Charter 2005 Annual Report Download - page 148

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2005 FORM 10-K
Notes to Consolidated Financial Statements (continued)
shares coupled with a forward contract for the reacquisition of effectiveness of transactions that receive hedge accounting. For
the shares at a future date. An instrument that requires physical the years ended December 31, 2005, 2004 and 2003, net gain on
settlement by repurchase of a fixed number of shares in derivative instruments and hedging activities includes gains of
exchange for cash is considered a forward purchase instrument. $3 million, $4 million and $8 million, respectively, which
While the share lending agreement does not require a cash represent cash flow hedge ineffectiveness on interest rate hedge
payment upon return of the shares, physical settlement is agreements arising from differences between the critical terms of
required (i.e., the shares borrowed must be returned at the end the agreements and the related hedged obligations. Changes in
of the arrangement.) The fair value of the 94.9 million shares the fair value of interest rate agreements designated as hedging
lent in 2005 is approximately $116 million as of December 31, instruments of the variability of cash flows associated with
2005. However, the net effect on shareholders’ deficit of the floating-rate debt obligations that meet the effectiveness criteria
shares lent in July pursuant to the share lending agreement, SFAS No. 133 are reported in accumulated other comprehensive
which includes Charter’s requirement to lend the shares and the loss. For the years ended December 31, 2005, 2004 and 2003, a
counterparties’ requirement to return the shares, is de minimis gain of $16 million, $42 million and $48 million, respectively,
and represents the cash received upon lending of the shares and related to derivative instruments designated as cash flow hedges,
is equal to the par value of the common stock to be issued. was recorded in accumulated other comprehensive loss and
minority interest. The amounts are subsequently reclassified into
15. COMPREHENSIVE LOSS interest expense as a yield adjustment in the same period in
which the related interest on the floating-rate debt obligations
Certain marketable equity securities are classified as available- affects earnings (losses).
for-sale and reported at market value with unrealized gains and Certain interest rate derivative instruments are not desig-
losses recorded as accumulated other comprehensive loss on the nated as hedges as they do not meet the effectiveness criteria
accompanying consolidated balance sheets. Additionally, the specified by SFAS No. 133. However, management believes such
Company reports changes in the fair value of interest rate instruments are closely correlated with the respective debt, thus
agreements designated as hedging the variability of cash flows managing associated risk. Interest rate derivative instruments not
associated with floating-rate debt obligations, that meet the designated as hedges are marked to fair value, with the impact
effectiveness criteria of SFAS No. 133, Accounting for Derivative recorded as gain (loss) on derivative instruments and hedging
Instruments and Hedging Activities, in accumulated other compre- activities in the Company’s consolidated statement of operations.
hensive loss, after giving effect to the minority interest share of For the years ended December 31, 2005, 2004 and 2003, net
such gains and losses. Comprehensive loss for the years ended gain on derivative instruments and hedging activities includes
December 31, 2005, 2004 and 2003 was $961 million, $4.3 bil- gains of $47 million, $65 million and $57 million, respectively,
lion and $219 million, respectively. for interest rate derivative instruments not designated as hedges.
As of December 31, 2005, 2004 and 2003, the Company
16. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
had outstanding $1.8 billion, $2.7 billion and $3.0 billion and
The Company uses interest rate risk management derivative $20 million, $20 million and $520 million, respectively, in
instruments, such as interest rate swap agreements and interest notional amounts of interest rate swaps and collars, respectively.
rate collar agreements (collectively referred to herein as interest The notional amounts of interest rate instruments do not
rate agreements) to manage its interest costs. The Company’s represent amounts exchanged by the parties and, thus, are not a
policy is to manage interest costs using a mix of fixed and measure of exposure to credit loss. The amounts exchanged are
variable rate debt. Using interest rate swap agreements, the determined by reference to the notional amount and the other
Company has agreed to exchange, at specified intervals through terms of the contracts.
2007, the difference between fixed and variable interest amounts
calculated by reference to an agreed-upon notional principal 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
amount. Interest rate collar agreements are used to limit the The Company has estimated the fair value of its financial
Company’s exposure to and benefits from interest rate fluctua- instruments as of December 31, 2005 and 2004 using available
tions on variable rate debt to within a certain range of rates. market information or other appropriate valuation methodolo-
The Company does not hold or issue derivative instruments gies. Considerable judgment, however, is required in interpreting
for trading purposes. The Company does, however, have certain market data to develop the estimates of fair value. Accordingly,
interest rate derivative instruments that have been designated as the estimates presented in the accompanying consolidated
cash flow hedging instruments. Such instruments effectively financial statements are not necessarily indicative of the amounts
convert variable interest payments on certain debt instruments the Company would realize in a current market exchange.
into fixed payments. For qualifying hedges, SFAS No. 133 The carrying amounts of cash, receivables, payables and
allows derivative gains and losses to offset related results on other current assets and liabilities approximate fair value because
hedged items in the consolidated statement of operations. The of the short maturity of those instruments. The Company is
Company has formally documented, designated and assessed the
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