Charter 2005 Annual Report Download - page 80

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
We do not believe that any other recently issued, but not
yet effective accounting pronouncements, if adopted, would have
a material effect on our accompanying financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK designated and assessed the effectiveness of transactions that
receive hedge accounting. For the years ended December 31,
We are exposed to various market risks, including fluctuations in 2005, 2004 and 2003, net gain (loss) on derivative instruments
interest rates. We use interest rate risk management derivative and hedging activities includes gains of $3 million, $4 million
instruments, such as interest rate swap agreements and interest and $8 million, respectively, which represent cash flow hedge
rate collar agreements (collectively referred to herein as interest ineffectiveness on interest rate hedge agreements arising from
rate agreements) as required under the terms of the credit differences between the critical terms of the agreements and the
facilities of our subsidiaries. Our policy is to manage interest related hedged obligations. Changes in the fair value of interest
costs using a mix of fixed and variable rate debt. Using interest rate agreements designated as hedging instruments of the
rate swap agreements, we agree to exchange, at specified variability of cash flows associated with floating-rate debt
intervals through 2007, the difference between fixed and variable obligations that meet the effectiveness criteria of SFAS No. 133
interest amounts calculated by reference to an agreed-upon are reported in accumulated other comprehensive loss. For the
notional principal amount. Interest rate collar agreements are years ended December 31, 2005, 2004 and 2003, a gain of
used to limit our exposure to, and to derive benefits from, $16 million, $42 million and $48 million, respectively, related to
interest rate fluctuations on variable rate debt to within a certain derivative instruments designated as cash flow hedges, was
range of rates. Interest rate risk management agreements are not recorded in accumulated other comprehensive loss and minority
held or issued for speculative or trading purposes. interest. The amounts are subsequently reclassified into interest
As of December 31, 2005 and 2004, our long-term debt expense as a yield adjustment in the same period in which the
totaled approximately $19.4 billion and $19.5 billion, respec- related interest on the floating-rate debt obligations affects
tively. This debt was comprised of approximately $5.7 billion earnings (losses).
and $5.5 billion of credit facilities debt, $12.8 billion and Certain interest rate derivative instruments are not desig-
$13.0 billion accreted amount of high-yield notes and $863 mil- nated as hedges as they do not meet the effectiveness criteria
lion and $990 million accreted amount of convertible senior specified by SFAS No. 133. However, management believes such
notes, respectively. instruments are closely correlated with the respective debt, thus
As of December 31, 2005 and 2004, the weighted average managing associated risk. Interest rate derivative instruments not
interest rate on the credit facility debt was approximately 7.8% designated as hedges are marked to fair value, with the impact
and 6.8%, the weighted average interest rate on the high-yield recorded as gain (loss) on derivative instruments and hedging
notes was approximately 10.2% and 9.2%, and the weighted activities in our statements of operations. For the years ended
average interest rate on the convertible senior notes was December 31, 2005, 2004 and 2003, net gain (loss) on derivative
approximately 6.3% and 5.7%, respectively, resulting in a instruments and hedging activities includes gains of $47 million,
blended weighted average interest rate of 9.3% and 8.8%, $65 million and $57 million, respectively, for interest rate
respectively. The interest rate on approximately 77% and 83% of derivative instruments not designated as hedges.
the total principal amount of our debt was effectively fixed,
including the effects of our interest rate hedge agreements as of
December 31, 2005 and 2004, respectively. The fair value of our
high-yield notes was $10.4 billion and $12.2 billion at Decem-
ber 31, 2005 and 2004, respectively. The fair value of our
convertible senior notes was $647 million and $1.1 billion at
December 31, 2005 and 2004, respectively. The fair value of our
credit facilities is $5.7 billion and $5.5 billion at December 31,
2005 and 2004, respectively. The fair value of high-yield and
convertible notes is based on quoted market prices, and the fair
value of the credit facilities is based on dealer quotations.
We do not hold or issue derivative instruments for trading
purposes. We do, however, have certain interest rate derivative
instruments that have been designated as cash flow hedging
instruments. Such instruments effectively convert variable inter-
est payments on certain debt instruments into fixed payments.
For qualifying hedges, SFAS No. 133 allows derivative gains and
losses to offset related results on hedged items in the consoli-
dated statement of operations. We have formally documented,
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