Time Warner Cable 2006 Annual Report Download - page 80

Developments — Dissolution of TKCCP” for selected operating statement information for the Kansas City Pool for
the years ended December 31, 2006 and 2005.
Interest expense, net. Interest expense, net, increased to $646 million in 2006 from $464 million in 2005
primarily due to an increase in debt levels attributable to the Transactions.
Income from equity investments, net. Income from equity investments, net, increased to $129 million in 2006
from $43 million in 2005. This increase was primarily due to an increase in the profitability of TKCCP, as well as
changes in the economic benefit of TWE’s partnership interest in TKCCP due to the pending dissolution of the
partnership triggered by Comcast on July 3, 2006. Beginning in the third quarter of 2006, the income from TKCCP
reflects 100% of the operations of the Kansas City Pool and does not reflect any of the economic benefits of the
Houston Pool. In addition, income from equity investments, net reflects the benefit from the allocation of all the
TKCCP debt to the Houston Pool, which reduced interest expense for the Kansas City Pool. TWC received the
Kansas City Pool on January 1, 2007 in the TKCCP asset distribution and began consolidating its results on that
date.
Minority interest expense, net. Minority interest expense, net, increased to $108 million in 2006 from
$64 million in 2005. This increase primarily reflects a change in the ownership structure of the Company and TWE.
At December 31, 2005, ATC, a subsidiary of Time Warner, and Comcast had residual equity ownership interests in
TWE of 1% and 4.7%, respectively. On July 28, 2006, ATC contributed its 1% common equity interest (as well as its
$2.4 billion preferred equity interest) in TWE to TW NY Holding in exchange for an approximately 12.4% non-
voting common stock interest in TW NY Holding. On July 31, 2006, the Company and TWE redeemed Comcast’s
ownership interests in the Company and TWE, respectively.
Income tax provision. TWC’s income tax provision has been prepared as if the Company operated as a stand-
alone taxpayer for all periods presented. In 2006 and 2005, the Company recorded income tax provisions of
$620 million and $153 million, respectively. The effective tax rate was approximately 40% in 2006 compared to
approximately 12% in 2005. The increase in the effective tax rate was primarily due to the favorable impact in 2005
of state tax law changes in Ohio, an ownership restructuring in Texas and certain other methodology changes. The
income tax provision for 2005, absent the noted deferred tax impacts, would have been $532 million, with a related
effective tax rate of approximately 41%.
Income before discontinued operations and cumulative effect of accounting change. Income before dis-
continued operations and cumulative effect of accounting change was $936 million in 2006 compared to
$1.149 billion in 2005. Basic and diluted income per common share before discontinued operations and cumulative
effect of accounting change were $0.95 in 2006 compared to $1.15 in 2005. These decreases were primarily due to
the increase in the income tax provision, discussed above, and higher interest expense, partially offset by increased
Operating Income and income from equity investments, net.
Discontinued operations, net of tax. Discontinued operations, net of tax, reflect the impact of treating the
Transferred Systems as discontinued operations. For the years ended December 31, 2006 and 2005, the Company
recognized pretax income applicable to these systems of $285 million and $163 million, respectively, ($1.038 bil-
lion and $104 million, respectively, net of tax). Included in the 2006 results are a pretax gain of approximately
$165 million on the Transferred Systems and a tax benefit of approximately $800 million comprised of a tax benefit
of $814 million on the Redemptions, partially offset by a provision of $14 million on the Exchange. The tax benefit
of $814 million resulted primarily from the reversal of historical deferred tax liabilities that had existed on systems
transferred to Comcast in the TWC Redemption. The TWC Redemption was designed to qualify as a tax-free split-
off under section 355 of the Tax Code, and as a result, such liabilities were no longer required. However, 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. See “Recent
Developments — Tax Benefits from the Transactions.”
75
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION — (Continued)