Time Warner Cable 2006 Annual Report Download - page 68

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including the gains discussed above, have been reflected as discontinued operations in the consolidated statement of
operations for all periods presented. See Note 5 to the accompanying consolidated financial statements for
additional information regarding the discontinued operations.
As a result of the closing of the Transactions, TWC gained systems with approximately 3.2 million net basic
video subscribers. As of February 23, 2007, Time Warner owns 84.0% of TWC’s outstanding common stock
(including 82.7% of TWC’s outstanding Class A common stock and all outstanding shares of TWC’s Class B
common stock), as well as an approximately 12.4% non-voting common stock interest in TW NY Holding.
Comcast no longer has an interest in TWC or TWE. As a result of the TWE Redemption and the ATC Contribution,
two of TWC’s subsidiaries are the sole general and limited partners of TWE.
Tax Benefits from the Transactions
The Adelphia Acquisition was designed to be a taxable acquisition of assets that would result in a tax basis in
the acquired assets equal to the purchase price paid. The depreciation and amortization deductions resulting from
this step-up in the tax basis of the assets would reduce future net cash tax payments and thereby increase the
Company’s future cash flows. The Company believes that most cable operators have a tax basis that is below the fair
market value of their cable systems and, accordingly, the Company has viewed a portion of its tax basis in the
acquired assets as incremental value above the amount of basis more generally associated with cable systems. The
tax benefit of such incremental step-up would reduce net cash tax payments by more than $300 million per year,
assuming the following: (i) incremental step-up relating to 85% of a $14.4 billion purchase price (which assumes
that 15% of the fair market value of cable systems represents a typical amount of basis), (ii) straight-line
amortization deductions over 15 years, (iii) sufficient taxable income to utilize the amortization deductions, and
(iv) a 40% effective tax rate. The Internal Revenue Service (the “IRS”) or state or local tax authorities might
challenge the anticipated tax characterizations or related valuations, and any successful challenge could materially
adversely affect the Company’s tax profile (including its ability to recognize the intended tax benefits from the
Transactions), significantly increase the Company’s future cash tax payments and significantly reduce the
Company’s future earnings and cash flow.
Also, the TWC Redemption was designed to qualify as a tax-free split-off under section 355 of the Tax Code. If
the IRS were successful in challenging the tax-free characterization of the TWC Redemption, an additional cash
liability on account of taxes of up to an estimated $900 million could become payable by the Company.
FCC Order Approving the Transactions
In its order approving the Adelphia Acquisition, the Federal Communications Commission (the “FCC”)
imposed conditions on TWC related to regional sports networks (“RSNs”), as defined in the order, and the
resolution of disputes pursuant to the FCC’s leased access regulations. In particular, the order provides that:
• neither TWC nor its affiliates may offer an affiliated RSN on an exclusive basis to any multichannel video
programming distributor (“MVPD”);
• 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;
• 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;
• if an unaffiliated RSN is denied carriage by TWC, it may elect commercial arbitration to resolve the
dispute; and
• 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.
63
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION — (Continued)