Virgin Media 2009 Annual Report Download - page 32

dollar and euro-denominated debt will be higher. Changes in the exchange rate result in foreign
currency gains or losses.
We are also subject to interest rate risks. Before taking into account the impact of current hedging
arrangements, as of December 31, 2009, we would have had interest determined on a variable basis on
£3,112.8 million, or 52.1%, of our long term debt. An increase in interest rates of 0.25% would increase
unhedged gross interest expense by approximately £7.8 million per year.
To manage these currency exchange and interest rate risks, we have entered into a number of
derivative instruments, including interest rate swaps, cross-currency swaps and foreign currency forward
rate contracts. Some of these hedges do not qualify as hedges under U.S. GAAP. After giving effect to
these hedges, an increase in interest rates of 0.25% would increase our gross interest expense by
approximately £0.3 million per year.
We also incur costs in U.S. dollars, euros and South African rand, in the ordinary course of our
business, such as TV programming, customer premise equipment and network maintenance services.
Any deterioration in the value of the pound relative to the U.S. dollar, euro or the rand increases the
effective cost of purchases made in these currencies as most of these exposures are not hedged.
We rely on third parties to distribute our mobile telephony products and procure customers for our services.
Our ability to distribute our mobile telephony products and services depends, to a large extent, on
securing and maintaining agreements with a number of third party distributors and increasing our retail
presence. These distributors also procure customers for our competitors and, in some cases, for
themselves. For example, one of our third-party distributors also sells its own broadband and telephone
services. Additionally, certain distributors may also receive incentives to encourage potential customers
to subscribe to our competitors’ services rather than our own. Our agreements with third-party
distributors generally allow for termination of the relationship by either party, with 30 days prior notice.
We are also exposed to risks associated with the potential financial instability of third-party distributors,
some of whom may be adversely affected by the general economic downturn. While we are currently
expanding our portfolio of Virgin Media branded retail outlets, our stores may not perform
successfully. Accordingly, if any of our distribution partners were to reduce or cease their operations,
due to financial difficulties or otherwise, or if we fail to maintain our key distribution relationships, our
revenue may decline.
We are subject to significant regulation; changes in U.K. and EU laws, regulations or governmental policy
affecting the conduct of our business may have an adverse impact on our ability to set prices, enter new
markets or control our costs.
Our principal business activities are regulated and supervised by Ofcom and the U.K. Office of
Fair Trading, among other regulators. Regulatory change is an ongoing process in the communications
sector at both the U.K. and the EU level. Changes in laws, regulations or governmental policy affecting
our activities and those of our competitors could significantly influence how we operate our business
and introduce new products and services. For example, regulatory changes relating to our activities and
those of our competitors, such as changes relating to third party access to cable networks, the costs of
interconnection with other networks or the prices of competing products and services, or any change in
policy allowing more favorable conditions for other operators, could adversely affect our ability to set
prices, enter new markets or control our costs. Our ability to introduce new products and services may
also be affected if we cannot predict how existing or future laws, regulations or policies would apply to
such products or services. In addition, our business and the industry in which we operate are subject to
investigation by regulators, which could lead to enforcement actions, fines and penalties or the
assertion of private litigation claims and damages. Any such action could harm our reputation and
result in increased costs to the business.
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