Virgin Media 2010 Annual Report Download - page 88
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency exchange rates and interest
rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. As some of our indebtedness accrues interest at variable rates, we have
exposure to volatility in future cash flows and earnings associated with variable interest rate payments.
Also, substantially all of our revenues, operating costs and selling, general and administrative expenses are
earned and paid in pounds sterling but we pay interest and principal obligations on some of our indebtedness in
U.S. dollars and euros. As of December 31, 2010, £2,884.8 million, or 46.6%, of our indebtedness based upon
contractual obligations, was denominated in U.S. dollars and £154.3 million, or 2.5%, of our indebtedness based
upon contractual obligations, was denominated in euros. As a result, we have exposure to volatility in future cash
flows and earnings associated with changes in foreign exchange rates on payments of principal and interest on a
portion of our indebtedness. We have also committed and forecasted purchases of goods and services in U.S.
dollars, euros and South African rand.
To mitigate the risk from these exposures, we have implemented a cash flow hedging program. The
objective of this program is to reduce but not eliminate the volatility of our cash flows and earnings caused by
changes in underlying rates. To achieve this objective we have entered into a number of derivative instruments.
The derivative instruments utilized comprise interest rate swaps, cross-currency interest rate swaps and foreign
currency forward contracts. We do not enter into derivative instruments for trading or speculative purposes. See
note 10 to the consolidated financial statements of Virgin Media Inc. and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Derivative Instruments and Hedging Activities”.
The fair market value of long term fixed interest rate debt and the amount of future interest payments on
variable interest rate debt are subject to interest rate risk
85