Charter 2009 Annual Report Download - page 67

CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008, AND 2007
(dollars in millions, except where indicated)
F-19
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 technological changes. The change in useful lives reduced
depreciation expense by approximately $81 million and $8 million during 2008 and 2007, respectively. On the
Effective Date, the Company applied fresh start accounting and as such adjusted its property, plant and equipment to
reflect fair value and adjusted remaining useful lives for existing property, plant and equipment and for future
purchases.
Depreciation expense for the one month ended December 31, 2009, eleven months ended November 30, 2009 and
years ended December 31, 2008, and 2007 was $94 million, $1.2 billion, $1.3 billion, and $1.3 billion, respectively.
6. Franchises, Goodwill and Other Intangible Assets
Franchise rights represent the value attributed to agreements or authorizations with local and state authorities that
allow access to homes in cable service areas. Franchises are tested for impairment annually, or more frequently as
warranted by events or changes in circumstances. Franchises are aggregated into essentially inseparable units of
accounting to conduct the valuations. The units of accounting 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.
As a result of the continued economic pressure on the Company’ s customers from the recent economic downturn
along with increased competition, the Company determined that its projected future growth would be lower than
previously anticipated in its annual impairment testing in December 2008. Accordingly, the Company determined
that sufficient indicators existed to require it to perform an interim franchise impairment analysis as of September
30, 2009. As of the date of the filing of its parent companies’ Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009, the Company determined that an impairment of franchises was probable and could be
reasonably estimated. Accordingly, for the quarter ended September 30, 2009, the Company recorded a preliminary
non-cash franchise impairment charge of $2.9 billion which represented the Company’ s best estimate of the
impairment of its franchise assets. The Company finalized its franchise impairment analysis during the two months
ended November 30, 2009, and recorded a reduction of the non-cash franchise impairment charge of $691 million.
The Company recorded non-cash franchise impairment charges of $1.5 billion and $178 million for the years ended
December 31, 2008 and 2007, respectively. The impairment charge recorded in 2008 was primarily the result of the
impact of the economic downturn along with increased competition while the impairment charge recorded in 2007
was primarily the result of an increase in competition.
On the Effective Date, the Company applied fresh start accounting and adjusted its franchise, goodwill, and other
intangible assets including customer relationships to reflect fair value. The Company’ s valuations, which are based
on the present value of projected after tax cash flows, resulted in a value for property, plant and equipment,
franchises, and customer relationships for each unit of accounting. As a result of applying fresh start accounting,
the Company recorded goodwill of $951 million which represents the excess of reorganization value over amounts
assigned to the other assets. See Note 2.
The Company determined the estimated fair value of each unit of accounting utilizing an income approach model
based on the present value of the estimated discrete future cash flows attributable to each of the intangible assets
identified for each unit assuming a discount rate. This approach makes use of unobservable factors such as projected
revenues, expenses, capital expenditures, and a discount rate applied to the estimated cash flows. The determination
of the discount rate was based on a weighted average cost of capital approach, which uses a market participant’ s cost
of equity and after-tax cost of debt and reflects the risks inherent in the cash flows.
The Company estimated discounted future cash flows using reasonable and appropriate assumptions including
among others, penetration rates for basic and digital video, high-speed Internet, and telephone; revenue growth rates;
operating margins; and capital expenditures. The assumptions are derived based on the Company’ s and its peers’