Charter 2006 Annual Report Download - page 106

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2006 FORM 10-K
Notes to Consolidated Financial Statements (continued)
includes Charter’s requirement to lend the shares and the loss. For the years ended December 31, 2006, 2005, and 2004, a
counterparties’ requirement to return the shares, is de minimis loss of $1 million and gains of $16 million and $42 million,
and represents the cash received upon lending of the shares and respectively, related to derivative instruments designated as cash
is equal to the par value of the common stock to be issued. flow hedges, were recorded in accumulated other comprehen-
sive loss and minority interest. The amounts are subsequently
14. COMPREHENSIVE LOSS reclassified into interest expense as a yield adjustment in the
same period in which the related interest on the floating-rate
Certain marketable equity securities are classified as available- debt obligations 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 other income, net, in the Company’s consolidated
Instruments and Hedging Activities, in accumulated other compre- statement of operations. For the years ended December 31,
hensive loss, after giving effect to the minority interest share of 2006, 2005, and 2004 other income, net includes gains of
such gains and losses. Comprehensive loss for the years ended $4 million, $47 million, and $65 million, respectively, for interest
December 31, 2006, 2005, and 2004 was $1.4 billion, $961 mil- rate derivative instruments not designated as hedges.
lion and $4.3 billion, respectively. As of December 31, 2006, 2005, and 2004, the Company
had outstanding $1.7 billion, $1.8 billion, and $2.7 billion and $0,
15. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
$20 million, and $20 million, respectively, in notional amounts
The Company uses interest rate risk management derivative of interest rate swaps and collars, respectively. The notional
instruments, such as interest rate swap agreements and interest amounts of interest rate instruments do not represent amounts
rate collar agreements (collectively referred to herein as interest exchanged by the parties and, thus, are not a measure of
rate agreements) to manage its interest costs. The Company’s exposure to credit loss. The amounts exchanged are determined
policy is to manage interest costs using a mix of fixed and by reference to the notional amount and the other terms of the
variable rate debt. Using interest rate swap agreements, the contracts.
Company has agreed to exchange, at specified intervals through
2007, the difference between fixed and variable interest amounts 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
calculated by reference to an agreed-upon notional principal The Company has estimated the fair value of its financial
amount. Interest rate collar agreements are used to limit the instruments as of December 31, 2006 and 2005 using available
Company’s exposure to and benefits from interest rate fluctua- market information or other appropriate valuation methodolo-
tions on variable rate debt to within a certain range of rates. gies. Considerable judgment, however, is required in interpreting
The Company does not hold or issue derivative instruments market data to develop the estimates of fair value. Accordingly,
for trading purposes. The Company does, however, have certain the estimates presented in the accompanying consolidated
interest rate derivative instruments that have been designated as financial statements are not necessarily indicative of the amounts
cash flow hedging instruments. Such instruments effectively the Company would realize in a current market exchange.
convert variable interest payments on certain debt instruments The carrying amounts of cash, receivables, payables and
into fixed payments. For qualifying hedges, SFAS No. 133 other current assets and liabilities approximate fair value because
allows derivative gains and losses to offset related results on of the short maturity of those instruments. The Company is
hedged items in the consolidated statement of operations. The exposed to market price risk volatility with respect to invest-
Company has formally documented, designated and assessed the ments in publicly traded and privately held entities.
effectiveness of transactions that receive hedge accounting. For The fair value of interest rate agreements represents the
the years ended December 31, 2006, 2005 and 2004, other estimated amount the Company would receive or pay upon
income, net includes gains of $2 million, $3 million and termination of the agreements. Management believes that the
$4 million, respectively, which represent cash flow hedge sellers of the interest rate agreements will be able to meet their
ineffectiveness on interest rate hedge agreements arising from obligations under the agreements. In addition, some of the
differences between the critical terms of the agreements and the interest rate agreements are with certain of the participating
related hedged obligations. Changes in the fair value of interest banks under the Company’s credit facilities, thereby reducing
rate agreements designated as hedging instruments of the the exposure to credit loss. The Company has policies regarding
variability of cash flows associated with floating-rate debt the financial stability and credit standing of major counterparties.
obligations that meet the effectiveness criteria specified by Nonperformance by the counterparties is not anticipated nor
SFAS No. 133 are reported in accumulated other comprehensive
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