Time Warner Cable 2010 Annual Report Download - page 74

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event of nonperformance. TWC does not expect that these contingent commitments will result in any amounts being paid
in the foreseeable future.
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
Fixed-rate Debt and TW NY Cable Preferred Membership Units
As of December 31, 2010, TWC had fixed-rate debt and TW NY Cable Preferred Membership Units with an
outstanding balance of $23.242 billion (excluding the estimated fair value of the interest rate derivative transactions
discussed below) and an estimated fair value of $26.236 billion. Based on TWC’s fixed-rate debt obligations outstanding
at December 31, 2010, 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 $471 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.
Variable-rate Debt
As of December 31, 2010, TWC had no outstanding variable-rate debt.
Interest Rate Derivative Transactions
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, 2010:
Maturities ..................................................................... 2012-2017
Notional amount (in millions) ...................................................... $ 6,250
Average pay rate (variable based on LIBOR plus variable margins) ........................... 4.33%
Average receive rate (fixed) ........................................................ 6.47%
Estimated fair value of asset, net (in millions) . . . ....................................... $ 176
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 and resulted in a decrease in interest expense, net, of $117 million
in 2010.
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 companies for operational and strategic business purposes. These investments are subject to
significant fluctuations in fair market value. As of December 31, 2010, TWC had $866 million of investments, which
included $692 million related to SpectrumCo and $94 million related to Clearwire Communications LLC. See “Critical
62
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)