|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Time Warner Cable 10-K 2009 Documents found in this filing:
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2008
Commission file number
001-33335
60 Columbus Circle
New York, New York 10023
(Address of principal executive
offices) (Zip Code)
(212) 364-8200
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of the close of business on February 13, 2009, there were
902,014,340 shares of the registrant’s Class A
Common Stock and 75,000,000 shares of the registrant’s
Class B Common Stock outstanding. The aggregate market
value of the registrant’s voting and non-voting common
equity securities held by non-affiliates of the registrant
(based upon the closing price of such shares on the New York
Stock Exchange on June 30, 2008) was approximately
$4.1 billion.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Business.
Time Warner Cable Inc. (together with its subsidiaries,
“TWC” or the “Company”) is the
second-largest cable operator in the U.S., with technologically
advanced, well-clustered systems located mainly in five
geographic areas – New York State (including New
York City), the Carolinas, Ohio, southern California (including
Los Angeles) and Texas. As of December 31, 2008, TWC served
approximately 14.6 million customers who subscribed to one
or more of its video, high-speed data and voice services,
representing approximately 34.2 million revenue generating
units (“RGUs”), which reflects the total of all TWC
basic video, digital video, high-speed data and voice service
subscribers.
As of December 31, 2008, TWC served approximately
13.1 million basic video subscribers. Of those,
approximately 8.6 million (or 66%) received some portion of
their video services at their dwelling or commercial
establishment via digital transmissions (“digital video
subscribers”). Also, as of December 31, 2008, TWC
served approximately 8.4 million residential high-speed
data subscribers (or 32% of estimated high-speed data
service-ready homes passed) and approximately 3.7 million
residential Digital Phone subscribers (or 14% of estimated voice
service-ready homes passed). TWC markets its services separately
and in “bundled” packages of multiple services and
features. As of December 31, 2008, 54% of TWC’s
customers subscribed to two or more of its primary services,
including 21% of its customers who subscribed to all three
primary services. As part of an increased emphasis on its
commercial business, TWC began selling its commercial Digital
Phone service, Business Class Phone, to small- and
medium-sized businesses in the majority of its operating areas
during 2007, and substantially completed the roll-out in the
remainder of its operating areas during 2008. TWC believes
providing commercial services will generate additional
opportunities for growth. As of December 31, 2008, TWC
served 283,000 commercial high-speed data subscribers and 30,000
commercial Digital Phone subscribers. In addition, TWC sells
advertising to a variety of national, regional and local
customers.
In July 2006, Time Warner NY Cable LLC (“TW NY
Cable”), a subsidiary of TWC, and Comcast Corporation
(together with its subsidiaries, “Comcast”) completed
their respective acquisitions of assets comprising in aggregate
substantially all of the cable assets of Adelphia Communications
Corporation (“Adelphia”) (the “Adelphia
Acquisition”). In February 2007, Adelphia’s
Chapter 11 reorganization plan became effective. Under the
terms of the reorganization plan, substantially all of the
shares of TWC Class A common stock, par value $.01 per
share (“TWC Class A common stock”), that Adelphia
received as part of the payment for the systems TW NY Cable
acquired from Adelphia were distributed to Adelphia’s
creditors. As a result, under applicable securities law
regulations and provisions of the U.S. bankruptcy code, TWC
became a public company subject to the requirements of the
Securities Exchange Act of 1934, as amended (the
“Securities Exchange Act”). On March 1, 2007, the
TWC Class A common stock began trading on the New York
Stock Exchange under the symbol “TWC.” Time Warner
Inc. (“Time Warner”) currently owns approximately
84.0% of the common stock of TWC (representing a 90.6% voting
interest) and also currently owns an indirect 12.43% non-voting
common stock interest in TW NY Cable Holding Inc. (“TW
NY”), a subsidiary of TWC. The financial results of
TWC’s operations are consolidated by Time Warner.
On May 20, 2008, TWC and its subsidiaries, Time Warner
Entertainment Company, L.P. (“TWE”) and TW NY, entered
into a Separation Agreement (the “Separation
Agreement”) with Time Warner and its subsidiaries, Warner
Communications Inc. (“WCI”), Historic TW Inc.
(“Historic TW”) and American Television and
Communications Corporation (“ATC”), the terms of which
will govern TWC’s legal and structural separation from Time
Warner. TWC’s separation from Time Warner will take place
through a series of related transactions, the occurrence of each
of which is a condition to the next. First, Time Warner will
complete certain internal restructuring transactions not
affecting TWC. Next, following the satisfaction or waiver of
certain conditions, including those mentioned below, Historic TW
will transfer its 12.43% non-voting common stock interest in TW
NY to TWC in exchange for 80 million newly issued shares of
TWC’s Class A common stock (the “TW NY
Exchange”).
Table of Contents
Following the TW NY Exchange, Time Warner will complete certain
additional restructuring steps that will make Time Warner the
direct owner of all shares of TWC’s Class A common
stock and Class B common stock previously held by its
subsidiaries (all of Time Warner’s restructuring
transaction steps being referred to collectively as the “TW
Internal Restructuring”). Upon completion of the TW
Internal Restructuring, TWC’s board of directors or a
committee thereof will declare a special cash dividend to
holders of TWC’s outstanding Class A common stock and
Class B common stock, including Time Warner, in an amount
equal to $10.27 per share (aggregating $10.855 billion)
(the “Special Dividend”). The Special Dividend will be
paid prior to the completion of TWC’s separation from Time
Warner. Following the receipt by Time Warner of its share of the
Special Dividend, TWC will file with the Secretary of State of
the State of Delaware an amended and restated certificate of
incorporation, pursuant to which, among other things, each
outstanding share of TWC Class A common stock (including
any shares of Class A common stock issued in the TW NY
Exchange) and TWC Class B common stock will automatically
be converted into one share of common stock, par value $0.01 per
share (the “TWC Common Stock”) (the
“Recapitalization”). Once the TW NY Exchange, the TW
Internal Restructuring, the payment of the Special Dividend and
the Recapitalization have been completed, TWC’s separation
from Time Warner (the “Separation”) will proceed in
the form of a pro rata dividend of all shares of TWC Common
Stock held by Time Warner to holders of Time Warner’s
common stock (the “Distribution”). The Separation, the
TW NY Exchange, the TW Internal Restructuring, the Special
Dividend, the Recapitalization and the Distribution collectively
are referred to as the “Separation Transactions.”
The Separation Agreement contains customary covenants, and
consummation of the Separation Transactions is subject to
customary closing conditions. As of February 12, 2009, all
regulatory and other necessary governmental reviews of the
Separation Transactions have been satisfactorily completed. Time
Warner and TWC expect the Separation Transactions to be
consummated in the first quarter of 2009. See Item 1A,
“Risk Factors,” for a discussion of risk factors
relating to the Separation.
In connection with the Separation Transactions, the Company has
been authorized to effectuate a reverse stock split of the TWC
Common Stock at a
1-for-3
ratio.
On June 16, 2008, TWC filed a shelf registration statement
on
Form S-3
(the “Shelf Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) that
allows TWC to offer and sell from time to time senior and
subordinated debt securities and debt warrants. TWC issued, in
total, $7.0 billion in aggregate principal amount of senior
unsecured notes and debentures under the Shelf Registration
Statement in two underwritten public offerings on June 19,
2008 and November 18, 2008 (collectively, the “2008
Bond Offerings”). Pending the payment of the Special
Dividend, a portion of the net proceeds from the 2008 Bond
Offerings was used to repay variable-rate debt with lower
interest rates than the interest rates on the debt securities
issued in the 2008 Bond Offerings, and the remainder was
invested in accordance with the Company’s investment
policy. If the Separation is not consummated and the Special
Dividend is not paid, the Company will use the remainder of the
net proceeds from the 2008 Bond Offerings for general corporate
purposes, including repayment of indebtedness.
In addition to issuing the debt securities in the 2008 Bond
Offerings described above, on June 30, 2008, the Company
entered into a credit agreement with a geographically diverse
group of major financial institutions for a senior unsecured
term loan facility in an initial aggregate principal amount of
$9.0 billion with an initial maturity date that is
364 days after the borrowing date (the “2008 Bridge
Facility”) in order to finance, in part, the Special
Dividend. TWC may elect to extend the maturity date of the loans
outstanding under the 2008 Bridge Facility for an additional
year. As a result of the 2008 Bond Offerings, the amount of the
commitments of the lenders under the 2008 Bridge Facility was
reduced to $2.070 billion. TWC may not borrow any amounts
under the 2008 Bridge Facility unless and until the Special
Dividend is declared. The financial institutions’
commitments to fund borrowings under the 2008 Bridge Facility
will expire upon the earliest of (i) May 19, 2009,
(ii) the date on which the Separation Agreement is
terminated in accordance with its terms or (iii) the
completion of the Separation.
On December 10, 2008, Time Warner (as lender) and TWC (as
borrower) entered into a credit agreement for a two-year
$1.535 billion senior unsecured supplemental term loan
facility (the “Supplemental Credit Agreement”).
Table of Contents
TWC may borrow under the Supplemental Credit Agreement only to
repay amounts outstanding at the final maturity of the 2008
Bridge Facility, if any.
TWC’s obligations under the debt securities issued in the
2008 Bond Offerings and under the 2008 Bridge Facility and the
Supplemental Credit Agreement are guaranteed by TWE and TW NY.
For more information about the 2008 Bond Offerings, the 2008
Bridge Facility and the Supplemental Credit Agreement, see
“Management’s Discussion and Analysis of Results of
Operations and Financial Condition—Overview—Recent
Developments—2008 Bond Offerings and Credit
Facilities” and Note 7 to the accompanying
consolidated financial statements.
This Annual Report on
Form 10-K
includes certain “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on management’s current
expectations and beliefs and are inherently susceptible to
uncertainty and changes in circumstances. Actual results may
vary materially from the expectations contained herein due to
changes in economic, business, competitive, technological,
strategic
and/or
regulatory factors and other factors affecting the operation of
TWC’s business, including the Separation. For more detailed
information about these factors, and risk factors with respect
to the Company’s operations, see Item 1A, “Risk
Factors,” below and “Caution Concerning
Forward-Looking Statements” in “Management’s
Discussion and Analysis of Results of Operations and Financial
Condition” in the financial section of this report. TWC is
under no obligation to, and expressly disclaims any obligation
to, update or alter its forward-looking statements, whether as a
result of such changes, new information, subsequent events or
otherwise.
Although TWC and its predecessors have been in the cable
business for over 40 years in various legal forms, Time
Warner Cable Inc. was incorporated as a Delaware corporation on
March 21, 2003. TWC’s annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to such reports filed with or furnished to
the Securities and Exchange Commission (“SEC”)
pursuant to Section 13(a) or 15(d) of the Exchange Act are
available free of charge on the Company’s website at
www.timewarnercable.com as soon as reasonably practicable
after such reports are electronically filed with the SEC.
The following charts illustrate TWC’s corporate structure
and its direct or indirect ownership interest in its principal
subsidiaries (i) on an actual basis as of December 31,
2008 and (ii) after giving effect to the Separation
Transactions. The subscriber numbers and RGUs, long-term debt
and preferred equity balances presented below are approximate as
of December 31, 2008. Certain intermediate entities and
certain preferred interests held by TWC or subsidiaries of TWC
are not reflected. The subscriber numbers and RGUs within each
entity indicate the approximate number of basic video
subscribers and RGUs attributable to cable systems owned by such
entity. Basic video subscriber numbers reflect billable
subscribers who receive at least TWC’s basic video service.
RGUs reflect the total of all TWC basic video, digital video,
high-speed data and voice subscribers. Therefore, a subscriber
who purchases basic video, digital video, high-speed data and
voice services will count as four RGUs.
Table of Contents
Table of Contents
Table of Contents
TWC offers residential and commercial video, high-speed data and
voice services over its broadband cable systems.
Programming tiers. TWC offers three main
levels or “tiers” of video programming—Basic
Service Tier (“BST”), Expanded Basic Service Tier (or
Cable Programming Service Tier) (“CPST”) and Digital
Basic Service Tier (“DBT”). BST generally includes
broadcast television signals, satellite-delivered broadcast
networks and superstations, local origination channels, a few
specialty networks, such as C-SPAN and QVC, and public access,
educational and government channels. CPST enables BST
subscribers to add to their service national, regional and local
cable news, entertainment and other specialty networks, such as
CNN, A&E, ESPN, CNBC and Discovery. In certain areas, BST
and CPST also include proprietary local programming devoted to
the communities TWC serves, including
24-hour
local news channels in a number of cities. Together, BST and
CPST provide customers with approximately 70 channels. DBT
enables digital video subscribers to add to their CPST service
up to approximately 50 additional cable networks, including
spin-off and successor networks to national cable services, news
networks and niche programming services, such as History
International and Biography. Generally, subscribers to CPST and
DBT can purchase thematically-linked programming tiers,
including movies, sports and Spanish language tiers, and
subscribers to any tier of video programming can purchase
premium services, such as HBO and Showtime.
TWC’s video subscribers pay a fixed monthly fee based on
the video programming tier they receive. Subscribers to
specialized tiers and premium services are charged an additional
monthly fee, with discounts generally available for the purchase
of packages of more than one such service. The rates TWC can
charge for its BST service in areas not subject to
“effective competition” and certain video equipment,
including set-top boxes, are subject to regulation under federal
law. See “—Regulatory Matters” below.
Transmission technology. TWC’s video
subscribers may receive service through analog transmissions, a
combination of digital and analog transmissions or, in systems
where TWC has fully deployed digital technology, digital
transmissions only. Customers who receive any level of video
service at their dwelling or commercial establishment via
digital transmissions over TWC’s systems are referred to as
“digital video subscribers.” As of December 31,
2008, 66% of TWC’s basic video subscribers were digital
video subscribers.
Digital video subscribers using a TWC-provided set-top box
generally have access to an interactive program guide, Video on
Demand (“VOD”), which is discussed below, music
channels and seasonal sports packages. Digital video subscribers
who receive premium services generally also receive
“multiplex” versions of these services. Digital video
subscribers will also have access to these services using a
television enabled with
tru2waytm
technology, which TWC expects will be made available by
third-parties in mid-2009. See “—Technology—Cable
Systems—Set-top Boxes” below.
The following table presents selected statistical data regarding
TWC’s video subscribers:
Table of Contents
On-Demand services. On-Demand services are
available to digital video subscribers using a TWC-provided
set-top box or, when available, a
tru2way-enabled
television. Available On-Demand services include a wide
selection of featured movies and special events, for which
separate per-use fees are generally charged, and free access to
selected movies, programs and program excerpts from broadcast
and cable networks, music videos, local programming and other
content. In addition, premium service (e.g., HBO) subscribers
receiving services via a TWC-provided digital set-top box
generally have access to the premium service’s On-Demand
content without additional fees.
Enhanced TV services. TWC is expanding the use
of VOD technology to introduce additional enhancements to the
video experience. For instance, as of December 31, 2008,
Start
Overtm,
which allows digital video subscribers using a TWC-provided
set-top box to restart select “in progress” programs
airing on participating cable networks and broadcast stations
directly from the relevant channel, without the ability to
fast-forward through commercials, was available to 47%, or
approximately 4.0 million, of TWC’s digital video
subscribers. TWC received an
Emmytm
award in 2007 for its Start Over service. TWC has begun rolling
out other Enhanced TV features such as Look
Backtm,
which utilizes the Start Over technology to allow viewing of
recently aired programs, and Quick
Clipstm,
which allows customers to view short-form content tied to the
cable network or broadcast station then being watched. TWC is
also working to make available Catch Up, which will allow
customers to view previously aired programs they have missed.
HD television. In its more advanced divisions,
as of December 31, 2008, TWC offered up to 95 channels of
high-definition (“HD”) television, or HDTV, and
expects to continue to add additional HD programming during
2009. In most divisions, HD simulcasts (i.e., HD channels that
are the same as their standard-definition counterparts but for
picture quality) are provided at no additional charge, and
additional charges apply only for HD channels that do not have
standard definition counterparts. In addition to its linear HD
channels, TWC also offers VOD programming in HD and, on select
channels, HD programming viewed using Start Over is presented in
HD.
DVRs. Set-top boxes equipped with digital
video recorders (“DVRs”) enable customers, among other
things, to pause
and/or
rewind “live” television programs and record programs
on the hard drive built into the set-top box. TWC also offers HD
DVRs, which enable customers to record HD programming.
Subscribers pay an additional monthly fee for TWC’s DVR
service. As of December 31, 2008, 47%, or approximately
4.0 million, of TWC’s digital video subscribers also
subscribed to its DVR service.
TWC offered residential high-speed data services to nearly all
of its homes passed as of December 31, 2008. TWC’s
high-speed data services provide customers with a fast,
always-on connection to the Internet. High-speed data
subscribers connect to TWC’s cable systems using a cable
modem, which TWC provides at no charge or which subscribers can
purchase on their own. Generally, subscribers pay a flat monthly
fee based on the level of service received.
The following table presents selected statistical data regarding
TWC’s residential high-speed data subscribers:
Table of Contents
Road Runner. TWC offers four tiers of its Road
Runnertm
high-speed data service in all of its systems:
Turbotm,
Standard, Basic and Lite and, in New York City, it also offers
Extreme. Generally, each tier offers different speeds at a
different monthly fee, although TWC is testing consumption-based
pricing in one of its operating areas. In TWC’s more
advanced operating areas, Turbo offers subscribers speeds of up
to 20 mbps downstream and 2 mbps upstream. In addition, in the
majority of its systems, TWC provides Turbo subscribers with
Powerboosttm,
which allows users to initiate brief download speed bursts when
TWC’s network capacity permits, and it is in the process of
rolling Powerboost out to its Standard subscribers.
TWC’s Road Runner service provides communication tools and
personalized services, including
e-mail, PC
security, parental controls, news groups and online radio,
without any additional charge. The Road Runner portal provides
access to content and media from local, national and
international providers and topic-specific channels, including
entertainment, games, news, sports, travel, music, movie
listings and shopping sites. In addition, in 2008, TWC launched
the Road Runner Video Store, which permits subscribers to rent
or purchase television shows and movies for online viewing.
TWC provides high-speed data service over its hybrid fiber coax
(“HFC”) network using Data Over Cable Service
Interface Specification (“DOCSIS”). In the majority of
its systems, TWC has deployed DOCSIS 2.0, and it plans to deploy
DOCSIS 3.0 selectively in its systems during 2009, which will
enable TWC to deliver speeds significantly faster than currently
achievable.
In addition to Road Runner, most of TWC’s cable systems
provide their high-speed data subscribers with access to the
services of certain other on-line providers, including Earthlink.
Digital Phone. TWC offered its Digital Phone
service to nearly all of its homes passed as of
December 31, 2008. Most Digital Phone customers receive
unlimited local, in-state and U.S., Canada and Puerto Rico
calling and a number of calling features, including call
waiting, caller ID and Enhanced 911 (“E911”) services,
for a fixed monthly fee. TWC also offers additional calling
plans with a variety of options that are designed to meet
customers’ particular needs, including a local-only calling
plan, an unlimited in-state calling plan and an international
calling plan.
The following table presents selected statistical data regarding
TWC’s residential Digital Phone subscribers:
TWC has provided video, high-speed data and network and
transport services to commercial customers for over a decade.
During 2007, TWC began selling Business Class Phone to
small- and medium-sized businesses in the majority of its
operating areas and substantially completed the roll-out in the
remainder of its operating areas during 2008. The introduction
of Business Class Phone enables TWC to offer its commercial
customers a bundle of video, high-speed data and voice services
and to compete against bundled services from its competitors.
Table of Contents
TWC offers commercial customers a full range of video
programming tiers marketed under the “Time Warner Cable
Business Class” brand. Packages are designed to meet the
demands of a business environment by offering a wide variety of
video services that enable businesses to entertain customers and
stay abreast of news, weather and financial information. Similar
to residential customers, commercial customers receive video
services through analog transmissions, a combination of digital
and analog transmissions or, in systems where TWC has fully
deployed digital technology, digital transmissions only.
TWC offers commercial customers a variety of high-speed data
services, including Internet access, website hosting and managed
security. These services are offered to a broad range of
businesses and are marketed under the “Road Runner Business
Class” brand. Commercial subscribers pay a flat monthly fee
based on the level of service received. Due to their different
characteristics, commercial subscribers are charged at different
rates than residential subscribers. As of December 31,
2008, TWC had 283,000 commercial high-speed data subscribers. In
addition, TWC provides its high-speed data services to other
cable operators for a fee, who in turn provide high-speed data
services to their customers.
Business Class Phone service includes unlimited local,
intrastate and long distance in the United States, Canada,
Puerto Rico, US Virgin Islands, Guam and Saipan as well as a
toll-free service for a flat monthly rate. As of
December 31, 2008, TWC had 30,000 Business Class Phone
subscribers.
TWC provides dedicated transmission capacity on its network to
customers that desire high-bandwidth connections among
locations. TWC also offers point-to-point circuits to wireless
telephone providers and to other carrier and wholesale
customers. TWC’s virtual private network, or VPN, services
enable customers to use
IP-based
business applications for secure communications among
geographically dispersed locations, while also providing
customers high-speed access to the Internet, and provide secure
access to the Internet for remote users, such as traveling
employees and employees working from home or a remote location.
TWC also offers a variety of Ethernet services that are designed
to provide high-speed, high-capacity connections among
customers’ local area networks, or LANs, within and between
metropolitan areas.
In addition to selling its services separately, TWC is focused
on marketing differentiated packages of multiple services and
features, or “bundles,” for a single price. TWC offers
bundled services to both its residential and commercial
customers and, increasingly, these customers subscribe to two or
three of TWC’s primary services. TWC customers who
subscribe to a bundle receive a discount from the price of
buying the services separately as well as the convenience of a
single monthly bill. TWC also is continuing to develop services
that are available only to customers who subscribe to a bundle.
See “—Cross-platform Features” below. TWC
believes that bundled offerings increase its customers’
satisfaction with TWC, increase customer retention and encourage
subscription to additional features.
Table of Contents
The following table presents selected statistical data regarding
TWC’s customer relationships and double play and triple
play subscribers:
In support of its bundled services strategy, TWC continues to
introduce features that operate across two or more of its
services. For example, TWC provides nearly two-thirds of its
digital video subscribers who also subscribe to its Digital
Phone service a Caller ID on TV feature that displays incoming
call information on the customer’s television set, at no
extra charge. TWC has also introduced a feature called
“PhotoShowTV” in the majority of its operating areas
that gives digital video subscribers who use both a TWC-provided
set-top box and subscribe to TWC’s Road Runner high-speed
data service the ability to create and share their personal
photo shows and videos with other TWC digital video subscribers
using its VOD technology. In addition, TWC has launched a
website, www.twondemand.com, and an iPhone application,
which provide subscribers with access to the entire catalog of
available VOD titles and the ability to conduct various
searches, including searching for VOD titles that are most
popular in the subscriber’s local area. In 2009, TWC
expects to launch remote DVR management, which will allow
customers who subscribe to TWC’s DVR service to use the
Internet to program their DVRs, and a residential phone web
portal, which will allow Digital Phone subscribers to use the
Internet to modify Digital Phone features, make payments and
listen to voicemail.
TWC earns revenues by selling advertising to national, regional
and local customers. As part of the agreements under which it
acquires video programming, TWC typically receives an allocation
of scheduled advertising time in such programming, generally two
or three minutes per hour, into which its systems can insert
commercials, subject, in some instances, to certain subject
matter limitations. The clustering of TWC’s systems expands
the share of viewers that TWC reaches within a local designated
market area, which helps its local advertising sales business to
compete more effectively with broadcast and other media. In
addition, TWC has a strong presence in the country’s two
largest advertising market areas, New York, NY, and Los Angeles,
CA.
In many locations, TWC has formed advertising
“interconnects” or entered into representation
agreements with contiguous cable system operators to deliver
locally inserted commercials across wider geographic areas,
replicating the reach of the local broadcast stations as much as
possible. TWC also sells the advertising inventory of certain
regional sports programming networks. In addition, TWC’s
local cable news channels and VOD offerings provide it with
opportunities to generate advertising revenue.
Table of Contents
TWC is exploring various means by which it could utilize its VOD
and other advanced capabilities to deliver to television
advertisers the same kind of advanced advertising offerings and
measurement data currently available to Internet advertisers.
For example, in several divisions, TWC provides overlays that
enable digital video subscribers with a TWC-provided set-top box
to request additional information regarding certain advertised
products, using the remote control, to “telescope”
from a traditional advertisement to a long-form VOD segment
regarding the advertised product, to vote on a relevant topic or
to receive more specific additional information. These tools can
be used to provide advertisers with important feedback about the
impact of their advertising efforts. TWC also currently provides
anonymized VOD and enhanced TV viewing data to its programming
partners. In addition, in 2008, TWC and certain other cable
operators formed a joint venture, Canoe Ventures LLC
(“Canoe”), focused on developing a common technology
platform among cable operators for the delivery of advanced
advertising products and services to be offered to programmers
and advertisers. TWC plans, through Canoe, to expand its
measurement capabilities in order to provide anonymized viewing
data to marketers and strategic partners to serve as the
foundation of its advanced advertising platform.
TWC is investing in technology to provide subscribers with the
ability to access its video, high-speed data and voice services
outside the home. In November 2008, TWC and several other
companies collectively invested $3.2 billion in Clearwire
Corporation, a wireless broadband communications company
(“Clearwire Corp”), and one of its operating
subsidiaries, Clearwire Communications LLC (“Clearwire
LLC,” and, collectively with Clearwire Corp,
“Clearwire”). TWC invested $550 million for
membership interests in Clearwire LLC and received voting and
board of director nomination rights in Clearwire Corp. Clearwire
LLC was formed by the combination of Sprint Nextel
Corporation’s (“Sprint”) and Clearwire
Corp’s respective wireless broadband businesses and is
focused on deploying the first nationwide fourth-generation
wireless network to provide mobile broadband services to
wholesale and retail customers. In connection with the
transaction, TWC entered into a wholesale agreement with Sprint
that allows TWC to offer wireless services utilizing
Sprint’s second-generation and third-generation network and
a wholesale agreement with Clearwire that will allow TWC to
offer wireless services utilizing Clearwire’s mobile
broadband wireless network. TWC is also a participant in a joint
venture with several other cable companies that holds advanced
wireless spectrum licenses. For more information about these
wireless investments, see “—Operating Partnerships and
Joint Ventures” below.
TWC’s marketing strategy primarily focuses on bundles of
video, high-speed data and voice services, including premium
services, offered in differentiated, but easy to understand
packages that also provide a discount from the price of buying
the services separately and the convenience of a single bill.
Bundles are generally marketed with entry level pricing, which
provides TWC’s customer care representatives the
opportunity to offer additional services or upgraded levels of
existing services that may be appealing to targeted customer
groups. In addition, TWC offers its customers a price lock
guarantee, which allows customers to enter into a longer-term
contract with TWC at a set rate. As of December 31, 2008,
more than 1.0 million of TWC’s customers had a price
lock guarantee.
TWC utilizes its brand and the brand statement, The Power of
Youtm,
in conjunction with a variety of integrated marketing,
promotional and sales campaigns and techniques generally on a
local or regional basis. TWC’s advertising is intended to
let its diverse base of subscribers and potential subscribers
know that it is a customer-centric company committed to
exceeding customers’ expectations through innovative
service offerings and customer service. This message is
delivered via broadcast, TWC’s website, its cable systems,
print, radio and other outlets including outdoor advertising,
direct mail,
e-mail,
on-line advertising, local grassroots efforts and
non-traditional media.
TWC also employs a wide range of direct channels to reach its
customers, including outbound telemarketing, door-to-door sales
and marketing in retail stores. In addition, TWC uses customer
care channels and inbound call centers to increase awareness of
its service offerings. Promotional offers with third parties are
also a key part of its strategy, and an area in which TWC works
with third parties such as consumer electronics manufacturers
and cable programmers.
Table of Contents
TWC believes that improving customer care contributes to
customer satisfaction and lasting customer relationships, which
results in increased penetration and retention of its services.
TWC’s customer care strategy is focused on four key
components, including:
Technology
TWC’s cable systems employ a HFC network. TWC transmits
signals on these systems via laser-fed fiber optic cable from
origination points known as “headends” and
“hubs” to a group of distribution “nodes,”
and uses coaxial cable to deliver these signals from the
individual nodes to the homes they serve. TWC pioneered this
architecture and received an Emmy award in 1994 for its HFC
development efforts. HFC architecture allows the delivery of
two-way video and broadband transmissions, which is essential to
providing advanced video services like VOD, Road Runner
high-speed data service and Digital Phone. As of
December 31, 2008, virtually all of the homes passed by
TWC’s cable systems were served by plant that had been
upgraded to provide at least 750MHz of capacity.
TWC believes that its network architecture is sufficiently
flexible and extensible to support its current requirements.
However, in order for TWC to continue to innovate and deliver
new services to its customers, as well as meet its competitive
needs, TWC anticipates that it will need to use the bandwidth
available to its systems more efficiently over the next few
years. TWC believes that this can be achieved without costly
upgrades. For example, to accommodate increasing demands for
greater capacity in its network, TWC is deploying a technology
known as switched digital video (“SDV”). SDV
technology expands network capacity by transmitting only those
digital and HD video channels that are being watched within a
given grouping of households at any given moment. Since it is
generally the case that not all such channels are being watched
at all times by a given group of households, SDV technology
frees up capacity that can then be made available for other
uses. TWC received an Emmy award in 2008 for its efforts in the
development of SDV technology. As of December 31, 2008,
approximately 5.2 million (or 60%) of digital video
subscribers received some portion of their video service via SDV
technology, and TWC expects to continue to deploy SDV technology
during 2009.
Each of TWC’s cable systems uses one of two
“conditional access” systems to secure signals from
unauthorized receipt, the intellectual property rights to which
are controlled by set-top box manufacturers. In part as a result
of the proprietary nature of these conditional access systems,
TWC currently purchases set-top boxes from a
Table of Contents
limited number of suppliers. For more information, see
“Risk Factors—Risks Related to Dependence on Third
Parties—TWC may not be able to obtain necessary hardware,
software and operational support.”
Historically, TWC has also relied primarily on set-top box
suppliers to create the applications and interfaces TWC makes
available to its customers. More recently, TWC has developed
and, in a number of its divisions, uses its Open Cable Digital
Navigator (“ODN”) and Mystro Digital Navigator
(“MDN”) program guides. Although TWC believes that its
current applications and interfaces are compelling to
subscribers, the lack of compatibility among set-top box
operating systems has in the past hindered application
development. CableLabs, a nonprofit research and development
consortium founded by members of the cable industry, has put
forward a set of hardware and software specifications known as
“tru2way,” which represent an effort to create a
common platform for set-top box applications regardless of the
box’s operating system. Several consumer electronics
companies, including LG Corporation, Sony Corporation, Panasonic
Corporation and Samsung Electronics, Co. Ltd.
(“Samsung”), have contracted to produce televisions
and other devices with tru2way technology and cable operators,
including TWC, have agreed to support the technology in their
operating areas. TWC expects that
tru2way-enabled
televisions and other devices will be available by mid-2009.
Currently, TWC’s digital video subscribers must have either
a TWC-provided digital set-top box or a “digital
cable-ready” television or similar device equipped with a
conditional-access security card
(“CableCARD”tm)
in order to receive digital video programming. However, a
“digital cable-ready” television or similar device
equipped with a CableCARD cannot request certain digital signals
that are necessary to receive TWC’s two-way video services,
such as VOD, channels delivered via SDV technology and
TWC’s interactive program guide. In order to receive
TWC’s two-way video services, customers generally must have
a TWC-provided digital set-top box.
Tru2way-enabled
televisions and other devices with tru2way technology will also
be able to receive TWC’s two-way video services.
TWC contracts with certain third parties for goods and services
related to the delivery of its video, high-speed data and voice
services.
Video programming. TWC carries local broadcast
stations pursuant to either the Federal Communications
Commission (the “FCC”) “must carry” rules or
a written retransmission consent agreement with the relevant
station owner. Broadcasters recently made their elections for
the current three-year carriage cycle, which began on
January 1, 2009, and TWC has multi-year transmission
consent agreements in place with most of the retransmission
consent stations that it carries. For more information, see
“—Regulatory Matters” below. Cable networks,
including premium services, are carried pursuant to written
affiliation agreements. TWC generally pays a monthly per
subscriber fee for cable services and sometimes pays a fee for
broadcast stations that elect retransmission consent. Such fees
typically cover the network or station’s linear feed as
well as its free On-Demand content. Payments to the providers of
some premium services may be based on a percentage of TWC’s
gross receipts from subscriptions to the services. Generally,
TWC obtains rights to carry VOD movies and
Pay-Per-View
events and to sell
and/or rent
online video programming via the Road Runner Video Store through
iN Demand L.L.C., a company in which TWC holds a minority
interest. In some instances, TWC contracts directly with film
studios for VOD carriage rights for movies. Such VOD content is
generally provided to TWC under revenue-sharing arrangements.
Set-top boxes, program guides and network
equipment. TWC purchases set-top boxes and
CableCARDs from a limited number of suppliers, including Cisco
Systems Inc. (“Cisco Systems”), Motorola Inc. and
Samsung and leases these devices to subscribers at monthly
rates. See “—Technology—Cable
Systems—Set-top Boxes” above and
“—Regulatory Matters” below. TWC purchases
routers, switches and other network equipment from a variety of
providers, the most significant of which is Cisco Systems. See
“Risk Factors—Risks Related to Dependence on Third
Parties—TWC may not be able to obtain necessary hardware,
software and operational support.” In addition to its ODN
and MDN program guides, TWC purchases program guides from Cisco
Systems and Macrovision Corporation.
High-speed data and voice connectivity. TWC
delivers high-speed data and voice services through TWC’s
HFC network, regional fiber networks that are either owned or
leased from third parties and through backbone networks that
provide connectivity to the Internet and are operated by third
parties. TWC pays fees for leased
Table of Contents
circuits based on the amount of capacity available to it and
pays for Internet connectivity based on the amount of data and
voice traffic received from and sent over the provider’s
network. TWC also has entered into a number of
“settlement-free peering” arrangements with affiliated
and third-party networks that allow TWC to exchange traffic with
those networks without a fee.
Digital Phone. Under a multi-year agreement
between TWC and Sprint Corporation (“Sprint”), Sprint
assists TWC in providing Digital Phone service by routing voice
traffic to and from destinations outside of TWC’s network
via the public switched telephone network, delivering E911
service and assisting in local number portability and
long-distance traffic carriage. See “Risk
Factors—Risks Related to Dependence on Third
Parties—TWC may not be able to obtain necessary hardware,
software and operational support.”
TWC faces intense competition from a variety of alternative
information and entertainment delivery sources, principally from
direct-to-home satellite video providers and certain telephone
companies, each of which offers a broad range of services that
provide features and functions comparable to those provided by
TWC. The services are also offered in bundles of video,
high-speed data and voice services similar to TWC’s and, in
certain cases, these offerings include wireless services. The
availability of these bundled service offerings and of wireless
offerings, whether as a single offering or as part of a bundle,
has intensified competition. In addition, technological advances
and product innovations have increased and will likely continue
to increase the number of alternatives available to TWC’s
customers from other providers and intensify the competitive
environment. See “Risk Factors—Risks Related to
Competition.”
Direct broadcast satellite. TWC’s video
services face competition from direct broadcast satellite
(“DBS”) services, such as DISH Network Corporation
(“Dish Network”) and DirecTV Group Inc.
(“DirecTV”). Dish Network and DirecTV offer
satellite-delivered pre-packaged programming services that can
be received by relatively small and inexpensive receiving
dishes. These providers offer aggressive promotional pricing,
exclusive programming (e.g., “NFL League Pass”) and
video services that are comparable in many respects to
TWC’s digital video services, including its DVR service and
some of its interactive programming features.
In some areas, incumbent local telephone companies and DBS
operators have entered into co-marketing arrangements that allow
both parties to offer synthetic bundles (i.e., video service
provided principally by the DBS operator, and digital subscriber
line (“DSL”), traditional phone service and, in some
cases, wireless service provided by the telephone company). From
a consumer standpoint, the synthetic bundles appear similar to
TWC’s bundles and also result in a single bill.
Local telephone companies. TWC’s video,
high-speed data and Digital Phone services face competition from
the video, DSL, wireless broadband and traditional and wireless
phone offerings of AT&T Inc. (“AT&T”) and
Verizon Communications Inc. (“Verizon”). In a number
of TWC’s operating areas, AT&T and Verizon have
upgraded portions of their networks to carry two-way video,
high-speed data and
IP-based
telephony services, each of which is similar to the
corresponding service offered by TWC. Moreover, AT&T and
Verizon market and sell service bundles of video, high-speed
data and voice services plus wireless services, and they market
cross-platform features with their wireless services, such as
remote DVR control from a wireless handset. TWC also faces
competition from the DSL, wireless broadband and phone offerings
of smaller incumbent local telephone companies, such as Frontier
Communications Corporation and Cincinnati Bell, Inc.
Cable overbuilds. TWC operates its cable
systems under non-exclusive franchises granted by state or local
authorities. The existence of more than one cable system,
including municipality-owned systems, operating in the same
territory is referred to as an “overbuild.” In some of
TWC’s operating areas, other operators have overbuilt
TWC’s systems and offer video, high-speed data and voice
services in competition with TWC.
Table of Contents
Aside from competing with the video, high-speed data and voice
services offered by DBS providers, local incumbent telephone
companies and cable overbuilders, each of TWC’s services
also faces competition from other companies that provide
services on a stand-alone basis.
Video competition. TWC’s video services
face competition from a number of different sources, including
companies that deliver movies, television shows and other video
programming over broadband Internet connections, such as
Hulu.com, as well as online order services with mail delivery,
and video stores and home video services. Increasingly, content
owners are utilizing Internet-based delivery of content directly
to consumers, often without charging a fee for access to the
content. Furthermore, due to consumer electronics innovations,
consumers will over time be more readily able to watch such
Internet-delivered content on television sets.
“Online” competition. TWC’s
high-speed data services face or may face competition from a
variety of companies that offer other forms of online services,
including low cost
dial-up
services over ordinary telephone lines and third-generation
wireless broadband services, such as those offered by Verizon,
AT&T, Sprint and
T-Mobile
USA, Inc. (“T-Mobile”), and developing technologies,
such as fourth-generation wireless services, Internet service
via power lines, satellite and various other wireless services
(e.g., Wi-Fi).
Digital Phone competition. TWC’s Digital
Phone service competes with traditional and wireless phone
providers. An increasing number of homes in the U.S. are
replacing their traditional telephone service with wireless
phone service, a trend commonly referred to as “wireless
substitution.” This trend may be sensitive to economic
conditions and consumer spending trends. TWC also competes with
national providers of
IP-based
telephony products, such as Vonage, Skype and magicJack, and
companies that sell phone cards at a cost per minute for both
national and international service. The increase in the number
of different technologies capable of carrying voice services has
intensified the competitive environment in which TWC operates
its Digital Phone service.
Additional competition. In addition to
multi-channel video providers, cable systems compete with all
other sources of news, information and entertainment, including
over-the-air television broadcast reception, live events, movie
theaters and the Internet. In general, TWC also faces
competition from other media for advertising dollars. To the
extent that TWC’s services converge with theirs, TWC
competes with the manufacturers of consumer electronics
products. For instance, TWC’s DVRs compete with similar
devices manufactured by consumer electronics companies.
Commercial competition. TWC’s commercial
video, high-speed data, voice and networking and transport
services face competition from local incumbent telephone
companies, especially AT&T and Verizon, as well as from a
variety of other national and regional business services
competitors. These companies include facilities-based business
service providers, such as Level 3 Communications, Inc. and
tw telecom inc., which provide fiber optic services to
enterprise and small- to medium-sized business customers,
smaller regional competitive local exchange carriers
(“CLECs”) that offer voice and high-speed data
services using local access lines leased from local incumbent
telephone operators, and national providers of
IP-telephony
products such as Vonage, which provide voice
and/or
high-speed data services on a residential broadband connection.
Franchise process. Under the Cable Television
Consumer Protection and Competition Act of 1992, franchising
authorities are prohibited from unreasonably refusing to award
additional franchises. In December 2006, the FCC adopted an
order intended to make it easier for competitors to obtain
franchises, by defining when the actions of county- and
municipal-level franchising authorities will be deemed to be
unreasonable as part of the franchising process. Furthermore,
legislation supported by regional telephone companies has been
enacted in a number of states to allow these companies to enter
the video distribution business without obtaining local
franchise approval. Legislation of this kind has been enacted in
California, Kansas, New Jersey, North Carolina, Ohio, South
Carolina, Texas and Wisconsin, which include some of the
Company’s largest operating areas. See
“—Regulatory Matters—Video
Services—Franchising” and “Risk
Factors—Risks Related to Government Regulation.”
Table of Contents
As of December 31, 2008, TWC had approximately
46,600 employees, including approximately
1,460 part-time employees. Approximately 5.1% of TWC’s
employees are represented by labor unions. TWC considers its
relations with its employees to be good.
Regulatory
Matters
TWC’s business is subject, in part, to regulation by the
Federal Communications Commission (“FCC”) and by most
local and some state governments where TWC has cable systems. In
addition, TWC’s business is operated subject to compliance
with the terms of the Memorandum Opinion and Order issued by the
FCC in July 2006 in connection with the regulatory clearance of
the transactions related to TWC’s 2006 acquisition of cable
systems from Adelphia and Comcast (the “Adelphia/Comcast
Transactions Order”). Various legislative and regulatory
proposals under consideration from time to time by the United
States Congress (“Congress”) and various federal
agencies have in the past materially affected TWC and may do so
in the future.
The Communications Act of 1934, as amended (the
“Communications Act”), and the regulations and
policies of the FCC affect significant aspects of TWC’s
cable system operations, including video subscriber rates;
carriage of broadcast television signals and cable programming,
as well as the way TWC sells its program packages to
subscribers; the use of cable systems by franchising authorities
and other third parties; cable system ownership; offering of
voice and high-speed data services; and its use of utility poles
and conduits.
The following is a summary of current significant federal, state
and local laws and regulations affecting the growth and
operation of TWC’s business as well as a summary of the
terms of the Adelphia/Comcast Transactions Order. The summary of
the Adelphia/Comcast Transactions Order herein does not purport
to be complete and is subject to, and is qualified in its
entirety by reference to, the provisions of the Adelphia/Comcast
Transactions Order.
Subscriber rates. The Communications Act and
the FCC’s rules regulate rates for basic cable service and
equipment in communities that are not subject to “effective
competition,” as defined by federal law. Where there has
been no finding by the FCC of effective competition, federal law
authorizes franchising authorities to regulate the monthly rates
charged by the operator for the minimum level of video
programming service, referred to as basic service tier or BST,
which generally includes broadcast television signals,
satellite-delivered broadcast networks and superstations, local
origination channels, a few specialty networks and public
access, educational and government channels. This regulation
also applies to the installation, sale and lease of equipment
used by subscribers to receive basic service, such as set-top
boxes and remote control units. In many localities, TWC is no
longer subject to rate regulation, either because the local
franchising authority has not become certified by the FCC to
regulate these rates or because the FCC has found that there is
effective competition.
Carriage of broadcast television stations and other
programming regulation. The Communications Act
and the FCC’s regulations contain broadcast signal carriage
requirements that allow local commercial television broadcast
stations to elect once every three years to require a cable
system to carry their stations, subject to some exceptions,
commonly called “must carry,” or to negotiate with
cable systems the terms by which the cable systems may carry
their stations, commonly called “retransmission
consent.” Broadcasters recently made their elections for
the current carriage cycle, which began on January 1, 2009.
The Communications Act and the FCC’s regulations require a
cable operator to devote up to one-third of its activated
channel capacity for the mandatory carriage of local commercial
television stations that elect “must carry” and
certain low-power stations. The Communications Act and the
FCC’s regulations give local non-commercial television
stations mandatory carriage rights, but non-commercial stations
do not have the option to negotiate retransmission consent for
the carriage of their signals by cable systems. Additionally,
cable systems must obtain retransmission consent for all
“distant” commercial television stations (i.e., those
television stations outside the designated market area to which
a community is assigned) except for commercial
satellite-delivered independent “superstations” and
some low-power television stations.
Table of Contents
In 2005, the FCC reaffirmed its earlier decision rejecting
multi-casting (i.e., carriage of more than one program stream
per broadcaster) requirements with respect to carriage of
broadcast signals pursuant to must-carry rules. Certain parties
filed petitions for reconsideration. To date, no action has been
taken on these reconsideration petitions, and TWC is unable to
predict what requirements, if any, the FCC might adopt.
In September 2007, the FCC adopted rules that will require cable
operators that offer at least some analog service (i.e., that
are not operating “all-digital” systems) to provide
subscribers down-converted analog versions of must-carry
broadcast stations’ digital signals. In addition,
must-carry stations broadcasting in HD format must be carried in
HD on cable systems with greater than 552 MHz capacity;
standard-definition signals may be carried only in analog
format. These rules will become effective after the broadcast
television transition from analog to digital service for full
power television stations, and are currently scheduled to
terminate after three years, subject to FCC review. Congress
recently extended the digital transition deadline from February
17, 2009 to June 12, 2009.
The Communications Act also permits franchising authorities to
negotiate with cable operators for channels for public,
educational and governmental access programming. It also
requires a cable system with 36 or more activated channels to
designate a significant portion of its channel capacity for
commercial leased access by third parties, which limits the
amount of capacity TWC has available for other programming. The
FCC regulates various aspects of such third-party commercial use
of channel capacity on TWC’s cable systems, including the
rates and some terms and conditions of the commercial use. These
rules are the subject of an ongoing FCC proceeding, and recent
revisions to such rules are stayed pursuant to an appeal in the
U.S. Court of Appeals for the Sixth Circuit. The FCC also
has an open proceeding to examine its substantive and procedural
rules for program carriage. TWC is unable to predict whether any
such proceedings will lead to any material changes in existing
regulations.
In connection with certain changes in TWC’s programming
line-up, the
Communications Act and FCC regulations also require TWC to give
various kinds of advance notice. Under certain circumstances,
TWC must give as much as 30 days’ advance notice to
subscribers, programmers and franchising authorities, and notice
may have to be given in the form of bill inserts, on-screen
announcements
and/or
newspaper advertisements. DBS operators and other non-cable
programming distributors are not subject to analogous duties.
As part of the FCC’s collection of information for its
Video Competition Report, the FCC released on January 16,
2009 a notice of inquiry, requiring that cable operators submit
to the agency information concerning the number of homes that
their systems pass and information concerning their subscribers
in order to determine whether the FCC’s so-called
“70/70” test has been met. If the FCC were to
determine that cable systems with 36 or more activated channels
are available to 70% of households within the United States and
that 70% of those households subscribe to such systems, it may
have the authority to promulgate certain additional regulations
covering cable operators.
Ownership limitations. There are various rules
prohibiting joint ownership of cable systems and other kinds of
communications facilities, including local telephone companies
and multichannel multipoint distribution service facilities. The
Communications Act also requires the FCC to adopt
“reasonable limits” on the number of subscribers a
cable operator may reach through systems in which it holds an
ownership interest. In December 2007, the FCC adopted an order
establishing a 30% limit on the percentage of nationwide
multichannel video subscribers that any single cable provider
can serve. This rule is now under appellate review. The
Communications Act also requires the FCC to adopt
“reasonable limits” on the number of channels that
cable operators may fill with programming services in which they
hold an ownership interest. The matter remains pending before
the FCC. It is uncertain when the FCC will rule on this issue or
how any regulation it adopts might affect TWC.
Pole attachment regulation. The Communications
Act requires that utilities provide cable systems and
telecommunications carriers with non-discriminatory access to
any pole, conduit or right-of-way controlled by investor-owned
utilities. The Communications Act also permits the FCC to
regulate the rates, terms and conditions imposed by these
utilities for cable systems’ use of utility poles and
conduit space. States are permitted to preempt FCC jurisdiction
over pole attachments through certifying that they regulate the
terms of attachments themselves. Many states in which TWC
operates have done so. Most of these certifying states have
generally followed the FCC’s pole attachment rate standards
and guidelines. The FCC or a certifying state could increase
pole attachment rates paid by cable operators. In addition, the
FCC has adopted a higher pole attachment rate applicable to pole
attachments made by companies providing telecommunications
services. The applicability of and method for
Table of Contents
calculating pole attachment rates for cable operators that
provide digital voice services remains unclear. In November
2007, the FCC issued a Notice of Proposed Rulemaking that
proposes to establish a new unified pole attachment rate that
would apply to attachments made by a cable operator that are
used to provide high-speed Internet services and, potentially,
digital voice services as well. The proposed rate would be
higher than the current rate paid by cable service providers. If
adopted, this proposal could materially increase TWC’s
current payments for pole attachments.
Set-top box regulation. Certain regulatory
requirements are also applicable to set-top boxes and other
equipment that can be used to receive digital video services.
Currently, many cable subscribers rent from their cable operator
a set-top box that performs both signal-reception functions and
conditional-access security functions. The lease rates cable
operators charge for this equipment are subject to rate
regulation to the same extent as basic cable service. Under
these regulations, cable operators are allowed to set equipment
rates for set-top boxes, CableCARDs and remote controls on the
basis of actual capital costs, plus an annual after-tax rate of
return of 11.25%, on the capital cost (net of depreciation). In
1996, Congress enacted a statute requiring the FCC to pass rules
fostering the availability of set-top boxes. An implementing
regulation, which became effective on July 1, 2007,
requires cable operators to cease placing into service new
set-top boxes that have integrated security. Direct broadcast
operators are not subject to this requirement.
In December 2002, cable operators and consumer-electronics
companies entered into a standard-setting agreement relating to
reception equipment that uses a conditional-access security
card—a CableCARD—provided by the cable operator to
receive one-way cable services. To implement the agreement, the
FCC adopted regulations that (i) establish a voluntary
labeling system for such one-way devices; (ii) require most
cable systems to support these devices; and (iii) adopt
various content-encoding rules, including a ban on the use of
“selectable output controls” to direct program content
only through authorized outputs. In June 2007, the FCC initiated
a notice of proposed rulemaking that may lead to regulations
covering equipment sold at retail that is designed to receive
two-way products and services, which, if adopted, could increase
TWC’s cost in supporting such equipment. This notice of
proposed rulemaking remains pending.
Switched digital video. The deployment of SDV
allows TWC to save bandwidth by transmitting particular
programming services only to groups of homes or nodes where
subscribers are viewing the programming at a particular time,
rather than broadcasting it to all subscriber homes. The
Enforcement Bureau of the FCC has issued preliminary decisions
finding that TWC’s notice of its deployment of SDV
technology violates FCC rules. These staff-level decisions do
not constitute final agency action on the substantive legal
issues, and are the subject of a pending appeal. However, if
these decisions are upheld, they could impose significant costs
upon TWC
and/or
impede its ability to make additional capacity available for new
services through the use of SDV.
On August 22, 2008, the Enforcement Bureau released a
Notice of Apparent Liability for Forfeiture (“NAL”)
concluding that Oceanic Time Warner Cable (“Oceanic”),
an operating division of TWC, violated FCC rules by not
providing 30 days’ advance notice to the local
franchising authority prior to initiating the delivery of
certain existing services using SDV technology. The Enforcement
Bureau concluded that this constituted a change in service for
which notice is required and fined TWC $7,500. On
September 22, 2008, TWC filed its response to this NAL. On
January 19, 2009, the Enforcement Bureau issued a
Forfeiture Order for this alleged rule violation.
On October 15, 2008, the Enforcement Bureau released two
additional NALs/Orders against Oceanic, concluding that the
deployment of SDV technology in two cable systems in Hawaii
violated FCC rules that require cable operators to support
unidirectional cable products and prohibit cable operators from
preventing subscribers’ use of navigation devices. The NALs
found that moving certain programming channels to the SDV
platform prevents subscribers with CableCARD-equipped digital
cable products from using their navigation devices to access
those channels. Each NAL/Order fined Oceanic $20,000 and ordered
Oceanic to provide refunds to customers impacted by the
deployment of SDV to reimburse them for the cost of programming
channels they are unable to access with their devices. On
November 14, 2008, TWC filed its response to these
NALs/Orders. On January 19, 2009, the Enforcement Bureau
issued Forfeiture Orders for these two SDV deployments and two
NALs proposing fines of $25,000 each for failure to describe the
methodology TWC would use to provide refunds to subscribers who
could not view SDV channels. TWC intends to seek further review
by the full FCC and, if necessary, the courts.
Table of Contents
Analog to digital migration. The migration of
analog programming channels to digital tiers also allows TWC to
save bandwidth. On January 19, 2009, the FCC’s
Enforcement Bureau issued two NALs concluding that TWC moved
channels in the Palcentia, California and San Diego systems
from analog to digital tiers of service without the required
notice to customers, in violation of FCC rules. Each NAL
proposes a fine of $7,500. These staff-level decisions do not
constitute final agency action, and TWC intends to seek further
review by the full Commission.
Multiple dwelling units and inside wiring. In
November 2007, the FCC adopted an order declaring null and void
all exclusive access arrangements between cable operators and
multiple dwelling units and other centrally managed real estate
developments (“MDUs”). In connection with the order,
the FCC also issued a Further Notice of Proposed Rulemaking
regarding whether to expand the ban on exclusivity to other
types of multi-channel video programming distributors
(“MVPDs”) in addition to cable operators, including
DBS providers, and whether to expand the scope of the rules to
prohibit exclusive marketing and bulk billing agreements. The
order has been appealed by the National Cable and
Telecommunications Association (“NCTA”), the cable
industry’s principal trade organization. The FCC also has
adopted rules facilitating competitors’ access to the cable
wiring inside such MDUs. This order, which also has been
appealed by the NCTA, could have an adverse impact on TWC’s
business because it would allow competitors to use wiring inside
MDUs that the cable industry has already deployed.
Copyright regulation. TWC’s cable systems
provide subscribers with, among other things, local and distant
television broadcast stations. TWC generally does not obtain a
license to use the copyrighted performances contained in these
stations’ programming directly from program owners.
Instead, in exchange for filing reports with the
U.S. Copyright Office and contributing a percentage of
revenue to a federal copyright royalty pool, cable operators
obtain rights to retransmit copyrighted material contained in
broadcast signals pursuant to a compulsory license. The
elimination or substantial modification of this compulsory
copyright license has been the subject of ongoing legislative
and administrative review, and, if eliminated or modified, could
adversely affect TWC’s ability to obtain suitable
programming and could substantially increase TWC’s
programming costs. Additionally, the U.S. Copyright Office
has released a ruling on issues relating to the calculation of
compulsory license fees that could increase the amount cable
operators are required to pay into the copyright royalty pool.
Further, the U.S. Copyright Office has not yet made any
determinations as to how the compulsory license will apply to
digital broadcast signals and services.
In addition, when TWC obtains programming from third parties,
TWC generally obtains licenses that include any necessary
authorizations to transmit the music included in it. When TWC
creates its own programming and provides various other
programming or related content, including local origination
programming and advertising that TWC inserts into
cable-programming networks, TWC is required to obtain any
necessary music performance licenses directly from the rights
holders. These rights are generally controlled by three music
performance rights organizations, each with rights to the music
of various composers. TWC generally has obtained the necessary
licenses, either through negotiated licenses or through
procedures established by consent decrees entered into by some
of the music performance rights organizations.
Program access and Adelphia/Comcast Transactions
Order. In the Adelphia/Comcast Transactions
Order, the FCC imposed conditions on TWC, which will expire in
July 2012, related to regional sports networks
(“RSNs”), as defined in the Adelphia/Comcast
Transactions Order, and the resolution of disputes pursuant to
the FCC’s leased access regulations. In particular, the
Adelphia/Comcast Transactions Order provides that
(i) neither TWC nor its affiliates may offer an affiliated
RSN on an exclusive basis to any MVPD; (ii) TWC may not
unduly or improperly influence the decision of any affiliated
RSN to sell programming to an unaffiliated MVPD or the prices,
terms and conditions of sale of programming by an affiliated RSN
to an unaffiliated MVPD; (iii) if an MVPD and an affiliated
RSN cannot reach an agreement on the terms and conditions of
carriage, the MVPD may elect commercial arbitration to resolve
the dispute; (iv) if an unaffiliated RSN is denied carriage
by TWC, it may elect commercial arbitration to resolve the
dispute in accordance with the FCC’s program carriage
rules; and (v) with respect to leased access, if an
unaffiliated programmer is unable to reach an agreement with
TWC, that programmer may elect commercial arbitration to resolve
the dispute, with the arbitrator being required to resolve the
dispute using the FCC’s existing rate formula relating to
pricing terms. The FCC has suspended this “baseball
style” arbitration procedure as it relates to TWC’s
carriage of unaffiliated RSNs, although it allowed the
arbitration of a claim brought by the Mid-Atlantic Sports
Network because the claim was brought prior to the suspension.
In that case, in October 2008, the FCC’s Media Bureau
upheld the arbitrator’s ruling in favor of the Mid-Atlantic
Sports Network, and TWC
Table of Contents
has petitioned for review by the full FCC. In addition, Herring
Broadcasting, Inc., which does business as WealthTV, filed a
program carriage complaint against TWC and other cable operators
alleging discrimination against WealthTV’s programming in
favor of a similarly situated video programming vendors in
violation of the FCC’s rules. These proceedings remain
pending.
Other federal regulatory requirements. The
Communications Act also includes provisions regulating customer
service, subscriber privacy, marketing practices, equal
employment opportunity, technical standards and equipment
compatibility, antenna structure notification, marking,
lighting, emergency alert system requirements and the collection
from cable operators of annual regulatory fees, which are
calculated based on the number of subscribers served and the
types of FCC licenses held. The FCC also actively regulates
other aspects of TWC’s video services, including the
mandatory blackout of syndicated, network and sports
programming; customer service standards; political advertising;
indecent or obscene programming; Emergency Alert System
requirements for analog and digital services; closed captioning
requirements for the hearing impaired; commercial restrictions
on children’s programming; equal employment opportunity;
recordkeeping and public file access requirements; and technical
rules relating to operation of the cable network.
Franchising. Cable operators generally operate
their systems under non-exclusive franchises. Franchises are
awarded, and cable operators are regulated, by state franchising
authorities, local franchising authorities, or both.
Franchise agreements typically require payment of franchise fees
and contain regulatory provisions addressing, among other
things, upgrades, service quality, cable service to schools and
other public institutions, insurance and indemnity bonds. The
terms and conditions of cable franchises vary from jurisdiction
to jurisdiction. The Communications Act provides protections
against many unreasonable terms. In particular, the
Communications Act imposes a ceiling on franchise fees of five
percent of revenues derived from cable service. TWC generally
passes the franchise fee on to its subscribers, listing it as a
separate item on the bill.
Franchise agreements usually have a term of ten to 15 years
from the date of grant, although some renewals may be for
shorter terms. Franchises usually are terminable only if the
cable operator fails to comply with material provisions. TWC has
not had a franchise terminated due to breach. After a franchise
agreement expires, a local franchising authority may seek to
impose new and more onerous requirements, including requirements
to upgrade facilities, to increase channel capacity and to
provide various new services. Federal law, however, provides
significant substantive and procedural protections for cable
operators seeking renewal of their franchises. In addition,
although TWC occasionally reaches the expiration date of a
franchise agreement without having a written renewal or
extension, TWC generally has the right to continue to operate,
either by agreement with the local franchising authority or by
law, while continuing to negotiate a renewal. In the past,
substantially all of the material franchises relating to
TWC’s systems have been renewed by the relevant local
franchising authority, though sometimes only after significant
time and effort.
In June 2008, the U.S. Court of Appeals for the Sixth
Circuit upheld regulations adopted by the FCC in December 2006
intended to limit the ability of local franchising authorities
to delay or refuse the grant of competitive franchises (by, for
example, imposing deadlines on franchise negotiations). The FCC
has applied most of these rules to incumbent cable operators
which, although immediately effective, in some cases may not
alter existing franchises prior to renewal.
At the state level, several states, including California,
Kansas, New Jersey, North Carolina, Ohio, South Carolina, Texas
and Wisconsin have enacted statutes intended to streamline entry
by additional video competitors, some of which provide more
favorable treatment to new entrants than to existing providers.
Similar bills are pending or may be enacted in additional
states. Despite TWC’s efforts and the protections of
federal law, it is possible that some of TWC’s franchises
may not be renewed, and TWC may be required to make significant
additional investments in its cable systems in response to
requirements imposed in the course of the franchise renewal
process. See “—Competition—Other Competition and
Competitive Factors—Franchise process.”
TWC provides high-speed data services over its existing cable
facilities. In 2002, the FCC released an order in which it
determined that cable-provided high-speed Internet access
service is an interstate “information service”
Table of Contents
rather than a “cable service” or a
“telecommunications service,” as those terms are
defined in the Communications Act. That determination was
sustained by the U.S. Supreme Court. The “information
service” classification means that the service is not
subject to regulation as a cable service or as a
telecommunications service under federal, state, or local law.
Nonetheless, TWC’s high-speed data access service is
subject to a number of regulatory requirements, including
compliance with the Communications Assistance for Law
Enforcement Act (“CALEA”) requirement that high-speed
data service providers implement certain network capabilities to
assist law enforcement agencies in conducting surveillance of
criminal suspects. In addition, the American Recovery and
Reinvestment Act of 2009, enacted on February 17, 2009,
provides approximately $7 billion to stimulate investment
in broadband. The eligibility and use of these funds has not yet
been determined. TWC could be placed at a disadvantage if these
funds are not made available in a competitively neutral way.
“Net neutrality” legislative and regulatory
proposals. In previous Congressional sessions,
legislation has been introduced proposing “net
neutrality” requirements. These legislative proposals would
have limited to a greater or lesser extent the ability of
broadband providers to adopt pricing models and network
management policies.
In September 2005, the FCC issued its Net Neutrality Policy
Statement, which at the time, the agency characterized as a
non-binding policy statement. The principles contained in the
Net Neutrality Policy Statement set forth the FCC’s view
that consumers are entitled to access and use lawful Internet
content and applications of their choice, to connect to lawful
devices of their choosing that do not harm the broadband
provider’s network and to competition among network,
application, service and content providers. The Net Neutrality
Policy Statement notes that these principles are subject to
“reasonable network management.” Subsequently, the FCC
made these principles binding as to certain telecommunications
companies for specified periods of time pursuant to
“voluntary commitments” in orders adopted in
connection with mergers undertaken by those companies.
Several parties have sought to persuade the FCC to adopt net
neutrality-type regulations in a number of proceedings before
the agency; however, none of these proceedings has resulted in
the adoption of formal regulations. Despite this, a formal
complaint was filed against Comcast alleging that its use of
“reset packets” to manage peer-to-peer file-sharing
traffic constituted an unreasonable network management practice.
In August 2008, the FCC released a decision finding in favor of
the complainant relying in part on the FCC’s Net Neutrality
Policy Statement. That decision is under appeal. For further
discussion of “net neutrality” and the impact such
proposals could have on TWC if adopted, see the discussion in
“Risk Factors—Risks Related to Government
Regulation—‘Net neutrality’ legislation or
regulation could limit TWC’s ability to operate its
high-speed data business profitably and to manage its broadband
facilities efficiently to respond to growing bandwidth usage by
TWC’s high-speed data customers.”
TWC currently offers residential Digital Phone and Business
Class Phone voice services using interconnected Voice over
Internet Protocol (“VoIP”) technology. Traditional
providers of circuit-switched telephone services generally are
subject to significant regulation. It is unclear whether and to
what extent regulators will subject interconnected VoIP services
such as TWC’s residential Digital Phone and Business
Class Phone services to the same regulations that apply to
these traditional voice services provided by incumbent telephone
companies. In February 2004, the FCC opened a broad-based
rulemaking proceeding to consider these and other issues. That
rulemaking remains pending. The FCC has, however, extended a
number of traditional telephone carrier regulations to
interconnected VoIP providers, including requiring
interconnected VoIP providers: to provide E911 capabilities as a
standard feature to their subscribers; to comply with the
requirements of CALEA to assist law enforcement investigations
in providing, after a lawful request, call content and call
identification information; to contribute to the federal
universal service fund; to pay regulatory fees; to comply with
subscriber privacy rules; to provide access to their services to
persons with disabilities; and to comply with local number
portability (“LNP”) rules when subscribers change
telephone providers. With respect to LNP requirements, however,
the FCC clarified that local exchange carriers and commercial
mobile radio service providers have an obligation to port
numbers to interconnected VoIP providers.
Table of Contents
Certain other issues related to interconnected VoIP services
remain unclear. In particular, in November 2004, the FCC
determined that regardless of their regulatory classification,
certain interconnected VoIP services qualify as interstate
services with respect to economic regulation. The FCC preempted
state regulations that address such issues as entry
certification, tariffing and E911 requirements, as applied to
certain interconnected VoIP services. On March 21, 2007,
the U.S. Court of Appeals for the Eighth Circuit affirmed
the FCC’s November 2004 order with respect to these VoIP
services, particularly those having portable or nomadic
capability. The jurisdictional classification of other types of
interconnected VoIP services, particularly “fixed”
services such as that provided by TWC remains uncertain. The
Wisconsin and Missouri public utility commissions, for instance,
have ruled that TWC’s Digital Phone service is subject to
traditional, circuit-switched telephone regulation, while other
state commissions have opened investigations into how such VoIP
services should be treated in their respective states.
The FCC and various states are also considering how
interconnected VoIP services should interconnect with incumbent
phone company networks. Because the FCC has yet to classify
interconnected VoIP service, the precise scope of
interconnection rules as applied to interconnected VoIP service
is not clear. As a result, some small incumbent telephone
companies may resist interconnecting directly with TWC. Finally,
the FCC is considering comprehensive intercarrier compensation
reform including the appropriate compensation regime applicable
to interconnected VoIP traffic over the public switched
telephone network. It is unclear whether and when the FCC or
Congress will adopt further rules relating to VoIP
interconnection and how such rules would affect TWC’s
interconnected VoIP service.
Entities providing point-to-point and other transport services
generally have been subjected to various kinds of regulation. In
particular, in connection with intrastate transport services,
state regulatory authorities commonly require such providers to
obtain and maintain certificates of public convenience and
necessity and to file tariffs setting forth the service’s
rates, terms, and conditions and to have just, reasonable, and
non-discriminatory rates, terms and conditions. Interstate
transport services are governed by similar federal regulations.
In addition, providers generally may not transfer assets or
ownership without receiving approval from or providing notice to
state and federal authorities. Finally, providers of
point-to-point and similar transport services are generally
required to contribute to various state and federal regulatory
funds, including the Federal Universal Service Fund.
TWE is a Delaware limited partnership that was formed in 1992.
At the time of the restructuring of TWE (the “TWE
Restructuring”), which was completed on March 31,
2003, subsidiaries of Time Warner owned general and limited
partnership interests in TWE consisting of 72.36% of the
pro-rata priority capital and residual equity capital and 100%
of the junior priority capital, and a trust established for the
benefit of Comcast (“Comcast Trust I”) owned
limited partnership interests in TWE consisting of 27.64% of the
pro-rata priority capital and residual equity capital. Prior to
the TWE Restructuring, TWE’s business consisted of
interests in cable systems, cable networks and filmed
entertainment.
Through a series of steps executed in connection with the TWE
Restructuring, TWE transferred its non-cable businesses,
including its filmed entertainment and cable network businesses,
along with associated liabilities, to WCI, a wholly owned
subsidiary of Time Warner, and the ownership structure of TWE
was reorganized so that (i) TWC owned 94.3% of the residual
equity interests in TWE, (ii) Comcast Trust I owned
4.7% of the residual equity interests in TWE and (iii) ATC,
a wholly owned subsidiary of Time Warner, owned 1.0% of the
residual equity interests in TWE and $2.4 billion in
mandatorily redeemable preferred equity issued by TWE. In
addition, following the TWE Restructuring, Time Warner
indirectly held shares of TWC Class A common stock and
Class B common stock representing, in the aggregate, 89.3%
of the voting power and 82.1% of TWC’s outstanding equity.
On July 28, 2006, the partnership interests and preferred
equity originally held by ATC, were contributed to TW NY Cable,
a wholly owned subsidiary of TWC, in exchange for a 12.43%
non-voting common stock economic interest in TW NY, and Comcast
Trust I’s ownership interest in TWE was redeemed. As a
result, Time Warner has
Table of Contents
no direct interest in TWE and Comcast no longer has any interest
in TWE. As of December 31, 2008, TWE had $2.6 billion
in principal amount of outstanding debt securities with
maturities ranging from 2012 to 2033 and fixed interest rates
ranging from 8.375% to 10.15%. See “Management’s
Discussion and Analysis of Results of Operations and Financial
Condition—Financial Condition and
Liquidity—Outstanding Debt and Mandatorily Redeemable
Preferred Equity and Available Financial Capacity.”
The TWE partnership agreement requires that transactions between
TWC and its subsidiaries, on the one hand, and TWE and its
subsidiaries, on the other hand, be conducted on an
arm’s-length basis, with management, corporate or similar
services being provided by TWC on a “no
mark-up”
basis with fair allocations of administrative costs and general
overhead.
The following description summarizes certain provisions of the
partnership agreement relating to TWE-A/N. Such description does
not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the TWE-A/N
partnership agreement.
Partners of TWE-A/N. The general partnership
interests in TWE-A/N are held by TW NY Cable and TWE (together
with TW NY Cable, the “TW Partners”) and A/N, a
partnership owned by wholly owned subsidiaries of Advance
Publications Inc. and Newhouse Broadcasting Corporation. The TW
Partners also hold preferred partnership interests. TWE acquired
its interest in TWE-A/N as the result of a merger of its
wholly-owned subsidiary, TWE-A/N Holdco, L.P. (which previously
held the interest), into TWE on December 31, 2008.
2002 restructuring of TWE-A/N. The TWE-A/N cable
television joint venture was formed by TWE and A/N in December
1995. A restructuring of the partnership was completed during
2002. As a result of this restructuring, cable systems and their
related assets and liabilities serving approximately
2.1 million subscribers as of December 31, 2002 (which
amount is not included in TWE-A/N’s 4.8 million
consolidated subscribers, as of December 31,
2008) located primarily in Florida (the “A/N
Systems”), were transferred to a subsidiary of TWE-A/N (the
“A/N Subsidiary”). As part of the restructuring,
effective August 1, 2002, A/N’s interest in TWE-A/N
was converted into an interest that tracks the economic
performance of the A/N Systems, while the TW Partners retain the
economic interests and associated liabilities in the remaining
TWE-A/N cable systems. Also, in connection with the
restructuring, TWC effectively acquired A/N’s interest in
Road Runner. TWE-A/N’s financial results, other than the
results of the A/N Systems, are consolidated with TWC’s.
Management and operations of TWE-A/N. Subject to
certain limited exceptions, TWE is the managing partner, with
exclusive management rights of TWE-A/N, other than with respect
to the A/N Systems. Also, subject to certain limited exceptions,
A/N has authority for the supervision of the day-to-day
operations of the A/N Subsidiary and the A/N Systems. In
connection with the 2002 restructuring, TWE entered into a
services agreement with A/N and the A/N Subsidiary under which
TWE agreed to exercise various management functions, including
oversight of programming and various engineering-related
matters. TWE and A/N also agreed to periodically discuss
cooperation with respect to new product development. TWC
receives a fee for providing the A/N Subsidiary with high-speed
data services and the management functions noted above.
Restrictions on transfer—TW Partners. Each TW
Partner is generally permitted to directly or indirectly dispose
of its entire partnership interest at any time to a wholly owned
affiliate of TWE (in the case of transfers by TWE) or to TWE,
Time Warner or a wholly owned affiliate of TWE or Time Warner
(in the case of transfers by TW NY Cable). In addition, the TW
Partners are also permitted to transfer their partnership
interests through a pledge to secure a loan, or a liquidation of
TWE in which Time Warner, or its affiliates, receives a majority
of the interests of TWE-A/N held by the TW Partners. TWE is
allowed to issue additional partnership interests in TWE so long
as Time Warner continues to own, directly or indirectly, either
35% or 43.75% of the residual equity capital of TWE, depending
on when the issuance occurs.
Restrictions on transfer—A/N Partner. A/N is
generally permitted to directly or indirectly transfer its
entire partnership interest at any time to certain members of
the Newhouse family or specified affiliates of A/N. A/N is also
permitted to dispose of its partnership interest through a
pledge to secure a loan and in connection with specified
restructurings of A/N.
Table of Contents
Restructuring rights of the partners. TWE and A/N
each has the right to cause TWE-A/N to be restructured at any
time. Upon a restructuring, TWE-A/N is required to distribute
the A/N Subsidiary with all of the A/N Systems to A/N in
complete redemption of A/N’s interests in TWE-A/N, and A/N
is required to assume all liabilities of the A/N Subsidiary and
the A/N Systems. To date, neither TWE nor A/N has delivered
notice of the intent to cause a restructuring of TWE-A/N.
TWE’s regular right of first offer. Subject to
exceptions, A/N and its affiliates are obligated to grant TWE a
right of first offer prior to any sale of assets of the A/N
Systems to a third party.
TWE’s special right of first offer. Within a
specified time period following the first, seventh, thirteenth
and nineteenth anniversaries of the deaths of two specified
members of the Newhouse family (those deaths have not yet
occurred), A/N has the right to deliver notice to TWE stating
that it wishes to transfer some or all of the assets of the A/N
Systems, thereby granting TWE the right of first offer to
purchase the specified assets. Following delivery of this
notice, an appraiser will determine the value of the assets
proposed to be transferred. Once the value of the assets has
been determined, A/N has the right to terminate its offer to
sell the specified assets. If A/N does not terminate its offer,
TWE will have the right to purchase the specified assets at a
price equal to the value of the specified assets determined by
the appraiser. If TWE does not exercise its right to purchase
the specified assets, A/N has the right to sell the specified
assets to an unrelated third party within 180 days on
substantially the same terms as were available to TWE.
In November 2008, TWC, Intel Corporation (“Intel”),
Google Inc., Comcast and Bright House Networks, LLC (together
with TWC, Intel Corporation, Google Inc. and Comcast, the
“Clearwire Investors”) collectively invested
$3.2 billion in Clearwire Corp and one of its operating
subsidiaries, Clearwire LLC. TWC’s final ownership interest
in Clearwire will be determined based on the trading price of
Clearwire Corp’s Class A common stock during a
post-closing measuring period ending on February 26, 2009.
If the volume weighted average trading price is $17 or below,
TWC’s ownership interest will be approximately 4.4%. The
closing price of Clearwire Corp’s Class A common stock
on February 13, 2009 was $3.60.
In connection with the transaction, affiliates of TWC and the
other Clearwire Investors entered into an operating agreement,
an equity holders’ agreement and a registration rights
agreement (the “Registration Rights Agreement”) with
Clearwire, and, other than Intel, a strategic investor agreement
governing certain rights and obligations of the parties with
respect to the governance of Clearwire Corp, including director
nominations, transfer and purchase restrictions on Clearwire
Corp’s common stock, rights of first refusal, pre-emptive
rights and tag-along rights. Under the Registration Rights
Agreement, TWC is entitled to two demand registration rights
(other than demands to file a
Form S-3)
as long as the securities to be registered have an aggregate
price to the public of not less than $50 million. After
Clearwire becomes eligible to use
Form S-3,
Clearwire is required to file a shelf registration statement
providing for the registration and sale of securities on a
delayed or continuous basis and TWC also has the right to demand
that Clearwire file a
Form S-3.
The Registration Rights Agreement also provides TWC with
customary “piggyback” registration rights.
TWC is a participant in a joint venture with certain other cable
companies (“SpectrumCo”) that holds advanced wireless
spectrum (“AWS”) licenses. Under certain
circumstances, the members of SpectrumCo have the ability to
exit the venture and receive from the venture, subject to
certain limitations and adjustments, AWS licenses covering the
areas in which they provide cable services. In January 2009,
SpectrumCo redeemed the 10.9% interest held by an affiliate of
Cox Communications, Inc. (“Cox”), and Cox received AWS
licenses, principally covering areas in which Cox has cable
services, and approximately $70 million in cash (of which
TWC’s share was $22 million). Following the closing of
the Cox transaction, SpectrumCo’s AWS licenses cover
20 MHz over 80% of the continental United States and Hawaii.
Table of Contents
The following description summarizes certain provisions of
TWC’s constituent documents and certain agreements that
affect and govern TWC’s ongoing operations. Such
description does not purport to be complete and is qualified in
its entirety by reference to the provisions of such agreements
and constituent documents.
TWC common stock. A subsidiary of Time Warner owns
746,000,000 shares of the TWC Class A common stock,
which has one vote per share, and 75,000,000 shares of
TWC’s Class B common stock, which has ten votes per
share, which together represent 90.6% of the voting power of
TWC’s common stock and approximately 84% of the common
stock. TWC’s existing amended and restated certificate of
incorporation (the “TWC Certificate of Incorporation”)
does not include a mechanism to convert Class B common
stock into Class A common stock. The TWC Class A
common stock and Class B common stock vote together as a
single class on all matters, except with respect to the election
of directors and certain matters described below. In connection
with the Separation, prior to the Distribution, TWC will file
the Second Amended and Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware. Effective
upon the filing, each outstanding share of TWC Class A
common stock and TWC Class B common stock will be
automatically converted into one fully paid and non-assessable
share of TWC Common Stock. Holders of TWC Common Stock will have
identical rights and one vote per share on all matters submitted
to a vote of stockholders.
Board of directors. Under the terms of the TWC
Certificate of Incorporation and TWC’s existing by-laws
(the “TWC By-laws”), the TWC Class A common stock
votes as a separate class with respect to the election of the
Class A directors (the “Class A Directors”),
and the Class B common stock votes as a separate class with
respect to the election of the Class B directors (the
“Class B Directors”). In addition, the
Class A Directors must represent not less than one-sixth
and not more than one-fifth of TWC’s directors, and the
Class B Directors must represent not less than four-fifths
of TWC’s directors. As a result of its holdings, Time
Warner has the ability to cause the election of all Class A
Directors and Class B Directors, subject to certain
restrictions on the identity of these directors discussed below.
Under the TWC Second Amended and Restated Certificate of
Incorporation, TWC will have a single class of directors and a
single class of common stock and holders of TWC Common Stock
will vote as one class for the election of all of the members of
TWC’s board of directors.
Under the terms of the TWC Certificate of Incorporation, until
August 1, 2009, at least 50% of TWC’s board of
directors must be independent directors as defined under the
NYSE listed company rules. This provision will also be retained
in the TWC Second Amended and Restated Certificate of
Incorporation.
Protections of minority Class A common
stockholders. Under the terms of the TWC Certificate of
Incorporation, the approval of the holders of a majority of the
voting power of the outstanding shares of TWC Class A
common stock held by persons other than Time Warner and its
subsidiaries is necessary for any merger, consolidation or
business combination in which the holders of TWC Class A
common stock do not receive per share consideration identical to
that received by the holders of TWC Class B common stock
(other than with respect to voting power) or that would
otherwise adversely affect the specific rights and privileges of
the holders of the TWC Class A common stock relative to the
specific rights and privileges of the holders of the TWC
Class B common stock. In addition, the approval of
(i) the holders of a majority of the voting power of the
outstanding shares of TWC Class A common stock held by
persons other than Time Warner and (ii) the majority of the
independent directors on TWC’s board of directors is
required to:
Table of Contents
The TWC Second Amended and Restated Certificate of Incorporation
will include provisions regarding required approvals that are
substantially similar to those described above, except that,
while the approval of the holders of a majority of the voting
power of the outstanding shares of TWC Class A common stock
held by persons other than Time Warner is currently required in
certain circumstances, pursuant to the TWC Second Amended and
Restated Certificate of Incorporation, the approval of the
holders of a majority of the voting power of the outstanding
shares of TWC Common Stock held by persons other than Time
Warner will be required.
Indebtedness approval right. Pursuant to a
shareholder agreement between TWC and Time Warner (the
“Shareholder Agreement”), until such time as the
indebtedness of TWC is no longer attributable to Time Warner, in
Time Warner’s reasonable judgment, TWC, its subsidiaries
and entities that it manages may not, without the consent of
Time Warner, create, incur or guarantee any indebtedness (except
for the issuance of commercial paper or borrowings under
TWC’s current revolving credit facility up to the limit of
that credit facility, to which Time Warner has consented),
including preferred equity, or rental obligations if its ratio
of indebtedness plus six times its annual rental expense to
EBITDA (as EBITDA is defined in the Shareholder Agreement) plus
rental expense, or “EBITDAR,” then exceeds or would
exceed 3:1. In the Separation Agreement, Time Warner agreed that
the calculation of indebtedness under the Shareholder Agreement
would exclude (i) any indebtedness incurred pursuant to the
2008 Bridge Facility to fund, in part, the Special Dividend and
(ii) any indebtedness that reduces, on a dollar-for-dollar
basis, the commitments of the lenders under the 2008 Bridge
Facility.
Time Warner standstill. Under the Shareholder
Agreement, so long as Time Warner has the power to elect a
majority of TWC’s board of directors, Time Warner has
agreed that, prior to August 1, 2009, Time Warner will not
make or announce a tender offer or exchange offer for TWC
Class A common stock without the approval of a majority of
the independent directors of TWC; and prior to August 1,
2016, Time Warner will not enter into any business combination
with TWC, including a short-form merger, without the approval of
a majority of the independent directors of TWC.
Other Time Warner rights. Pursuant to the
Shareholder Agreement, so long as Time Warner has the power to
elect a majority of TWC’s board of directors, TWC must
obtain Time Warner’s consent before (i) entering into
any agreement that binds or purports to bind Time Warner or its
affiliates or that would subject TWC or its subsidiaries to
significant penalties or restrictions as a result of any action
or omission of Time Warner or its affiliates; or
(ii) adopting a stockholder rights plan, becoming subject
to section 203 of the Delaware General Corporation Law,
adopting a “fair price” provision in the TWC
Certificate of Incorporation or taking any similar action.
Furthermore, pursuant to the Shareholder Agreement, so long as
Time Warner has the power to elect a majority of TWC’s
board of directors, Time Warner may purchase debt securities
issued by TWE only after giving notice to TWC of the approximate
amount of debt securities it intends to purchase and the general
time period for the purchase, which period may not be greater
than 90 days, subject to TWC’s right to give notice to
Time Warner that it intends to purchase such amount of TWE debt
securities itself.
Concurrently with the execution of the Separation Agreement, TWC
and Time Warner entered into Amendment No. 1 to the
Shareholder Agreement. Under this amendment, all of Time
Warner’s and TWC’s rights and obligations under the
Shareholder Agreement will terminate upon the completion of the
Separation.
Transactions between Time Warner and TWC. The TWC
By-laws provide that Time Warner may only enter into
transactions with TWC and its subsidiaries, including TWE, that
are on terms that, at the time of entering into
Table of Contents
such transaction, are substantially as favorable to TWC or its
subsidiaries as they would be able to receive in a comparable
arm’s-length transaction with a third party. Any such
transaction involving reasonably anticipated payments or other
consideration of $50 million or greater also requires the
prior approval of a majority of the independent directors of
TWC. The TWC By-laws also prohibit TWC from entering into any
transaction having the intended effect of benefiting Time Warner
and any of its affiliates (other than TWC and its subsidiaries)
at the expense of TWC or any of its subsidiaries in a manner
that would deprive TWC or any of its subsidiaries of the benefit
it would have otherwise obtained if the transaction were to have
been effected on arm’s-length terms. Each of these By-law
provisions terminates in the event that Time Warner and TWC
cease to be affiliates.
The provisions described above will not be included in
TWC’s amended and restated By-laws that will become
effective in connection with the Separation.
Time Warner Registration Rights. At the closing of
the TWE Restructuring, Time Warner and TWC entered into a
registration rights agreement (the “Time Warner
Registration Rights Agreement”) relating to Time
Warner’s shares of TWC common stock. Subject to several
exceptions, including TWC’s right to defer a demand
registration under some circumstances, Time Warner may, under
that agreement, require that TWC take commercially reasonable
steps to register for public resale under the Securities Act of
1933, as amended, all shares of common stock that Time Warner
requests to be registered. Time Warner may demand an unlimited
number of registrations. In addition, Time Warner has been
granted “piggyback” registration rights subject to
customary restrictions and TWC is permitted to piggyback on Time
Warner’s registrations. TWC has also agreed that, in
connection with a registration and sale by Time Warner under the
Time Warner Registration Rights Agreement, it will indemnify
Time Warner and bear all fees, costs and expenses, except
underwriting discounts and selling commissions.
Concurrently with the execution of the Separation Agreement, TWC
and Time Warner entered into Amendment No. 1 to the Time
Warner Registration Rights Agreement, which provides Time Warner
with the right to require TWC to file any registration statement
necessary to consummate the Separation. In addition, under this
amendment, all of TWC’s and Time Warner’s rights and
obligations under the Time Warner Registration Rights Agreement
will terminate upon the consummation of the Distribution.
Table of Contents
TWC’s industry is, and will continue to be, highly
competitive. Some of TWC’s principal competitors, DBS
operators and incumbent local telephone companies, in
particular, offer services that provide features and functions
comparable to the video, high-speed data
and/or voice
services that TWC offers, and they offer them in bundles similar
to TWC’s. In a number of TWC’s operating areas,
AT&T and Verizon have upgraded portions of their networks
to carry two-way video, high-speed data with substantial
bandwidth and
IP-based
telephony services, which they market and sell in bundles along
with their wireless service. TWC’s competitors try to
distinguish their services from TWC’s by offering
aggressive promotional pricing, exclusive programming,
and/or
assertions of superior service or offerings.
In addition, TWC faces competition from a range of other
competitors, including, increasingly, companies that deliver
content to consumers over the Internet, often without charging a
fee for access to the content. This trend could negatively
impact customer demand for TWC’s video services, especially
premium and On-Demand services, and could encourage content
owners to seek higher license fees from TWC in order to
subsidize their free distribution of content. TWC also faces
competition in high speed data from second- and third-generation
wireless broadband services provided by mobile carriers such as
Verizon, AT&T, Sprint and
T-Mobile and
broadband over power lines. Competition in voice services is
increasing as more homes in the United States are replacing
their traditional telephone service with wireless service.
Any inability to compete effectively or an increase in
competition with respect to video, high-speed data or voice
services could have an adverse effect on TWC’s financial
results and return on capital expenditures due to possible
increases in the cost of gaining and retaining subscribers and
lower per subscriber revenue, could slow or cause a decline in
TWC’s growth rates, reduce TWC’s revenues, reduce the
number of TWC’s subscribers
and/or
reduce TWC’s ability to increase penetration rates for
services. As TWC expands and introduces new and enhanced
services, TWC may be subject to competition from other providers
of those services, such as telecommunications providers,
Internet Service Providers and consumer electronics companies,
among others. TWC cannot predict the extent to which this
competition will affect its future business and financial
results or return on capital expenditures.
Future advances in technology, as well as changes in the
marketplace, in the economy and in the regulatory and
legislative environments, may result in changes to the
competitive landscape. For additional information regarding the
regulatory and legal environment, see “—Risks Related
to Government Regulation,” “—Risks Related to
TWC’s Operations—Weakening economic conditions,
including a continued downturn in the housing market, may
negatively impact TWC’s ability to attract new subscribers,
increase rates and maintain or increase revenues” and
“Business—Competition” and “—Regulatory
Matters.”
TWC’s cable systems are constructed and operated under
non-exclusive franchises granted by state or local governmental
authorities. Federal law prohibits franchising authorities from
unreasonably denying requests for additional franchises.
Consequently, competing operators may build systems in areas in
which TWC holds franchises. The existence of more than one cable
system operating in the same territory is referred to as an
“overbuild.” In the past, competing
operators—most of them relatively small—have obtained
such franchises and offered competing services in some areas in
which TWC holds franchises. More recently, incumbent local
telephone companies with significant resources, particularly
Verizon and AT&T, have obtained such franchises in order to
offer video, high-speed data and voice services in some of
TWC’s service areas. See “—TWC faces a wide range
of competition, which could negatively affect its business and
financial results” above. Verizon and AT&T are
continuing to upgrade their networks to expand the geographic
areas in which they can deliver video and high-speed data
services, in addition to their existing telephone services.
Increased competition from any source, including overbuilders,
could require TWC to charge lower prices for existing or future
services than TWC otherwise might or require TWC to invest in or
obtain additional services more
Table of Contents
quickly or at higher costs than TWC otherwise might. These
actions, or the failure to take steps to allow TWC to compete
effectively, could adversely affect TWC’s growth, financial
condition and results of operations.
In addition to the various competitive factors discussed above,
TWC’s business is subject to risks relating to increasing
competition for the leisure and entertainment time of consumers.
TWC’s business competes with all other sources of
entertainment and information delivery, including broadcast
television, movies, live events, radio broadcasts, home video
products, console games, sports, print media and the Internet.
Technological advancements, such as VOD, new video formats, and
Internet streaming and downloading, many of which have been
beneficial to TWC’s business, have nonetheless increased
the number of entertainment and information delivery choices
available to consumers and intensified the challenges posed by
audience fragmentation. Increasingly, content owners are
delivering their content directly to consumers over the
Internet, often without charging any fee for access to the
content. Furthermore, due to consumer electronics innovations,
consumers are more readily able to watch such Internet-delivered
content on television sets. The increasing number of choices
available to audiences could negatively impact not only consumer
demand for TWC’s products and services, but also
advertisers’ willingness to purchase advertising from TWC.
If TWC does not respond appropriately to further increases in
the leisure and entertainment choices available to consumers,
TWC’s competitive position could deteriorate, and
TWC’s financial results could suffer.
TWC believes that broadband cable networks currently provide the
most efficient means to deliver its services, but consumers are
increasingly interested in accessing information, entertainment
and communication services outside the home as well. TWC is
exploring various means by which it can offer its customers
mobile services. TWC has entered into a wholesale agreement with
Sprint that allows TWC to offer wireless services utilizing
Sprint’s second-generation and third-generation network and
a wholesale agreement with Clearwire that will allow TWC to
offer wireless services utilizing Clearwire’s mobile
broadband wireless network, once constructed. TWC also is a
participant in SpectrumCo, which holds AWS licenses covering
20 MHz over 80% of the continental United States and
Hawaii. There can be no assurance that Clearwire will
successfully finance, develop, construct and deploy a nationwide
mobile broadband wireless network or that Clearwire, SpectrumCo
or the Company will successfully develop wireless services. If
TWC incurs significant costs in developing or marketing mobile
voice and/or
related wireless offerings, and the resulting offerings are not
competitive with the offerings of TWC’s competitors or
appealing to TWC’s customers, TWC’s business and
financial results could suffer. In addition, if TWC’s
competitors expand their service bundles to include compelling
mobile features before TWC has developed and rolled out
equivalent or more compelling offerings, TWC may not be in a
position to provide a competitive service offering and its
growth, business and financial results may be adversely affected.
Risks
Related to TWC’s Operations
Weakening
economic conditions, including a continued downturn in the
housing market, may negatively impact TWC’s ability to
attract new subscribers, increase rates and maintain or increase
revenues.
The United States economy is currently undergoing a period of
slowdown and the future economic environment may continue to be
less favorable than that of recent years. A continuation or
further weakening of these economic conditions could lead to
further reductions in consumer demand for the Company’s
services, especially premium services and DVRs, and a continued
increase in the number of homes that replace their traditional
telephone service with wireless service, which would negatively
impact TWC’s ability to attract customers, increase rates
and maintain or increase subscription revenues. In addition,
providing basic video services is an established and highly
penetrated business. TWC’s ability to achieve incremental
growth in basic video subscribers is dependent to a large extent
on growth in occupied housing in TWC’s service areas, which
is influenced by both national and local economic conditions. If
growth in the number of occupied homes continues to decline, it
may negatively impact TWC’s ability to gain new basic video
subscribers. In addition, TWC’s advertising revenues have
Table of Contents
been negatively impacted by the weakening economic conditions,
and a continuation or further weakening of these conditions
could lead to further reduced advertising revenue in the
foreseeable future.
TWC operates in a highly competitive, consumer-driven and
rapidly changing environment and is, to a large extent,
dependent on its ability to acquire, develop, adopt and exploit
new and existing technologies to distinguish its services from
those of its competitors. If TWC chooses technologies or
equipment that are less effective, cost-efficient or attractive
to its customers than those chosen by its competitors, or if TWC
offers services that fail to appeal to consumers, are not
available at competitive prices or that do not function as
expected, TWC’s competitive position could deteriorate, and
TWC’s business and financial results could suffer.
The ability of TWC’s competitors to acquire or develop and
introduce new technologies, products and services more quickly
than TWC may adversely affect TWC’s competitive position.
Furthermore, advances in technology, decreases in the cost of
existing technologies or changes in competitors’ product
and service offerings also may require TWC in the future to make
additional research and development expenditures or to offer at
no additional charge or at a lower price certain products and
services TWC currently offers to customers separately or at a
premium. In addition, the uncertainty of the costs for obtaining
intellectual property rights from third parties could impact
TWC’s ability to respond to technological advances in a
timely manner.
The rising popularity of bandwidth-intensive Internet-based
services poses special risks for TWC’s high-speed data
services. Examples of such services include peer-to-peer file
sharing services, gaming services and the delivery of video via
streaming technology and by download. If heavy usage of
bandwidth-intensive services grows beyond TWC’s current
expectations, TWC may need to invest more capital than currently
anticipated to expand the bandwidth capacity of its systems or
TWC’s customers may have a suboptimal experience when using
TWC’s high-speed data service. In order to continue to
provide quality service at attractive prices, TWC needs the
continued flexibility to develop and refine business models that
respond to changing consumer uses and demands and to manage
bandwidth usage efficiently. TWC’s ability to do these
things could be restricted by legislative efforts to impose
so-called “net neutrality” requirements on cable
operators. See “—Risks Related to Government
Regulation—‘Net neutrality’ legislation or
regulation could limit TWC’s ability to operate its
high-speed data business profitably and to manage its broadband
facilities efficiently to respond to growing bandwidth usage by
TWC’s high-speed data customers.”
TWC has sold video, high-speed data and network and transport
services to businesses for some time and, in 2007, introduced an
IP-based
telephony service, Business Class Phone, geared to small-
and medium-sized businesses. In order to provide its commercial
customers with reliable services, TWC may need to increase
expenditures, including spending on technology, equipment and
personnel. If the services are not sufficiently reliable or TWC
otherwise fails to meet commercial customers’ expectations,
the growth of its commercial services business may be limited.
In addition, TWC faces competition from the existing local
telephone companies as well as from a variety of other national
and regional business services competitors. If TWC is unable to
successfully attract and retain commercial customers, its
growth, financial condition and results of operations may be
adversely affected.
Table of Contents
TWC
relies on network and information systems and other technology,
and a disruption or failure of such networks, systems or
technology as a result of computer viruses, misappropriation of
data or other malfeasance, as well as outages, natural
disasters, accidental releases of information or similar events,
may disrupt TWC’s business.
Because network and information systems and other technologies
are critical to TWC’s operating activities, network or
information system shutdowns caused by events such as computer
hacking, dissemination of computer viruses, worms and other
destructive or disruptive software, denial of service attacks
and other malicious activity, as well as power outages, natural
disasters, terrorist attacks and similar events, pose increasing
risks. Such an event could have an adverse impact on TWC and its
customers, including degradation of service, service disruption,
excessive call volume to call centers and damage to TWC’s
plant, equipment and data. Such an event also could result in
large expenditures necessary to repair or replace such networks
or information systems or to protect them from similar events in
the future. Significant incidents could result in a disruption
of TWC’s operations, customer dissatisfaction, or a loss of
customers or revenues.
Furthermore, TWC’s operating activities could be subject to
risks caused by misappropriation, misuse, leakage, falsification
and accidental release or loss of information maintained in
TWC’s information technology systems and networks,
including customer, personnel and vendor data. TWC could be
exposed to significant costs if such risks were to materialize,
and such events could damage the reputation and credibility of
TWC and its business and have a negative impact on its revenues.
TWC also could be required to expend significant capital and
other resources to remedy any such security breach. As a result
of the increasing awareness concerning the importance of
safeguarding personal information, the potential misuse of such
information and legislation that has been adopted or is being
considered regarding the protection, privacy and security of
personal information, information-related risks are increasing,
particularly for businesses like TWC’s that handle a large
amount of personal customer data.
TWC relies on patent, copyright, trademark and trade secret laws
and licenses and other agreements with its employees, customers,
suppliers, and other parties, to establish and maintain its
intellectual property rights in technology and the products and
services used in TWC’s operations. However, any of
TWC’s intellectual property rights could be challenged or
invalidated, or such intellectual property rights may not be
sufficient to permit TWC to take advantage of current industry
trends or otherwise to provide competitive advantages, which
could result in costly redesign efforts, discontinuance of
certain product or service offerings or other competitive harm.
Claims of intellectual property infringement could require TWC
to enter into royalty or licensing agreements on unfavorable
terms, incur substantial monetary liability or be enjoined
preliminarily or permanently from further use of the
intellectual property in question, which could require TWC to
change its business practices or offerings and limit its ability
to compete effectively. Even claims without merit can be
time-consuming and costly to defend and may divert
management’s attention and resources away from TWC’s
businesses. Also, because of the rapid pace of technological
change, TWC relies on technologies developed or licensed by
third parties, and TWC may not be able to obtain or continue to
obtain licenses from these third parties on reasonable terms, if
at all.
Financial Accounting Standards Board (“FASB”)
Statement No. 142, Goodwill and Other Intangible Assets
(“FAS 142”) requires that goodwill, including the
goodwill included in the carrying value of investments accounted
for using the equity method of accounting, and other intangible
assets deemed to have indefinite useful lives, such as cable
franchise rights, cease to be amortized. FAS 142 requires that
goodwill and certain intangible assets be tested annually for
impairment or earlier upon the occurrence of certain events or
substantive changes in circumstances. If TWC finds that the
carrying value of goodwill or a certain intangible asset exceeds
its estimated fair value, it will reduce the carrying value of
the goodwill or intangible asset to the estimated fair value,
and TWC will recognize an impairment. Any such impairment is
required to be recorded as a noncash operating loss.
Table of Contents
TWC’s 2008 annual impairment analysis, which was performed
as of December 31, 2008, resulted in a noncash pretax
impairment on its cable franchise rights of $14.822 billion, and
as a result, the carrying values of the Company’s impaired
cable franchise rights were re-set to their estimated fair
values as of December 31, 2008. Consequently, any further
decline in the estimated fair values of these cable franchise
rights could result in additional cable franchise rights
impairments. It is possible that such impairments, if required,
could be material and may need to be recorded prior to the
fourth quarter of 2009 (i.e., during an interim period) if the
Company’s results of operations or other factors require
such assets to be tested for impairment at an interim date. See
“Management’s Discussion and Analysis of Results of
Operations and Financial Condition—Critical Accounting
Policies and Estimates—Asset Impairments—Goodwill and
Indefinite-lived Intangible Assets” and
“—Long-lived Assets.”
The
IRS and state and local tax authorities may challenge the tax
characterizations of the Adelphia Acquisition, the Redemptions
(as defined below) and the Exchange (as defined below), or
TWC’s related valuations, and any successful challenge by
the IRS or state or local tax authorities could materially
adversely affect TWC’s tax profile, significantly increase
TWC’s future cash tax payments and significantly reduce
TWC’s future earnings and cash flow.
The Adelphia Acquisition was designed to be a fully taxable
asset sale, the redemption by TWC of Comcast’s interests in
TWC (the “TWC Redemption”) was designed to qualify as
a tax-free split-off under section 355 of the Internal
Revenue Code of 1986, as amended (the “Tax Code”), the
redemption by TWE of Comcast’s interests in TWE (the
“TWE Redemption” and collectively with the TWC
Redemption, the “Redemptions”) was designed as a
redemption of Comcast’s partnership interest in TWE, and
the exchange between TW NY Cable and Comcast immediately after
the Adelphia Acquisition (the “Exchange”) was designed
as an exchange of designated cable systems. There can be no
assurance, however, that the Internal Revenue Service (the
“IRS”) or state or local tax authorities (collectively
with the IRS, the “Tax Authorities”) will not
challenge one or more of such characterizations or TWC’s
related valuations. Such a successful challenge by the Tax
Authorities could materially adversely affect TWC’s tax
profile (including TWC’s ability to recognize the intended
tax benefits from the Adelphia/Comcast Transactions),
significantly increase TWC’s future cash tax payments and
significantly reduce TWC’s future earnings and cash flow.
The tax consequences of the Adelphia Acquisition, the
Redemptions and the Exchange are complex and, in many cases,
subject to significant uncertainties, including, but not limited
to, uncertainties regarding the application of federal, state
and local income tax laws to various transactions and events
contemplated therein and regarding matters relating to valuation.
In connection with the Separation, TWC incurred
$7.0 billion of indebtedness pursuant to the 2008 Bond
Offerings to fund, in part, the Special Dividend and expects to
incur additional indebtedness to fund the Special Dividend and
expenses related to the Separation Transactions through a
combination of borrowings under the 2008 Bridge Facility,
additional financing in the public debt markets
and/or
borrowings under TWC’s $6 billion senior unsecured
five-year revolving credit facility (the “Revolving Credit
Facility”). The increased indebtedness and the terms of
these financing arrangements and any future indebtedness will
impose various restrictions on TWC that could limit its ability
to respond to market conditions, provide for capital investment
needs or take advantage of business opportunities. Also, as a
result of TWC’s increased borrowings, its interest expense
will be higher than it has been in the past, which will affect
TWC’s profitability and cash flows.
In addition, the Revolving Credit Facility and TWC’s
$3.045 billion five-year term loan facility both mature in
2011. At this time it is difficult to forecast the future state
of the bank loan market. As a result of TWC’s substantial
debt levels and the uncertain state of various financial
institutions and the credit markets generally, TWC may be unable
to refinance its bank facilities in the same amount and on the
same terms as its current facilities, which could negatively
impact its liquidity and results of operations.
U.S. and global credit and equity markets have recently
undergone significant disruption, making it difficult for many
businesses to obtain financing on acceptable terms. In addition,
equity markets are continuing to
Table of Contents
experience wide fluctuations in value. As a result, an
increasing number of financial institutions and insurance
companies have reported significant deterioration in their
financial condition. If any of the significant lenders,
insurance companies or other financial institutions are unable
to perform their obligations under the Company’s credit
agreements, insurance policies or other contracts, and the
Company is unable to find suitable replacements on acceptable
terms, the Company’s results of operations, liquidity and
cash flows could be adversely affected. The Company also faces
challenges relating to the impact of the disruption in the
global financial markets on other parties with which the Company
does business, such as vendors and retailers. The inability of
these parties to obtain financing on acceptable terms could
impair their ability to perform under their agreements with the
Company and lead to various negative effects on the Company,
including business disruption, decreased revenues and increases
in bad debt write-offs. A sustained decline in the financial
stability of these parties could have an adverse impact on
TWC’s business and results of operations.
Video programming costs represent a major component of
TWC’s expenses and are expected to continue to increase
primarily due to the increasing cost of obtaining desirable
programming, particularly broadcast and sports programming.
TWC’s video service margins have declined over recent years
and will continue to decline over the next coming years as cable
programming and broadcast station retransmission consent cost
increases outpace growth in video revenues. Furthermore,
providers of desirable content may be unwilling to enter into
distribution arrangements with TWC on acceptable terms. In
addition, owners of non-broadcast video programming content may
enter into exclusive distribution arrangements with TWC’s
competitors. A failure to carry programming that is attractive
to TWC’s subscribers could adversely impact subscription
and advertising revenues.
TWC depends on third party suppliers and licensors to supply
some of the hardware, software and operational support necessary
to provide some of TWC’s services. Some of TWC’s
hardware, software and operational support vendors represent
TWC’s sole source of supply or have, either through
contract or as a result of intellectual property rights, a
position of some exclusivity. If demand exceeds these
vendors’ capacity or if these vendors experience operating
or financial difficulties, especially in light of current
economic and market conditions, TWC’s ability to provide
some services might be materially adversely affected. These
events could materially and adversely affect TWC’s ability
to retain and attract subscribers, and have a material negative
impact on TWC’s operations, business, financial results and
financial condition.
TWC has an agreement with Sprint under which it provides certain
functions and services necessary to TWC in providing Digital
Phone service to customers by routing voice traffic to and from
destinations outside of TWC’s network via the public
switched telephone network, delivering E911 service and
assisting in local number portability and long-distance traffic
carriage. TWC’s reliance on a single provider for these
services may render TWC vulnerable to service disruptions and
other operational difficulties, which could have an adverse
effect on TWC’s business and financial results.
Under federal law, TWC has the right to attach cables carrying
video services to telephone and similar poles of investor-owned
utilities at regulated rates. However, because these cables
carry services other than video services, such as high-speed
data services or new forms of voice services, some utility pole
owners have sought to impose additional fees for pole
attachment. The U.S. Supreme Court has rejected the efforts
of some utility pole owners to make cable attachments carrying
Internet traffic ineligible for regulatory protection. Pole
owners have, however, made arguments in other areas of pole
regulation that, if successful, could significantly increase
TWC’s costs. In November 2007, the FCC issued a Notice of
Proposed Rulemaking that proposes to establish a single pole
attachment rate for all utility pole owners carrying broadband
Internet access services that would be higher than the rate
charged for video and cable modem service.
Table of Contents
Some of the poles TWC uses are exempt from federal regulation
because they are owned by utility cooperatives and municipal
entities. These entities may not renew TWC’s existing
agreements when they expire, and they may require TWC to pay
substantially increased fees. A number of these entities are
currently seeking to impose substantial rate increases. Any
inability to secure continued pole attachment agreements with
these cooperatives or municipal utilities on commercially
reasonable terms could cause TWC’s business, financial
results or financial condition to suffer.
TWC’s video and voice services are subject to extensive
regulation at the federal, state, and local levels. In addition,
the federal government has extended some regulation to
high-speed data services and is considering additional
regulations. TWC is also subject to regulation of its video
services relating to rates, equipment, technologies,
programming, levels and types of services, taxes and other
charges. Modification to existing regulations or the imposition
of new regulations could have an adverse impact on TWC’s
services. If the Congress or regulators were to disallow the use
of certain technologies TWC uses today or to mandate the
implementation of other technologies, TWC’s services and
results of operations could suffer. TWC expects that legislative
enactments, court actions, and regulatory proceedings will
continue to clarify and, in some cases, change the rights of
cable companies and other entities providing video, high-speed
data and voice services under the Communications Act and other
laws, possibly in ways that TWC has not foreseen. The results of
these legislative, judicial, and administrative actions may
materially affect TWC’s business operations in areas such
as:
Although TWC would likely choose to carry the majority of
primary feeds of full power stations voluntarily, so-called
“must carry” rules require TWC to carry some local
broadcast television signals on some of its cable systems that
it might not otherwise carry. If the FCC seeks to revise or
expand the “must carry” rules, such as to require
carriage of multicast streams, TWC would be forced to carry
video programming that it would not otherwise carry and
potentially to drop other, more popular programming in order to
free capacity for the required programming, which could make TWC
less competitive. Moreover, if the FCC adopts rules that are not
competitively neutral, cable operators could be placed at a
disadvantage versus other multi-channel video providers.
The Communications Act and the FCC’s “program
carriage” rules restrict cable operators and MVPDs from
unreasonably restraining the ability of an unaffiliated
programming vendor to compete fairly by discriminating against
the programming vendor on the basis of its non-affiliation in
the selection, terms or conditions for carriage. The FCC’s
Adelphia/Comcast Transactions Order imposes certain additional
obligations related to these rules. Under a successful program
carriage complaint, TWC might be compelled to carry programming
services it would
Table of Contents
not otherwise carry
and/or to do
so on economic and other terms that it would not accept absent
such compulsion. TWC is currently the defendant in two program
carriage complaints. See “Business—Regulatory
Matters—Video Services—Program access and
Adelphia/Comcast Transactions Order.” Compelled government
carriage could reduce TWC’s ability to carry other, more
desirable programming and non-video services, decrease its
ability to manage its bandwidth efficiently and increase
TWC’s costs, adversely affecting TWC’s competitive
position.
Several disparate groups have adopted the term “net
neutrality” in connection with their efforts to persuade
Congress and regulators to adopt rules that could limit the
ability of broadband providers to effectively manage or operate
their broadband networks. Proponents of net neutrality advocate
a variety of regulations, including regulations which prohibit
broadband providers from recovering the costs of rising
bandwidth usage from any parties other than retail customers;
require absolute nondiscrimination for any Internet traffic; and
require forms of “open access.”
The average bandwidth usage of TWC’s high-speed data
customers has been increasing significantly in recent years as
the amount of high-bandwidth content and the number of
applications available on the Internet continue to grow. In
order to continue to provide quality service at attractive
prices, TWC needs the continued flexibility to develop and
refine business models that respond to changing consumer uses
and demands and to manage bandwidth usage efficiently. As a
result, depending on the form it might take, “net
neutrality” legislation or regulation could adversely
impact TWC’s ability to operate its high-speed data network
profitably and to undertake the upgrades that may be needed to
continue to provide high quality high-speed data services and
could negatively impact its ability to compete effectively. For
a description of current regulatory proposals, see
“Business—Regulatory Matters—High-Speed Data
Internet Access Services—‘Net neutrality’
legislative and regulatory proposals.”
As of December 31, 2008, TWC had deployed switched digital
video, or SDV, technology to approximately 5.2 million
digital video subscribers. SDV technology allows TWC to save
bandwidth by transmitting particular programming services only
to groups of homes or nodes where subscribers are viewing the
programming at a particular time rather than broadcasting it to
all subscriber homes. The FCC may interpret existing regulation
or introduce new regulation to restrict cable operators’
ability to use SDV technology. If TWC is prohibited by
regulation from using SDV technology, it may have difficulty
carrying the volume of HDTV channels and other
bandwidth-intensive traffic carried by competitors and may be
forced to make costly upgrades to its systems in order to remain
competitive. See “Business—Regulatory
Matters—Video Services—Switched digital video.”
Under current FCC regulations, rates for BST video service and
associated equipment are permitted to be regulated. In many
localities, TWC is not subject to BST video rate regulation,
either because the local franchising authority has not asked the
FCC for permission to regulate rates or because the FCC has
found that there is “effective competition.” Also,
there is currently no rate regulation for TWC’s other
services, including high-speed data and voice services. It is
possible, however, that the FCC or Congress will adopt more
extensive rate regulation for TWC’s video services or
regulate other services, such as high-speed data and voice
services, which could impede TWC’s ability to raise rates,
or require rate reductions, and therefore could cause TWC’s
business, financial results or financial condition to suffer.
Local franchising authorities generally require cable operators
to pay a franchise fee of five percent of revenue, which cable
operators collect in turn from their subscribers. TWC has taken
the position that under the
Table of Contents
Communications Act, local franchising authorities are allowed to
impose a franchise fee only on revenue from “cable
services.” Following the FCC’s March 2002
determination that cable modem service does not constitute a
“cable service,” TWC and most other multiple system
operators stopped collecting and paying franchise fees on cable
modem revenue.
The FCC has initiated a rulemaking proceeding to explore the
consequences of its March 2002 order. If either the FCC or a
court were to determine that, despite the March 2002 order, TWC
is required to pay franchise fees on cable modem revenue,
TWC’s franchise fee burden could increase going forward.
TWC would be permitted to collect those increased fees from its
subscribers, but doing so could impair its competitive position
as compared to high-speed data service providers who are not
required to collect and pay franchise fees. TWC could also
become liable for franchise fees back to the time TWC stopped
paying them. TWC may not be able to recover those fees from
subscribers. Most courts interpreting the rules, including
several instances involving TWC, have determined that cable
operators are not required to pay these fees on cable modem
service.
The exact requirements of applicable law are not always clear,
and the rules affecting TWC’s businesses are always subject
to change. For example, the FCC may interpret its rules and
regulations in enforcement proceedings in a manner that is
inconsistent with the judgments TWC has made. Likewise,
regulators and legislators at all levels of government may
sometimes change existing rules or establish new rules.
Congress, for example, considers new legislative requirements
for cable operators virtually every year, and there is always a
risk that such proposals will ultimately be enacted. In
addition, federal, state or local governments
and/or tax
authorities may change tax laws, regulations or administrative
practices that could negatively impact TWC’s operating
results and financial condition. See
“Business—Regulatory Matters.”
TWC believes that the Separation will result in several benefits
to the Company, including increased long-term strategic,
operational and regulatory flexibility and a more efficient
capital structure. The Company cannot predict with certainty the
extent to which these benefits actually will be achieved, if at
all. Furthermore, even if some or all of these benefits are
achieved, they may not result in the creation of value for
TWC’s stockholders.
If the
Separation Transactions, including the Distribution, do not
qualify as tax-free, either as a result of actions taken or not
taken by TWC or as a result of the failure of certain
representations by TWC to be true, TWC has agreed to indemnify
Time Warner for its taxes resulting from such disqualification,
which would be significant. In addition, the restrictions
imposed on TWC in connection with the tax treatment of the
Distribution could limit TWC’s ability to engage in certain
corporate transactions.
The Separation Transactions are conditioned upon Time
Warner’s receipt of a private letter ruling from the IRS
and Time Warner’s and TWC’s receipt of opinions of tax
counsel confirming that the Separation Transactions should
generally qualify as tax-free to Time Warner and its
stockholders for U.S. federal income tax purposes. The
ruling and opinions rely on certain facts, assumptions,
representations, and undertakings from Time Warner and TWC
regarding the past and future conduct of the companies’
businesses and other matters. If any of these facts,
assumptions, representations or undertakings are incorrect or
not otherwise satisfied, Time Warner and its stockholders may
not be able to rely on the ruling or the opinions and could be
subject to significant tax liabilities. Notwithstanding the
private letter ruling and opinions, the IRS could determine on
audit that the Separation Transactions should be treated as
taxable transactions if it determines that any of these facts,
assumptions, representations or undertakings are not correct or
have been violated, or for other reasons, including as a result
of significant changes in the stock ownership of Time Warner or
TWC after the Distribution.
Under the tax sharing agreement among Time Warner and TWC, TWC
generally would be required to indemnify Time Warner against its
taxes resulting from the failure of any of the Separation
Transactions to qualify as tax-free as a result of
(i) certain actions or failures to act by TWC or
(ii) the failure of certain representations to be made by
TWC to be true. Due to the potential impact of significant stock
ownership changes on the taxability of the
Table of Contents
Separation Transactions, TWC’s indemnification obligations
may prevent it from entering into transactions that might
otherwise be advantageous, such as issuing equity securities to
satisfy financing needs or acquiring businesses or assets with
equity securities if such issuances would exceed certain
thresholds and such actions could be considered part of a plan
or series of related transactions that include the Distribution.
In addition, even if TWC bears no contractual responsibility for
taxes related to a failure of the Separation Transactions to
qualify for their intended tax treatment, Treasury regulation
section 1.1502-6
imposes on TWC several liability for all Time Warner federal
income tax obligations relating to the period during which TWC
was a member of the Time Warner federal consolidated tax group,
including the date of the Separation Transactions. Similar
provisions may apply under foreign, state, or local law. Absent
TWC causing the Separation Transactions to not qualify as
tax-free, Time Warner has indemnified TWC against such several
liability arising from a failure of the Separation Transactions
to qualify for their intended tax treatment.
Risks
Related to TWC’s Relationship with Time Warner
Time Warner indirectly holds all of TWC’s outstanding
Class B common stock and approximately 82.7% of TWC’s
outstanding Class A common stock. The common stock held by
Time Warner represents approximately 90.6% of TWC’s
combined voting power and 84.0% of the total number of shares of
capital stock outstanding of all classes of TWC’s voting
stock. Accordingly, Time Warner can control the outcome of most
matters submitted to a vote of TWC’s stockholders. In
addition, Time Warner, because it is the indirect holder of all
of TWC’s outstanding Class B common stock, and because
it also indirectly holds a majority of TWC’s outstanding
Class A common stock, is able to elect all of TWC’s
directors and will continue to be able to do so as long as it
owns a majority of TWC’s Class A common stock and
Class B common stock. As a result of Time Warner’s
share ownership and representation on TWC’s board of
directors, Time Warner is able to influence all of TWC’s
affairs and actions, including matters requiring stockholder
approval such as the election of directors and approval of
significant corporate transactions. The interests of Time Warner
may differ from the interests of TWC’s other stockholders.
The TWC Certificate of Incorporation requires that TWC’s
board of directors include independent members, subject to
certain limitations, and the TWC By-laws require that certain
related party transactions be approved by a majority of these
independent directors.
Some of TWC’s officers and directors may experience
conflicts of interest with respect to decisions involving
business opportunities and similar matters that may arise in the
ordinary course of TWC’s business or the business of Time
Warner and its affiliates. One of TWC’s directors is an
executive officer of Time Warner and five of TWC’s
directors (including Glenn A. Britt, TWC’s President and
Chief Executive Officer) served as executive officers of Time
Warner or its predecessors in the past. A number of TWC
directors and executive officers also have restricted shares,
restricted stock units
and/or
options to purchase shares of Time Warner common stock. These
past and ongoing relationships with Time Warner and any
significant financial interest in Time Warner by these persons
may present conflicts of interest that could materially
adversely affect TWC’s business, financial results or
financial condition. For example, these decisions could be
materially related to:
Table of Contents
Time Warner and its affiliates are engaged in a diverse range of
entertainment and media-related businesses, including filmed
entertainment, home video and Internet-related businesses, and
these businesses may have interests that conflict with or
compete in some manner with TWC’s business. Time Warner and
its affiliates are generally under no obligation to share any
future business opportunities available to it with TWC and the
TWC Certificate of Incorporation contains provisions that
release Time Warner and its affiliates, including TWC’s
directors who are also Time Warner’s employees or executive
officers, from this obligation and any liability that would
result from breach of this obligation. Time Warner may deliver
video, high-speed data, voice and wireless services over DSL,
satellite or other means using the “Time Warner” brand
name or similar brand names, potentially causing confusion among
customers and complicating TWC’s marketing efforts. Any
competition directly with Time Warner or its affiliates could
materially adversely impact TWC’s business, financial
results or financial condition.
TWC is
currently party to agreements and, following the Separation,
will be party to new agreements with Time Warner governing the
use of TWC’s brand names, including the “Time Warner
Cable” brand name, that may be terminated by Time Warner if
TWC fails to perform its obligations under those agreements or
if TWC undergoes a specified change of control.
TWC is currently party to agreements with Time Warner and, has
entered into new agreements with Time Warner that will be
effective at the Separation, governing the use of TWC’s
brand name. These agreements may be terminated by Time Warner if
TWC:
TWC licenses its brand name, “Time Warner Cable,” from
Time Warner and the trademark “Road Runner” from an
affiliate of Time Warner and will continue to do so following
the Separation. If Time Warner terminates these brand name
license agreements, TWC would lose the goodwill associated with
its brand names and be forced to develop new brand names, which
would likely require substantial expenditures, and TWC’s
business, financial results or financial condition would likely
be materially adversely affected.
Time Warner currently owns approximately 84.0% of TWC’s
common stock, which represents a 90.6% voting interest. Time
Warner and TWC have entered into a Separation Agreement. In
connection with the Separation Transactions, if a number of
TWC’s resulting new stockholders chose to sell their
shares, or if there is a perception that such sales might occur,
it may cause short-term volatility in the trading volume and
market price of TWC’s common stock.
Prior to the Separation, TWC’s ability to obtain financing
in the capital markets and from other private sources may be
adversely affected by future capital markets activity undertaken
by Time Warner and its other subsidiaries. Capital raised by or
committed to Time Warner for matters unrelated to TWC may reduce
the supply of capital available for TWC as a result of increased
leverage of Time Warner on a consolidated basis or reluctance in
the market to incur additional credit exposure to Time Warner on
a consolidated basis. In addition, TWC’s ability to
undertake significant capital raising activities may be
constrained by competing capital needs of other Time Warner
businesses unrelated to TWC. As of December 31, 2008, Time
Warner had unused committed capacity of approximately
$4.4 billion under its $7.0 billion committed credit
facility, and approximately $1.2 billion of cash and
equivalents, and TWC had approximately $5.7 billion of
available borrowing capacity under the Revolving Credit
Facility, and approximately $5.4 billion of cash and
equivalents.
Table of Contents
Time Warner controls more than 50% of the voting power of
TWC’s outstanding common stock. As a result, TWC is
considered to be a “controlled company” for the
purposes of the NYSE listing requirements and therefore is
permitted to, and has, opted out of the NYSE listing
requirements that would otherwise require TWC’s
compensation and nominating and governance committees to be
comprised entirely of independent directors. Accordingly,
TWC’s stockholders do not have the same protections
afforded to stockholders of companies that are subject to all of
the NYSE corporate governance requirements. However, the TWC
Certificate of Incorporation contains provisions requiring that
independent directors constitute at least 50% of TWC’s
board of directors and the TWC By-laws require that certain
related party transactions be approved by a majority of these
independent directors.
As a condition to the consummation of the Adelphia Acquisition,
TWC’s Certificate of Incorporation provides that this
provision may not be amended, altered or repealed, and no
provision inconsistent with this requirement may be adopted,
until August 1, 2009 (three years following the closing of
the Adelphia Acquisition) without, among other things, the
consent of a majority of the holders of the Class A common
stock other than Time Warner and its affiliates.
Not applicable.
TWC’s principal physical assets consist of operating plant
and equipment, including signal receiving, encoding and decoding
devices, headends and distribution systems and equipment at or
near subscribers’ homes for each of TWC’s cable
systems. The signal receiving apparatus typically includes a
tower, antenna, ancillary electronic equipment and earth
stations for reception of satellite signals. Headends,
consisting of electronic equipment necessary for the reception,
amplification and modulation of signals, are located near the
receiving devices. TWC’s distribution system consists
primarily of coaxial and fiber optic cables, lasers, routers,
switches and related electronic equipment. TWC’s cable
plant and related equipment generally are either attached to
utility poles under pole rental agreements with local public
utilities or the distribution cable is buried in underground
ducts or trenches. Customer premise equipment consists
principally of set-top boxes and cable modems. The physical
components of cable systems require periodic maintenance.
TWC’s high-speed data backbone consists of fiber owned by
TWC or circuits leased from third-party vendors, and related
equipment. TWC also operates regional and national data centers
with equipment that is used to provide services, such as
e-mail, news
and web services to TWC’s high-speed data subscribers and
to provide services to TWC’s Digital Phone customers. In
addition, TWC maintains a network operations center with
equipment necessary to monitor and manage the status of
TWC’s high-speed data network.
As of December 31, 2008, TWC leased and owned real property
housing national operations centers and regional data centers
used in its high-speed data services business in Herndon, VA;
Raleigh, NC; Syracuse, NY; Austin, TX; Kansas City, MO; Orange
County, CA; New York, NY; Coudersport, PA; and Columbus, OH, and
TWC also leased and owned locations for its corporate offices in
New York, NY; Stamford, CT; and Charlotte, NC as well as
numerous business offices, warehouses and properties housing
divisional operations throughout the country. TWC’s signal
reception sites, primarily antenna towers and headends, and
microwave facilities are located on owned and leased parcels of
land, and TWC owns or leases space on the towers on which
certain of its equipment is located. TWC owns most of its
service vehicles.
TWC believes that its properties, both owned and leased, taken
as a whole, are in good operating condition and are suitable and
adequate for its business operations.
Table of Contents
On September 20, 2007, Brantley, et al. v. NBC
Universal, Inc., et al. was filed in the U.S. District
Court for the Central District of California against the Company
and Time Warner. The complaint, which also named as defendants
several other programming content providers (collectively, the
“programmer defendants”) as well as other cable and
satellite providers (collectively, the “distributor
defendants”), alleged violations of Sections 1 and 2
of the Sherman Antitrust Act. Among other things, the complaint
alleged coordination between and among the programmer defendants
to sell
and/or
license programming on a “bundled” basis to the
distributor defendants, who in turn purportedly offer that
programming to subscribers in packaged tiers, rather than on a
per channel (or “à la carte”) basis. Plaintiffs,
who seek to represent a purported nationwide class of cable and
satellite subscribers, demand, among other things, unspecified
treble monetary damages and an injunction to compel the offering
of channels to subscribers on an “à la carte”
basis. On December 3, 2007, plaintiffs filed an amended
complaint in this action (the “First Amended
Complaint”) that, among other things, dropped the
Section 2 claims and all allegations of horizontal
coordination. On December 21, 2007, the programmer
defendants, including Time Warner, and the distributor
defendants, including TWC, filed motions to dismiss the First
Amended Complaint. On March 10, 2008, the court granted
these motions, dismissing the First Amended Complaint with leave
to amend. On March 20, 2008, plaintiffs filed a second
amended complaint (the “Second Amended Complaint”)
that modified certain aspects of the First Amended Complaint in
an attempt to address the deficiencies noted by the court in its
prior dismissal order. On April 22, 2008, the programmer
defendants, including Time Warner, and the distributor
defendants, including TWC, filed motions to dismiss the Second
Amended Complaint, which motions were denied by the court on
June 25, 2008. On July 14, 2008, the programmer
defendants and the distributor defendants filed motions
requesting the court to certify its June 25, 2008 order for
interlocutory appeal to the U.S. Court of Appeals for the
Ninth Circuit, which motions were denied by the district court
on August 4, 2008. On November 14, 2008, Time Warner
was dismissed as a programmer defendant, and Turner Broadcasting
System, Inc. was substituted in its place. The Company intends
to defend against this lawsuit vigorously.
On June 22, 2005, Mecklenburg County filed suit against
TWE-A/N in the General Court of Justice District Court Division,
Mecklenburg County, North Carolina. Mecklenburg County, the
franchisor in TWE-A/N’s Mecklenburg County cable system,
alleges that TWE-A/N’s predecessor failed to construct an
institutional network in 1981 and that TWE-A/N assumed that
obligation upon the transfer of the franchise in 1995.
Mecklenburg County is seeking compensatory damages and
TWE-A/N’s release of certain video channels it is currently
using on the cable system. On April 14, 2006, TWE-A/N filed
a motion for summary judgment, which is pending. TWE-A/N intends
to defend against this lawsuit vigorously.
On June 16, 1998, plaintiffs in Andrew Parker and Eric
DeBrauwere, et al. v. Time Warner Entertainment Company,
L.P. and Time Warner Cable filed a purported nationwide
class action in U.S. District Court for the Eastern
District of New York claiming that TWE sold its
subscribers’ personally identifiable information and failed
to inform subscribers of their privacy rights in violation of
the Cable Communications Policy Act of 1984 and common law. The
plaintiffs seek damages and declaratory and injunctive relief.
On August 6, 1998, TWE filed a motion to dismiss, which was
denied on September 7, 1999. On December 8, 1999, TWE
filed a motion to deny class certification, which was granted on
January 9, 2001 with respect to monetary damages, but
denied with respect to injunctive relief. On June 2, 2003,
the U.S. Court of Appeals for the Second Circuit vacated
the district court’s decision denying class certification
as a matter of law and remanded the case for further proceedings
on class certification and other matters. On May 4, 2004,
plaintiffs filed a motion for class certification, which the
Company opposed. On October 25, 2005, the court granted
preliminary approval of a class settlement arrangement, but
final approval of that settlement was denied on January 26,
2007. The parties subsequently reached a revised settlement to
resolve this action on terms that are not material to the
Company and submitted their agreement to the district court on
April 2, 2008. On May 8, 2008, the district court
granted preliminary approval of the settlement, but it is still
subject to final approval by the district court, and there can
be no assurance that the settlement will receive this approval.
Absent the issuance of final court approval of the revised
settlement, the Company intends to defend against this lawsuit
vigorously.
On September 1, 2006, Ronald A. Katz Technology Licensing,
L.P. (“Katz”) filed a complaint in the
U.S. District Court for the District of Delaware alleging
that TWC and several other cable operators, among
Table of Contents
other defendants, infringe a number of patents purportedly
relating to the Company’s customer call center operations
and/or
voicemail services. The plaintiff is seeking unspecified
monetary damages as well as injunctive relief. On March 20,
2007, this case, together with other lawsuits filed by Katz, was
made subject to a Multidistrict Litigation (“MDL”)
Order transferring the case for pretrial proceedings to the
U.S. District Court for the Central District of California.
In April 2008, TWC and other defendants filed “common”
motions for summary judgment, which argued, among other things,
that a number of claims in the patents at issue are invalid
under Sections 112 and 103 of the Patent Act. On June 19
and August 4, 2008, the court issued orders granting, in
part, and denying, in part, those motions. Defendants filed
additional “individual” motions for summary judgment
in August 2008, which argued, among other things, that
defendants’ respective products do not infringe the
surviving claims in plaintiff’s patents. Those motions have
been fully briefed, but no decision has been reached. The
Company intends to defend against this lawsuit vigorously.
On June 1, 2006, Rembrandt Technologies, LP
(“Rembrandt”) filed a complaint in the
U.S. District Court for the Eastern District of Texas
alleging that the Company and a number of other cable operators
infringed several patents purportedly related to a variety of
technologies, including high-speed data and
IP-based
telephony services. In addition, on September 13, 2006,
Rembrandt filed a complaint in the U.S. District Court for
the Eastern District of Texas alleging that the Company
infringes several patents purportedly related to
“high-speed cable modem internet products and
services.” In each of these cases, the plaintiff is seeking
unspecified monetary damages as well as injunctive relief. On
June 18, 2007, these cases, along with other lawsuits filed
by Rembrandt, were made subject to an MDL Order transferring the
case for pretrial proceedings to the U.S. District Court
for the District of Delaware. The Company intends to defend
against these lawsuits vigorously.
On April 26, 2005, Acacia Media Technologies
(“AMT”) filed suit against TWC in the
U.S. District Court for the Southern District of New York
alleging that TWC infringes several patents held by AMT. AMT has
publicly taken the position that delivery of broadcast video
(except live programming such as sporting events),
pay-per-view,
VOD and ad insertion services over cable systems infringe its
patents. AMT has brought similar actions regarding the same
patents against numerous other entities, and all of the
previously pending litigations have been made the subject of an
MDL Order consolidating the actions for pretrial activity in the
U.S. District Court for the Northern District of
California. On October 25, 2005, the TWC action was
consolidated into the MDL proceedings. The plaintiff is seeking
unspecified monetary damages as well as injunctive relief. The
Company intends to defend against this lawsuit vigorously.
From time to time, the Company receives notices from third
parties claiming that it infringes their intellectual property
rights. Claims of intellectual property infringement could
require TWC to enter into royalty or licensing agreements on
unfavorable terms, incur substantial monetary liability or be
enjoined preliminarily or permanently from further use of the
intellectual property in question. In addition, certain
agreements entered into may require the Company to indemnify the
other party for certain third-party intellectual property
infringement claims, which could increase the Company’s
damages and its costs of defending against such claims. Even if
the claims are without merit, defending against the claims can
be time consuming and costly.
As part of the TWE Restructuring, Time Warner agreed to
indemnify the cable businesses of TWE from and against any and
all liabilities relating to, arising out of or resulting from
specified litigation matters brought against the TWE non-cable
businesses. Although Time Warner has agreed to indemnify the
cable businesses of TWE against such liabilities, TWE remains a
named party in certain litigation matters.
The costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and
proceedings (whether civil or criminal), settlements, judgments
and investigations, claims and changes in those matters
(including those matters described above), and developments or
assertions by or against the Company relating to intellectual
property rights and intellectual property licenses, could have a
material adverse effect on the Company’s business,
financial condition and operating results.
On November 21, 2008, WCI, in its capacity as the holder of
a majority of TWC’s outstanding Class A common stock
and all of its Class B common stock (representing in the
aggregate 1,496,000,000 votes), consented to amendments to
TWC’s 2006 Stock Incentive Plan that were approved by
TWC’s Board of Directors on August 1,
Table of Contents
2008, with respect to the treatment of TWC’s outstanding
restricted stock units in connection with the Separation. On
December 8, 2008, TWC filed an Information Statement
pursuant to Section 14(c) of the Securities Exchange Act
with the SEC and furnished it to its stockholders. The
amendments to TWC’s 2006 Stock Incentive Plan will not
become effective until certain conditions set forth in the
Separation Agreement have been satisfied or waived.
Table of Contents
Pursuant to General Instruction G(3) to
Form 10-K,
the information regarding the Company’s executive officers
required by Item 401(b) of
Regulation S-K
is hereby included in Part I of this report.
The following table sets forth the name of each executive
officer of the Company, the office held by such officer and the
age of such officer as of February 20, 2009.
Set forth below are the principal positions held during at least
the last five years by each of the executive officers named
above:
Table of Contents
Table of Contents
The principal market for TWC Class A common stock is the
NYSE. The TWC Class A common stock began trading on the
NYSE on March 1, 2007. For quarterly price information with
respect to the TWC Class A common stock since that date,
see “Quarterly Financial Information” at page 141
herein, which information is incorporated herein by reference.
There were approximately 5,800 holders of record of TWC
Class A common stock as of January 30, 2009. There is
no established public trading market for the Company’s
Class B common stock, which was held of record by one
holder as of February 20, 2009.
TWC has not paid any cash dividends on its common stock over the
last two years. Pursuant to the terms of the Separation
Agreement, TWC’s board of directors has authorized the
payment of a special cash dividend to holders of TWC’s
outstanding Class A common stock and Class B common
stock, including Time Warner, in an amount equal to $10.27 per
share (aggregating $10.855 billion). TWC’s board of
directors will determine whether to pay other dividends in the
future based on conditions then existing, including TWC’s
earnings, financial condition and capital requirements, as well
as economic and other conditions TWC’s board of directors
may deem relevant. In addition, TWC’s ability to declare
and pay dividends on its common stock is subject to requirements
under Delaware law and covenants in TWC’s senior unsecured
revolving credit facility.
In connection with the Separation Transactions, the Company will
effectuate the Recapitalization, causing each share of TWC Class
A common stock and Class B common stock to be converted into one
share of TWC Common Stock. The Company also has been authorized
to effectuate a reverse stock split of the TWC Common Stock at a
1-for-3 ratio.
The selected financial information of TWC for the five years
ended December 31, 2008 is set forth at pages 139
through 140 herein and is incorporated herein by reference.
The information set forth under the caption
“Management’s Discussion and Analysis of Results of
Operations and Financial Condition” at pages 50 through 87
herein is incorporated herein by reference.
The information set forth under the caption “Market Risk
Management” at pages 80 through 81 herein is incorporated
herein by reference.
The consolidated financial statements of TWC and the report of
independent registered public accounting firm thereon set forth
at pages 88 through 135 and 137 herein are incorporated herein
by reference.
Quarterly Financial Information set forth at page 141
herein is incorporated herein by reference.
Not Applicable.
Table of Contents
TWC, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and
operation of TWC’s “disclosure controls and
procedures” (as such term is defined in
Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that
TWC’s disclosure controls and procedures are effective to
ensure that information required to be disclosed in reports
filed or submitted by TWC under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that information
required to be disclosed by TWC is accumulated and communicated
to TWC’s management to allow timely decisions regarding the
required disclosure.
Management’s report on internal control over financial
reporting and the report of the independent registered public
accounting firm thereon set forth at pages 136 and 138 is
incorporated herein by reference.
There have not been any changes in TWC’s internal control
over financial reporting during the quarter ended
December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, its internal control
over financial reporting.
Not applicable.
Information called for by Items 10, 11, 12, 13 and 14 of
Part III is incorporated by reference from the
Company’s definitive Proxy Statement to be filed in
connection with its 2009 Annual Meeting of Stockholders pursuant
to Regulation 14A, except that (i) the information
regarding the Company’s executive officers called for by
Item 401(b) of
Regulation S-K
has been included in Part I of this Annual Report and
(ii) the information regarding certain Company equity
compensation plans called for by Item 201(d) of
Regulation S-K
is set forth below.
The Company has adopted a Code of Ethics for its Senior
Executive and Senior Financial Officers. A copy of the Code is
publicly available on the Company’s website at
www.timewarnercable.com/investors. Amendments to the Code
or any grant of a waiver from a provision of the Code requiring
disclosure under applicable SEC rules will also be disclosed on
the Company’s website.
Table of Contents
The following table summarizes information as of
December 31, 2008, about the Company’s outstanding
equity compensation awards and shares of Class A common
stock reserved for future issuance under the Company’s
equity compensation plans.
The Company’s stockholders approved amendments to the 2006
Stock Plan, effective upon the date of the Separation. These
amendments will increase the number of shares of TWC common
stock available for future issuances under the 2006 Stock Plan
by an aggregate of (1) 25 million shares, (2) the
number of additional shares subject to options as a result of
adjustments made to stock options outstanding under the 2006
Stock Plan immediately prior to the Separation to account for
any decrease in the value of TWC common stock resulting from the
payment of the Special Dividend and (3) the number of
shares that will be underlying additional RSUs awarded to
certain holders of outstanding RSUs pursuant to the terms of
their award agreements in connection with the payment of the
Special Dividend. The table above does not reflect these
additional authorized shares or the impact of the
Recapitalization or the reverse stock split, which are
anticipated to be effected in connection with the Separation.
(a)(1)-(2) Financial Statements and Schedules:
(i) The list of consolidated financial statements and
schedules set forth in the accompanying Index to Consolidated
Financial Statements and Other Financial Information at
page 49 herein is incorporated herein by reference. Such
consolidated financial statements and schedules are filed as
part of this Annual Report.
(ii) All other financial statement schedules are omitted
because the required information is not applicable, or because
the information required is included in the consolidated
financial statements and notes thereto.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are
filed or incorporated by reference as part of this Annual Report
and such Exhibit Index is incorporated herein by reference.
Exhibits 10.30 through 10.40 and 10.43 through 10.48 listed on
the accompanying Exhibit Index identify management
contracts or compensatory plans or arrangements required to be
filed as exhibits to this Annual Report, and such listing is
incorporated herein by reference.
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TIME WARNER CABLE INC.
Name: Glenn A. Britt
Dated: February 20, 2009
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Table of Contents
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management’s discussion and analysis of results of
operations and financial condition (“MD&A”) is a
supplement to the accompanying consolidated financial statements
and provides additional information on Time Warner Cable
Inc.’s (together with its subsidiaries, “TWC” or
the “Company”) business, current developments,
financial condition, cash flows and results of operations.
MD&A is organized as follows:
TWC is the second-largest cable operator in the U.S., with
technologically advanced, well-clustered systems located mainly
in five geographic areas – New York State (including
New York City), the Carolinas, Ohio, southern California
(including Los Angeles) and Texas. As of December 31, 2008,
TWC served approximately 14.6 million customers who
subscribed to one or more of its video, high-speed data and
voice services, representing approximately 34.2 million
revenue generating units.
Time Warner Inc. (“Time Warner”) currently owns
approximately 84% of the common stock of TWC (representing a
90.6% voting interest), and also currently owns an indirect
12.43% non-voting common stock interest in TW NY Cable Holding
Inc. (“TW NY”), a subsidiary of TWC. The financial
results of TWC’s operations are consolidated by Time
Warner. On May 20, 2008, TWC and its subsidiaries, Time
Warner Entertainment Company, L.P. (“TWE”) and TW NY,
entered into a Separation Agreement (the “Separation
Agreement”) with Time Warner and its subsidiaries, Warner
Communications Inc. (“WCI”), Historic TW Inc.
(“Historic TW”) and American Television and
Communications Corporation (“ATC”), the terms of which
will govern TWC’s legal and structural separation from Time
Warner. Refer to “—Recent Developments” for
further details.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
TWC principally offers three services – video,
high-speed data and voice – over its broadband cable
systems. TWC markets its services separately and in
“bundled” packages of multiple services and features.
As of December 31, 2008, 54% of TWC’s customers
subscribed to two or more of its primary services, including 21%
of its customers who subscribed to all three primary services.
Historically, TWC has focused primarily on residential
customers, while also selling video, high-speed data and
networking and transport services to commercial customers. As
part of an increased emphasis on its commercial business, TWC
also began selling its commercial Digital Phone service,
Business Class Phone, to small- and medium-sized businesses
during 2007. During 2008, TWC generated nearly $800 million
of revenues from its commercial services. TWC believes providing
commercial services will generate additional opportunities for
growth. In addition, TWC sells advertising to a variety of
national, regional and local customers.
Video is TWC’s largest service in terms of revenues
generated and, as of December 31, 2008, TWC had
approximately 13.1 million basic video subscribers, of
which approximately 8.6 million subscribed to TWC’s
digital video service. Although providing video services is a
competitive and highly penetrated business, TWC expects to
continue to increase video revenues through the offering of
advanced digital video services, as well as through price
increases and digital video subscriber growth. TWC’s
digital video subscribers provide a broad base of potential
customers for additional services. Video programming costs
represent a major component of TWC’s expenses and are
expected to continue to increase, reflecting programming rate
increases on existing services, costs associated with
retransmission consent agreements, subscriber growth and the
expansion of service offerings (e.g., new network channels). TWC
expects that its video service margins as a percentage of video
revenues will continue to decline over the next few years as
increases in programming costs outpace growth in video revenues.
As of December 31, 2008, TWC had approximately
8.4 million residential high-speed data subscribers. TWC
expects continued growth in residential high-speed data
subscribers and revenues for the foreseeable future; however,
the rate of growth of both subscribers and revenues is expected
to continue to slow over time as high-speed data services become
increasingly penetrated. TWC also offers commercial high-speed
data services and had 283,000 commercial high-speed data
subscribers as of December 31, 2008.
As of December 31, 2008, TWC had approximately
3.7 million residential Digital Phone subscribers. TWC
expects increases in Digital Phone subscribers and revenues for
the foreseeable future; however, the rate of growth of both
subscribers and revenues is expected to slow over time as
Digital Phone services become increasingly penetrated and as an
increasing number of homes in the U.S. replace their
traditional telephone service with wireless phone service. TWC
rolled out Business Class Phone to small- and medium-sized
businesses during 2007 in the majority of its operating areas
and substantially completed the roll-out in the remainder of its
operating areas during 2008. As of December 31, 2008, TWC
had 30,000 commercial Digital Phone subscribers.
TWC faces intense competition from a variety of alternative
information and entertainment delivery sources, principally from
direct-to-home
satellite video providers and certain telephone companies, each
of which offers a broad range of services that provide features
and functions comparable to those provided by TWC. The services
are also offered in bundles of video, high-speed data and voice
services similar to TWC’s and, in certain cases, these
offerings include wireless services. The availability of these
bundled service offerings and of wireless offerings, whether as
a single offering or as part of a bundle, has intensified
competition. In addition, technological advances and product
innovations have increased and will likely continue to increase
the number of alternatives available to TWC’s customers
from other providers and intensify the competitive environment.
TWC expects that competition will continue to intensify in the
future, which may negatively affect the growth of revenue
generating units. By continuing to enhance its services with
innovative offerings and continuing to focus on customer
service, TWC believes it will distinguish its services from
those of its competitors.
The recent events affecting the U.S. and international
financial markets have had a significant and adverse impact on
the global economy. These events have served to increase capital
market volatility and reduce future expectations for economic
growth. Since the end of the third quarter of 2008, the Company
has experienced a
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
slowdown in growth across all revenue generating unit
categories, which the Company believes is partly a result of the
challenging economic environment and a general reduction in
consumer spending. The Company believes it is premature to
determine if this is a long- or short-term development and that
the impact of a protracted economic downturn on its financial
and subscriber results is difficult to estimate; however, the
Company believes that growth in revenue generating unit net
additions, as well as growth in other digital services (e.g.,
digital video recorders and
video-on-demand),
will slow in 2009 as compared to 2008. In addition, the Company
has continued to see a decline in its Advertising revenues from
national, regional and local businesses, which it expects to
continue in 2009.
Excluding the $14.822 billion noncash impairment of cable
franchise rights and the $58 million loss on sale of
certain cable systems (as discussed below), the Company expects
that its year-over-year growth rate in Operating Income will be
lower in 2009 (as compared to the same measure in 2008) as a
result of, among other things, slower growth in revenues and
higher video programming costs, pension expense and
restructuring charges, partially offset by various cost saving
initiatives. The Company also expects that capital expenditures
will decline in 2009 as compared to 2008.
Despite the current economic environment, the Company believes
it continues to have strong liquidity to meet its needs for the
foreseeable future. As of December 31, 2008, the Company
had $13.130 billion of unused committed capacity (including
cash and equivalents and credit facilities containing
commitments from a geographically diverse group of major
financial institutions), $10.855 billion of which TWC
expects to use to finance the Special Dividend (as defined
below). Additionally, there are no significant maturities of the
Company’s long-term debt prior to February 2011. See
“Financial Condition and Liquidity” for further
details regarding the Company’s committed capacity.
Beginning in the first quarter of 2009, TWC is undertaking a
significant restructuring, primarily consisting of headcount
reductions, and expects to incur restructuring charges ranging
from approximately $50 million to $100 million during
2009.
As discussed in more detail in “Critical Accounting
Policies—Asset Impairments—Goodwill and
Indefinite-lived Intangible Assets,” during the fourth
quarter of 2008, the Company recorded a noncash impairment of
$14.822 billion to reduce the carrying value of its cable
franchise rights as a result of its annual impairment testing of
goodwill and indefinite-lived intangible assets.
On May 20, 2008, TWC and its subsidiaries, TWE and TW NY,
entered into the Separation Agreement with Time Warner and its
subsidiaries, WCI, Historic TW and ATC. TWC’s separation
from Time Warner will take place through a series of related
transactions, the occurrence of each of which is a condition to
the next. First, Time Warner will complete certain internal
restructuring transactions not affecting TWC. Next, following
the satisfaction or waiver of certain conditions, including
those mentioned below, Historic TW will transfer its 12.43%
non-voting common stock interest in TW NY to TWC in exchange for
80 million newly issued shares of TWC’s Class A
common stock (the “TW NY Exchange”). Following the TW
NY Exchange, Time Warner will complete certain additional
restructuring steps that will make Time Warner the direct owner
of all shares of TWC’s Class A common stock and
Class B common stock previously held by its subsidiaries
(all of Time Warner’s restructuring transaction steps being
referred to collectively as the “TW Internal
Restructuring”). Upon completion of the TW Internal
Restructuring, TWC’s board of directors or a committee
thereof will declare a special cash dividend to holders of
TWC’s outstanding Class A common stock and
Class B common stock, including Time Warner, in an amount
equal to $10.27 per share (aggregating $10.855 billion)
(the “Special Dividend”). The Special Dividend will be
paid prior to the completion of TWC’s separation from Time
Warner. Following the receipt by Time Warner of its share of the
Special Dividend, TWC will file with the Secretary of State of
the State of Delaware an amended and restated
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
certificate of incorporation, pursuant to which, among other
things, each outstanding share of TWC Class A common stock
(including any shares of Class A common stock issued in the
TW NY Exchange) and TWC Class B common stock will
automatically be converted into one share of common stock, par
value $0.01 per share (the “TWC Common Stock”) (the
“Recapitalization”). Once the TW NY Exchange, the TW
Internal Restructuring, the payment of the Special Dividend and
the Recapitalization have been completed, TWC’s separation
from Time Warner (the “Separation”) will proceed in
the form of a pro rata dividend of all shares of TWC Common
Stock held by Time Warner to holders of Time Warner’s
common stock (the “Distribution”). The Separation, the
TW NY Exchange, the TW Internal Restructuring, the Special
Dividend, the Recapitalization and the Distribution collectively
are referred to as the “Separation Transactions.”
The Separation Agreement contains customary covenants, and
consummation of the Separation Transactions is subject to
customary closing conditions. As of February 12, 2009, all
regulatory and other necessary governmental reviews of the
Separation Transactions have been satisfactorily completed. Time
Warner and TWC expect the Separation Transactions to be
consummated in the first quarter of 2009. See Item 1A,
“Risk Factors,” in Part I of this report for a
discussion of risk factors relating to the Separation.
In connection with the Separation Transactions, the Company has
been authorized to effectuate a reverse stock split of the TWC
Common Stock at a
1-for-3
ratio.
During the year ended December 31, 2008, the Company
incurred pretax costs related to the Separation of
$62 million, which consisted of direct transaction costs
(e.g., legal and professional fees) of $17 million (which
are included in other expense, net, in the accompanying
consolidated statement of operations) and debt issuance costs of
$45 million (which are included in interest expense, net,
in the accompanying consolidated statement of operations). The
debt issuance costs are primarily related to the portion of the
upfront loan fees for the 2008 Bridge Facility that was expensed
due to the reduction of commitments under such facility as a
result of the 2008 Bond Offerings. The Company expects to incur
additional direct transaction costs and financing costs related
to the Separation.
In addition, in connection with the Separation Transactions, and
as provided for in Time Warner’s equity plans, the number
of Time Warner stock options and restricted stock units
outstanding at the Separation and the exercise prices of such
stock options will be adjusted to maintain the fair value of
those awards. The changes in the number of equity awards and the
exercise prices will be determined by comparing the fair value
of such awards immediately prior to the Separation Transactions
to the fair value of such awards immediately after the
Separation Transactions. In performing this analysis, the only
assumptions that would change relate to the Time Warner stock
price and the employee’s exercise price. The modifications
to the outstanding equity awards will be made pursuant to
existing antidilution provisions in Time Warner’s equity
plans.
Under the terms of Time Warner’s equity plans and related
award agreements, as a result of the Separation, TWC employees
who hold Time Warner equity awards will be treated as if their
employment with Time Warner had been terminated without cause at
the time of the Separation. For most TWC employees, this
treatment will result in the forfeiture of unvested stock
options and shortened exercise periods for vested stock options
and pro rata vesting of the next installment of (and forfeiture
of the remainder of) the restricted stock units. TWC plans to
grant
“make-up”
TWC equity awards or make cash payments to TWC employees that
are generally intended to offset any loss of economic value in
Time Warner equity awards as a result of the Separation.
Finally, in connection with the Special Dividend, and as
provided for in the Company’s equity plans and related
award agreements, the number and the exercise prices of
outstanding TWC stock options will be adjusted to maintain the
fair value of those awards. The changes in the number of shares
subject to options and the exercise prices will be determined by
comparing the fair value of such awards immediately prior to the
Special Dividend to the fair value of such awards immediately
after the Special Dividend. The modifications to the outstanding
equity awards will be made pursuant to existing antidilution
provisions in TWC’s equity plans and related award
agreements.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
On June 16, 2008, TWC filed a shelf registration statement
on
Form S-3
(the “Shelf Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) that
allows TWC to offer and sell from time to time senior and
subordinated debt securities and debt warrants. On June 19,
2008, TWC issued $5.0 billion in aggregate principal amount
of senior unsecured notes and debentures under the Shelf
Registration Statement (the “June 2008 Bond
Offering”), consisting of $1.5 billion principal
amount of 6.20% notes due 2013, $2.0 billion principal
amount of 6.75% notes due 2018 and $1.5 billion
principal amount of 7.30% debentures due 2038. On
November 18, 2008, TWC issued $2.0 billion in
aggregate principal amount of senior unsecured notes under the
Shelf Registration Statement (the “November 2008 Bond
Offering” and, together with the June 2008 Bond Offering,
the “2008 Bond Offerings”), consisting of
$750 million principal amount of 8.25% notes due 2014
and $1.250 billion principal amount of 8.75% notes due
2019. The Company expects to use the net proceeds from the 2008
Bond Offerings to finance, in part, the Special Dividend.
Pending the payment of the Special Dividend, a portion of the
net proceeds from the 2008 Bond Offerings was used to repay
variable-rate debt with lower interest rates than the interest
rates on the debt securities issued in the 2008 Bond Offerings,
and the remainder was invested in accordance with the
Company’s investment policy. If the Separation is not
consummated and the Special Dividend is not paid, the Company
will use the remainder of the net proceeds from the 2008 Bond
Offerings for general corporate purposes, including repayment of
indebtedness.
In addition to issuing the debt securities in the 2008 Bond
Offerings described above, on June 30, 2008, the Company
entered into a credit agreement with a geographically diverse
group of major financial institutions for a senior unsecured
term loan facility originally in an aggregate principal amount
of $9.0 billion with an initial maturity date that is
364 days after the borrowing date (the “2008 Bridge
Facility”) in order to finance, in part, the Special
Dividend. The Company may elect to extend the maturity date of
the loans outstanding under the 2008 Bridge Facility for an
additional year. As a result of the 2008 Bond Offerings, the
amount of the commitments of the lenders under the 2008 Bridge
Facility was reduced to $2.070 billion. As discussed below
in “Financial Condition and Liquidity—Outstanding Debt
and Mandatorily Redeemable Preferred Equity and Available
Financial Capacity—Lending Commitments,” the Company
does not expect that Lehman Brothers Commercial Bank
(“LBCB”) will fund its $138 million in
commitments under the 2008 Bridge Facility, and, therefore, the
Company has included only $1.932 billion of commitments
under the 2008 Bridge Facility in its unused committed capacity
as of December 31, 2008. TWC may not borrow any amounts
under the 2008 Bridge Facility unless and until the Special
Dividend is declared.
On December 10, 2008, Time Warner (as lender) and TWC (as
borrower) entered into a credit agreement for a two-year
$1.535 billion senior unsecured supplemental term loan
facility (the “Supplemental Credit Agreement”). TWC
may borrow under the Supplemental Credit Agreement only to repay
amounts outstanding at the final maturity of the 2008 Bridge
Facility, if any.
TWC’s obligations under the debt securities issued in the
2008 Bond Offerings and under the 2008 Bridge Facility and the
Supplemental Credit Agreement are guaranteed by TWE and TW NY.
See Note 7 to the accompanying consolidated financial
statements for further details regarding the 2008 Bond
Offerings, the 2008 Bridge Facility and the Supplemental Credit
Agreement.
In November 2008, TWC, Intel Corporation, Google Inc., Comcast
Corporation (together with its subsidiaries,
“Comcast”) and Bright House Networks, LLC collectively
invested $3.2 billion in Clearwire Corporation, a wireless
broadband communications company (“Clearwire Corp”),
and one of its operating subsidiaries (“Clearwire
LLC,” and, collectively with Clearwire Corp,
“Clearwire”). TWC invested $550 million for
membership interests in Clearwire LLC and received voting and
board of director nomination rights in Clearwire Corp. Clearwire
LLC was formed by the combination of Sprint Nextel
Corporation’s (“Sprint”) and Clearwire
Corp’s respective wireless broadband businesses and is
focused on deploying the first nationwide fourth-generation
wireless network to provide mobile broadband services to
wholesale and retail customers. In connection with the
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
transaction, TWC entered into a wholesale agreement with Sprint
that allows TWC to offer wireless services utilizing
Sprint’s second-generation and third-generation network and
a wholesale agreement with Clearwire that will allow TWC to
offer wireless services utilizing Clearwire’s mobile
broadband wireless network. The Company allocated
$20 million of its $550 million investment in
Clearwire LLC to its rights under these agreements, which the
Company believes represents the fair value of favorable pricing
provisions contained in the agreements. Such assets are included
in other assets in the accompanying consolidated balance sheet
as of December 31, 2008 and will be amortized over the
estimated lives of the agreements. The Company’s investment
in Clearwire LLC is being accounted for under the equity method
of accounting. During the fourth quarter of 2008, the Company
recorded a noncash pretax impairment of $367 million on its
investment in Clearwire LLC as a result of a significant decline
in the estimated fair value of Clearwire, reflecting the
Clearwire Corp stock price decline from May 2008, when TWC
agreed to make its investment. The Company expects that
Clearwire will incur losses in its early periods of operation.
TWC is a participant in a joint venture with certain other cable
companies (“SpectrumCo”) that holds advanced wireless
spectrum (“AWS”) licenses. Under certain
circumstances, the members of SpectrumCo have the ability to
exit the venture and receive from the venture, subject to
certain limitations and adjustments, AWS licenses covering the
areas in which they provide cable services. In January 2009,
SpectrumCo redeemed the 10.9% interest held by an affiliate of
Cox Communications, Inc. (“Cox”) and Cox received AWS
licenses, principally covering areas in which Cox has cable
services, and approximately $70 million in cash (of which
TWC’s share was $22 million). Following the closing of
the Cox transaction, SpectrumCo’s AWS licenses cover
20 MHz over 80% of the continental United States and Hawaii.
In December 2008, the Company sold a group of small cable
systems, serving 78,000 basic video subscribers and 126,000
revenue generating units as of November 30, 2008, located
in areas outside of the Company’s core geographic clusters.
The sale price was $54 million, of which $3 million is
included in receivables in the accompanying consolidated balance
sheet as of December 31, 2008. The Company does not expect
that the sale of these systems will have a material impact on
the Company’s future financial results. The Company
recorded a pretax loss of $58 million on the sale of these
systems during 2008, of which $13 million (primarily
post-closing and working capital adjustments) was recorded
during the fourth quarter.
During the third quarter of 2008, Hurricane Ike caused
significant damage to a portion of TWC’s operations in
Texas, particularly in the Port Arthur, Beaumont, Orange and
Bridge City areas. TWC’s cable systems in these areas
experienced significant damage, business interruption and a loss
of customer relationships. As a result of Hurricane Ike, the
Company lost a small number of basic video subscribers and
revenue generating units in its southeast Texas cable systems.
In addition to Texas, Hurricane Ike also caused physical damage
and service outages in parts of Ohio.
For the year ended December 31, 2008, the Company estimates
that both Operating Loss before Depreciation and Amortization
and Operating Loss were negatively impacted by $14 million
as a result of service outages and damage to the plant
infrastructure caused by the storm. Additionally, the Company
estimates that it incurred approximately $10 million of
capital expenditures during the fourth quarter of 2008 to
replace property, plant and equipment damaged by Hurricane Ike.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The Company’s revenues consist of Subscription and
Advertising revenues. Subscription revenues consist of revenues
from video, high-speed data and voice services.
Video revenues include subscriber fees for basic, expanded basic
and digital services from both residential and commercial
subscribers. Video revenues from digital services, or digital
video revenues, include revenues from digital tiers, digital pay
channels,
pay-per-view,
video-on-demand,
subscription-video-on-demand and digital video recorder
services. Video revenues also include related equipment rental
charges, installation charges and franchise fees collected on
behalf of local franchising authorities. Several ancillary items
are also included within video revenues, such as commissions
earned on the sale of merchandise by home shopping services and
rental income earned on the leasing of antenna attachments on
transmission towers owned by the Company.
High-speed data revenues include subscriber fees from both
residential and commercial subscribers, along with related
equipment rental charges, home networking fees and installation
charges. High-speed data revenues also include fees received
from certain distributors of TWC’s Road
Runnertm
high-speed data service (including cable systems managed by the
Advance/Newhouse Partnership). High-speed data revenues also
include fees paid to TWC by the Advance/Newhouse Partnership for
managing certain functions for the Advance/Newhouse Partnership,
including, among others, programming and engineering. The
aggregate of such fees from the Advance/Newhouse Partnership and
other third-party distributors totaled $139 million,
$132 million and $112 million in 2008, 2007 and 2006,
respectively. High-speed data revenues also include fees
received from third-party internet service providers whose
on-line services are provided to some of TWC’s customers.
High-speed data revenues in 2008 included $7 million
generated by the sale of commercial networking and transport
services (i.e., cellular backhaul). Additionally, in 2006,
high-speed data revenues included fees received from Texas and
Kansas City Cable Partners, L.P. (“TKCCP”), which was
a 50-50
joint venture between a consolidated subsidiary of TWC (Time
Warner Entertainment-Advance/Newhouse Partnership
(“TWE-A/N”)) and Comcast that distributed its assets
to TWC and Comcast on January 1, 2007.
Voice revenues include subscriber fees from residential and
commercial Digital Phone subscribers, along with related
installation charges. For the years ended December 31, 2007
and December 31, 2006, voice revenues also included
subscriber fees from circuit-switched telephone (9,000 and
106,000 subscribers as of December 31, 2007 and
December 31, 2006, respectively). During the first half of
2008, TWC completed the process of discontinuing the provision
of circuit-switched telephone service in accordance with
regulatory requirements. As a result, during 2008, Digital Phone
was the only voice service offered by TWC.
Advertising revenues primarily include the fees charged to
local, regional and national advertising customers for
advertising placed on the Company’s video and high-speed
data services. Nearly all Advertising revenues are attributable
to advertising placed on the Company’s video service.
Costs of revenues include: video programming costs (including
fees paid to programming vendors net of certain amounts received
from the vendors); high-speed data connectivity costs; voice
network costs; other service-related expenses, including
non-administrative labor costs directly associated with the
delivery of services to subscribers; maintenance of the
Company’s delivery systems; franchise fees; and other
related costs. The Company’s programming agreements are
generally multi-year agreements that provide for the Company to
make payments to the programming vendors at agreed upon market
rates based on the number of subscribers to which the Company
provides the programming service.
Selling, general and administrative expenses include amounts not
directly associated with the delivery of services to subscribers
or the maintenance of the Company’s delivery systems, such
as administrative labor costs,
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
marketing expenses, billing system charges, non-plant repair and
maintenance costs, fees paid to Time Warner for reimbursement of
certain administrative support functions and other
administrative overhead costs. Additionally, management fees
received from TKCCP prior to August 1, 2006 were recorded
as a reduction of selling, general and administrative expenses.
Operating Income (Loss) before Depreciation and Amortization is
a financial measure not calculated and presented in accordance
with U.S. generally accepted accounting principles
(“GAAP”). The Company defines Operating Income (Loss)
before Depreciation and Amortization as Operating Income (Loss)
before depreciation of tangible assets and amortization of
intangible assets. Management utilizes Operating Income (Loss)
before Depreciation and Amortization, among other measures, in
evaluating the performance of the Company’s business
because Operating Income (Loss) before Depreciation and
Amortization eliminates the uneven effect across its business of
considerable amounts of depreciation of tangible assets and
amortization of intangible assets recognized in business
combinations. Additionally, management utilizes Operating Income
(Loss) before Depreciation and Amortization because it believes
this measure provides valuable insight into the underlying
performance of the Company’s individual cable systems by
removing the effects of items that are not within the control of
local personnel charged with managing these systems such as
income tax benefit (provision), other income (expense), net,
minority interest income (expense), net, and interest expense,
net. In this regard, Operating Income (Loss) before Depreciation
and Amortization is a significant measure used in the
Company’s annual incentive compensation programs. Operating
Income (Loss) before Depreciation and Amortization also is a
metric used by the Company’s parent, Time Warner, to
evaluate the Company’s performance and is an important
measure in the Time Warner reportable segment disclosures. A
limitation of this measure, however, is that it does not reflect
the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in the
Company’s business. To compensate for this limitation,
management evaluates the investments in such tangible and
intangible assets through other financial measures, such as
capital expenditure budget variances, investment spending levels
and return on capital analyses. Another limitation of this
measure is that it does not reflect the significant costs borne
by the Company for income taxes, debt servicing costs, the share
of Operating Income (Loss) before Depreciation and Amortization
related to the minority ownership, the results of the
Company’s equity investments or other non-operational
income or expense. Management compensates for this limitation
through other financial measures such as a review of net income
(loss) and earnings (loss) per share.
Free Cash Flow is a non-GAAP financial measure. The Company
defines Free Cash Flow as cash provided by operating activities
(as defined under GAAP) plus excess tax benefits from the
exercise of stock options, less cash provided by (used by)
discontinued operations, capital expenditures, partnership
distributions and principal payments on capital leases.
Management uses Free Cash Flow to evaluate the Company’s
business. The Company believes this measure is an important
indicator of its liquidity, including its ability to reduce net
debt and make strategic investments, because it reflects the
Company’s operating cash flow after considering the
significant capital expenditures required to operate its
business. A limitation of this measure, however, is that it does
not reflect payments made in connection with investments and
acquisitions, which reduce liquidity. To compensate for this
limitation, management evaluates such expenditures through other
financial measures such as return on investment analyses.
Both Operating Income (Loss) before Depreciation and
Amortization and Free Cash Flow should be considered in addition
to, not as a substitute for, the Company’s Operating Income
(Loss), net income (loss) and various cash flow measures (e.g.,
cash provided by operating activities), as well as other
measures of financial performance and liquidity reported in
accordance with GAAP, and may not be comparable to similarly
titled measures used by other companies. A reconciliation of
Operating Income (Loss) before Depreciation and Amortization to
Operating Income (Loss) is presented under “Results of
Operations.” A reconciliation of Free Cash Flow to cash
provided by operating activities is presented under
“Financial Condition and Liquidity.”
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
RESULTS
OF OPERATIONS
Certain reclassifications have been made to the prior
years’ financial information to conform to the
December 31, 2008 presentation.
See Note 2 to the accompanying consolidated financial
statements for a discussion of the accounting standards adopted
in 2008 and accounting standards not yet adopted.
2008 vs.
2007
Revenues. Revenues by major category were as follows
(in millions):
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Selected subscriber-related statistics were as follows (in
thousands):
Subscription revenues increased as a result of increases in
video, high-speed data and voice revenues. The increase in video
revenues was primarily due to the continued growth of digital
video subscriptions and video price increases. Additional
information regarding the major components of video revenues was
as follows (in millions):
High-speed data revenues increased primarily due to growth in
high-speed data subscribers.
The increase in voice revenues was due to growth in Digital
Phone subscribers. Voice revenues in 2007 also included
$34 million of revenues associated with subscribers who
received traditional, circuit-switched telephone service.
Average monthly subscription revenue (which includes video,
high-speed data and voice revenues) per basic video subscriber
(“subscription ARPU”) increased 9% to $102.52 in 2008
from $94.09 in 2007. This increase was
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
primarily a result of the increased penetration of digital
video, high-speed data and Digital Phone and higher video
prices, as discussed above. Average monthly subscription revenue
per revenue generating unit remained essentially flat at $40.61
in 2008 as compared to $40.75 in 2007.
Advertising revenues increased primarily due to an increase in
political advertising revenues, partially offset by a decline in
Advertising revenues from national, regional and local
businesses. The Company expects that Advertising revenues will
decline in 2009 due to a decline in political advertising
revenues and continued weakness in Advertising revenues from
national, regional and local businesses.
Costs of revenues. The major components of costs of
revenues were as follows (in millions):
Costs of revenues increased 8%, primarily related to increases
in video programming, employee, voice and other direct operating
costs. As a percentage of revenues, costs of revenues were 47%
in both 2008 and 2007.
The increase in video programming costs was primarily due to
contractual rate increases and an increase in the percentage of
basic video subscribers who also subscribe to expanded tiers of
video services. Average programming costs per basic video
subscriber increased 7% to $23.60 per month in 2008 from $22.04
per month in 2007. The Company expects video programming costs
to increase in 2009 at a rate greater than that experienced in
2008, reflecting programming rate increases on existing
services, costs associated with retransmission consent
agreements, subscriber growth and the expansion of service
offerings.
Employee costs increased primarily due to higher headcount
resulting from the continued growth of digital video, high-speed
data and Digital Phone services, as well as salary increases.
High-speed data costs consist of the direct costs associated
with the delivery of high-speed data services, including network
connectivity costs. High-speed data costs decreased primarily
due to a decrease in per-subscriber connectivity costs,
partially offset by growth in subscribers and usage per
subscriber.
Voice costs consist of the direct costs associated with the
delivery of voice services, including network connectivity
costs. Voice costs increased primarily due to growth in Digital
Phone subscribers, partially offset by a decline in
per-subscriber connectivity costs due to volume discounts
received in 2008.
Other direct operating costs increased primarily due to
increases in certain other costs associated with the continued
growth of digital video, high-speed data and Digital Phone
services.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Selling, general and administrative expenses. The major
components of selling, general and administrative expenses were
as follows (in millions):
Selling, general and administrative expenses increased primarily
due to higher employee and marketing costs. Employee costs
increased primarily due to headcount and salary increases and
marketing costs increased primarily due to intensified marketing
efforts. Other costs in 2008 included a benefit of approximately
$16 million due to changes in estimates of previously
established casualty insurance accruals. Excluding this benefit,
other costs increased primarily due to higher miscellaneous
administrative costs.
Merger-related and restructuring costs. The results
for 2008 and 2007 included restructuring costs of
$15 million and $13 million, respectively. In
addition, during 2007, the Company expensed non-capitalizable
merger-related costs associated with the 2006 transactions with
Adelphia Communications Corporation (“Adelphia”) and
Comcast (the “Adelphia/Comcast Transactions”) of
$10 million. Beginning in the first quarter of 2009, TWC is
undertaking a significant restructuring, primarily consisting of
headcount reductions, and expects to incur restructuring charges
ranging from approximately $50 million to $100 million
during 2009.
Impairment of cable franchise rights. During the
fourth quarter of 2008, the Company recorded a noncash
impairment of $14.822 billion to reduce the carrying value
of its cable franchise rights as a result of its annual
impairment testing of goodwill and indefinite-lived intangible
assets. See “Critical Accounting Policies—Asset
Impairments—Goodwill and Indefinite-lived Intangible
Assets” for further details.
Loss on sale of cable systems. During 2008, the
Company recorded a loss of $58 million as a result of the
sale of certain non-core cable systems, which closed in December
2008. See “Overview—Recent Developments—Sale of
Certain Cable Systems” for further details.
Reconciliation of Operating Income (Loss) to Operating Income
(Loss) before Depreciation and Amortization. The
following table reconciles Operating Income (Loss) to Operating
Income (Loss) before Depreciation and Amortization. In addition,
the table provides the components from Operating Income (Loss)
to net income (loss) for purposes of the discussions that follow
(in millions):
NM—Not meaningful.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Operating Income (Loss) before Depreciation and
Amortization. As discussed above, Operating Loss before
Depreciation and Amortization in 2008 was negatively impacted by
the $14.822 billion impairment of cable franchise rights
and the $58 million loss on the sale of certain non-core
cable systems. Excluding these items, Operating Income before
Depreciation and Amortization increased principally as a result
of revenue growth (particularly in high margin high-speed data
revenues), partially offset by higher costs of revenues and
selling, general and administrative expenses. Additionally, as
discussed in “Overview—Recent
Developments—Hurricane Ike,” Operating Income before
Depreciation and Amortization in 2008 included the
$14 million negative impact of Hurricane Ike on the cable
systems in southeast Texas and Ohio.
Depreciation expense. The increase in depreciation
expense was primarily associated with purchases of customer
premise equipment, scalable infrastructure and line extensions
occurring during or subsequent to 2007.
Amortization expense. Amortization expense decreased
primarily due to the absence of amortization expense associated
with customer relationships recorded in connection with the 2003
restructuring of TWE, which were fully amortized as of the end
of the first quarter of 2007.
Operating Income (Loss). Operating Loss in 2008 included
the impairment of cable franchise rights and the loss on the
sale of cable systems, as discussed above. Excluding these
items, Operating Income increased primarily due to the increase
in Operating Income before Depreciation and Amortization,
partially offset by the increase in depreciation expense, as
discussed above.
Interest expense, net. Interest expense, net, increased
primarily due to an increase in fixed-rate debt with higher
average interest rates as a result of the 2008 Bond Offerings.
Additionally, interest expense, net, was impacted by the April
2007 issuance of fixed-rate debt securities and, for 2008, also
included $45 million of debt issuance costs primarily
related to the portion of the upfront loan fees for the 2008
Bridge Facility that was expensed due to the reduction of
commitments under such facility as a result of the 2008 Bond
Offerings. These items were partially offset by a decrease in
interest on the Company’s variable-rate debt, which
resulted from both a decrease in variable-rate debt and lower
variable interest rates, and an increase in interest income. As
a result of the 2008 Bond Offerings and additional debt that the
Company expects to issue in 2009 in connection with the
Separation Transactions, the Company expects that interest
expense, net, will increase significantly in 2009.
Minority interest expense (income), net. Minority
interest income, net, in 2008 included the impacts of the
impairment of cable franchise rights and the loss on the sale of
cable systems, as discussed above. Excluding these items,
minority interest expense, net, increased primarily due to
larger profits recorded by TW NY during 2008. Due to pending
changes in the ownership structure of the Company as a result of
the Separation Transactions, the Company expects that minority
interest expense, net, will decrease significantly in 2009.
Other expense (income), net. Other expense (income), net,
detail is shown in the table below (in millions):
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Income tax provision (benefit). TWC’s income
tax provision (benefit) has been prepared as if the Company
operated as a stand-alone taxpayer for all periods presented. In
2008, the Company recorded an income tax benefit of
$4.706 billion and in 2007, the Company recorded an income
tax provision of $740 million. The effective tax rate was
39% in 2008, which included the impacts of the impairment of
cable franchise rights and the loss on the sale of cable
systems, as compared to 40% in 2007. Absent these items, the
effective tax rate for 2008 would have been 45%. The increase in
the Company’s effective tax rate for 2008 (excluding the
impairment of cable franchise rights and the loss on the sale of
cable systems) was primarily due to the tax impact of the 2008
impairment on the Company’s investment in Clearwire LLC, as
discussed above.
On February 19, 2009, California’s legislature
approved the state’s budget, which is expected to be signed
into law during the first quarter of 2009, that, in part,
changes the methodology of income tax apportionment in
California. This tax law change is likely to result in an
increase in state deferred tax liabilities and a corresponding
noncash tax provision, which would be recorded in the first
quarter of 2009.
Net income (loss) and net income (loss) per common
share. Net loss was $7.344 billion in 2008
compared to net income of $1.123 billion in 2007. Basic and
diluted net loss per common share were $7.52 in 2008 compared to
basic and diluted net income per common share of $1.15 in 2007.
Net loss in 2008 included the impairment of cable franchise
rights and the loss on the sale of cable systems, as discussed
above. Excluding these items, net income decreased primarily due
to the change in other expense (income), net, (which included
the 2008 impairment on the Company’s investment in
Clearwire LLC and the 2007 TKCCP Gain) and increases in minority
interest expense, net, and interest expense, net, partially
offset by an increase in Operating Income and a decrease in
income tax provision.
2007 vs.
2006
As further discussed in Notes 5 and 10 to the accompanying
consolidated financial statements, the Company completed the
Adelphia/Comcast Transactions and began consolidating the
results of the systems acquired in and retained after the
Adelphia/Comcast Transactions (the “Acquired Systems”)
on July 31, 2006. Additionally, on January 1, 2007,
the Company began consolidating the results of certain cable
systems located in Kansas City, south and west Texas and New
Mexico (the “Kansas City Pool”) upon the distribution
of the assets of TKCCP to TWC and Comcast. Accordingly, the
operating results for 2007 include the results for the systems
TWC owned before and retained after the Adelphia/Comcast
Transactions (the “Legacy Systems”), the Acquired
Systems and the Kansas City Pool for the full twelve-month
period, and the operating results for 2006 include the results
of the Legacy Systems for the full twelve-month period and the
Acquired Systems for only the five months following the closing
of the Adelphia/Comcast Transactions and do not include the
consolidation of the results of the Kansas City Pool. The impact
of the incremental seven months of revenues and expenses of the
Acquired Systems on the results for 2007 is referred to as the
“impact of the Acquired Systems” in this report.
Additionally, the Company has reflected the financial position,
results of operations and cash flows of the systems transferred
to Comcast in connection with the Adelphia/Comcast Transactions
as discontinued operations for all periods presented.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Revenues. Revenues by major category were as follows
(in millions):
Revenues by major category for the Legacy Systems, the Acquired
Systems, the Kansas City Pool and the total systems were as
follows (in millions):
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Selected subscriber-related statistics were as follows (in
thousands):
NM—Not meaningful.
Subscription revenues increased as a result of increases in
video, high-speed data and voice revenues. The increase in video
revenues was primarily due to the impact of the Acquired
Systems, the consolidation of the Kansas City Pool, the
continued penetration of digital video services and video price
increases. Digital video revenues represented 23% and 22% of
video revenues in 2007 and 2006, respectively.
High-speed data revenues increased primarily due to the impact
of the Acquired Systems, the consolidation of the Kansas City
Pool and growth in high-speed data subscribers.
The increase in voice revenues was primarily due to growth in
Digital Phone subscribers and the consolidation of the Kansas
City Pool. Voice revenues for the Acquired Systems also included
revenues associated with subscribers acquired from Comcast who
received traditional, circuit-switched telephone service of
$34 million and $27 million in 2007 and 2006,
respectively.
Subscription ARPU increased 5% to $94.09 in 2007 from $89.75 in
2006. This increase was primarily a result of the increased
penetration of advanced services (including digital video,
high-speed data and Digital Phone) in the Legacy Systems and
higher video prices, as discussed above, partially offset by
lower penetration of advanced services in both the Acquired
Systems and the Kansas City Pool as compared to the Legacy
Systems.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Advertising revenues increased due to a $176 million
increase in local advertising and a $27 million increase in
national advertising. These increases were primarily due to the
impact of the Acquired Systems and, to a lesser extent, the
consolidation of the Kansas City Pool.
Costs of revenues. The major components of costs of
revenues were as follows (in millions):
Costs of revenues increased 41%, and, as a percentage of
revenues, were 47% in 2007 compared to 46% in 2006. The increase
in costs of revenues was primarily related to the impact of the
Acquired Systems and the consolidation of the Kansas City Pool,
as well as increases in video programming, employee, voice and
other direct operating costs. The increase in costs of revenues
as a percentage of revenues in 2007 reflected lower margins in
the Acquired Systems.
Video programming costs for the Legacy Systems, the Acquired
Systems, the Kansas City Pool and the total systems were as
follows (in millions):
The increase in video programming costs was primarily due to the
impact of the Acquired Systems and the consolidation of the
Kansas City Pool, as well as contractual rate increases and the
expansion of service offerings. Average programming costs per
basic video subscriber increased 8% to $22.04 per month in 2007
from $20.33 per month in 2006.
Employee costs increased primarily due to the impact of the
Acquired Systems, the consolidation of the Kansas City Pool,
higher headcount resulting from the continued roll-out of
advanced services and salary increases. Additionally, employee
costs in 2006 included a benefit of $32 million (with an
additional benefit of $8 million included in selling,
general and administrative expenses) related to both changes in
estimates and a correction of prior period medical benefit
accruals.
High-speed data costs increased due to the impact of the
Acquired Systems, the consolidation of the Kansas City Pool and
subscriber growth, offset by a decrease in per-subscriber
connectivity costs.
Voice costs increased primarily due to growth in Digital Phone
subscribers and the consolidation of the Kansas City Pool,
partially offset by a decline in per-subscriber connectivity
costs.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Other direct operating costs increased primarily due to the
impact of the Acquired Systems and the consolidation of the
Kansas City Pool, as well as certain other increases in costs
associated with the continued roll-out of advanced services.
Selling, general and administrative expenses. The major
components of selling, general and administrative expenses were
as follows (in millions):
Selling, general and administrative expenses increased as a
result of higher employee, marketing and other costs. Employee
costs increased primarily due to the impact of the Acquired
Systems, the consolidation of the Kansas City Pool, increased
headcount resulting from the continued roll-out of advanced
services and salary increases. Marketing costs increased as a
result of the impact of the Acquired Systems and higher
marketing costs associated with the continued roll-out of
advanced services. Other costs increased primarily due to the
impact of the Acquired Systems, the consolidation of the Kansas
City Pool and increases in administrative costs associated with
the increase in headcount discussed above.
Merger-related and restructuring costs. In 2007 and
2006, the Company expensed non-capitalizable
merger-related
costs associated with the Adelphia/Comcast Transactions of
$10 million and $38 million, respectively. In
addition, the results for 2007 and 2006 included restructuring
costs of $13 million and $18 million, respectively.
Reconciliation of Operating Income to Operating Income before
Depreciation and Amortization. The following table
reconciles Operating Income to Operating Income before
Depreciation and Amortization. In addition, the table provides
the components from Operating Income to net income for purposes
of the discussions that follow (in millions):
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Operating Income before Depreciation and
Amortization. Operating Income before Depreciation and
Amortization increased principally due to revenue growth
(particularly growth in high margin high-speed data revenues),
partially offset by higher costs of revenues and selling,
general and administrative expenses, as discussed above.
Depreciation expense. Depreciation expense increased
primarily due to the impact of the Acquired Systems, the
consolidation of the Kansas City Pool and demand-driven
increases in recent years of purchases of customer premise
equipment, which generally has a shorter useful life compared to
the mix of assets previously purchased.
Amortization expense. Amortization expense increased
primarily as a result of the amortization of intangible assets
related to customer relationships associated with the Acquired
Systems. This was partially offset by the absence after the
first quarter of 2007 of amortization expense associated with
customer relationships recorded in connection with the 2003
restructuring of TWE, which were fully amortized as of the end
of the first quarter of 2007.
Operating Income. Operating Income increased
primarily due to the increase in Operating Income before
Depreciation and Amortization, partially offset by increases in
both depreciation and amortization expense, as discussed above.
Interest expense, net. Interest expense, net,
increased primarily due to an increase in long-term debt and
mandatorily redeemable preferred membership units issued by a
subsidiary in connection with the Adelphia/Comcast Transactions,
partially offset by a decrease in mandatorily redeemable
preferred equity issued by a subsidiary as a result of
ATC’s contribution in 2006 of its 1% common equity interest
and $2.4 billion preferred equity interest in TWE to TW NY
in exchange for a 12.43% non-voting common stock interest in TW
NY (the “ATC Contribution”).
Minority interest expense, net. Minority interest
expense, net, increased primarily reflecting the change in the
ownership structure of the Company and TWE as a result of the
ATC Contribution and the redemption of Comcast’s interest
in TWC and TWE.
Other income, net. Other income, net, detail is
shown in the table below (in millions):
Income from equity investments, net, decreased primarily due to
the Company no longer treating TKCCP as an equity-method
investment.
Income tax provision. TWC’s income tax
provision has been prepared as if the Company operated as a
stand-alone taxpayer for all periods presented. In 2007 and
2006, the Company recorded income tax provisions of
$740 million and $620 million, respectively. The
effective tax rate was approximately 40% in both 2007 and 2006.
Income from continuing operations. Income from
continuing operations was $1.123 billion in 2007 compared
to $936 million in 2006. Basic and diluted income per
common share from continuing operations were $1.15 in 2007
compared to $0.95 in 2006. These increases were due to an
increase in Operating Income and other income, net, partially
offset by increases in interest expense, net, income tax
provision and minority interest expense, net, and a decrease in
income from equity investments, net.
Discontinued operations, net of tax. Discontinued
operations, net of tax, in 2006 reflected the impact of treating
the systems transferred to Comcast in connection with the
Adelphia/Comcast Transactions as discontinued
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
operations. In 2006, the Company recognized pretax income
applicable to these systems of $285 million
($1.038 billion, net of a tax benefit). Included in the
2006 results were a pretax gain of $165 million on the
systems transferred to Comcast in connection with the
Adelphia/Comcast Transactions and a net tax benefit of
$800 million comprised of a tax benefit of
$814 million on the redemption of Comcast’s interest
in TWC and TWE, partially offset by a provision of
$14 million on the exchange of cable systems with Comcast
in connection with the Adelphia/Comcast Transactions. The tax
benefit of $814 million resulted primarily from the
reversal of historical deferred tax liabilities that had existed
on systems transferred to Comcast in the redemption of
Comcast’s interest in TWC. The redemption of Comcast’s
interest in TWC was designed to qualify as a tax-free split-off
under section 355 of the Internal Revenue Code of 1986, as
amended, and, as a result, such liabilities were no longer
required. However, if the Internal Revenue Service were
successful in challenging the tax-free characterization of the
redemption of Comcast’s interest in TWC, an additional cash
liability on account of taxes of up to an estimated
$900 million could become payable by the Company.
Cumulative effect of accounting change, net of
tax. In 2006, the Company recorded a benefit of
$2 million, net of tax, as the cumulative effect of a
change in accounting principle upon the adoption of Financial
Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“Statement”)
No. 123 (revised 2004), Share-Based Payment
(“FAS 123R”) to recognize the effect of
estimating the number of Time Warner equity-based awards granted
to TWC employees prior to January 1, 2006 that are not
ultimately expected to vest.
Net income and net income per common share. Net
income was $1.123 billion in 2007 compared to
$1.976 billion in 2006. Basic and diluted net income per
common share were $1.15 in 2007 compared to $2.00 in 2006.
Management believes that cash generated by or available to TWC
should be sufficient to fund its capital and liquidity needs for
the foreseeable future, including the expected payment of
$10.855 billion for the Special Dividend. There are no
significant maturities of the Company’s long-term debt
prior to February 2011. TWC’s sources of cash include cash
provided by operating activities, cash and equivalents on hand,
borrowing capacity under its committed credit facilities
(including the 2008 Bridge Facility, under which TWC may not
borrow any amounts unless and until the Special Dividend is
declared) and commercial paper program, as well as access to
capital markets.
TWC’s unused committed capacity was $13.130 billion as
of December 31, 2008, reflecting $5.449 billion of
cash and equivalents, $5.749 billion of available borrowing
capacity under the Company’s $6.0 billion senior
unsecured five-year revolving credit facility (the
“Revolving Credit Facility”) and $1.932 billion
of borrowing capacity under the 2008 Bridge Facility. TWC may
not borrow any amounts under the 2008 Bridge Facility unless and
until the Special Dividend is declared. Borrowings under the
Supplemental Credit Agreement are only available to the Company
at the final maturity of the 2008 Bridge Facility to repay
amounts then outstanding under the 2008 Bridge Facility, if any,
and are not included in TWC’s unused committed capacity.
See “—Outstanding Debt and Mandatorily Redeemable
Preferred Equity and Available Financial Capacity—Lending
Commitments” below for a discussion regarding the
Company’s decision to exclude funding commitments from
subsidiaries of Lehman Brothers Holdings Inc. in determining the
amount of its unused committed capacity.
As of December 31, 2008, the Company had
$17.728 billion of debt, $5.449 billion of cash and
equivalents (net debt of $12.279 billion, defined as total
debt less cash and equivalents), $300 million of
mandatorily redeemable non-voting Series A Preferred Equity
Membership Units (the “TW NY Cable Preferred Membership
Units”) issued by a subsidiary of TWC, Time Warner NY Cable
LLC (“TW NY Cable”), and $17.164 billion of
shareholders’ equity. As of December 31, 2007, the
Company had $13.577 billion of debt, $232 million of
cash and equivalents
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
(net debt of $13.345 billion), $300 million of TW NY
Cable Preferred Membership Units and $24.706 billion of
shareholders’ equity.
The following table shows the significant items contributing to
the decrease in net debt from December 31, 2007 to
December 31, 2008 (in millions):
As discussed in “Overview—Recent
Developments—2008 Bond Offerings and Credit
Facilities,” the Shelf Registration Statement on file with
the SEC allows TWC to offer and sell from time to time senior
and subordinated debt securities and debt warrants.
As discussed in “Overview—Recent
Developments—Separation from Time Warner, Recapitalization
and Reverse Stock Split of TWC Common Stock,” upon
completion of the TW Internal Restructuring, TWC’s board of
directors or a committee thereof will declare the Special
Dividend to holders of TWC’s outstanding Class A
common stock and Class B common stock, including Time
Warner, in an amount equal to $10.27 per share (aggregating
$10.855 billion), which will be paid prior to the
completion of the Separation.
As discussed in “Overview—Recent
Developments—2008 Bond Offerings and Credit
Facilities,” pending the payment of the Special Dividend, a
portion of the net proceeds of the 2008 Bond Offerings was used
to repay variable-rate debt with lower interest rates, and the
remainder was invested in accordance with the Company’s
investment policy.
The Company invests its cash and equivalents in a combination of
money market, government and treasury funds, as well as bank
certificates of deposit, in accordance with the Company’s
investment policy of diversifying its investments and limiting
the amount of its investments in a single entity or fund.
Consistent with the foregoing, the Company invested a portion of
the cash proceeds of the June 2008 Bond Offering in The Reserve
Fund’s Primary Fund (“The Reserve Fund”). On the
morning of September 15, 2008, the Company requested a full
redemption of its $490 million investment in The Reserve
Fund, but the redemption request was not honored. On
September 22, 2008, The Reserve Fund announced that
redemptions of shares were suspended pursuant to an SEC order
requested by The Reserve Fund so that an orderly liquidation
could be effected. Through December 31, 2008, the Company
has received $387 million from The Reserve Fund
representing its pro rata share of partial distributions made by
The Reserve Fund. The Company has not been informed as to when
the remaining amount will be returned. However, the Company
believes its remaining receivable is recoverable. As a result of
the status of The Reserve Fund, the Company has classified the
remaining $103 million receivable from The Reserve Fund as
of December 31, 2008 as prepaid expenses and other current
assets in the Company’s consolidated balance sheet and
within investments and acquisitions, net of cash acquired and
distributions received, in the Company’s consolidated
statement of cash flows.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
In addition, as discussed in “Overview—Recent
Developments—Investment in Clearwire,” TWC invested
$550 million in Clearwire LLC on November 28, 2008. Of
such investment, $20 million was allocated to the
additional agreements entered into in connection with its
investment in Clearwire LLC.
TWE’s 7.25% debentures due September 1, 2008
(aggregate principal amount of $600 million) matured and
were retired on September 1, 2008.
Cash
Flows
Cash and equivalents increased by $5.217 billion,
$181 million and $39 million in 2008, 2007 and 2006,
respectively. Components of these changes are discussed below in
more detail.
Details of cash provided by operating activities are as follows
(in millions):
Cash provided by operating activities increased from
$4.563 billion in 2007 to $5.300 billion in 2008. This
increase was primarily related to an increase in Operating
Income before Depreciation and Amortization excluding the
noncash items noted in the table above (primarily due to revenue
growth, partially offset by increases in costs of revenues and
selling, general and administrative expenses, as previously
discussed), a favorable change in working capital requirements
and decreases in net income tax and net interest payments,
partially offset by 2008 pension plan contributions. The change
in working capital requirements was primarily due to the timing
of payments and collections of accounts receivable. The decrease
in net income tax payments was primarily due to the impact of
the Economic Stimulus Act of 2008, which was enacted in the
first quarter of 2008 and provided for a bonus first year
depreciation deduction of 50% of qualified property. The
benefits of this legislation were applicable to certain of the
Company’s capital expenditures during 2008. With the
passage of the American Recovery and Reinvestment Act of 2009,
signed by the President on February 17, 2009, this bonus
depreciation benefit will continue.
As a result of the 2008 Bond Offerings and additional debt that
the Company expects to incur in 2009 in connection with the
Separation Transactions, the Company expects that its net
interest payments will increase significantly in 2009.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The Company expects to make discretionary cash contributions of
at least $150 million to its defined benefit pension plans
during 2009, subject to market conditions and other
considerations. See Note 13 to the accompanying
consolidated financial statements for additional discussion of
the funded status of the Company’s defined benefit pension
plans.
Cash provided by operating activities increased from
$3.595 billion in 2006 to $4.563 billion in 2007. This
increase was primarily related to an increase in Operating
Income before Depreciation and Amortization (due to revenue
growth, partially offset by increases in costs of revenues and
selling, general and administrative expenses, as described
above) and a decrease in net income taxes paid (primarily as a
result of the timing of tax-related payments to Time Warner
under the Company’s tax sharing arrangement, as well as tax
benefits related to the Adelphia/Comcast Transactions) and a
decrease in pension plan contributions, which were partially
offset by a change in working capital requirements, an increase
in net interest payments reflecting the increase in debt levels
attributable to the Adelphia/Comcast Transactions and a decrease
in cash relating to discontinued operations. The change in
working capital requirements was primarily due to the timing of
payments and collections of accounts receivable.
Investing
Activities
Details of cash used by investing activities are as follows (in
millions):
Cash used by investing activities increased from
$3.432 billion in 2007 to $4.140 billion in 2008. This
increase was principally due to the Company’s investment in
Clearwire LLC and the classification of the Company’s
investment in The Reserve Fund as prepaid expenses and other
current assets on the Company’s consolidated balance sheet
as a result of the status of the investment (as discussed
above), as well as an increase in capital expenditures.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Cash used by investing activities decreased from
$11.999 billion in 2006 to $3.432 billion in 2007.
This decrease was principally due to payments associated with
the Adelphia/Comcast Transactions, which closed on July 31,
2006, and a decrease in investment spending related to the
Company’s investment in SpectrumCo. This decrease was
partially offset by an increase in capital expenditures from
continuing operations, driven by the Acquired Systems, as well
as the continued roll-out of advanced digital services in the
Legacy Systems, and the receipt of proceeds associated with the
repayment by Comcast of TKCCP debt owed to TWE-A/N during 2006.
TWC’s capital expenditures from continuing operations
included the following major categories (in millions):
TWC incurs expenditures associated with the construction of its
cable systems. Costs associated with the construction of the
cable transmission and distribution facilities and new cable
service installations are capitalized. TWC generally capitalizes
expenditures for tangible fixed assets having a useful life of
greater than one year. Capitalized costs include direct
material, labor and overhead, as well as interest. Sales and
marketing costs, as well as the costs of repairing or
maintaining existing fixed assets, are expensed as incurred.
With respect to certain customer premise equipment, which
includes set-top boxes and high-speed data and telephone cable
modems, TWC capitalizes installation charges only upon the
initial deployment of these assets. All costs incurred in
subsequent disconnects and reconnects are expensed as incurred.
Depreciation on these assets is provided generally using the
straight-line method over their estimated useful lives. For
set-top boxes and modems, the useful life is 3 to 5 years,
and, for distribution plant, the useful life is up to
16 years.
The Company expects that capital expenditures will decline in
2009 as compared to 2008.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Details of cash provided (used) by financing activities are as
follows (in millions):
Cash used by financing activities was $950 million in 2007
compared to cash provided by financing activities of
$4.057 billion in 2008. Cash provided by financing
activities in 2008 primarily included borrowings from the 2008
Bond Offerings, partially offset by repayments under the
Revolving Credit Facility and commercial paper program,
repayment of matured long-term debt as previously discussed, and
debt issuance costs relating to the 2008 Bond Offerings and the
2008 Bridge Facility. Cash used by financing activities for 2007
included net repayments under the Company’s debt
obligations and payments for other financing activities.
Cash used by financing activities was $950 million in 2007
compared to cash provided by financing activities of
$8.443 billion in 2006. Cash used by financing activities
for 2007 included net repayments under the Company’s debt
obligations and payments for other financing activities, while
cash provided by financing activities for 2006 included
significant net borrowings primarily associated with the
financing of the Adelphia/Comcast Transactions, the issuance of
the TW NY Cable Preferred Membership Units in connection with
the Adelphia/Comcast Transactions and other financing
activities, net of cash used in the TWC Redemption on
July 31, 2006.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Reconciliation of Cash provided by operating activities to
Free Cash Flow. The following table reconciles Cash
provided by operating activities to Free Cash Flow (in millions):
Free Cash Flow increased from $1.060 billion in 2007 to
$1.773 billion in 2008 primarily as a result of an increase
in cash provided by continuing operating activities, partially
offset by an increase in capital expenditures, as discussed
above.
Free Cash Flow increased from $735 million in 2006 to
$1.060 billion in 2007 primarily as a result of an increase
in cash provided by continuing operating activities, partially
offset by an increase in capital expenditures from continuing
operations, as discussed above.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Debt and mandatorily redeemable preferred equity as of
December 31, 2008 and 2007 were as follows:
See “Overview—Recent Developments—2008 Bond
Offerings and Credit Facilities” and Note 7 to the
accompanying consolidated financial statements for further
details regarding the Company’s outstanding debt and
mandatorily redeemable preferred equity and other financing
arrangements, including certain information about maturities,
covenants, rating triggers and bank credit agreement leverage
ratios relating to such debt and financing arrangements.
As noted above, as of December 31, 2008, TWC had
$5.749 billion of available borrowing capacity under the
Revolving Credit Facility and $1.932 billion of borrowing
capacity under the 2008 Bridge Facility. TWC may not borrow any
amounts under the 2008 Bridge Facility unless and until the
Special Dividend is declared. The 2008 Bridge Facility consists
of commitments of approximately $138 million from each of
14 institutions, consisting of affiliates of Bank of America,
N.A., The Bank of Tokyo-Mitsubishi UFJ, LTD., Barclays Bank Plc,
BNP Paribas Securities Corp., Citibank, N.A., Deutsche Bank AG,
Fortis Bank SA/NV, Goldman Sachs Bank USA, Mizuho Corporate
Bank, LTD., Morgan Stanley Bank, The Royal Bank of Scotland PLC,
Sumitomo Mitsui Banking Corporation, UBS Loan Finance LLC and
Wachovia Bank, National Association. These same financial
institutions also comprise approximately 70% of the commitments
under the Revolving Credit Facility. Recently, a number of these
lenders have entered into agreements to acquire or to be
acquired by other financial institutions. TWC believes that
these transactions will not adversely affect the commitments
under the 2008 Bridge Facility or the Revolving Credit Facility.
The Company’s bank credit agreements do not contain
borrowing restrictions due to material adverse changes in the
Company’s business or market disruption. See Note 7 to
the accompanying consolidated financial statements.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
In addition, LBCB and Lehman Brothers Bank, FSB
(“LBB”), subsidiaries of Lehman Brothers Holdings Inc.
(“Lehman”), are lenders under the 2008 Bridge Facility
and the Revolving Credit Facility, respectively, with undrawn
commitments of $138 million and $125 million,
respectively, as of December 31, 2008. On
September 15, 2008, Lehman filed a petition under
Chapter 11 of the U.S. Bankruptcy Code with the
U.S. Bankruptcy Court for the Southern District of New York
(the “Lehman Bankruptcy”). TWC has not requested to
borrow under either the 2008 Bridge Facility or the Revolving
Credit Facility since the Lehman Bankruptcy, and neither LBCB
nor LBB has been placed in receivership or a similar proceeding
as of February 19, 2009. While the Company believes that
LBCB and LBB are contractually obligated under the 2008 Bridge
Facility and the Revolving Credit Facility, respectively, the
Company does not expect that LBCB and LBB will fund any future
borrowing requests and is uncertain as to whether another lender
might assume either commitment. Accordingly, the Company’s
unused committed capacity as of December 31, 2008 excludes
the undrawn commitments of LBCB and LBB. The Company believes
that it continues to have sufficient liquidity to meet its needs
for the foreseeable future, including payment of the Special
Dividend, even if LBCB
and/or LBB
fails to fund its portion of any future borrowing requests.
Contractual
and Other Obligations
Contractual
Obligations
The Company has obligations under certain contractual
arrangements to make future payments for goods and services.
These contractual obligations secure the future rights to
various assets and services to be used in the normal course of
operations. For example, the Company is contractually committed
to make certain minimum lease payments for the use of property
under operating lease agreements. In accordance with applicable
accounting rules, the future rights and obligations pertaining
to firm commitments, such as operating lease obligations and
certain purchase obligations under contracts, are not reflected
as assets or liabilities in the accompanying consolidated
balance sheet.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The following table summarizes the Company’s aggregate
contractual obligations as of December 31, 2008, and the
estimated timing and effect that such obligations are expected
to have on the Company’s liquidity and cash flows in future
periods.
The Company’s total rent expense, which primarily includes
facility rental expense and pole attachment rental fees,
amounted to $190 million in 2008, $182 million in 2007
and $149 million in 2006.
Minimum pension funding requirements have not been presented, as
such amounts have not been determined beyond 2008. The Company
did not have a required minimum pension contribution obligation
for its funded defined benefit pension plans in 2008; however,
the Company made discretionary cash contributions of
$400 million to these plans and expects to contribute at
least $150 million to these plans in 2009.
Contingent
Commitments
Prior to the restructuring of TWE, which was completed in March
2003 (the “TWE Restructuring”), TWE had various
contingent commitments, including guarantees, related to
TWE’s non-cable businesses, including Warner Bros., Home
Box Office, and TWE’s interests in The WB Television
Network (which has subsequently ceased
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
operations), Comedy Central (which was subsequently sold) and
the Courtroom Television Network (d/b/a truTV effective
January 1, 2008) (collectively, the “Non-cable
Businesses”). In connection with the TWE Restructuring,
some of these commitments were not transferred with their
applicable Non-cable Business and they remain contingent
commitments of TWE. Specifically, in connection with the
Non-cable Businesses’ former investment in the Six Flags
theme parks located in Georgia and Texas (“Six Flags
Georgia” and “Six Flags Texas,” respectively,
and, collectively, the “Parks”), in 1997, TWE and a
subsidiary of Time Warner, Historic TW Inc. (formerly known as
Time Warner Inc., “Historic TW”), each agreed to
guarantee (the “Six Flags Guarantee”) certain
obligations of the partnerships that hold the Parks (the
“Partnerships”) for the benefit of the limited
partners in such Partnerships, including the following (the
“Guaranteed Obligations”): (a) making a minimum
annual distribution to the limited partners of the Partnerships
(the minimum was approximately $61 million in 2008 and is
subject to annual cost of living adjustments); (b) making a
minimum amount of capital expenditures each year (an amount
approximating 6% of the Parks’ annual revenues);
(c) offering each year to purchase 5% of the limited
partnership units of the Partnerships (plus any such units not
purchased pursuant to such offer in any prior year) based on an
aggregate price for all limited partnership units at the higher
of (i) $250 million in the case of Six Flags Georgia
and $374.8 million in the case of Six Flags Texas (the
“Base Valuations”) and (ii) a weighted average
multiple of EBITDA for the respective Park over the previous
four-year period (the “Cumulative LP Unit Purchase
Obligation”); (d) making annual ground lease payments;
and (e) either (i) purchasing all of the outstanding
limited partnership units through the exercise of a call option
upon the earlier of the occurrence of certain specified events
and the end of the term of each of the Partnerships in 2027 (Six
Flags Georgia) and 2028 (Six Flags Texas) (the “End of Term
Purchase”) or (ii) causing each of the Partnerships to
have no indebtedness and to meet certain other financial tests
as of the end of the term of the Partnership. The aggregate
amount payable in connection with an End of Term Purchase option
on either Park will be the Base Valuation applicable to such
Park, adjusted for changes in the consumer price index from
December 1996, in the case of Six Flags Georgia, and December
1997, in the case of Six Flags Texas, through December of the
year immediately preceding the year in which the End of Term
Purchase occurs, in each case, reduced ratably to reflect
limited partnership units previously purchased.
In connection with Time Warner’s 1998 sale of Six Flags
Entertainment Corporation (which held the controlling interests
in the Parks) to Six Flags, Inc. (formerly Premier Parks Inc.)
(“Six Flags”), Six Flags, Historic TW and TWE, among
others, entered into a Subordinated Indemnity Agreement (the
“Six Flags Indemnity Agreement”) pursuant to which Six
Flags agreed to guarantee the performance of the Guaranteed
Obligations when due and, to indemnify Historic TW and TWE,
among others, in the event that the Guaranteed Obligations are
not performed and the Six Flags Guarantee is called upon. In the
event of a default of Six Flags’ obligations under the Six
Flags Indemnity Agreement, the Six Flags Indemnity Agreement and
related agreements provide, among other things, that Historic TW
and TWE have the right to acquire control of the managing
partner of the Parks. Six Flags’ obligations to Historic TW
and TWE are further secured by its interest in all limited
partnership units that are held by Six Flags.
Additionally, Time Warner and WCI have agreed, on a joint and
several basis, to indemnify TWE from and against any and all of
these contingent liabilities, but TWE remains a party to these
commitments. In the event that TWE is required to make a payment
related to any contingent liabilities of the TWE Non-cable
Businesses, TWE will recognize an expense from discontinued
operations and will receive a capital contribution from Time
Warner
and/or its
subsidiary, WCI, for reimbursement of the incurred expenses.
Additionally, costs related to any acquisition and subsequent
distribution to Time Warner would also be treated as an expense
of discontinued operations to be reimbursed by Time Warner.
Pursuant to the original terms of the Six Flags Guarantee, TWE
is expected to terminate its obligations thereunder in
connection with the Separation Transactions. Also in connection
with the Separation Transactions, TWE is expected to assign its
rights and obligations under the Six Flags Indemnity Agreement
to Warner Bros. Entertainment Inc., a subsidiary of Time Warner.
In November 2007, Moody’s Investors Service,
Standard & Poor’s and Fitch Ratings downgraded
their credit ratings for Six Flags. In March 2008, Moody’s
Investors Service changed Six Flags’ rating outlook to
negative from
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
stable and downgraded its speculative-grade liquidity rating. In
June 2008, Moody’s Investors Service and Fitch Ratings
downgraded their senior unsecured credit ratings for Six Flags.
In September 2008, Moody’s Investors Service downgraded Six
Flags’ corporate family rating. To date, no payments have
been made by Historic TW or TWE pursuant to the Six Flags
Guarantee. In its quarterly report on
Form 10-Q
for the period ended September 30, 2008, Six Flags reported
an estimated maximum Cumulative LP Unit Purchase Obligation for
2009 of approximately $335 million. The aggregate
undiscounted estimated future cash flow requirements covered by
the Six Flags Guarantee over the remaining term of the
agreements are approximately $1.4 billion. Six Flags has
also publicly disclosed that it has deposited approximately
$15 million in an escrow account as a source of funds in
the event Historic TW or TWE is required to fund any portion of
the Guaranteed Obligations in the future.
Because the Six Flags Guarantee existed prior to the
Company’s adoption of FASB Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (“FIN 45”), and no modifications to
the arrangements have been made since the date the guarantee
came into existence, the recognition requirements of FIN 45
are not applicable to the arrangements and the Company has
continued to account for the Guaranteed Obligations in
accordance with FASB Statement No. 5, Accounting for
Contingencies (“FAS 5”). Based on its
evaluation of the current facts and circumstances surrounding
the Guaranteed Obligations and the Six Flags Indemnity Agreement
(including the recent financial performance reported for the
Parks and by Six Flags), the Company has concluded that a
probable loss does not exist and, consequently, no liability for
the arrangements has been recognized at December 31, 2008.
Because of the specific circumstances surrounding the
arrangements and the fact that no active or observable market
exists for this type of financial guarantee, the Company is
unable to determine a current fair value for the Guaranteed
Obligations and related Six Flags Indemnity Agreement.
TWC has cable franchise agreements containing provisions
requiring the construction of cable plant and the provision of
services to customers within the franchise areas. In connection
with these obligations under existing franchise agreements, TWC
obtains surety bonds or letters of credit guaranteeing
performance to municipalities and public utilities and payment
of insurance premiums. Such surety bonds and letters of credit
as of December 31, 2008 and 2007 totaled $288 million
and $299 million, respectively. Payments under these
arrangements are required only in the event of nonperformance.
TWC does not expect that these contingent commitments will
result in any amounts being paid in the foreseeable future.
TWC is required to make cash distributions to Time Warner when
employees of the Company exercise previously issued Time Warner
stock options. For more information, see “Market Risk
Management—Equity Risk” below.
Market risk is the potential gain/loss arising from changes in
market rates and prices, such as interest rates.
As of December 31, 2008, TWC had an outstanding balance of
variable-rate debt of $3.045 billion. Based on TWC’s
variable-rate obligations outstanding at December 31, 2008,
each 25 basis point increase or decrease in the level of
interest rates would, respectively, increase or decrease
TWC’s annual interest expense and related cash payments by
approximately $8 million. Such potential increases or
decreases are based on certain simplifying assumptions,
including a constant level of variable-rate debt for all
maturities and an immediate,
across-the-board
increase or decrease in the level of interest rates with no
other subsequent changes for the remainder of the period.
Conversely, since almost all of the Company’s cash balance
of $5.449 billion is invested in variable-rate interest-
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
earning assets, the Company would also earn more (less) interest
income due to such an increase (decrease) in interest rates.
As of December 31, 2008, TWC had fixed-rate debt and TW NY
Cable Preferred Membership Units with an outstanding balance of
$14.970 billion, including an unamortized fair value
adjustment of $114 million, and an estimated fair value of
$14.587 billion. Based on TWC’s fixed-rate debt
obligations outstanding at December 31, 2008, a
25 basis point increase or decrease in the level of
interest rates would, respectively, decrease or increase the
fair value of the fixed-rate debt by approximately
$263 million. Such potential increases or decreases are
based on certain simplifying assumptions, including a constant
level of fixed-rate debt and an immediate,
across-the-board
increase or decrease in the level of interest rates with no
other subsequent changes for the remainder of the period.
TWC is also exposed to market risk as it relates to changes in
the market value of its investments. TWC invests in equity
instruments of companies for operational and strategic business
purposes. These investments are subject to significant
fluctuations in fair market value due to volatility in the
general equity markets and the specific industries in which the
companies operate. As of December 31, 2008, TWC had
$895 million of investments, which primarily included
$663 million related to SpectrumCo and $167 million
related to Clearwire LLC.
Some of TWC’s employees have been granted options to
purchase shares of Time Warner common stock in connection with
their past employment with subsidiaries and affiliates of Time
Warner, including TWC. TWC has agreed that, upon the exercise by
any of its officers or employees of any options to purchase Time
Warner common stock, TWC will reimburse Time Warner in an amount
equal to the excess of the closing price of a share of Time
Warner common stock on the date of the exercise of the option
over the aggregate exercise price paid by the exercising officer
or employee for each share of Time Warner common stock. TWC
accrues stock option distributions payable to Time Warner, which
are not payable until the underlying options are exercised and
then only subject to limitations on cash distributions in
accordance with the senior unsecured revolving credit
facilities. Any accrued amounts will be adjusted in subsequent
accounting periods based on changes in the quoted market prices
for Time Warner’s common stock. As of December 31,
2008, TWC had no stock option distributions payable to Time
Warner. See Note 12 to the accompanying consolidated
financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The Company’s consolidated financial statements are
prepared in accordance with GAAP, which requires management to
make estimates, judgments and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Management considers an accounting policy
and estimate to be critical if it requires the use of
assumptions that were uncertain at the time the estimate was
made and if changes in the estimate or selection of a different
estimate could have a material effect on the Company’s
consolidated results of operations or financial condition. The
development and selection of the following critical accounting
policies and estimates have been determined by the management of
TWC and the related disclosures have been reviewed with the
Audit Committee of the board of directors of TWC. Due to the
significant judgment involved in selecting certain of the
assumptions used in these areas, it is possible that different
parties could choose different assumptions and reach different
conclusions. For a summary of all of the Company’s
significant accounting policies, see Note 3 to the
accompanying consolidated financial statements.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Asset
Impairments
Goodwill impairment is determined using a two-step process. The
first step involves a comparison of the estimated fair value of
each of the Company’s eight geographic reporting units to
its carrying amount, including goodwill. In performing the first
step, the Company determines the fair value of a reporting unit
using a combination of a discounted cash flow (“DCF”)
analysis and a market-based approach. Determining fair value
requires the exercise of significant judgment, including
judgment about appropriate discount rates, perpetual growth
rates, the amount and timing of expected future cash flows, as
well as relevant comparable company earnings multiples for the
market-based approach. The cash flows employed in the DCF
analyses are based on the Company’s most recent budget and,
for years beyond the budget, the Company’s estimates, which
are based on assumed growth rates. The discount rates used in
the DCF analyses are intended to reflect the risks inherent in
the future cash flows of the respective reporting units. In
addition, the market-based approach utilizes comparable company
public trading values, research analyst estimates and, where
available, values observed in private market transactions. If
the estimated fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not impaired
and the second step of the impairment test 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. The second step of the goodwill impairment
test compares the implied fair value of the reporting
unit’s goodwill with its goodwill carrying amount to
measure the amount of impairment, if any. The implied fair value
of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. In other words,
the estimated fair value of the reporting unit is allocated to
all of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the fair value of
the reporting unit was the purchase price paid. If the carrying
amount of the reporting unit’s goodwill exceeds the implied
fair value of that goodwill, an impairment is recognized in an
amount equal to that excess.
The impairment test for other intangible assets not subject to
amortization involves a comparison of the estimated fair value
of the intangible asset with its carrying value. If the carrying
value of the intangible asset exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess.
The estimates of fair value of intangible assets not subject to
amortization are determined using a DCF valuation analysis. The
DCF methodology used to value cable franchise rights entails
identifying the projected discrete cash flows related to such
cable franchise rights and discounting them back to the
valuation date. Significant judgments inherent in this analysis
include the selection of appropriate discount rates, estimating
the amount and timing of estimated future cash flows
attributable to cable franchise rights and identification of
appropriate terminal growth rate assumptions. The discount rates
used in the DCF analyses are intended to reflect the risk
inherent in the projected future cash flows generated by the
respective intangible assets.
Goodwill and indefinite-lived intangible assets, primarily the
Company’s cable franchise rights, are tested annually for
impairment during the fourth quarter or earlier upon the
occurrence of certain events or substantive changes in
circumstances. As a result of entering into the Separation
Agreement, the Company tested goodwill and the cable franchise
rights for impairment during the second quarter of 2008, and no
impairment charges were recognized. The Company’s 2008
annual impairment analysis, which was performed as of
December 31, 2008, did not result in any goodwill
impairments, but did result in a noncash pretax impairment on
its cable franchise rights of
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
$14.822 billion. The impairment charge by unit of
accounting, as well as the remaining value of the cable
franchise rights by unit of accounting as of December 31,
2008, is as follows (in millions):
The aggregate impairment charge was primarily attributable to
the use of higher discount rates, which accounted for
approximately two-thirds of the decline in fair value as
compared to the impairment test performed in May 2008 and lower
projected future cash flows related to the cable franchise
rights utilized in the DCF valuation analyses (which accounted
for the remaining approximately one-third decline). Although the
Company continues to project future growth in cash flows, such
growth is lower than that estimated at the time the cable
franchise rights were acquired. The higher discount rates (on
average approximately 12.5% as compared to approximately 10%
used in the May 2008 valuation) reflect an increase in the risks
inherent in the estimated future cash flows attributable to the
individual cable franchise rights; this increase in risk is due
to the current economic volatility, which became more pronounced
during the fourth quarter of 2008. The discount rates used in
both the May 2008 and December 2008 analyses include significant
risk premiums of up to 250 basis points to the
Company’s weighted-average cost of capital to reflect the
greater uncertainty in the cash flows attributable to the
Company’s cable franchise rights. Furthermore, had the
Company used a discount rate in assessing the impairment of its
cable franchise rights that was 1% higher across all units of
accounting (holding all other assumptions unchanged) the Company
would have recorded an additional impairment charge of
approximately $3.0 billion.
The reduction in estimated future cash flows since May 2008
reflects the impact of the weaker economy and increased
competition, including fourth quarter 2008 subscriber trends
(specifically, lower fourth quarter revenue generating unit net
additions) lower advertising revenues and higher video
programming costs (resulting from, among other things, higher
projected costs for acquiring retransmission consent rights)
offset in part by reduced capital expenditures and increased
cost controls in other areas of the Company. In addition, the
terminal growth rates used in the analyses for both the May 2008
and December 2008 impairment tests were the same and in line
with historical U.S. gross domestic product growth rates.
As a result of the cable franchise rights impairment taken in
2008, the carrying values of the Company’s impaired cable
franchise rights (which represented the cable franchise rights
in all but one of the Company’s eight units of accounting)
were re-set to their estimated fair values as of
December 31, 2008. Consequently, any further decline in the
estimated fair values of these cable franchise rights could
result in additional cable franchise rights impairments.
Management has no reason to believe that any one unit of
accounting is more likely than any other to incur further
impairments of its cable franchise rights. It is possible that
such impairments, if required, could be material and may need to
be recorded prior to the fourth quarter of 2009 (i.e., during an
interim period) if the Company’s results of operations or
other factors require such assets to be tested for impairment at
an interim date.
For illustrative purposes only, had the fair values of each of
the cable franchise rights been lower by 10% as of
December 31, 2008, the Company would have recorded an
additional cable franchise rights impairment of
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
approximately $2.37 billion; had the fair values of the
cable franchise rights been lower by 20%, the Company would have
recorded an additional cable franchise rights impairment of
approximately $4.74 billion; and had the fair values of the
cable franchise rights been lower by 30%, the Company would have
recorded an additional cable franchise rights impairment of
approximately $7.11 billion. A decline in the fair values
of the reporting units by up to 30% would not result in any
goodwill impairments, as the accounting rules first require a
company to impair its indefinite-lived intangible assets prior
to testing for any goodwill impairments.
Long-lived assets (e.g., customer relationships and property,
plant and equipment) do not require that an annual impairment
test be performed; instead, long-lived assets are tested for
impairment upon the occurrence of a triggering event. Triggering
events include the more likely than not disposal of a portion of
such assets or the occurrence of an adverse change in the market
involving the business employing the related assets. Once a
triggering event has occurred, the impairment test is based on
whether the intent is to hold the asset for continued use or to
hold the asset for sale. If the intent is to hold the asset for
continued use, the impairment test first requires a comparison
of estimated undiscounted future cash flows generated by the
asset group against the carrying value of the asset group. If
the carrying value of the asset group exceeds the estimated
undiscounted future cash flows, the asset would be deemed to be
impaired. Impairment would then be measured as the difference
between the estimated fair value of the asset and its carrying
value. Fair value is generally determined by discounting the
future cash flows associated with that asset. If the intent is
to hold the asset for sale and certain other criteria are met
(e.g., the asset can be disposed of currently, appropriate
levels of authority have approved the sale, and there is an
active program to locate a buyer), the impairment test involves
comparing the asset’s carrying value to its estimated fair
value. To the extent the carrying value is greater than the
asset’s estimated fair value, an impairment loss is
recognized for the difference.
Significant judgments in this area involve determining whether a
triggering event has occurred, determining the future cash flows
for the assets involved and selecting the appropriate discount
rate to be applied in determining estimated fair value. In 2008,
there were no significant long-lived asset impairments. However,
as a result of the impairment of cable franchise rights recorded
during 2008, the Company determined a triggering event had
occurred and tested certain customer relationships for
impairment in accordance with FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, concluding that these customer relationships were
not impaired.
TWC’s investments are primarily accounted for using the
equity method of accounting. A subjective aspect of accounting
for investments involves determining whether an
other-than-temporary
decline in value of the investment has been sustained. If it has
been determined that an investment has sustained an
other-than-temporary
decline in its value, the investment is written down to its fair
value by a charge to earnings. This evaluation is dependent on
the specific facts and circumstances. TWC evaluates available
information (e.g., budgets, business plans, financial
statements, etc.) in addition to quoted market prices, if any,
in determining whether an
other-than-temporary
decline in value exists. Factors indicative of an
other-than-temporary
decline include recurring operating losses, credit defaults and
subsequent rounds of financing at an amount below the cost basis
of the Company’s investment. This list is not all-inclusive
and the Company weighs all known quantitative and qualitative
factors in determining if an
other-than-temporary
decline in the value of an investment has occurred. As discussed
further in “Overview—Recent
Developments—Investment in Clearwire,” during the
fourth quarter of 2008, the Company recorded a noncash pretax
impairment of $367 million on its investment in Clearwire
LLC as a result of a significant decline in the estimated fair
value of Clearwire, reflecting the Clearwire Corp stock price
decline from May 2008, when TWC agreed to make its
investment.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The Company is subject to legal, regulatory and other
proceedings and claims that arise in the ordinary course of
business. The Company records an estimated liability for those
proceedings and claims arising in the ordinary course of
business based upon the probable and reasonably estimable
criteria contained in FAS 5. The Company reviews
outstanding claims with internal, as well as external, counsel
to assess the probability and the estimates of loss. The Company
reassesses the risk of loss as new information becomes available
and adjusts liabilities as appropriate. The actual cost of
resolving a claim may be substantially different from the amount
of the liability recorded. Differences between the estimated and
actual amounts determined upon ultimate resolution, individually
or in the aggregate, are not expected to have a material adverse
effect on the Company’s consolidated financial position but
could possibly be material to the Company’s consolidated
results of operations or cash flow for any one period.
From time to time, the Company engages in transactions in which
the tax consequences may be subject to uncertainty. Examples of
such transactions include business acquisitions and
dispositions, including dispositions designed to be tax free,
issues related to consideration paid or received, and certain
financing transactions. Significant judgment is required in
assessing and estimating the tax consequences of these
transactions. The Company prepares and files tax returns based
on interpretation of tax laws and regulations. In the normal
course of business, the Company’s tax returns are subject
to examination by various taxing authorities. Such examinations
may result in future tax and interest assessments by these
taxing authorities. In determining the Company’s tax
provision for financial reporting purposes, the Company
establishes a reserve for uncertain tax positions unless such
positions are determined to be “more likely than not”
of being sustained upon examination, based on their technical
merits. That is, for financial reporting purposes, the Company
only recognizes tax benefits taken on the tax return that it
believes are “more likely than not” of being
sustained. There is considerable judgment involved in
determining whether positions taken on the tax return are
“more likely than not” of being sustained.
The Company adjusts its tax reserve estimates periodically
because of ongoing examinations by, and settlements with, the
various taxing authorities, as well as changes in tax laws,
regulations and interpretations. The consolidated tax provision
of any given year includes adjustments to prior year income tax
accruals that are considered appropriate and any related
estimated interest. The Company’s policy is to recognize,
when applicable, interest and penalties on uncertain tax
positions as part of income tax expense. Refer to Note 11
to the accompanying consolidated financial statements for
further details.
The Company exercises significant judgment in estimating
programming expense associated with certain video programming
contracts. The Company’s policy is to record video
programming costs based on the Company’s contractual
agreements with its programming vendors, which are generally
multi-year agreements that provide for the Company to make
payments to the programming vendors at agreed upon market rates
based on the number of subscribers to which the Company provides
the programming service. If a programming contract expires prior
to the parties’ entry into a new agreement and the Company
continues to distribute the service, management estimates the
programming costs during the period there is no contract in
place. In doing so, management considers the previous
contractual rates, inflation and the status of the negotiations
in determining its estimates. When the programming contract
terms are finalized, an adjustment to programming expense is
recorded, if necessary, to reflect the terms of the new
contract. Management also makes estimates in the recognition of
programming expense related to other items, such as the
accounting for free periods and credits from service
interruptions, as well as the allocation of consideration
exchanged between the parties in multiple-element transactions.
Additionally, judgments are also required by management when the
Company purchases multiple services from the same programming
vendor. In these scenarios, the total consideration provided to
the
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
programming vendor is required to be allocated to the various
services received based upon their respective fair values.
Because multiple services from the same programming vendor may
be received over different contractual periods and may have
different contractual rates, the allocation of consideration to
the individual services will have an impact on the timing of the
Company’s expense recognition.
TWC has both funded and unfunded noncontributory defined benefit
pension plans covering a majority of its employees. Pension
benefits are based on formulas that reflect the employees’
years of service and compensation during their employment
period. The Company recognized pension expense associated with
these plans of $91 million, $64 million and
$77 million in 2008, 2007 and 2006, respectively. The
Company expects pension expense to be approximately
$150 million in 2009. The pension expense recognized by the
Company is determined using certain assumptions, including the
expected long-term rate of return on plan assets, the interest
factor implied by the discount rate and the rate of compensation
increases. TWC uses a December 31 measurement date for its
plans. See Notes 3 and 13 to the accompanying consolidated
financial statements for additional discussion. The
determination of these assumptions is discussed in more detail
below.
The Company used a discount rate of 6% to compute 2008 pension
expense. The discount rate for the plan year ended
December 31, 2007 was determined by comparison against the
Moody’s Aa Corporate Index rate, adjusted for coupon
frequency and duration of the obligation, consistent with prior
periods. The resulting discount rate was supported by periodic
matching of plan liability cash flows to a pension yield curve
constructed of a large population of high-quality corporate
bonds. Effective for the plan year ending on December 31,
2008, the Company refined the discount rate determination
process to rely on the matching of plan liability cash flows to
a pension yield curve constructed of a large population of
high-quality corporate bonds, without comparison against the
Moody’s Aa Corporate Index rate. A decrease in the discount
rate of 25 basis points, from 6.00% to 5.75%, while holding
all other assumptions constant, would have resulted in an
increase in the Company’s pension expense of approximately
$13 million in 2008.
The Company’s expected long-term rate of return on plan
assets used to compute 2008 pension expense was 8%. In
developing the expected long-term rate of return on assets, the
Company considered the pension portfolio’s composition,
past average rate of earnings and discussions with portfolio
managers. The expected long-term rate of return is based on an
asset allocation assumption of 75% equity securities and 25%
fixed-income securities. A decrease in the expected long-term
rate of return of 25 basis points, from 8.00% to 7.75%,
while holding all other assumptions constant, would have
resulted in an increase in the Company’s pension expense of
approximately $3 million in 2008.
The Company used an estimated rate of future compensation
increases of 4.5% to compute 2008 pension expense. An increase
in the rate of 25 basis points while holding all other
assumptions constant would have resulted in an increase in the
Company’s domestic pension expense of approximately
$4 million in 2008.
TWC incurs expenditures associated with the construction of its
cable systems. Costs associated with the construction of the
cable transmission and distribution facilities and new cable
service installations are capitalized. TWC uses standard
capitalization rates to capitalize installation activities.
Significant judgment is involved in the development of these
capitalization standards, including the average time required to
perform an installation and the determination of the nature and
amount of indirect costs to be capitalized. Additionally, the
development of capitalization standards for new products
involves more estimates than those used for established products
because the Company has less historical data related to the
installation of new products. The capitalization standards are
reviewed at least annually and adjusted, if necessary, based on
comparisons to actual costs incurred.
Table of Contents
TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
This document contains “forward-looking statements”
within the meaning of the Private Securities Litigation Reform
Act of 1995, particularly statements anticipating future growth
in revenues, Operating Income (Loss) before Depreciation and
Amortization, cash provided by operating activities and other
financial measures. Words such as “anticipates,”
“estimates,” “expects,”
“projects,” “intends,” “plans,”
“believes” and words and terms of similar substance
used in connection with any discussion of future operating or
financial performance identify forward-looking statements. These
forward-looking statements are based on management’s
current expectations and beliefs about future events. As with
any projection or forecast, they are inherently susceptible to
uncertainty and changes in circumstances, and the Company is
under no obligation to, and expressly disclaims any obligation
to, update or alter its forward-looking statements whether as a
result of such changes, new information, subsequent events or
otherwise.
Various factors could adversely affect the operations, business
or financial results of TWC in the future and cause TWC’s
actual results to differ materially from those contained in the
forward-looking statements, including those factors discussed in
detail in Item 1A, “Risk Factors,” in Part I
of this report, and in TWC’s other filings made from time
to time with the SEC after the date of this report. In addition,
the Company operates in a highly competitive, consumer and
technology-driven and rapidly changing business. The
Company’s business is affected by government regulation,
economic, strategic, political and social conditions, consumer
response to new and existing products and services,
technological developments and, particularly in view of new
technologies, its continued ability to protect and secure any
necessary intellectual property rights. TWC’s actual
results could differ materially from management’s
expectations because of changes in such factors.
Further, lower than expected valuations associated with the
Company’s cash flows and revenues may result in the
Company’s inability to realize the value of recorded
intangibles and goodwill. Additionally, achieving the
Company’s financial objectives could be adversely affected
by the factors discussed in detail in Item 1A, “Risk
Factors,” in Part I of this report, as well as:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||