to manage interest costs using a mix of fixed and life of the programming agreement as a reduction of program-
variable rate debt. Using interest rate swap agreements, the ming expense. This offset to programming expense was $59 mil-
Company agrees to exchange, at specified intervals, the differ- lion, $62 million and $57 million for the years ended
ence between fixed and variable interest amounts calculated by December 31, 2004, 2003 and 2002, respectively. Programming
reference to an agreed-upon notional principal amount. Interest costs included in the accompanying statement of operations
rate cap agreements are used to lock in a maximum interest rate were $1.3 billion, $1.2 billion and $1.2 billion for the years
should variable rates rise, but enable the Company to otherwise ended December 31, 2004, 2003 and 2002, respectively. As of
pay lower market rates. Interest rate collar agreements are used December 31, 2004 and 2003, the deferred amount of launch
to limit exposure to and benefits from interest rate fluctuations incentives, included in other long-term liabilities, totaled
on variable rate debt to within a certain range of rates. The $106 million and $170 million, respectively.
Company does not hold or issue any derivative financial
instruments for trading purposes.
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