Charter 2004 Annual Report Download - page 75

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
At December 31, 2004 and 2003, we had outstanding addresses the accounting for share-based payment transactions
$2.7 billion and $3.0 billion and $20 million and $520 million, in which a company receives employee services in exchange for
respectively, in notional amounts of interest rate swaps and (a) equity instruments of that company or (b) liabilities that are
collars, respectively. The notional amounts of interest rate based on the fair value of the company’s equity instruments or
instruments do not represent amounts exchanged by the parties that may be settled by the issuance of such equity instruments.
and, thus, are not a measure of our exposure to credit loss. See This statement will be effective for us beginning July 1, 2005.
‘‘Item 7A. Quantitative and Qualitative Disclosures About Because we adopted the fair value recognition provisions of
Market Risk,’’ for further information regarding the fair values SFAS No. 123 on January 1, 2003, we do not expect this revised
and contract terms of our interest rate agreements. standard to have a material impact on our financial statements.
We do not believe that any other recently issued, but not
RECENTLY ISSUED ACCOUNTING STANDARDS yet effective accounting pronouncements, if adopted, would have
In December 2004, the Financial Accounting Standards Board a material effect on our accompanying financial statements.
issued the revised SFAS No. 123, Share-Based Payment, which
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK 2004 and 2003, respectively. The fair value of high-yield and
convertible notes is based on quoted market prices, and the fair
We are exposed to various market risks, including fluctuations in value of the credit facilities is based on dealer quotations.
interest rates. We use interest rate risk management derivative We do not hold or issue derivative instruments for trading
instruments, such as interest rate swap agreements and interest purposes. We do, however, have certain interest rate derivative
rate collar agreements (collectively referred to herein as interest instruments that have been designated as cash flow hedging
rate agreements) as required under the terms of the credit instruments. Such instruments effectively convert variable inter-
facilities of our subsidiaries. Our policy is to manage interest est payments on certain debt instruments into fixed payments.
costs using a mix of fixed and variable rate debt. Using interest For qualifying hedges, SFAS No. 133 allows derivative gains and
rate swap agreements, we agree to exchange, at specified losses to offset related results on hedged items in the consoli-
intervals through 2007, the difference between fixed and variable dated statement of operations. We have formally documented,
interest amounts calculated by reference to an agreed-upon designated and assessed the effectiveness of transactions that
notional principal amount. Interest rate collar agreements are receive hedge accounting. For the years ended December 31,
used to limit our exposure to, and to derive benefits from, 2004, 2003 and 2002, net gain (loss) on derivative instruments
interest rate fluctuations on variable rate debt to within a certain and hedging activities includes gains of $4 million and $8 mil-
range of rates. Interest rate risk management agreements are not lion and losses of $14 million, respectively, which represent cash
held or issued for speculative or trading purposes. flow hedge ineffectiveness on interest rate hedge agreements
As of December 31, 2004 and 2003, our long-term debt arising from differences between the critical terms of the
totaled approximately $19.5 billion and $18.6 billion, respec- agreements and the related hedged obligations. Changes in the
tively. This debt was comprised of approximately $5.5 billion fair value of interest rate agreements designated as hedging
and $7.2 billion of credit facilities debt, $13.3 billion and instruments of the variability of cash flows associated with
$11.2 billion principal amount of high-yield notes and $1.0 bil- floating-rate debt obligations that meet the effectiveness criteria
lion and $774 million principal amount of convertible senior of SFAS No. 133 are reported in accumulated other comprehen-
notes, respectively. sive loss. For the years ended December 31, 2004, 2003 and
As of December 31, 2004 and 2003, the weighted average 2002, a gain of $42 million and $48 million and losses of
interest rate on the credit facility debt was approximately 6.8% $65 million, respectively, related to derivative instruments
and 5.4%, the weighted average interest rate on the high-yield designated as cash flow hedges, was recorded in accumulated
notes was approximately 9.2% and 10.3%, and the weighted other comprehensive loss and minority interest. The amounts
average interest rate on the convertible senior notes was are subsequently reclassified into interest expense as a yield
approximately 5.7% and 5.5%, respectively, resulting in a adjustment in the same period in which the related interest on
blended weighted average interest rate of 8.8% and 8.2%, the floating-rate debt obligations affects earnings (losses).
respectively. The interest rate on approximately 83% and 80% of Certain interest rate derivative instruments are not desig-
the total principal amount of our debt was effectively fixed, nated as hedges as they do not meet the effectiveness criteria
including the effects of our interest rate hedge agreements as of specified by SFAS No. 133. However, management believes such
December 31, 2004 and 2003, respectively. The fair value of our instruments are closely correlated with the respective debt, thus
high-yield notes was $12.2 billion and $9.9 billion at Decem- managing associated risk. Interest rate derivative instruments not
ber 31, 2004 and 2003, respectively. The fair value of our designated as hedges are marked to fair value, with the impact
convertible senior notes was $1.1 billion and $732 million at recorded as gain (loss) on derivative instruments and hedging
December 31, 2004 and 2003, respectively. The fair value of our activities in our statements of operations. For the years ended
credit facilities is $5.5 billion and $6.9 billion at December 31,
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