Charter 2011 Annual Report Download - page 98

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 AND 2009
(dollars in millions, except share or per share data or where indicated)
F- 14
5. 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.
The Company recorded non-cash franchise impairment charges of $2.2 billion for the eleven months ended November 30, 2009
(Predecessor). The impairment charges recorded in 2009 were primarily the result of the impact of the economic downturn along
with increased competition. The Company’s 2011 and 2010 impairment analyses did not result in any franchise impairment
charges.
On the Effective Date, the Company applied fresh start accounting and adjusted its franchise, goodwill, and other intangible assets
including trademarks and 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.
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 Internet and telephone, to potential customers
(service marketing rights). Fair value is determined based on estimated discrete discounted future cash flows using assumptions
consistent with internal forecasts. The franchise after-tax cash flow is calculated as the after-tax cash flow generated by the
potential customers obtained (less the anticipated 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 franchises.
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 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’ historical operating performance adjusted for current and
expected competitive and economic factors surrounding the cable industry. The estimates and assumptions made in the Company’s
valuations are inherently subject to significant uncertainties, many of which are beyond its control, and there is no assurance that
these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation
that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense
growth rates, the amount and timing of capital expenditures and the discount rate utilized.
Goodwill is tested for impairment as of November 30 of each year, or more frequently as warranted by events or changes in
circumstances. The first step involves a comparison of the estimated fair value of each of our reporting units to its carrying amount.
If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired
and the second step of the goodwill impairment is not necessary. If the carrying amount of a reporting unit exceeds its estimated
fair value, then the second step of the goodwill impairment test must be performed, and a comparison of the implied fair value of
the reporting unit’s goodwill is compared to its carrying amount to determine the amount of impairment, if any. Reporting units
are consistent with the units of accounting used for franchise impairment testing. Likewise the fair values of the reporting units
are determined using a consistent income approach model as that used for franchise impairment testing. The Company’s 2011 and
2010 impairment analyses did not result in any goodwill impairment charges.
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 the discrete future after-tax cash flows from these customers, including
the right to deploy and market additional services to these customers. The present value of these after-tax cash flows yields the