Charter 2007 Annual Report Download - page 91

6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of
December 31, 2007 and 2006:
2007 2006
Cable distribution systems $ 6,697 $ 6,415
Customer equipment and installations 3,740 3,428
Vehicles and equipment 257 254
Buildings and leasehold improvements 483 498
Furniture, fixtures and equipment 388 397
11,565 10,992
Less: accumulated depreciation (6,462) (5,775)
$ 5,103 $ 5,217
The Company has adjusted the historical cost basis and
related accumulated depreciation as of December 31, 2007 and
2006 to reflect estimated asset retirements through December 31,
2007 and 2006, respectively. No gain or loss was recorded on
these retirements.
The Company periodically evaluates the estimated useful
lives used to depreciate its assets and the estimated amount of
assets that will be abandoned or have minimal use in the future.
A significant change in assumptions about the extent or timing
of future asset retirements, or in the Company’s use of new
technology and upgrade programs, could materially affect future
depreciation expense. In 2007, the Company changed the useful
lives of certain property, plant, and equipment based on techno-
logical changes. The change in useful lives reduced depreciation
expense by approximately $8 million during 2007.
Depreciation expense for the years ended December 31,
2007, 2006, and 2005 was $1.3 billion, $1.3 billion, and $1.4 bil-
lion, respectively.
7. FRANCHISES AND GOODWILL
Franchise rights represent the value attributed to agreements
with local authorities that allow access to homes in cable service
areas acquired through the purchase of cable systems. Manage-
ment estimates the fair value of franchise rights at the date of
acquisition and determines if the franchise has a finite life or an
indefinite-life as defined by SFAS No. 142, Goodwill and Other
Intangible Assets. Franchises that qualify for indefinite-life treat-
ment under SFAS No. 142 are tested for impairment annually
each October 1 based on valuations, or more frequently as
warranted by events or changes in circumstances. The Compa-
ny’s impairment assessment as of October 1, 2007 did not
indicate impairment; however upon completion of its 2008
budgeting process in December 2007, the Company determined
that a triggering event requiring a reassessment of franchise
values had occurred. Largely driven by increased competition
being experienced by the Company and its peers, the Company
lowered its projected revenue and expense growth rates and
increased its projected capital expenditures, and accordingly
revised its estimates of future cash flows as compared to those
used in prior valuations. As a result, the Company recorded
$178 million of impairment for the year ended December 31,
2007. The valuations completed at October 1, 2006 and 2005
showed franchise values in excess of book value, and thus
resulted in no impairments. Franchises are aggregated into essen-
tially inseparable asset groups to conduct the valuations. The
asset groups generally represent geographical clustering of the
Company’s cable systems into groups by which such systems are
managed. Management believes such grouping represents the
highest and best use of those assets.
The Company’s valuations, which are based on the present
value of projected after tax cash flows, result in a value of
property, plant and equipment, franchises, customer relationships,
and its total entity value. The value of goodwill is the difference
between the total entity value and amounts assigned to the other
assets.
Franchises, for valuation purposes, are defined as the future
economic benefits of the right to solicit and service potential
customers (customer marketing rights), and the right to deploy
and market new services, such as interactivity and telephone, to
the potential customers (service marketing rights). Fair value is
determined based on estimated discounted future cash flows
using assumptions consistent with internal forecasts. The fran-
chise after-tax cash flow is calculated as the after-tax cash flow
generated by the potential customers obtained (less the antici-
pated customer churn), and the new services added to those
customers in future periods. The sum of the present value of the
franchises’ after-tax cash flow in years 1 through 10 and the
continuing value of the after-tax cash flow beyond year 10 yields
the fair value of the franchise.
Customer relationships, for valuation purposes, represent the
value of the business relationship with existing customers (less
the anticipated customer churn), and are calculated by projecting
future after-tax cash flows from these customers, including the
right to deploy and market additional services to these custom-
ers. The present value of these after-tax cash flows yields the fair
value of the customer relationships. Substantially all acquisitions
occurred prior to January 1, 2002. The Company did not record
any value associated with the customer relationship intangibles
related to those acquisitions. For acquisitions subsequent to
January 1, 2002 the Company did assign a value to the customer
relationship intangible, which is amortized over its estimated
useful life.
F-13
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2007 FORM 10-K
Notes to Consolidated Financial Statements (continued)