Time Warner Cable 2006 Annual Report Download - page 97

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MARKET RISK MANAGEMENT
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates
and changes in the market value of investments.
Interest Rate Risk
Variable-rate Debt
As of December 31, 2006, TWC had an outstanding balance of variable-rate debt of $11.077 billion, which
excludes an unamortized discount adjustment of $17 million. Based on the variable-rate obligations outstanding at
December 31, 2006, 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 $28 million.
These potential increases or decreases are based on simplifying assumptions, including a constant level of variable-
rate debt for all maturities and an immediate, across-the-yield curve increase or decrease in the level of interest rates
with no other subsequent changes for the remainder of the periods.
Fixed-rate Debt
As of December 31, 2006, TWC had approximately $3.640 billion of fixed-rate debt and TW NY Series A
Preferred Membership Units, including an amortized fair value adjustment of $140 million. Based on the fixed-rate
debt obligations outstanding at December 31, 2006, a 25 basis point increase or decrease in the level of interest
would, respectively, increase or decrease the fair value of the fixed-rate debt by approximately $77 million. These
potential increases or decreases are based on simplifying assumptions, including a constant level and rate 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 periods.
Equity Risk
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 private companies for operational and strategic business purposes. These investments are
subject to significant fluctuations in fair market value due to volatility of the industries in which the companies
operate. As of December 31, 2006, TWC had approximately $2.072 billion of investments, which included
$1.363 billion related to TKCCP, whose assets were distributed to its partners on January 1, 2007. Refer to “Recent
Developments” for further details.
Some of TWC’s employees have been granted options to purchase shares of Time Warner common stock in
connection with their past employment with subsidiaries and affiliates of Time Warner. TWC has agreed that, upon
the exercise by any of its officers or employees of any options to purchase Time Warner common stock, TWC will
reimburse Time Warner in an amount equal to the excess of the closing price of a share of Time Warner common
stock on the date of the exercise of the option over the aggregate exercise price paid by the exercising officer or
employee for each share of Time Warner common stock. At December 31, 2006, TWC had accrued approximately
$137 million of stock option distributions payable to Time Warner. That amount, which is not payable until the
underlying options are exercised and then only subject to limitations on cash distributions in accordance with the
senior unsecured revolving credit facilities, will be adjusted in subsequent accounting periods based on changes in
the quoted market prices for Time Warner’s common stock. See Note 4 to the accompanying consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES
The SEC considers an accounting policy to be critical if it is important to the Company’s financial condition
and results, and if it requires significant judgment and estimates on the part of management in its application. The
92
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION — (Continued)