Virgin Media 2012 Annual Report Download - page 176

F-105
loss position over the most recent three year period. While there has been a trend of positive evidence that has been
strengthening in recent years, it was not sufficiently persuasive to outweigh the negative evidence provided by our
cumulative pre-tax loss position. During the year ended December 31, 2012, we emerged from a cumulative pre-tax
loss position in the U.K. for the first time, which removed this important piece of negative evidence from our evaluation.
Our assessment for the year ended December 31, 2012 considered the following positive and negative evidence.
Based on this evidence, we concluded that it was more likely than not that in future periods we will generate sufficient
pre-tax income to utilize substantially all of our U.K. deferred tax assets relating to capital allowances and NOLs:
Positive evidence:
• We have now generated pre-tax income in the U.K. of more than £150 million for two consecutive years
and have utilized some of our available tax assets to reduce the tax liabilities that would have otherwise
arisen in those periods.
• Our U.K. capital allowances and NOLs do not have an expiration date.
• Our financial performance has continued to improve despite challenging macroeconomic conditions.
Steady growth in revenue and operating income has been maintained for three years, and we believe that
financial performance will continue to improve even if the current economic conditions persist.
• Our forecasts of future taxable income indicate that our pre-tax income and taxable income will increase
in the future.
• We have re-financed a significant portion of our high-coupon debt into lower-coupon, longer duration debt
in recent years.
Negative evidence:
In the absence of a cumulative loss in the last three years, the remaining negative evidence consists solely of our long
history of significant pre-tax losses prior to 2011, dating back many years prior to the merger with Telewest in 2006.
In total, our U.K. group companies have approximately £377.2 million of deferred tax assets on £1,639.9 million of
NOLs which accumulated over many years. We believe that the combined impact of a number of company specific
and industry specific developments over recent years makes it unlikely that those historic losses will be repeated in
the future. These include:
Company specific factors:
• The significant investment associated with building our unique cable network does not need to be replicated.
Instead, we are able to spend relatively more modest sums to gradually upgrade and improve that network.
• We have established ourselves as one of the major telecommunication service providers in the U.K.,
offering leading next generation broadband and television services which has enabled us to steadily and
economically grow revenues.
• Significant restructuring and rationalization activities subsequent to the Telewest merger have reduced
our cost base and focused the business on its core activities. This allowed us to leverage our network into
financial returns and generate consistently improving operating margins.
• There has been a material improvement in our credit standing in recent years, including certain of our
debt being rated investment grade, which has allowed us to reduce and lock-in lower interest rates.
Industry specific factors:
• The cable and telecommunications markets have matured since the late 1990s and early 2000s.
• There is only one competitor in the U.K. with a substantial fiber network.
• Pricing in the U.K. telecommunications market in recent years is considerably more rational than in the
early to mid portion of the previous decade. We expect that trend to continue given a) the increase in
Table of Contents
VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED AND SUBSIDIARIES
VIRGIN MEDIA INVESTMENTS LIMITED AND SUBSIDIARIES
COMBINED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9 - Income Taxes (continued)