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Time Warner Cable 10-K 2010 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 EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2009
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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o 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. o
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 10, 2010, there
were 352,558,973 shares of the registrant’s 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, 2009) was approximately $11.2 billion.
TABLE OF CONTENTS
Table of Contents
PART I
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, 2009, TWC served
approximately 14.6 million residential and commercial
customers who subscribed to one or more of its three primary
subscription services – video, high-speed data and
voice – totaling approximately 26.4 million
primary service units (“PSUs”). TWC markets its
services separately and in “bundled” packages of
multiple services and features. As of December 31, 2009,
57.3% of TWC’s residential and commercial customers
subscribed to two or more of its primary services, including
23.7% of such customers who subscribed to all three primary
services. In addition, TWC sells advertising to a variety of
national, regional and local advertising customers.
In February 2007, 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, TWC’s Class A common stock began trading on the
New York Stock Exchange.
On March 12, 2009, TWC completed its separation from Time
Warner Inc. (“Time Warner”), which, prior to the
Separation Transactions (as defined in “—Recent
Developments”), owned approximately 84% of the common stock
of TWC (representing a 90.6% voting interest) and a 12.43%
non-voting common stock interest in TW NY Cable Holding Inc.
(“TW NY”), a subsidiary of TWC. As a result of the
separation, Time Warner no longer has an ownership interest in
TWC or TW NY.
On March 12, 2009, TWC’s separation from Time Warner
was completed pursuant to a Separation Agreement between TWC and
Time Warner and certain of their subsidiaries dated as of
May 20, 2008 (the “Separation Agreement”). In
accordance with the Separation Agreement, on February 25,
2009, a subsidiary of Time Warner transferred its 12.43%
non-voting common stock interest in TW NY to TWC in exchange for
80 million newly issued shares (approximately
27 million shares after giving effect to the
1-for-3
reverse stock split discussed below) of TWC’s Class A
common stock (the “TW NY Exchange”). On March 12,
2009, TWC paid a special cash dividend of $10.27 per share
($30.81 per share after giving effect to the
1-for-3
reverse stock split, aggregating $10.856 billion) to
holders of record on March 11, 2009 of TWC’s
outstanding Class A common stock and Class B common
stock (the “Special Dividend”). Following the payment
of the Special Dividend, each outstanding share of TWC
Class A common stock and TWC Class B common stock was
automatically converted (the “Recapitalization”) into
one share of TWC common stock, par value $0.01 per share (the
“TWC Common Stock”). TWC’s separation from Time
Warner (the “Separation”) was effected as a pro rata
dividend of all shares of TWC Common Stock held by Time Warner
to holders of record of Time Warner’s common stock (the
“Spin-Off Dividend” or the “Distribution”).
The TW NY Exchange, the Special Dividend, the Recapitalization,
the Separation and the Distribution collectively are referred to
as the “Separation Transactions.”
In connection with the Separation Transactions, on
March 12, 2009, the Company implemented a reverse stock
split of the TWC Common Stock (the “TWC Reverse Stock
Split”) at a
1-for-3
ratio, effective immediately after the Recapitalization. The
shares of TWC Common Stock distributed in the Spin-Off Dividend
reflected both the Recapitalization and the TWC Reverse Stock
Split.
In 2009, TWC issued, in total, $6.5 billion in aggregate
principal amount of senior unsecured notes and debentures under
a shelf registration statement on
Form S-3
in three underwritten public offerings. The Company used the net
proceeds from these debt issuances (1) to repay all of the
borrowings outstanding under a
364-day
senior unsecured term loan facility (including accrued interest
and commitment fees) that TWC entered into in connection with
the Separation Transactions, (2) to repay all of the
borrowings outstanding under its $4.0 billion five-year
term loan facility, (3) to repay borrowings outstanding
under the Company’s senior unsecured five-year revolving
credit facility and a portion of the borrowings outstanding
under the Company’s commercial paper program, and
(4) for general corporate purposes.
For more information about the 2009 Bond Offerings, see
“Management’s Discussion and Analysis of Results of
Operations and Financial Condition—Overview—Recent
Developments—2009 Bond Offerings and Termination of Lending
Commitments” 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
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to changes in economic, business, competitive, technological,
strategic
and/or
regulatory factors and other factors affecting the operation of
TWC’s business. 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 Securities
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.
TWC offers video, high-speed data and voice services over its
broadband cable systems to residential and commercial customers.
TWC offers a broad range of residential video services,
including advanced services such as On-Demand, high-definition
(“HD”) and digital video recorder (“DVR”)
services. As of December 31, 2009, TWC had approximately
12.7 million residential video subscribers.
Programming tiers. TWC currently 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 networks, such as CNN, USA
and ESPN. 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. DBT enables
subscribers who receive digital video signals (“digital
video subscribers”) to receive additional cable networks.
Generally, subscribers to any tier of video programming can
purchase genre-based programming tiers, such as movies, sports
and Spanish language tiers, and 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. HD simulcasts (i.e.,
HD channels that are the same as their standard-definition
counterparts but for picture quality) are generally provided at
no additional charge, and additional charges generally apply
only for HD channels that do not have
standard-definition
counterparts. The rates TWC can charge for its BST service and
certain video equipment, including set-top boxes, in areas not
subject to “effective competition” are subject to
regulation under federal law. See “—Regulatory
Matters” below.
On-Demand services. On-Demand services are
generally available to digital video subscribers. 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,
programming from broadcast stations and cable networks, music
videos, local programming and other content. In addition,
premium service (e.g., HBO) subscribers generally have access to
the premium service’s On-Demand content without additional
fees.
DVR service. Set-top boxes equipped with 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. Subscribers pay an
additional monthly fee for TWC’s DVR service. As of
December 31, 2009, 50%, or approximately 4.4 million,
of TWC’s digital video subscribers also subscribed to its
DVR service. In 2010, TWC expects to introduce remote DVR
management, which will allow customers to program their DVRs via
a website or mobile handset, and a
multi-room DVR
service, which will allow a program recorded on a DVR to be
watched on any television with a TWC-provided set-top box in a
customer’s home.
Network DVR services. TWC is expanding the use
of Video On-Demand (“VOD”) technology to introduce
additional enhancements to the video experience. For instance,
as of December 31, 2009, Start
Overtm,
TWC’s Emmy-award winning technology, was available to 79%,
or approximately 7.0 million, of TWC’s digital video
subscribers. Start Over allows digital video subscribers using a
TWC-provided set-top box to restart select “in
progress” programs directly from the relevant channel,
without the ability to fast-forward through commercials. TWC has
begun rolling out other Network DVR services such as Look
Backtm,
which
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extends the window for viewing a program to 72 hours after
it has aired, and Quick
Clipstm,
which allows customers to view short-form content tied to the
broadcast station or cable network then being watched.
TWC offered residential high-speed data services to nearly all
of its homes passed as of December 31, 2009. 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. Subscribers pay a fixed monthly fee based
on the level of service received. As of December 31, 2009,
TWC served approximately 9.0 million residential
high-speed
data subscribers.
Road Runner High-Speed
Onlinetm. TWC
offers four tiers of Road Runner High-Speed Online service in
all of its systems:
Turbotm,
Standard, Basic and Lite. Each tier offers a different speed at
a different monthly fee. Turbo generally offers subscribers
speeds of up to 20 Mbps downstream and 2 Mbps
upstream. In addition, in the majority of its systems, TWC
provides Turbo and Standard subscribers with
Powerboosttm
at no additional charge, which allows users to initiate brief
download speed bursts when TWC’s network capacity permits.
During 2009, TWC deployed a new “Wideband” service in
New York City, and expects to continue to selectively deploy
Wideband in its service areas during 2010. Wideband generally
offers subscribers speeds of up to 50 Mbps downstream and
5 Mbps upstream.
TWC’s Road Runner High-Speed Online service provides
communication tools and personalized services, including
e-mail, PC
security, parental controls and online radio, without any
additional charge. The Roadrunner.com portal provides access to
content and media from local, national and international
providers and topic-specific channels, including entertainment,
dating, games, news, sports, travel, music, movie listings,
shopping, ticketing and coupon sites.
In addition to Road Runner High-Speed Online, 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.
Road Runner
Mobiletm. During
the fourth quarter of 2009, TWC launched Road Runner Mobile, a
wireless mobile broadband service, in several cities. Road
Runner Mobile provides customers with wireless broadband
Internet access on their computers via a
TWC-provided
data card. TWC offers service delivered over Clearwire
Corporation’s (“Clearwire”) fourth-generation
(“4G”) WiMax network and Sprint Corporation’s
(“Sprint”) third-generation (“3G”) CDMA
network. In 2010, TWC expects to continue to roll out Road
Runner Mobile in additional cities. TWC is also an equity
investor in Clearwire, see “—Operating Partnerships,
Joint Ventures and Significant Investments” below.
TWC offered its Digital Phone service to nearly all of its homes
passed as of December 31, 2009. 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. As of December 31, 2009, TWC
served approximately 4.2 million residential Digital Phone
subscribers. In 2010, TWC expects to launch a residential web
portal, which will allow Digital Phone subscribers to use the
Internet to customize their Digital Phone features and listen to
their voicemail.
TWC offers video, high-speed data, voice, networking and
transport services to commercial customers marketed under the
Time Warner Cable Business Class brand.
TWC offers small- and medium-sized businesses a full range of
video programming tiers and music services. Packages are
designed with a wide variety of options to meet the specific
demands of a business environment, with access to entertainment
and news programming covering world events, local news, weather
and financial markets. Commercial subscribers are charged a
fixed rate based on their tier of service. As of
December 31, 2009, TWC served 160,000 commercial video
subscribers.
TWC offers commercial customers a variety of high-speed data,
networking and transport services.
High-speed data service. TWC provides
high-speed data service to small businesses with speeds of up to
15 Mbps downstream and up to 2 Mbps upstream and, in New
York City, up to 50 Mbps downstream and up to 5 Mbps
upstream with Wideband (“Shared Internet Access”). TWC
also provides dedicated access to small- and medium-sized
businesses through a fiber connection to the Internet
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(“Dedicated Internet Access”). The downstream and
upstream speeds for Dedicated Internet Access service are
generally up to 1 Gbps. Customers may add to their Shared
Internet Access or Dedicated Internet Access certain additional
services, including managed storage, web hosting and personal
and managed data security. In addition, TWC expects to begin
offering its wireless mobile broadband service, Time Warner
Cable Business Class Mobile, to commercial customers in
certain of its service areas during 2010.
Commercial subscribers pay a fixed monthly fee based on the
services received. Due to their different characteristics,
commercial subscribers are charged at different rates than
residential subscribers. As of December 31, 2009, TWC had
295,000 commercial
high-speed
data subscribers.
Commercial networking and transport
services. TWC offers Metro Ethernet service that
provides high capacity connections to the Internet for
commercial customers with geographically dispersed locations
with speeds ranging from up to
sub-T1 to up
to 10 Gbps. TWC’s Metro Ethernet service can also extend
the reach of the customer’s local area network or
“LAN” within and between metropolitan areas.
In addition, TWC offers
point-to-point
transport services to wireless telephone providers, Internet
services providers and competitive carriers on a wholesale basis.
TWC offers its commercial voice service, Business
Class Phone, to a broad range of businesses. Business
Class Phone is a multi-line voice service developed for
small businesses, which provides unlimited local, intrastate and
long distance calling, along with other key business features,
such as call restrictions, non-verified account codes and
three-way call transfer. During 2009, TWC also began offering
Business Class PRI, which is designed for medium-sized
businesses and supports up to twenty-three simultaneous voice
calls on each two-way trunk line.
Due to their different characteristics, commercial Business
Class Phone subscribers are charged at different rates than
residential Digital Phone subscribers. At December 31,
2009, TWC had 67,000 commercial voice subscribers.
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 video advertising inventory of
certain regional sports programming networks. In addition,
TWC’s local cable news channels, VOD offerings and online
services, such as Roadrunner.com, provide it with opportunities
to generate advertising revenue.
TWC is exploring various means to use 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, as well as to attract
advertising that would otherwise be placed with other media,
such as print and direct mail. For example, in several
geographic areas, TWC provides overlays that enable video
subscribers with a TWC-provided digital 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. In addition, in
2009, TWC launched certain digital offerings, such as Promotions
on Demand, which enable video subscribers to use their remote
control to request that coupons, samples
and/or
brochures be sent to their home. These tools are used to provide
advertisers with important feedback about the impact of their
advertising efforts and the value of enhancing the video
experience with interactive features. TWC also currently
provides anonymized VOD and enhanced TV viewing data to its
programming partners.
In 2008, TWC and certain other cable operators formed Canoe
Ventures LLC (“Canoe”), a joint venture 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. One component of
Canoe’s strategy is to enable TWC and the industry as a
whole to expand their measurement capabilities in order to
provide anonymized viewing data to marketers and strategic
partners to serve as the foundation of its advanced advertising
platform.
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TWC’s marketing focuses both on acquiring new customers as
well as retaining and selling additional services to existing
customers. In both cases, offering attractive bundled services,
particularly a triple play offering of video, high-speed data
and voice services, is a key element of TWC’s strategy. 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 believes that bundled
offerings increase its customers’ satisfaction with TWC,
increase customer retention and encourage subscription to
additional features. Using a proprietary system, TWC is able to
segment existing and potential customers, and target its
marketing efforts appropriately.
The following table presents selected statistical data regarding
TWC’s customer relationships and double play and triple
play subscribers (in thousands):
TWC is in the fourth year of using the brand, The Power of
Youtm,
to advertise a variety of features, such as Start Over, that
demonstrate that TWC customers are in control of their
experience. 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, online at www.timewarnercable.com and through
third-party web partners, and in TWC and third-party retail
stores. In addition, TWC uses customer care channels and inbound
call centers to sell additional services to existing customers,
as well as new services to potential customers.
During 2009, TWC made significant progress in improving its
customer care processes and infrastructure. The Company’s
customer care strategy is designed to give customers more
control over their experience in ways that are simple and easy
and, to that end, is focused on the reliability and technical
quality of its plant, resolving customers’ issues on the
first call, and providing customers several means of
communicating with the Company, including online approaches,
such as eCare and MyService at www.timewarnercable.com.
Technology
TWC’s cable systems employ a hybrid fiber coaxial cable, or
“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,
high-speed data, voice, networking and transport services. As of
December 31, 2009, virtually all of the homes passed by
TWC’s cable systems were served by two-way capable 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. To accommodate increasing demands for greater capacity in
its network, TWC has deployed 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
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households at any given moment. Since it is generally the case
that not all such channels are being watched at all times within
a given group of households, SDV technology frees up capacity
that can then be made available for other uses, including
additional HD channels, expanded VOD offerings, faster
high-speed data connections, reliable Digital Phone quality and
interactive services. TWC received an Emmy award in 2008 for its
efforts in SDV technology development. As of December 31,
2009, approximately 5.9 million (or 46%) of video
subscribers received some portion of their video service via SDV
technology, and TWC expects to complete its roll-out of SDV
technology during 2010.
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 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.”
Generally, TWC’s 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
(“CableCARDtm”)
in order to receive digital video programming. However, a
unidirectional device, such as a “digital cable-ready”
television, 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.
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.
Tru2way-enabled
televisions and other devices with tru2way technology are able
to receive TWC’s two-way video services. During 2009, TWC
deployed approximately 2.3 million
tru2way-enabled
set-top boxes, and it expects to continue to deploy additional
boxes during 2010.
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. The current three-year carriage cycle began on
January 1, 2009, and TWC has multi-year retransmission
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 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 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 Electronics Co., Ltd. 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 Open Cable Digital Navigator
(“ODN”) and Mystro Digital Navigator (“MDN”)
program guides, TWC provides its subscribers with set-top box
program guides from Cisco Systems and Rovi Corporation (formerly
Macrovision Corporation).
High-speed data and voice connectivity. TWC
delivers high-speed data and voice services through TWC’s
HFC network and regional and national fiber networks that are
either owned or leased from third parties. These networks
provide connectivity to the Internet. TWC pays fees for leased
circuits based on the amount of capacity available to it and
pays for Internet connectivity based on the amount of
IP-based
traffic received from and sent over the other carrier’s
network. TWC also has entered into a number of
“settlement-free
peering” arrangements with third-party networks that allow
TWC to exchange traffic with those networks without a fee.
Digital Phone. Under multi-year agreements
between TWC and 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, operator and directory assistance
services and assisting in order processing, local number
portability and
long-distance
traffic carriage. In
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2009, TWC launched an initiative to replace Sprint as the
provider of these services, a process that will take a number of
years. 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 for customers from a variety of
alternative communications, information and entertainment
delivery sources. TWC competes with incumbent local telephone
companies, including AT&T Inc. (“AT&T”) and
Verizon Communications Inc. (“Verizon”), across each
of its primary services. Some of these telephone companies offer
a broad range of services with features and functions comparable
to those provided by TWC and in bundles similar to those offered
by TWC, sometimes with the addition of wireless services. Each
of TWC’s services also faces competition from other
companies that provide services on a stand-alone basis.
TWC’s video service faces competition from direct broadcast
satellite (“DBS”) services, and increasingly from
companies that deliver content to consumers over the Internet.
TWC’s high-speed data service faces competition from
wireless data providers, and competition in voice service is
increasing as more homes in the United States are replacing
their wireline telephone service with wireless service.
Technological advances and product innovations have increased
and will likely continue to increase the number of alternatives
available to TWC’s customers, further intensifying
competition. See “Risk Factors—Risks Related to
Competition.”
Incumbent local telephone
companies. TWC’s video, high-speed data and
Digital Phone services face competition from the video, digital
subscriber line (“DSL”), wireless broadband and
wireline and wireless phone offerings of AT&T and Verizon.
In a significant number of TWC’s operating areas, AT&T
and Verizon have upgraded 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 aggressively market and sell bundles of video,
high-speed data and voice services plus, in some cases, 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 in some areas from the DSL,
wireless broadband and phone offerings of smaller incumbent
local telephone companies, such as Frontier Communications
Corporation (“Frontier Communications”) and Cincinnati
Bell, Inc. (“Cincinnati Bell”).
Direct broadcast satellite. TWC’s video
service faces competition from 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
Sunday
Tickettm)
and video services that are comparable in many respects to
TWC’s digital video service, 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
the telephone companies to offer synthetic bundles (i.e., video
service provided principally by the DBS operator, and DSL,
wireline 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.
Cable overbuilders. 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.
Aside from competing with the video, high-speed data and voice
services offered by incumbent local telephone companies, DBS
providers 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 service
faces 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, Apple Inc.’s iTunes, Netflix Inc.’s
“Watch Instantly” and YouTube. Increasingly, content
owners are utilizing Internet-based delivery of content directly
to consumers, some without charging a fee for access to the
content. Furthermore, due to consumer electronics innovations,
consumers are able to watch such Internet-delivered content on
television sets. TWC also competes with online order services
with mail delivery and video stores.
“Online” competition. TWC’s
high-speed data service faces competition from a variety of
companies that offer other forms of online services, including
low cost
dial-up
services over telephone lines and wireless broadband services,
such as those offered by Verizon, AT&T, Sprint,
T-Mobile
USA, Inc. and Clearwire, Internet service via power lines,
satellite and various other wireless services (e.g., Wi-Fi).
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Digital Phone competition. TWC’s Digital
Phone service competes with wireline, wireless and
“over-the-top”
phone providers. An increasing number of homes in the
U.S. are replacing their traditional wireline telephone
service with wireless phone service, a trend commonly referred
to as “wireless substitution.” Wireless phone
providers are encouraging this trend with aggressive marketing
and the launch of wireless products targeted for home use. TWC
also competes with
“over-the-top”
providers, such as Vonage, Skype, magicJack and Google Voice,
and companies that sell phone cards at a cost per minute for
both national and international service. The increase in
wireless substitution and 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 DVR service competes with similar devices
manufactured by consumer electronics companies.
Commercial competition. TWC competes with
incumbent local telephone companies, especially AT&T and
Verizon, across all of its commercial services: video,
high-speed data, voice, networking and transport. In addition,
on a stand-alone basis, TWC’s commercial video service
faces competition from DBS providers that compete with TWC
primarily in the hospitality and restaurant industry, and its
commercial high-speed data, voice, networking and transport
services face competition from national and smaller regional
competitive local exchange carriers or, “CLECs,” and
from a variety of smaller incumbent local telephone companies,
such as Frontier Communications and Cincinnati Bell.
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 under state-wide franchises and
without obtaining local franchise approval. Legislation of this
kind has been enacted in California, Kansas, Missouri, 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.”
As of December 31, 2009, TWC had approximately
47,000 employees, including approximately
1,400 part-time employees. 4.6% 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
FCC and by most local and 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 Communications
Corporation and Comcast Corporation (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, high-speed data and transport 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
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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 the majority of
its 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 on which the cable systems may carry
their stations, commonly called “retransmission
consent.” The current carriage cycle 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.” 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.
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
connection with multi-casting.
In September 2007, the FCC adopted rules that 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 became effective after the broadcast
television transition from analog to digital service for full
power television stations on June 12, 2009, and are
currently scheduled to terminate after three years, subject to
FCC review.
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 addition, the Communications Act and FCC regulations also
require TWC to give various kinds of advance notice of certain
changes in TWC’s programming
line-up.
Under certain circumstances, TWC must give as much as 30 or
45 days’ advance notice to subscribers, programmers
and franchising authorities of such changes. DBS operators and
other non-cable programming distributors are not subject to
analogous duties.
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. The U.S. Court of Appeals for the District of
Columbia Circuit reversed and vacated the FCC order in August
2009. TWC is unable to predict when the FCC will take action to
set new limits, if any. 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 investor-owned utilities provide cable systems
and telecommunications carriers with non-discriminatory access
to any pole, conduit or
right-of-way
controlled by those utilities. The Communications Act 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. 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
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attachments made by any company that provides telecommunications
services. The applicability of and method for calculating pole
attachment rates for cable operators that provide Voice Over
Internet Protocol (“VoIP”) 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 cable operators and
telecommunications companies that are used to provide high-speed
Internet services. It is unclear whether this ruling would apply
to VoIP services or have any effect on the pole attachment rates
for companies providing telecommunications services. The
proposed rate could be higher than the current rate paid by
cable service providers. In addition, in August 2009, a
coalition of electric utility companies petitioned the FCC to
declare that the pole attachment rate for attachments used by
cable companies to provide VoIP services should be assessed at
the higher rate paid by telecommunications providers. TWC has
opposed this petition. If either of these petitions is adopted,
TWC’s current payments for pole attachments could
materially increase. Finally, 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 increase in TWC’s pole attachment rates or
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. For further discussion
of pole attachment rates, see the discussion in “Risk
Factors—Risks Related to Dependence on Third
Parties—TWC may encounter substantially increased pole
attachment costs.”
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 functions. DBS
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. In June 2008, cable
operators and consumer-electronics companies entered into a
Memorandum of Understanding that establishes a national platform
for retail devices to receive interactive (or two-way) cable
services.
In November 2009, in its National Broadband Plan proceeding, the
FCC identified a set-top box “innovation gap” that it
stated could hinder the convergence of video, TV and
IP-based
technology. In December 2009, the FCC sought specific comment on
how it can encourage innovation in the market for navigation
devices. If the FCC requires multi-channel video programming
distributors (“MVPDs”) and consumer electronics
manufacturers to develop a universal
“plug-and-play”
device for all MVPDs, it may impede innovation in this area.
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 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
U.S. Court of Appeals for the District of Columbia Circuit
upheld the order in May 2009. The FCC also has adopted rules
facilitating competitors’ access to the cable wiring inside
such MDUs. This order, which was upheld by the U.S. Court
of Appeals for the District of Columbia Circuit in October 2008,
could have an adverse impact on TWC’s business because it
allows competitors to use wiring inside MDUs that TWC has
already deployed.
Copyright regulation. TWC’s cable systems
provide subscribers with, among other things, content from 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.
Legislation has been introduced to address this issue and it is
pending as of February 18,
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2010. 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 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.
In October 2009, after convening an evidentiary hearing on the
merits of the claim, an FCC Administrative Law Judge issued a
recommended decision in favor of TWC and the other cable
operators in the proceeding, which WealthTV appealed to the full
FCC. These proceedings remain pending.
Tax. Under the Telecommunications Act of 1996,
DBS providers benefit from federal preemption of locally imposed
or administered taxes and fees on video services, including
those borne by the Company and its customers. Several states
have enacted or are considering parity tax measures to equalize
the tax and fee burden imposed on DBS and cable video services.
DBS providers have been challenging such parity efforts in the
courts, Congress and, increasingly, state legislatures in an
effort to maintain their competitive pricing advantage and
preclude states from implementing such parity tax measures. Thus
far, the states have prevailed in the federal and state courts
with respect to legal challenges to such tax parity statutes.
However, there can be no assurance as to the outcome with
respect to cases still pending and ongoing legislative efforts.
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; 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,
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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, Missouri, 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” 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 Internet access
service is subject to a number of regulatory requirements,
including the Communications Assistance for Law Enforcement Act
(“CALEA”), which requires that high-speed data
providers implement certain network capabilities to assist law
enforcement agencies in conducting surveillance of criminal
suspects.
“Net neutrality” legislative and regulatory
proposals. 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. In previous
Congressional sessions, legislation has been introduced
proposing “net neutrality” requirements, which would
have limited to a greater or lesser extent the ability of
high-speed Internet access service providers to adopt pricing
models and network management policies. Similar legislation was
introduced in the most recent session, as well as legislation to
prevent the FCC from adopting any net neutrality rules.
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, in November
2007, a formal complaint was filed against Comcast Corporation
(“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. In October 2009, the FCC initiated a Notice of
Proposed Rulemaking that proposes to adopt so-called “net
neutrality” rules that it describes as intended to preserve
the openness of the Internet. The proposed rules would apply to
all providers of broadband Internet access services, whether
wireline or wireless, but would not apply to providers of
applications, content or other services. The FCC indicated that
its comment process seeks comment both on its rationales for the
draft proposals as well as their form and scope. Initial
comments were filed on January 14, 2010, and reply comments
are due by March 5, 2010. 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.”
American Recovery and Reinvestment Act of
2009. The American Recovery and Reinvestment Act
of 2009 (“ARRA”), enacted on February 17, 2009,
provides approximately $7 billion to stimulate investment
in broadband. As of February 18, 2010, only a small portion
of the available funds has been awarded. All broadband funding
awards must be made by September 30, 2010. TWC did not
apply
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for any of these funds, but many other organizations have done
so. TWC could be placed at a disadvantage if these funds are not
made available in a competitively neutral way, or are used to
compete with TWC’s broadband services in a manner that
gives the recipients a competitive advantage.
National Broadband Plan. As part of the ARRA,
Congress directed the FCC to develop a National Broadband Plan
to deliver to Congress by February 17, 2010. The primary
focuses of the plan are universal broadband deployment,
increased broadband utilization and adoption, and the
integration of broadband into several key “national
purposes,” such as healthcare, education, energy and
E-government.
The FCC initiated a proceeding to develop the National Broadband
Plan in April 2009 and has issued more than 28 different
requests for comment on related issues. The cable industry,
generally, has encouraged the FCC to focus on ways to increase
broadband adoption and digital literacy. On January 7,
2010, FCC Chairman Genachowski notified Congress of the need for
a one month extension until March 17, 2010 to deliver the
plan to Congress. The final plan is expected to result in a
number of new rulemaking proceedings. TWC is unable to predict
the impact of such proceedings on TWC’s business.
TWC currently offers residential and commercial voice services
using 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 and commercial voice services to the same
regulations that apply to the 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
service discontinuance requirements and local number portability
(“LNP”) rules when subscribers change telephone
providers.
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 public utility commission regulations that address such
issues as entry certification and tariffing requirements, as
applied to 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. Despite this ruling, certain states have sought to
impose state regulation on interconnected VoIP providers such as
TWC. For instance, in 2008, the Wisconsin public utility
commission ruled that TWC’s Digital Phone service is
subject to traditional, circuit-switched telephone regulation.
In addition, other state commissions have opened investigations
into whether and to what extent interconnected VoIP services
should be regulated 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 state universal funds and the Federal Universal
Service Fund.
Operating
Partnerships, Joint Ventures and Significant
Investments
TWE is a Delaware limited partnership that was formed in 1992
that, as of the Separation Transactions, is wholly owned by TWC.
At the time of the restructuring of TWE (the “TWE
Restructuring”), which was completed on March 31,
2003, subsidiaries of Time
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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 Warner Communications
Inc., 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) American Television and
Communications Corporation (“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 Time Warner NY
Cable LLC (“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
had no direct interest in TWE and Comcast no longer had any
interest in TWE. As a result of the Separation Transactions,
Time Warner no longer has an ownership interest in TWC or TW NY.
As of December 31, 2009, 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 following description summarizes certain provisions of the
partnership agreement relating to the Time Warner
Entertainment–Advance/Newhouse Partnership
(“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 (the
“TW Partners”) and Advance/Newhouse Partnership
(“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 4.7 million
consolidated subscribers, as of December 31,
2009) located primarily in Florida (the “A/N
Systems”), were transferred to a wholly owned 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, TWC or a wholly owned
affiliate of TWE or TWC (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 TWC, 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 TWC continues to own, directly or
indirectly, either 35% or 43.75% of the residual equity capital
of TWE, depending on when the issuance occurs.
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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.
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.
TWC holds an indirect equity interest in Clearwire, which was
formed by the combination of the respective wireless broadband
businesses of Sprint and Clearwire Communications LLC, an
operating subsidiary of Clearwire (the “Clearwire
Investment”). The Clearwire Invesment is focused on
deploying the first nationwide 4G wireless network to provide
mobile broadband services to wholesale and retail customers.
Clearwire’s Class A Common Stock is listed for trading
on the NASDAQ Global Select Market. In November 2008, TWC, Intel
Corporation (“Intel”), Google Inc., Comcast and Bright
House Networks, LLC (collectively, the “Clearwire
Investors”) invested $3.2 billion (the “Initial
Clearwire Investment”) in Clearwire Communications LLC. TWC
initially invested $550 million for membership interests in
Clearwire Communications, LLC, which represented an ownership
interest in Clearwire, after post-closing adjustments, of
approximately 4.47%. In connection with the transaction, TWC
entered into wholesale agreements with Clearwire and Sprint that
allow TWC to offer wireless services utilizing Clearwire’s
4G WiMax network and Sprint’s 3G CDMA network. See
“—Services—Residential Services—High-speed
Data Services” above.
In November 2009, TWC, Sprint, Intel, Comcast, Bright House
Networks, LLC and Eagle River Holdings, LLC (the
“Participating Equityholders”) collectively agreed to
invest up to an additional $1.564 billion in Clearwire
Communications LLC, of which TWC agreed to fund approximately
$103 million (the “Follow-On Clearwire
Investment”). Through December 31, 2009,
$1.497 billion of the investment had been funded, of which
TWC had invested $99 million. Following the completion of
the transaction in the first quarter of 2010, TWC expects its
ownership in Clearwire will be approximately 4.93%.
In exchange for TWC investing in the Follow-On Clearwire
Investment in amounts in excess of its pro rata ownership in
Clearwire prior to such investment, Clearwire agreed to pay TWC
a cash fee of $2 million. Certain other Participating
Equityholders received similar fees in connection with the
Follow-On Clearwire Investment.
In connection with the Initial Clearwire Investment, 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, including director nominations, transfer and purchase
restrictions on Clearwire’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 registration statement on
Form S-3)
as long as the securities to be registered have an aggregate
price to the public of not less than $50 million. On
December 21, 2009, Clearwire filed a shelf registration
statement providing for the registration and sale of all
Clearwire securities held by TWC as of such date.
TWC is a participant in a joint venture with certain other cable
companies (“SpectrumCo”) that holds advanced wireless
spectrum (“AWS”) licenses. 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 the areas in which Cox provides
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.
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TWC’s industry is, and will continue to be, highly
competitive. Some of TWC’s principal competitors, 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, sometimes with the addition of wireless services.
In a significant number of TWC’s operating areas, AT&T
and Verizon have upgraded 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, in
some cases, along with their wireless service.
In addition, each of TWC’s services faces competition from
other companies that provide services on a stand-alone basis.
TWC’s video service faces competition from DBS providers
that try to distinguish their services from TWC’s by
offering aggressive promotional pricing, exclusive programming,
and/or
assertions of superior service or offerings. Increasingly,
TWC’s video service also faces competition from companies
that deliver content to consumers over the Internet, some
without charging a fee for access to the content. This trend
could negatively impact customer demand for TWC’s video
service, 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 service from wireless data
providers, and in voice service from wireline, wireless and
“over-the-top”
phone providers, especially as an increasing number of homes in
the United States replace their wireline 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, and reduce TWC’s revenues. As TWC
expands and introduces new and enhanced services, TWC may be
subject to competition from other providers of those services.
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, see
“—Risks Related to Government Regulation,” and
“Business—Competition” and “—Regulatory
Matters.”
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. 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
and mobile devices. 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 the increasing 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
launched Road Runner Mobile, a wireless mobile broadband
service, in several cities during the fourth quarter of 2009,
and it expects to continue to roll out the service in additional
cities during 2010. TWC utilizes Clearwire’s mobile
broadband network to provide the service pursuant to a wholesale
agreement with Clearwire. Clearwire’s network is currently
available in a limited number of cities and there can be no
assurance that Clearwire will successfully finance, construct
and deploy a nationwide mobile broadband network.
TWC does not offer wireless voice products although some of its
wireline competitors and their affiliates do offer such
products. TWC may determine that it needs to offer a wireless
voice product to remain competitive. If TWC incurs significant
costs in developing or marketing wireless mobile voice
and/or
broadband 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. Furthermore, if TWC’s
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competitors expand their service bundles to include compelling
wireless features before TWC has 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
A
prolonged economic downturn, especially a continued downturn in
the housing market, may negatively impact TWC’s ability to
attract new subscribers and generate increased subscription
revenues.
The United States economy has experienced a period of slowdown,
and the future economic environment may continue to be less
favorable than that of prior 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 wireline 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 video services is an established and highly penetrated
business. TWC’s ability to achieve incremental growth in
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 in TWC’s operating
areas continues to decline, it may negatively impact TWC’s
ability to gain new video subscribers.
TWC operates in a highly competitive, consumer-driven and
rapidly changing environment and its success 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
service. 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 or regulatory 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, 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.
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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.
TWC licenses “Time Warner Cable” and “Road
Runner” from Time Warner and an affiliate of Time Warner,
respectively. These license agreements may be terminated by Time
Warner or its affiliate if TWC commits a significant breach of
its obligations under such agreements, undergoes a specified
change of control, or materially fails to maintain the quality
standards established for the use of these trademarks and the
products and services related to these trademarks.
If Time Warner or its affiliate 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 could be
materially adversely affected.
Authoritative guidance issued by the Financial Accounting
Standards Board (“FASB”) 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.
The guidance 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.
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TWC’s 2009 annual impairment analysis, which was performed
as of December 31, 2009, did not result in any goodwill or
cable franchise rights impairment charges. However, it is
possible that impairment charges may be recorded in the future
to reflect potential declines in fair value. 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.”
As of December 31, 2009, TWC had $21.583 billion of
net debt and mandatorily redeemable preferred equity. This level
of indebtedness may limit TWC’s 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 in 2008 and 2009 to fund the
Special Dividend, its interest expense will be higher than it
was prior to the borrowings, which will affect TWC’s
profitability and cash flows.
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 programming costs as a percentage of video
revenues have increased over recent years and will continue to
increase 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 and 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 multi-year agreements 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,
operator and directory assistance service and assisting in order
processing, local number portability and long-distance traffic
carriage. TWC recently launched an initiative to replace Sprint
as the provider of these services. However, the process will
take a number of years, during which time TWC’s reliance on
Sprint 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 and other services to telephone and similar poles of
investor-owned
utilities at regulated rates. However, because these cables may
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. In addition, in
August 2009, a coalition of electric utility companies
petitioned the FCC to declare that the pole attachment rate for
cable companies’ digital telephone service should be
assessed at the higher rate paid by telecommunications providers
rather than the rate paid by cable providers.
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
increase in TWC’s pole attachment rates or 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.
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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. 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.
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 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.” In October 2009, the
FCC initiated a Notice of Proposed Rulemaking that proposes to
adopt
so-called
“net neutrality” rules that it describes as intended
to preserve the openness of the Internet. The proposed rules
would apply to all providers of broadband Internet access
services, whether wireline or wireless, but would not apply to
providers of applications, content or other services. The FCC
indicated that its comment process seeks comment both on its
rationales for the draft proposals as well as their form and
scope. Any final rules that ultimately may be adopted, depending
upon their scope and terms, could have a significant adverse
effect on the Company’s broadband services.
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 Internet
Access Services—‘Net neutrality’ legislative and
regulatory proposals.”
Under current FCC regulations, rates for BST video service and
associated equipment are permitted to be regulated. In the
majority of its localities, TWC is not subject to BST video rate
regulation, either because the local franchising authority has
not asked the FCC for
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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 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
IRS and state and local tax authorities may challenge the tax
characterizations of the Adelphia Acquisition (as defined
below), 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 acquisition by TW NY Cable and Comcast of assets comprising
in aggregate substantially all of the cable assets of Adelphia
Communications Corporation (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.
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.
As part of the Separation Transactions, Time Warner received a
private letter ruling from the IRS and Time Warner and TWC
received 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 made by TWC to
be true. Due to the potential impact of significant
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stock ownership changes on the taxability of the 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.
TWC operates cable systems in locations throughout the United
States and, as a result, it is subject to the tax laws and
regulations of the U.S. federal, state and local
governments. From time to time, various legislative
and/or
administrative initiatives may be proposed that could adversely
affect the Company’s tax positions. There can be no
assurance that the Company’s effective tax rate or tax
payments will not be adversely affected by these initiatives. As
a result of state and local budget shortfalls due primarily to
the recession as well as other considerations, certain states
and localities have imposed or are considering imposing new or
additional taxes or fees on TWC’s services or changing the
methodologies or base on which certain fees and taxes are
computed. Such potential changes include additional taxes or
fees on the TWC’s services which could impact its
customers, combined reporting and other changes to general
business taxes, central/unit-level assessment of property taxes
and other matters that could increase TWC’s income,
franchise, sales, use
and/or
property tax liabilities. In addition, U.S. federal, state
and local tax laws and regulations are extremely complex and
subject to varying interpretations. There can be no assurance
that TWC ’s tax positions will not be challenged by
relevant tax authorities or that TWC would be successful in any
such challenge.
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.”
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 fiber optic and coaxial 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, 2009, 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
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throughout the United States. 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.
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. The complaint, which also named as defendants several
other cable and satellite providers (collectively, the
“distributor defendants”) as well as programming
content providers (collectively, the “programmer
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 distributor
defendants, including TWC, and the programmer defendants 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 distributor defendants,
including the Company, and the programmer defendants filed
motions to dismiss the Second Amended Complaint, which motions
were denied by the court on June 25, 2008. On July 14,
2008, the distributor defendants and the programmer 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 May 4, 2009, by
stipulation of the parties, plaintiffs filed a third amended
complaint (the “Third Amended Complaint”) and on
June 12, 2009, the distributor defendants and the
programmer defendants filed a motion to dismiss the Third
Amended Complaint, which the district court granted with
prejudice on October 15, 2009, terminating the action.
Plaintiffs have filed a notice of appeal to the U.S. Court
of Appeals for the Ninth Circuit. 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 and on July 1, 2005, the
action was removed to the U.S. District Court for the
Western District of 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 the district court granted
on January 26, 2010 on the basis plaintiff’s claims
were barred by the statute of limitations. The time to appeal
this decision has not yet expired. If the decision is appealed,
TWE-A/N will 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 district 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 July 6, 2009, the
district court granted approval of the settlement, which certain
class members have appealed with respect to attorneys’
fees. The Company intends to defend against this lawsuit
vigorously should the settlement not be upheld.
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 other
defendants, infringe 18 patents purportedly relating to the
Company’s customer call center operations
and/or
voicemail services. The plaintiff is seeking unspecified
monetary
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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. On August 13, 2009, the district
court found one additional patent invalid, but denied
defendants’ motions for summary judgment on three remaining
patents, and on October 27, 2009, the district court denied
the defendants’ requests for reconsideration of the
decision. On January 29, 2010, the district court found one
of the three remaining patents invalid based on a motion for
summary judgment brought by another defendant. 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.” 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. In
November 2008, the district court issued its claims construction
orders. In response to these orders, the plaintiff has indicated
it will dismiss its claims relating to the alleged infringement
of eight patents purportedly relating to high-speed data and
IP-based
telephony services. The plaintiff has not indicated that it will
dismiss its claim relating to one remaining patent alleged to
relate to digital video decoder technology and summary judgment
motions are pending relating to the remaining claim. The Company
intends to defend against the remaining claim 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. On
September 25, 2009, the district court ruled on the
Company’s summary judgment motions finding all AMT patents
invalid and, on February 2, 2010, AMT filed its notice of
appeal to this decision. The Company will 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 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.
Not applicable.
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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 19, 2010.
Set forth below are the principal positions held during at least
the last five years by each of the executive officers named
above:
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The principal market for TWC Common Stock is the NYSE. In
connection with the Separation, TWC effected the
Recapitalization in March 2009, causing each share of TWC
Class A common stock and Class B common stock to be
converted into one share of TWC Common Stock. For quarterly
price information for the two years ended December 31, 2009
with respect to TWC Common Stock and, prior to the
Recapitalization, TWC Class A common stock, as adjusted for
the TWC Reverse Stock Split and reflecting the payment of the
Special Dividend, see “Quarterly Financial
Information” at page 103 herein, which information is
incorporated herein by reference. There was no established
public trading market for the Company’s Class B common
stock, which prior to the Separation was held of record by one
holder. There were approximately 33,251 holders of record of TWC
Common Stock as of February 10, 2010.
On March 12, 2009, TWC paid the Special Dividend of $10.27
per share ($30.81 per share after giving effect to the
1-for-3
reverse stock split, aggregating $10.856 billion) to
holders of record on March 11, 2009 of TWC’s
outstanding Class A common stock and Class B common
stock. On January 28, 2010, TWC announced that it would
begin paying a regular quarterly cash dividend of $.40 per share
on TWC Common Stock. TWC expects to pay the first dividend on
March 15, 2010 to stockholders of record on
February 26, 2010. TWC currently expects to pay comparable
cash dividends in the future; however, changes in TWC’s
dividend program will depend on the Company’s earnings,
capital requirements, financial condition and other factors
considered relevant by the Company’s Board of Directors.
The selected financial information of TWC for the five years
ended December 31, 2009 is set forth at pages 101
through 102 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 32 through 56
herein is incorporated herein by reference.
The information set forth under the caption “Market Risk
Management” at pages 51 through 53 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 57 through 97 and 99 herein are incorporated herein by
reference.
Quarterly Financial Information set forth at page 103
herein is incorporated herein by reference.
Not Applicable.
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 98 and 100 is
incorporated herein by reference.
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There have not been any changes in TWC’s internal control
over financial reporting during the quarter ended
December 31, 2009 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 2010 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.
The following table summarizes information as of
December 31, 2009, about the Company’s outstanding
equity compensation awards and shares of common stock reserved
for future issuance under the Company’s equity compensation
plans.
In connection with the Separation, the Company’s
stockholders approved amendments to the 2006 Stock Plan that,
among other things, increased the number of shares of TWC Common
Stock authorized for issuance thereunder by 18.0 million
shares. As a result, as of December 31, 2009, the Company
was authorized to issue up to 51.3 million shares of TWC
Common Stock under the 2006 Stock Plan (which also reflects
certain
Separation-related
adjustments to outstanding awards effected pursuant to the terms
of the 2006 Stock Plan and the TWC Reverse Stock Split).
Stock options granted under the 2006 Plan have exercise prices
equal to the fair market value of TWC Common Stock at the date
of grant. Generally, the stock options vest ratably over a
four-year vesting period and expire ten years from the date of
grant. Certain stock option awards provide for accelerated
vesting upon the grantee’s termination of employment after
reaching a specified age and years of
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service. In connection with the payment of the Special Dividend
and the TWC Reverse Stock Split, adjustments were made to the
number of underlying shares and exercise prices of outstanding
TWC stock options to maintain the fair value of those awards.
(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 31
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 10.31 through 10.43 and 10.46 through 10.58 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.
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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 19, 2010
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.
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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, 2009,
TWC served approximately 14.6 million residential and
commercial customers who subscribed to one or more of its three
primary subscription services – video, high-speed data
and voice – totaling approximately 26.4 million
primary service units (as defined in “Results of
Operations”).
As discussed further in “—Recent Developments,”
on March 12, 2009, TWC completed its separation from Time
Warner Inc. (“Time Warner”), which, prior to the
Separation Transactions (as defined below), owned approximately
84% of the common stock of TWC (representing a 90.6% voting
interest) and a 12.43% non-voting common stock interest in TW NY
Cable Holding Inc. (“TW NY”), a subsidiary of TWC. As
a result of the separation, Time Warner no longer has an
ownership interest in TWC or TW NY.
TWC offers video, high-speed data and voice services over its
broadband cable systems to residential and commercial customers.
TWC markets its services separately and in “bundled”
packages of multiple services and features. As of
December 31, 2009, 57.3% of TWC’s residential and
commercial customers subscribed to two or more of its primary
services, including 23.7% of its customers who subscribed to all
three primary services. TWC also sells advertising to a variety
of national, regional and local advertising customers.
Video generates the largest share of TWC’s revenues and, as
of December 31, 2009, TWC had approximately
12.9 million video subscribers, of which approximately
8.9 million received digital video signals. Although TWC
expects to continue to lose video subscribers as a result of
increased competition, TWC believes it will continue to increase
video revenues for the foreseeable future through the offering
of incremental video services (e.g., digital video recorder
services and additional programming tiers), as well as through
equipment rentals and price increases; however, future video
revenue growth rates will depend on video subscriber and
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TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
penetration levels, competition, regulation, pricing and the
state of the economy. Video programming costs represent a major
component of TWC’s expenses and are expected to continue to
increase, reflecting rate increases on existing programming
services, costs associated with retransmission consent
agreements, growth in video subscribers taking tiers of service
with more channels and the expansion of service offerings (e.g.,
new network channels). TWC expects that its video programming
costs as a percentage of video revenues will continue to
increase as increases in programming costs outpace growth in
video revenues. TWC also offers video services to business
customers and of the Company’s 12.9 million video
subscribers as of December 31, 2009, 160,000 were
commercial video subscribers.
As of December 31, 2009, TWC had approximately
9.0 million residential high-speed data subscribers. TWC
expects continued growth in residential high-speed data
subscribers and revenues for the foreseeable future; however,
future high-speed data subscriber and revenue growth rates will
depend on high-speed data penetration levels, competition,
regulation, pricing, the rate of wireless substitution of
wireline high-speed data service and the state of the economy.
TWC also offers high-speed data services to business customers,
as well as networking and transport services, and had 295,000
commercial high-speed data subscribers as of December 31,
2009.
During the fourth quarter of 2009, TWC launched Road Runner
Mobiletm,
a wireless mobile broadband service, in several cities and
expects to continue the roll-out during 2010. The Company
estimates that it will incur “start up” losses of
approximately $50 million during 2010 in connection with
the deployment of this service.
As of December 31, 2009, TWC had approximately
4.2 million residential Digital Phone subscribers. TWC
expects increases in Digital Phone subscribers and revenues for
the foreseeable future; however, future Digital Phone subscriber
and revenue growth rates will depend on Digital Phone
penetration levels, competition, regulation, pricing, the rate
of wireless substitution of wireline phone service and the state
of the economy. TWC also offers its commercial Digital Phone
service, Business Class Phone, in nearly all of its
operating areas and had 67,000 commercial Digital Phone
subscribers as of December 31, 2009.
TWC faces intense competition for customers from a variety of
alternative communications, information and entertainment
delivery sources. TWC competes with incumbent local telephone
companies, including AT&T Inc. and Verizon Communications
Inc., across each of its primary services. Some of these
telephone companies offer a broad range of services with
features and functions comparable to those provided by TWC and
in bundles similar to those offered by TWC, sometimes with the
addition of wireless service. Each of TWC’s services also
faces competition from other companies that provide services on
a stand-alone basis. TWC’s video service faces competition
from direct broadcast satellite services, and increasingly from
companies that deliver content to consumers over the Internet.
TWC’s high-speed data service faces competition from
wireless data providers, and competition in voice service is
increasing as more homes in the U.S. are replacing their
wireline telephone service with wireless service. Technological
advances and product innovations have increased and will likely
continue to increase the number of alternatives available to
TWC’s customers, further intensifying competition. The more
competitive environment may negatively affect the growth of
primary service units and average monthly subscription revenues
per primary service unit and, additionally, may increase
TWC’s cost to obtain certain video programming.
Since the fourth quarter of 2008, the Company has experienced a
slowdown in growth across all primary service unit categories,
which the Company believes is in significant part a result of a
challenging economic environment. In particular, the Company
believes its subscriber growth has been negatively affected by
the slowdown in new home formation and high housing vacancy
rates, as well as high unemployment and the related reduction in
consumer spending.
Management believes that cash generated by or available to TWC
should be sufficient to fund its capital and liquidity needs for
the foreseeable future. As of December 31, 2009, the
Company had approximately $5.5 billion of unused committed
capacity (including cash and equivalents). Additionally, there
are no maturities of the Company’s long-term debt prior to
the February 2011 maturity of the Company’s
$5.875 billion senior unsecured five-year revolving credit
facility (the “Revolving Credit Facility”), which, as
of December 31, 2009, supported outstanding borrowings of
approximately $1.3 billion under the Company’s
commercial paper program. The Company expects to enter into a
new revolving credit agreement prior to the maturity of the
current Revolving Credit Facility. See “Financial Condition
and Liquidity” for further details regarding the
Company’s committed capacity.
On March 12, 2009, TWC’s separation from Time Warner
was completed pursuant to a Separation Agreement dated as of
May 20, 2008 (the “Separation Agreement”) between
TWC and Time Warner and certain of their subsidiaries. In
accordance with the Separation Agreement, on February 25,
2009, a subsidiary of Time Warner transferred its 12.43%
non-voting common stock interest in TW NY to TWC in exchange for
80 million newly issued shares (approximately
27 million shares after giving effect to the
1-for-3
reverse stock split discussed below) of TWC’s Class A
common stock (the “TW NY Exchange”). On March 12,
2009, TWC paid a special cash dividend of $10.27 per share
($30.81 per share after giving effect to the
1-for-3
reverse stock split, aggregating $10.856 billion) to
holders of record on
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TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
March 11, 2009 of TWC’s outstanding Class A
common stock and Class B common stock (the “Special
Dividend”). Following the payment of the Special Dividend,
each outstanding share of TWC Class A common stock and TWC
Class B common stock was automatically converted (the
“Recapitalization”) into one share of common stock,
par value $0.01 per share (the “TWC Common Stock”).
TWC’s separation from Time Warner (the
“Separation”) was effected as a pro rata dividend of
all shares of TWC Common Stock held by Time Warner to holders of
record of Time Warner’s common stock (the “Spin-Off
Dividend” or the “Distribution”). The TW NY
Exchange, the Special Dividend, the Recapitalization, the
Separation and the Distribution collectively are referred to as
the “Separation Transactions.”
To pay a portion of the Special Dividend, on March 12,
2009, TWC borrowed (i) the full committed amount of
$1.932 billion under its
364-day
senior unsecured term loan facility (the “2008 Bridge
Facility”) and (ii) approximately $3.3 billion
under the Revolving Credit Facility. The Company funded the
remainder of the Special Dividend with approximately
$5.6 billion of cash on hand. See “—2009 Bond
Offerings and Termination of Lending Commitments” below for
further details regarding the termination of the 2008 Bridge
Facility.
In connection with the Separation Transactions, on
March 12, 2009, the Company implemented a reverse stock
split of the TWC Common Stock (the “TWC Reverse Stock
Split”) at a
1-for-3
ratio, effective immediately after the Recapitalization. The
shares of TWC Common Stock distributed in the Spin-Off Dividend
reflected both the Recapitalization and the TWC Reverse Stock
Split.
During 2009 and 2008, the Company incurred pretax costs related
to the Separation, which have been reflected in the
Company’s consolidated statement of operations as follows
(in millions):
The Separation-related costs recorded in other income (expense),
net, consist of direct transaction costs (e.g., legal and
professional fees) and such costs recorded in interest expense,
net, consist of debt issuance costs. The debt issuance costs for
2009 primarily relate to the portion of the upfront loan fees
for the 2008 Bridge Facility that was recognized as expense due
to the repayment of all borrowings outstanding under, and the
resulting termination of, such facility with a portion of the
net proceeds of the March 2009 Bond Offering (as defined below).
In 2009, TWC issued, in total, $6.5 billion in aggregate
principal amount of senior unsecured notes and debentures under
a shelf registration statement on
Form S-3
in three public underwritten offerings (the “2009 Bond
Offerings”). The bond offering in March 2009 consisted of
$1.0 billion principal amount of 7.50% notes due 2014
and $2.0 billion principal amount of 8.25% notes due
2019 (the “March 2009 Bond Offering”). The bond
offering in June 2009 consisted of $1.5 billion principal
amount of 6.75% debentures due 2039 (the “June 2009
Bond Offering”). The bond offering in December 2009
consisted of $500 million principal amount of
3.50% notes due 2015 and $1.5 billion principal amount
of 5.00% notes due 2020 (the “December 2009 Bond
Offering”). TWC’s obligations under the debt
securities issued in the 2009 Bond Offerings are guaranteed by
Time Warner Entertainment Company, L.P. (“TWE”) and TW
NY.
The Company used $1.934 billion of the net proceeds from
the March 2009 Bond Offering to repay all of the borrowings
outstanding under the 2008 Bridge Facility, as well as accrued
interest and commitment fees, and such facility was terminated
by the parties thereto in accordance with its terms.
Additionally, as a result of the March 2009 Bond Offering and
the termination of the 2008 Bridge Facility, the Company
terminated Time Warner’s commitment (as lender) under a
two-year $1.535 billion senior unsecured supplemental term
loan facility in accordance with its terms. The Company used the
remaining net proceeds from the March 2009 Bond Offering to
repay a portion of the borrowings outstanding under the
Revolving Credit Facility.
The Company used the net proceeds of $1.444 billion from
the June 2009 Bond Offering and a portion of the net proceeds of
$1.957 billion from the December 2009 Bond Offering to
repay all of the outstanding borrowings under its five-year term
loan facility, which terminated in accordance with its terms as
a result of such repayment. The remaining net proceeds from the
December 2009 Bond Offering were used to repay a portion of the
borrowings outstanding under the Company’s commercial paper
program and for general corporate purposes.
See Note 7 to the accompanying consolidated financial
statements for further details regarding the 2009 Bond Offerings.
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TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
On January 27, 2010, the Company’s Board of Directors
declared a quarterly cash dividend on TWC Common Stock. The
quarterly dividend of $0.40 per share of TWC Common Stock,
representing the first payment of a planned annual dividend of
$1.60 per share, will be payable in cash on March 15, 2010
to stockholders of record at the close of business on
February 26, 2010.
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 residential and commercial subscriber
fees for the Company’s 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”), as well as fees for genre-based
programming tiers, such as movies, sports and Spanish language
tiers. Video revenues also include related equipment rental
charges, installation charges and franchise fees collected on
behalf of local franchising authorities. Additionally, video
revenues include revenues from premium channels, transactional
video-on-demand
(e.g., events and movies) and digital video recorder services.
Several ancillary items are also included within video revenues,
such as commissions earned on the sale of merchandise by home
shopping networks and revenues from home security services.
High-speed data revenues primarily include subscriber fees from
both residential and commercial subscribers, along with related
home networking fees and installation charges. High-speed data
revenues also include fees paid to TWC by (a) the
Advance/Newhouse Partnership for the ability to distribute
TWC’s Road
Runnertm
high-speed data service and TWC’s management of certain
functions for the Advance/Newhouse Partnership, including, among
others, programming and engineering, and (b) other
distributors of TWC’s Road Runner high-speed data service,
which together totaled $127 million, $139 million and
$132 million in 2009, 2008 and 2007, respectively. In
addition, high-speed data revenues include fees received from
third-party internet service providers whose
on-line
services are provided to some of TWC’s customers (e.g.,
Earthlink). Commercial high-speed data revenues also include
amounts generated by the sale of networking and transport
services (e.g., Metro Ethernet services and
point-to-point
transport services offered to wireless telephone providers,
Internet service providers and competitive carriers on a
wholesale basis).
Voice revenues include subscriber fees from residential and
commercial Digital Phone subscribers, along with related
installation charges. For the year ended December 31, 2007,
voice revenues also included subscriber fees from
circuit-switched telephone (9,000 subscribers as of
December 31, 2007). During the first half of 2008, TWC
completed the process of discontinuing the provision of
circuit-switched
telephone service in accordance with regulatory requirements.
Advertising revenues 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 the following costs directly
associated with the delivery of services to subscribers or the
maintenance of the Company’s delivery systems: video
programming costs; high-speed data connectivity costs and
certain high-speed data customer care support service costs;
voice network costs; other service-related expenses, including
non-administrative labor; franchise fees; and other related
costs.
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, marketing expenses, billing
system charges,
non-plant
repair and maintenance costs, other administrative overhead
costs and, prior to the Separation, fees paid to Time Warner for
reimbursement of certain administrative support functions.
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TIME
WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
In discussing its performance, the Company may use certain
measures that are not calculated and presented in accordance
with U.S. generally accepted accounting principles
(“GAAP”). These measures include OIBDA and Free Cash
Flow, which the Company defines as follows:
Management uses OIBDA, among other measures, in evaluating the
performance of the Company’s business because it eliminates
the effects of (1) considerable amounts of noncash
depreciation and amortization and (2) items not within the
control of the Company’s operations managers (such as net
income (loss) attributable to noncontrolling interests, income
tax benefit (provision), other income (expense), net, and
interest expense, net). Free Cash Flow is used as an important
indicator of the Company’s liquidity after the payment of
cash taxes, interest and other cash items, including its ability
to reduce net debt, pay dividends and make strategic
investments. Performance measures derived from OIBDA are also
used in the Company’s annual incentive compensation
programs. In addition, management believes that both of these
measures are commonly used by analysts, investors and others in
evaluating the Company’s performance and liquidity.
These measures have inherent limitations. For example, OIBDA
does not reflect capital expenditures or the periodic costs of
certain capitalized assets used in generating revenues. To
compensate for such limitations, management evaluates
performance through, among other measures, Free Cash Flow, which
reflects capital expenditure decisions and net income
attributable to TWC, which reflects the periodic costs of
capitalized assets. OIBDA also fails to reflect the significant
costs borne by the Company for income taxes and debt servicing
costs, the share of OIBDA attributable to noncontrolling
interests, the results of the Company’s equity investments
or other
non-operational
income or expense. Management compensates for these limitations
by using other analytics such as a review of net income (loss)
attributable to TWC. Free Cash Flow, a liquidity measure, does
not reflect payments made in connection with investments and
acquisitions, which reduce liquidity. To compensate for this
limitation, management evaluates such investments and
acquisitions through other measures such as return on investment
analyses.
These measures should be considered in addition to, not as
substitutes for, the Company’s Operating Income (Loss), net
income (loss) attributable to TWC 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.
In December 2007, the Financial Accounting Standards Board
issued authoritative guidance that establishes accounting and
reporting standards for a noncontrolling interest in a
subsidiary, including the accounting treatment upon the
deconsolidation of a subsidiary. This guidance became effective
for TWC on January 1, 2009 and has been applied
prospectively, except for the provisions related to the
presentation of noncontrolling interests, which have been
applied retrospectively for all periods presented. As required
by this guidance, the Company has recast the presentation of
noncontrolling interests in the prior year financial statements
so that they are comparable to those of 2009. Noncontrolling
interests of $1.110 billion as of December 31, 2008
were reclassified to a component of total equity as reflected in
the accompanying consolidated balance sheet. For the year ended
December 31, 2008, minority interest income of
$1.022 billion ($619 million, net of tax) and, for the
year ended December 31, 2007, minority interest expense of
$165 million ($99 million, net of tax) are excluded
from net income (loss) in the accompanying consolidated
statement of operations. Net income (loss) attributable to TWC
per common share for prior periods is not impacted.
In connection with the Separation Transactions, on
March 12, 2009, the Company implemented the TWC Reverse
Stock Split at a
1-for-3
ratio. The Company has recast the presentation of share and per
share data in the accompanying consolidated financial statements
to reflect the TWC Reverse Stock Split.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Certain reclassifications have been made to the prior
years’ financial information to conform to the
December 31, 2009 presentation.
See Note 2 to the accompanying consolidated financial
statements for other accounting standards adopted in 2009 and
accounting standards not yet adopted.
RESULTS
OF OPERATIONS
2009 vs.
2008
The following discussion provides an analysis of the
Company’s results of operations and should be read in
conjunction with the accompanying consolidated financial
statements and notes thereto.
Revenues. Revenues by major category were as follows
(in millions):
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
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 an increase in revenues from
digital video recorder service, video price increases and the
continued growth of digital video subscribers, which were
partially offset by a decrease in video subscribers (resulting,
in part, from the December 2008 sale of certain non-core cable
systems serving 78,000 video subscribers) and a decline in
premium channel subscribers and transactional
video-on-demand
revenues. Commercial video revenues were $252 million in
2009 compared to $239 million in 2008. 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 and an increase in cell tower
backhaul and Metro Ethernet revenues. Commercial high-speed data
revenues were $593 million in 2009 compared to
$526 million in 2008.
The increase in voice revenues was due to growth in Digital
Phone subscribers, partially offset by a decrease in average
revenues per subscriber. Commercial voice revenues were
$70 million in 2009 compared to $28 million in 2008.
Average monthly subscription revenues (which includes video,
high-speed data and voice revenues) per unit were as follows:
Advertising revenues decreased due to a decline in Advertising
revenues from national, regional and local businesses and
political advertising revenues. The Company expects that
Advertising revenues will increase in 2010 as compared to 2009
primarily due to an increase in political advertising revenues,
as well as an increase 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 5.0%, primarily related to increases
in video programming, employee and voice costs.
The increase in video programming costs was primarily due to
contractual rate increases, incremental costs associated with
the continued retransmission of certain local broadcast stations
and the expansion of service offerings, partially offset by a
decline in video and premium channel subscriptions. Average
programming costs per video subscriber increased 8.5% to $25.60
per month in 2009 from $23.60 per month in 2008.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Employee costs increased primarily due to an increase in pension
expense and employee medical and compensation expenses.
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.
Selling, general and administrative expenses. The
components of selling, general and administrative expenses were
as follows (in millions):
NM—Not meaningful.
Selling, general and administrative expenses decreased slightly
primarily as a result of lower bad debt expense, which declined
by $38 million in 2009 primarily due to improvement in
collection efforts and a reduction in the allowance for doubtful
accounts to reflect the quality of residential receivables as of
the end of 2009. The decrease in bad debt expense benefited both
the fourth quarter and full year 2009. Casualty insurance
expense in 2009 and 2008 included benefits of approximately
$11 million and $16 million, respectively, due to
changes in estimates of previously established casualty
insurance accruals. Employee costs in 2009 remained essentially
flat as an increase in pension expense was primarily offset by a
decrease in employee headcount.
As a result of the Separation, pursuant to their terms, Time
Warner equity awards held by TWC employees were forfeited
and/or
experienced a reduction in value. During 2009, the Company
recorded $9 million of costs associated with TWC stock
options and restricted stock units granted to its employees to
offset these forfeitures
and/or
reduced values.
Restructuring costs. The results for 2009 and 2008
included restructuring costs of $81 million and
$15 million, respectively. The Company eliminated
approximately 1,300 positions during 2009. The Company expects
to incur additional restructuring charges during 2010.
Impairment of cable franchise rights. During the
fourth quarter of 2008, the Company recorded a noncash
impairment charge 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. There was no such impairment charge in 2009. See
“Critical Accounting Policies—Asset
Impairments—Goodwill and Indefinite-lived Intangible
Assets” and Notes 3 and 10 to the accompanying
consolidated financial statements for further details on the
Company’s 2009 and 2008 impairment testing of cable
franchise rights.
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.
Reconciliation of Operating Income (Loss) before Depreciation
and Amortization to Operating Income (Loss). The
following table reconciles Operating Income (Loss) before
Depreciation and Amortization to Operating Income (Loss). In
addition, the table provides
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
the components from Operating Income (Loss) to net income (loss)
attributable to TWC for purposes of the discussions that follow
(in millions):
NM—Not meaningful.
Operating Income (Loss) before Depreciation and
Amortization. As discussed above, in 2009, Operating
Income before Depreciation and Amortization was impacted by
restructuring costs and Separation-related
“make-up”
equity award costs. In 2008, Operating Loss before Depreciation
and Amortization was impacted by the impairment of cable
franchise rights, the loss on sale of cable systems and
restructuring costs. Excluding these items, Operating Income
before Depreciation and Amortization increased principally as a
result of revenue growth, partially offset by higher costs of
revenues, as discussed above. Additionally, Operating Income
before Depreciation and Amortization in 2008 was negatively
impacted by $14 million of costs resulting from the impact
of Hurricane Ike on certain of the Company’s cable systems
in southeast Texas and Ohio.
Depreciation expense. The slight increase in
depreciation expense was primarily associated with continued
purchases of customer premise equipment, scalable infrastructure
and line extensions occurring during or subsequent to 2008,
partially offset primarily by certain property, plant and
equipment acquired in the 2006 transactions with Adelphia
Communications Corporation (“Adelphia”) and Comcast
Corporation (“Comcast”) (the “Adelphia/Comcast
Transactions”) that was fully depreciated as of
July 31, 2008. The Company expects depreciation expense to
increase in 2010 as compared to 2009 primarily as a result of
continued purchases of customer premise equipment, scalable
infrastructure and line extensions occurring during or
subsequent to 2009.
Amortization expense. Amortization expense in 2009
benefited from an approximate $13 million adjustment to
reduce excess amortization recorded in prior years. The Company
expects amortization expense to decrease in 2010 as compared to
2009 as a result of customer relationships acquired in the
Adelphia/Comcast Transactions becoming fully amortized during
the third quarter of 2010.
Operating Income (Loss). As discussed above, in
2009, Operating Income was impacted by restructuring costs and
Separation-related
“make-up”
equity award costs. In 2008, Operating Loss was impacted by the
impairment of cable franchise rights, the loss on sale of cable
systems and restructuring costs. Excluding these items,
Operating Income increased primarily due to the increase in
Operating Income before Depreciation and Amortization, as
discussed above.
Interest expense, net. Interest expense, net,
increased primarily due to higher average debt outstanding
during 2009. Additionally, interest expense, net, for 2009
included $13 million of debt issuance costs primarily
related to the portion of the upfront loan fees for the 2008
Bridge Facility that was recognized as expense due to the
repayment of all borrowings outstanding under, and the resulting
termination of, such facility with a portion of the net proceeds
of the March 2009 Bond Offering. Interest expense, net, for 2008
included $45 million of debt issuance costs primarily
related to the portion of the upfront loan fees for the 2008
Bridge Facility that was recognized as expense due to the
reduction of commitments under such facility as a result of the
public debt issuances in June 2008 and November 2008 (the
“2008 Bond Offerings”). The Company expects that
interest expense, net, will increase in 2010 primarily due to
higher average interest rates on outstanding debt.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Other expense, net. Other expense, net, detail is
shown in the table below (in millions):
Income tax benefit (provision). TWC’s income
tax benefit (provision) has been prepared as if the Company
operated as a
stand-alone
taxpayer for all periods presented. In 2009, the Company
recorded an income tax provision of $820 million and, in
2008, the Company recorded an income tax benefit of
$5.109 billion. The effective tax rate for 2009 was 42.9%,
which included the impact of the passage of the California state
budget during the first quarter of 2009 that, in part, changed
the methodology of income tax apportionment in California. This
tax law change resulted in an increase in state deferred tax
liabilities and a corresponding noncash tax provision of
$38 million. Absent this tax law change, the effective tax
rate for 2009 would have been 40.9%. The effective tax rate for
2008 was 39.1%, which included the impacts of the impairment of
cable franchise rights and the loss on sale of cable systems.
Absent these items, the effective tax rate for 2008 would have
been 44.2%. The decrease in the Company’s effective tax
rate for 2009 (excluding the California state tax law change in
2009 and the impairment of cable franchise rights and the loss
on sale of cable systems in 2008) was primarily due to the
tax impact of the 2008 impairment charge on the Company’s
investment in Clearwire Communications LLC, as discussed above.
Net (income) loss attributable to noncontrolling
interests. Net loss attributable to noncontrolling
interests in 2008 included the impacts of the impairment of
cable franchise rights and the loss on sale of cable systems, as
discussed above. Excluding these items, net income attributable
to noncontrolling interests decreased principally due to the
changes in the ownership structure of the Company as a result of
the TW NY Exchange, which occurred in February 2009.
Net income (loss) attributable to TWC and net income (loss)
attributable to TWC per common share. Net income (loss)
attributable to TWC and net income (loss) attributable to TWC
per common share were as follows for 2009 and 2008 (in millions,
except per share data):
NM—Not meaningful.
As discussed above, in 2009, net income attributable to TWC and
net income attributable to TWC per common share were impacted by
restructuring costs and Separation-related
“make-up”
equity award costs. In 2008, net loss attributable to TWC and
net loss attributable to TWC per common share were impacted by
the impairment of cable franchise rights, the loss on sale of
cable systems and restructuring costs. Excluding these items,
net income attributable to TWC and net income attributable to
TWC per common share increased primarily due to an increase in
Operating Income and decreases in other expense, net, and net
income attributable to noncontrolling interests, partially
offset by increases in interest expense, net, and income tax
provision, each as discussed above.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
2008 vs.
2007
The following discussion provides an analysis of the
Company’s results of operations and should be read in
conjunction with the accompanying consolidated financial
statements and notes thereto.
Revenues. Revenues by major category were as follows
(in millions):
Selected subscriber-related statistics were as follows (in
thousands):
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
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 an increase in revenues from
digital video recorder service, the continued growth of digital
video subscribers 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.
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.
Costs of revenues. The major components of costs of
revenues were as follows (in millions):
Costs of revenues increased 8.0%, primarily related to increases
in video programming, employee, voice and other direct operating
costs.
The increase in video programming costs was primarily due to
contractual rate increases and an increase in the percentage of
video subscribers who also subscribe to expanded tiers of video
services. Average programming costs per video subscriber
increased 7.1% to $23.60 per month in 2008 from $22.04 per month
in 2007.
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.
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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 Adelphia/Comcast
Transactions of $10 million.
Impairment of cable franchise rights. During the
fourth quarter of 2008, the Company recorded a noncash
impairment charge 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.
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.
Reconciliation of Operating Income (Loss) before Depreciation
and Amortization to Operating Income (Loss). The
following table reconciles Operating Income (Loss) before
Depreciation and Amortization to Operating Income (Loss). In
addition, the table provides the components from Operating
Income (Loss) to net income (loss) attributable to TWC for
purposes of the discussions that follow (in millions):
NM—Not meaningful.
Operating Income (Loss) before Depreciation and
Amortization. As discussed above, in 2008, Operating
Loss before Depreciation and Amortization was impacted by the
impairment of cable franchise rights, the loss on sale of cable
systems and restructuring costs. In 2007, Operating Income
before Depreciation and Amortization was impacted by
merger-related and restructuring costs. 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, Operating Income before Depreciation and
Amortization in 2008 was negatively impacted by $14 million
of costs resulting from the impact of Hurricane Ike on certain
of the Company’s cable systems in southeast Texas and Ohio.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
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, partially offset by
certain property, plant and equipment acquired in the
Adelphia/Comcast Transactions that was fully depreciated as of
July 31, 2008.
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). As discussed above, in
2008, Operating Loss was impacted by the impairment of cable
franchise rights, the loss on sale of cable systems and
restructuring costs. In 2007, Operating Income was impacted by
merger-related and restructuring costs. 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 recognized as expense 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.
Other income (expense), net. Other income (expense),
net, detail is shown in the table below (in millions):
Income tax benefit (provision). TWC’s income
tax benefit (provision) 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 $5.109 billion and, in
2007, the Company recorded an income tax provision of
$806 million. The effective tax rate was 39.1% in 2008,
which included the impacts of the impairment of cable franchise
rights and the loss on sale of cable systems, as compared to
39.7% in 2007. Absent these items, the effective tax rate for
2008 would have been 44.2%. The increase in the Company’s
effective tax rate for 2008 (excluding the impairment of cable
franchise rights and the loss on sale of cable systems) was
primarily due to the tax impact of the 2008 impairment charge on
the Company’s investment in Clearwire Communications LLC,
as discussed above.
Net (income) loss attributable to noncontrolling
interests. Net loss attributable to noncontrolling
interests in 2008 included the impacts of the impairment of
cable franchise rights and the loss on sale of cable systems, as
discussed above. Excluding these items, net income attributable
to noncontrolling interests increased primarily due to larger
profits recorded by TW NY during 2008.
Net income (loss) attributable to TWC and net income (loss)
attributable to TWC per common share. Net income (loss)
attributable to TWC and net income (loss) attributable to TWC
per common share were as follows for 2008 and 2007 (in millions,
except per share data):
NM—Not meaningful.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
As discussed above, in 2008, net loss attributable to TWC and
net loss attributable to TWC per common share were impacted by
the impairment of cable franchise rights, the loss on sale of
cable systems and restructuring costs. In 2007, net income
attributable to TWC and net income attributable to TWC per
common share were impacted by merger-related and restructuring
costs. Excluding these items, net income attributable to TWC and
net income attributable to TWC per common share decreased
primarily due to the change in other income (expense), net,
(which included the 2008 impairment on the Company’s
investment in Clearwire Communications LLC and the 2007 gain
resulting from the distribution of TKCCP’s assets) and
increases in net income attributable to noncontrolling interests
and interest expense, net, partially offset by an increase in
Operating Income and a decrease in income tax provision.
Management believes that cash generated by or available to TWC
should be sufficient to fund its capital and liquidity needs for
the foreseeable future. There are no maturities of the
Company’s long-term debt prior to the February 2011
maturity of the Revolving Credit Facility, which, as of
December 31, 2009, supported outstanding borrowings of
approximately $1.3 billion under the Company’s
commercial paper program. The Company expects to enter into a
new revolving credit agreement prior to the maturity of the
current Revolving Credit Facility. TWC’s sources of cash
include cash provided by operating activities, cash and
equivalents on hand, borrowing capacity under its committed
credit facility and commercial paper program, as well as access
to capital markets.
TWC’s unused committed capacity was $5.512 billion as
of December 31, 2009, reflecting $1.048 billion of
cash and equivalents and $4.464 billion of available
borrowing capacity under the Company’s $5.875 billion
Revolving Credit Facility.
As of December 31, 2009, the Company had
$22.331 billion of debt, $1.048 billion of cash and
equivalents (net debt of $21.283 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 $8.685 billion of total
TWC shareholders’ equity. 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),
$300 million of TW NY Cable Preferred Membership Units and
$17.164 billion of total TWC shareholders’ equity.
The following table shows the significant items contributing to
the increase in net debt from December 31, 2008 to
December 31, 2009 (in millions):
In 2008, TWC filed a shelf registration statement on
Form S-3
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 January 27, 2010, the Company’s Board of Directors
declared a quarterly cash dividend on TWC Common Stock. The
quarterly dividend of $0.40 per share of TWC Common Stock,
representing the first payment of a planned annual dividend of
$1.60 per share, will be payable in cash on March 15, 2010
to stockholders of record at the close of business on
February 26, 2010.
Included in prepaid expenses and other current assets in the
accompanying consolidated balance sheet as of December 31,
2009 is a $34 million net receivable from The Reserve
Fund’s Primary Fund (the “The Reserve Fund”). On
January 29, 2010, the Company received an additional
$33 million from The Reserve Fund reducing its remaining
net receivable to $1 million. See Note 18 to the
accompanying consolidated financial statements for additional
discussion of the Company’s investment in The Reserve Fund.
Cash
Flows
Cash and equivalents decreased $4.401 billion in 2009 and
increased $5.217 billion and $181 million in 2008 and
2007, respectively. Components of these changes are discussed
below in more detail.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Details of cash provided by operating activities are as follows
(in millions):
Cash provided by operating activities decreased from
$5.300 billion in 2008 to $5.179 billion in 2009. This
decrease was primarily related to an increase in net interest
payments and the change in working capital requirements,
partially offset by an increase in Operating Income before
Depreciation and Amortization excluding the noncash items noted
in the table above (as previously discussed) and the decrease in
pension plan contributions.
The increase in net interest payments resulted from higher
average debt outstanding during 2009, as well as the timing of
interest payments. The Company expects that its net interest
payments will increase in 2010 primarily as a result of the
timing of interest payments related to the 2009 Bond Offerings.
The Company contributed $160 million to its funded defined
benefit pension plans during 2009 and may make discretionary
cash contributions to its funded defined benefit pension plans
during 2010. See Note 14 to the accompanying consolidated
financial statements for additional discussion of the funded
status of the Company’s defined benefit pension plans.
Net income taxes paid during 2009 benefited from reimbursements
from Time Warner in accordance with a tax sharing arrangement
between TWC and Time Warner, as well as the impact of the
accelerated depreciation deductions provided by the American
Recovery and Reinvestment Act of 2009, partially offset by the
reversal of a portion of similar benefits received in 2008 from
the Economic Stimulus Act of 2008. These Acts provide for a
first year bonus depreciation deduction of 50% of the cost of
the Company’s qualified capital expenditures for the year.
The Company expects that net income taxes paid will increase
significantly in 2010, primarily due to the absence of bonus
depreciation (unless there is a legislative extension of bonus
depreciation) and the reversal of a portion of the bonus
depreciation benefits received in 2008 and 2009.
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 (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.
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Investing
Activities
Details of cash used by investing activities are as follows (in
millions):
Cash used by investing activities decreased from
$4.140 billion in 2008 to $3.307 billion in 2009. This
decrease was principally due to the change in investments and
acquisitions, net, and a decrease in capital expenditures. The
Company expects that capital expenditures will decrease to less
than $3.0 billion in 2010.
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 Communications 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 discussed above), as well as an
increase in capital expenditures.
TWC’s capital expenditures included the following major
categories (in millions):
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WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
TWC incurs expenditures associated with the construction of its
cable systems. Costs associated with the construction of
transmission and distribution facilities 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 customer premise equipment, which
includes set-top boxes and
high-speed
data and telephone modems, TWC capitalizes installation costs
only upon the initial deployment of these assets. All costs
incurred in subsequent disconnects and reconnects of previously
installed customer premise equipment 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.
Details of cash provided (used) by financing activities are as
follows (in millions):
Cash provided by financing activities was $4.057 billion in
2008 compared to cash used by financing activities of
$6.273 billion in 2009. Cash used by financing activities
in 2009 primarily included the payment of the Special Dividend,
partially offset by the net proceeds of the 2009 Bond Offerings
(after repayment of other debt). Cash provided by financing
activities in 2008 primarily included the net proceeds from the
2008 Bond Offerings, partially offset by repayments under the
Revolving Credit Facility and commercial paper program, the
repayment of TWE’s 7.25% debentures due
September 1, 2008 (aggregate principal amount of
$600 million), and debt issuance costs relating to the 2008
Bond Offerings and the 2008 Bridge Facility.
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 the net proceeds from the
2008 Bond Offerings, partially offset by repayments under the
Revolving Credit Facility and commercial paper program, the
repayment of TWE’s matured long-term debt (discussed
above), 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.
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):
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Free Cash Flow increased from $1.739 billion in 2008 to
$1.917 billion in 2009 primarily as a result of a decrease
in capital expenditures, partially offset by a decrease in cash
provided by operating activities, as discussed above.
Free Cash Flow increased from $1.024 billion in 2007 to
$1.739 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.
Debt and mandatorily redeemable preferred equity as of
December 31, 2009 and 2008 were as follows:
See “Overview—Recent Developments—2009 Bond
Offerings and Termination of Lending Commitments” 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.
Lehman Brothers Bank, FSB (“LBB”), a subsidiary of
Lehman Brothers Holding Inc. (“Lehman”), was a lender
under the Revolving Credit Facility. 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. On March 3, 2009,
the Company entered into an amendment to the Revolving Credit
Facility to terminate LBB’s $125 million commitment
under such facility. As a result of this termination, the
borrowing capacity under the Revolving Credit Facility was
reduced from $6.000 billion to $5.875 billion.
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.
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The following table summarizes the Company’s aggregate
contractual obligations as of December 31, 2009, and the
estimated timing and effect that such obligations are expected
to have on the Company’s liquidity and cash flows in future
periods (in millions):
The Company’s total rent expense, which primarily includes
facility rental expense and pole attachment rental fees,
amounted to $212 million in 2009, $190 million in 2008
and $182 million in 2007.
Minimum pension funding requirements have not been presented as
such amounts have not been determined beyond 2009. The Company
did not have a required minimum pension contribution obligation
for its funded defined benefit pension plans in 2009; however,
the Company made discretionary cash contributions of
$160 million to these plans during 2009 and may make
discretionary cash contributions to these plans in 2010.
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, 2009 and 2008 totaled $313 million
and $288 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.
Market risk is the potential gain/loss arising from changes in
market rates and prices, such as interest rates.
As of December 31, 2009, TWC had fixed-rate debt and TW NY
Cable Preferred Membership Units with an outstanding balance of
$21.371 billion (excluding the estimated fair value of the
interest rate derivative transactions discussed below) and an
estimated fair value
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of $23.639 billion. Based on TWC’s fixed-rate debt
obligations outstanding at December 31, 2009, 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
$427 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.
As of December 31, 2009, TWC had an outstanding balance of
variable-rate debt of $1.261 billion. Based on TWC’s
variable-rate debt obligations outstanding at December 31,
2009, 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 $3 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.
The Company is exposed to the market risk of adverse changes in
interest rates. To manage the volatility relating to these
exposures, the Company’s policy is to maintain a mix of
fixed-rate and variable-rate debt by entering into various
interest rate derivative transactions as described below to help
achieve that mix. Using interest rate swaps, the Company agrees
to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated by reference to
an
agreed-upon
notional principal amount.
The following table summarizes the terms of the Company’s
existing fixed to variable interest rate swaps as of
December 31, 2009:
The notional amounts of interest rate instruments, as presented
in the above table, are used to measure interest to be paid or
received and do not represent the amount of exposure to credit
loss. Interest rate swaps represent an integral part of the
Company’s interest rate risk management program, with a
benefit to interest expense, net, in 2009 of $30 million.
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, 2009, TWC had
$975 million of investments, which included
$691 million related to SpectrumCo LLC and
$207 million related to Clearwire Communications LLC.
Prior to 2007, some of TWC’s employees were 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. Upon the exercise of Time Warner
stock options held by TWC employees, TWC is obligated to
reimburse Time Warner for the excess of the market price of Time
Warner common stock on the day of exercise over the option
exercise price (the “intrinsic” value of the award).
Prior to the Separation, TWC recorded an equity award
reimbursement obligation for the intrinsic value of vested and
outstanding Time Warner stock options held by TWC employees.
This liability was adjusted each reporting period to reflect
changes in the market price of Time Warner common stock and the
number of Time Warner stock options held by TWC employees with
an offsetting adjustment to TWC shareholders’ equity.
Beginning on March 12, 2009, the date of the Separation,
TWC began accounting for the equity award reimbursement
obligation as a derivative financial instrument because, as of
such date, Time Warner is no longer a controlling shareholder of
the Company. The Company records the equity award reimbursement
obligation at fair value in the consolidated balance sheet,
which is estimated using the
Black-Scholes
model, and, on March 12, 2009, TWC established a liability
of $16 million for the fair value of the equity award
reimbursement obligation in other liabilities with an offsetting
adjustment to TWC shareholders’ equity in the consolidated
balance sheet. The change in the equity award reimbursement
obligation fluctuates primarily with the fair value and expected
volatility of Time Warner common stock and is recorded in
earnings in the period of change. For the year ended
December 31, 2009, TWC recognized a loss of
$21 million in other income
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(expense), net, in the consolidated statement of operations for
the change in the fair value of the equity award reimbursement
obligation after the Separation.
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.
Asset
Impairments
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. In 2009,
there were no significant investment impairment charges.
Long-lived assets (e.g., 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. The impairment
charge 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 charge 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 2009,
there were no significant long-lived asset impairment charges.
Goodwill is tested annually for impairment during the fourth
quarter or earlier upon occurrence of a triggering event.
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
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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 charge is recognized
in an amount equal to that excess.
Other intangible assets not subject to amortization, primarily
cable franchise rights, are tested annually for impairment
during the fourth quarter or earlier upon the occurrence of a
triggering event. 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 charge 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.
The Company’s 2009 impairment analysis, which was performed
as of December 31, 2009, did not result in any goodwill or
cable franchise rights impairment charges. The carrying value of
the cable franchise rights and goodwill by unit of accounting as
of December 31, 2009, is as follows (in millions):
As a result of the $14.822 billion cable franchise rights
impairment charge taken in 2008, the carrying values of the
Company’s impaired cable franchise rights (which
represented the cable franchise rights in all of the
Company’s eight units of accounting except for Kansas City)
were re-set to their estimated fair values as of
December 31, 2008. Management believes that the fair value
of its cable franchise rights increased during 2009 across all
reporting units and as a result, the Company did not record any
cable franchise rights impairment charges. However, it is
possible that impairment charges may be recorded in the future
to reflect potential declines in fair value. Such impairment
charges, if required, could be material.
To illustrate the extent that the fair value of the cable
franchise rights exceeded their carrying value as of
December 31, 2009, had the fair values of each of the cable
franchise rights been lower by 15%, the Company still would not
have recorded an impairment charge. Similarly, a decline in the
fair values of the reporting units by up to 30% would not have
resulted in any goodwill impairment charges.
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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 when the loss from such proceedings and claims becomes
probable and reasonably estimable. 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 income 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 income tax
positions as part of income tax expense. Refer to Note 12
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 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.
Significant judgment is also involved when the Company enters
into agreements that result in the Company receiving cash
consideration from the programming vendor, usually in the form
of advertising sales, channel positioning fees, launch support
or marketing support. In these situations, management must
determine based upon facts and circumstances if such cash
consideration should be recorded as revenue, a reduction in
programming expense or a reduction in another expense category
(e.g., marketing).
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Company recognized pension expense associated with these plans
of $162 million, $91 million and $64 million in
2009, 2008 and 2007, respectively. The Company expects pension
expense to be approximately $130 million in 2010. 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 expected rate of compensation increases.
TWC uses a December 31 measurement date for its plans. See
Notes 3 and 14 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 6.17% to compute 2009
pension expense, which was determined by the matching of plan
liability cash flows to a pension yield curve constructed of a
large population of high-quality corporate bonds. A decrease in
the discount rate of 25 basis points, from 6.17% to 5.92%,
while holding all other assumptions constant, would have
resulted in an increase in the Company’s pension expense of
approximately $15 million in 2009.
The Company’s expected long-term rate of return on plan
assets used to compute 2009 pension expense was 8.00%. 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 was based on the
2008 asset allocation targets. 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 2009.
The Company used an estimated rate of future compensation
increases of 4.00% to compute 2009 pension expense. An increase
in the rate of 25 basis points, from 4.00% to 4.25%, while
holding all other assumptions constant, would have resulted in
an increase in the Company’s pension expense of
approximately $4 million in 2009.
TWC incurs expenditures associated with the construction of its
cable systems. Costs associated with the construction of
transmission and distribution facilities 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. The
capitalization standards are reviewed at least annually and
adjusted, if necessary, based on comparisons to actual costs
incurred.
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:
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WARNER CABLE INC.
CONSOLIDATED BALANCE SHEET
See accompanying notes.
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WARNER CABLE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
See accompanying notes.
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WARNER CABLE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
See accompanying notes.
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CONSOLIDATED STATEMENT OF EQUITY
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