Time Warner Cable 2012 Annual Report Download - page 77

TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with,
the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated income tax
provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate and any
related estimated interest. The Company’s policy is to recognize, when applicable, interest and penalties on uncertain income
tax positions as part of income tax provision. Refer to Note 16 to the accompanying consolidated financial statements for
further details.
Legal Contingencies
The Company is subject to legal, regulatory and other proceedings and claims that arise in the ordinary course of
business. The Company records an estimated liability for those proceedings and claims arising in the ordinary course of
business when the loss from such proceedings and claims becomes probable and reasonably estimable. The Company
reviews outstanding claims with internal and external counsel to assess the probability and the estimates of loss, including
the possible range of an estimated loss. The Company reassesses the risk of loss as new information becomes available and
adjusts liabilities as appropriate. The actual cost of resolving a claim may be substantially different from the amount of the
liability recorded. Differences between the estimated and actual amounts determined upon ultimate resolution, individually
or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but
could possibly be material to the Company’s consolidated results of operations or cash flow for any one period.
Pension Plans
TWC sponsors two qualified defined benefit pension plans covering a majority of its employees. TWC also provides a
nonqualified defined benefit pension plan for certain employees. Pension benefits are based on formulas that reflect the
employees’ years of service and compensation during their employment period. The Company recognized pension expense
associated with these plans of $183 million, $123 million and $117 million in 2012, 2011 and 2010, respectively. The
pension expense recognized by the Company is determined using certain assumptions, including the expected long-term rate
of return on plan assets, the interest factor implied by the discount rate and the expected rate of compensation increases.
TWC uses a December 31 measurement date for its pension plans. See Notes 3 and 14 to the accompanying consolidated
financial statements for additional discussion. The determination of these assumptions is discussed in more detail below.
The Company used a discount rate of 5.21% to compute 2012 pension expense, which was determined by the matching
of plan liability cash flows to a portfolio of bonds individually selected from a large population of high-quality corporate
bonds. A decrease in the discount rate of 25 basis points, from 5.21% to 4.96% while holding all other assumptions constant,
would have resulted in an increase in the Company’s pension expense of approximately $23 million in 2012.
The Company’s expected long-term rate of return on plan assets used to compute 2012 pension expense was 7.75%. In
developing the expected long-term rate of return on assets, the Company considered the pension portfolio’s composition, past
average rate of earnings, discussions with portfolio managers and the Company’s asset allocation targets. A decrease in the
expected long-term rate of return of 25 basis points, from 7.75% to 7.50%, while holding all other assumptions constant,
would have resulted in an increase in the Company’s pension expense of approximately $5 million in 2012.
The Company used an estimated rate of future compensation increases of 5.25% to compute 2012 pension expense. A
decrease in the rate of 25 basis points, from 5.25% to 5.00%, while holding all other assumptions constant, would have
resulted in a decrease in the Company’s pension expense of approximately $9 million in 2012.
The Company expects pension expense to be approximately $220 million in 2013 based on a discount rate of 4.31%, an
expected long-term rate of return on plan assets of 7.50% and an estimated rate of future compensation increases of 4.75%.
Programming Agreements
The Company exercises significant judgment in estimating programming expense associated with certain video
programming contracts. The Company’s policy is to record video programming costs based on the Company’s contractual
agreements with its programming vendors, which are generally multi-year agreements that provide for the Company to make
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