Time Warner Cable 2007 Annual Report Download - page 77

of the incurred expenses. Additionally, costs related to any acquisition and subsequent distribution to Time Warner
would also be treated as an expense of discontinued operations to be reimbursed by Time Warner.
In November 2007, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings downgraded their credit
ratings for Six Flags. To date, no payments have been made by Historic TW or TWE pursuant to the Six Flags
Guarantee. In its quarterly report on Form 10-Q for the period ended September 30, 2007, Six Flags reported an
estimated maximum Cumulative LP Unit Purchase Obligation for 2008 of approximately $305 million. The
aggregate undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the
remaining term of the agreements are approximately $1.4 billion. Six Flags has also disclosed that it has deposited
approximately $13 million in an escrow account as a source of funds in the event Historic Time Warner or TWE is
required to fund any portion of the Guaranteed Obligations in the future.
Because the Six Flags Guarantee existed prior to the Company’s adoption of FASB Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (“FIN 45”), and no modifications to the arrangements have been made since the date
the guarantee came into existence, the recognition requirements of FIN 45 are not applicable to the arrangements
and the Company has continued to account for the Guaranteed Obligations in accordance with FASB Statement
No. 5, Accounting for Contingencies. Based on its evaluation of the current facts and circumstances surrounding the
Guaranteed Obligations and the Subordinated Indemnity Agreement (including the recent financial performance
reported for the Parks and by Six Flags), the Company has concluded that a probable loss does not exist and
consequently, no liability for the arrangements has been recognized at December 31, 2007. Because of the specific
circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of
financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and
related Subordinated Indemnity Agreement.
Other Contingent Commitments
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, 2007
and 2006 totaled $299 million and $328 million, respectively. Payments under these arrangements are required only
in the event of nonperformance. TWC does not expect that these contingent commitments will result in any amounts
being paid in the foreseeable future.
TWC is required to make cash distributions to Time Warner when employees of the Company exercise
previously issued Time Warner stock options. For more information, see “Market Risk Management—Equity Risk”
below.
MARKET RISK MANAGEMENT
Market risk is the potential gain/loss arising from changes in market rates and prices, such as interest rates.
Interest Rate Risk
Variable-rate Debt
As of December 31, 2007, TWC had an outstanding balance of variable-rate debt of $5.256 billion, which
excludes an unamortized discount adjustment of $5 million. Based on TWC’s variable-rate obligations outstanding
at December 31, 2007, 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 $13 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.
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TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)