UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptemberJune 30, 20132014 or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________________to _________________________to

Commission File Number: 001-33335

 

 

TIME WARNER CABLE INC.

(Exact name of registrant as specified in its charter)

 

Delaware 84-1496755
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

60 Columbus Circle

New York, New York 10023

(Address of principal executive offices) (Zip Code)

(212) 364-8200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ

  Accelerated filer 

                Accelerated filer  ¨

Non-accelerated filer  ¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

 

Description of Class

  

Shares Outstanding


as of OctoberJuly 29, 2013

2014

Common Stock – $0.01 par value

  

281,889,889

279,488,788

 

 

 


TIME WARNER CABLE INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER FINANCIAL INFORMATION

 

   Page 

PART I. FINANCIAL INFORMATION

  

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   1  

Item 4. Controls and Procedures

   2122  

Consolidated Balance Sheet as of SeptemberJune 30, 20132014 and December 31, 20122013

   2223  

Consolidated Statement of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20132014 and 20122013

   2324  

Consolidated Statement of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20132014 and 2012

24

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

   25  

Consolidated Statement of EquityCash Flows for the NineSix Months Ended SeptemberJune 30, 20132014 and 20122013

   26

Consolidated Statement of Equity for the Six Months Ended June 30, 2014 and 2013

27  

Notes to Consolidated Financial Statements

   2728  

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   5155  

Item 1A. Risk Factors

   5155  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   5155  

Item 4. Mine Safety Disclosures

   5155

Item 5. Other Information

55  

Item 6. Exhibits

   5155  


TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Cable Inc.’s (together with its subsidiaries, “TWC” or the “Company”) business, any recent developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

 

  

Overview.This section provides a general description of TWC’s business, as well as any recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.

Financial statement presentation.This section also provides a summary of how the Company’s operations are presented in the accompanying consolidated financial statements.

 

  

Results of operations.This section provides an analysis of the Company’s results of operations for the three and ninesix months ended SeptemberJune 30, 2013.2014. This analysis is presented on both a consolidated and reportable segment basis.

 

  

Financial condition and liquidity.This section provides an analysis of the Company’s financial condition as of SeptemberJune 30, 20132014 and cash flows for the ninesix months ended SeptemberJune 30, 2013.2014.

 

  

Caution concerning forward-looking statements.  This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are subject to uncertainty and changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 20122013 (the “2012“2013 Form 10-K”) for a discussion of the risk factors applicable to the Company.

OVERVIEW

TWC is among the largest providers of video, high-speed data and voice services in the U.S., with technologically advanced, well-clustered cable systems located mainly in five geographic areas – New York State (including New York City), the Carolinas, the Midwest (including Ohio, Kentucky and Wisconsin), Southern California (including Los Angeles) and Texas. TWC’s mission is to connect its customers to the world—simply, reliably and with superior service. As of SeptemberJune 30, 2013,2014, TWC served approximately 15.1 million customers (approximately 14.5 million residential services customers and 606,000 business services customers) who subscribed to one or more of its video, high-speed data and voice services.

TWC offers video, high-speed data and voice services to residential and business services customers over the Company’s broadband cable systems. TWC’s residential services also include security and home management services, and TWC’s business services also include networking and transport services (including cell tower backhaul services) and enterprise-class, cloud-enabled hosting, managed applications and services. During the ninesix months ended SeptemberJune 30, 2013, TWC generated total2014, TWC’s revenue increased 2.6% to approximately $11.3 billion.

Comcast Merger

On February 12, 2014, the Company entered into an Agreement and Plan of approximately $16.5 billion. Of this total, approximately $13.8 billionMerger with Comcast Corporation (“Comcast”) whereby the Company agreed to merge with and $1.7 billion were frominto a 100% owned subsidiary of Comcast (the “Comcast merger”). Upon completion of the provisionComcast merger, all of residentialthe outstanding shares of the Company will be cancelled and business services, respectively. TWC also sells advertisingeach issued and outstanding share will be converted into the right to receive 2.875 shares of Class A common stock of Comcast. Merger integration planning is underway, with the Company and Comcast working toward a varietyclosing by year-end 2014, subject to receipt of national, regionalshareholder and local customers, which resulted in advertising revenue of $741 million during the nine months ended September 30, 2013. Additionally, TWC generated $284 million of revenue from other sources during the nine months ended September 30, 2013.

As of September 30, 2013, TWC had approximately 11.4 million residential video subscribers, 11.1 million residential high-speed data subscribers and 4.8 million residential voice subscribers,regulatory approvals, as well as 193,000 businesssatisfaction of certain other closing conditions.

On April 25, 2014, Comcast entered into a binding agreement with Charter Communications, Inc., (“Charter”), which contemplates three transactions (the “divestiture transactions”): (1) a contribution, spin-off and merger transaction, (2) an asset exchange and (3) a sale of assets. The completion of the divestiture transactions will result in the combined company divesting a net total of approximately 3.9 million video subscribers, 500,000 business high-speed dataa portion of which are TWC subscribers and 262,000 business voice subscribers. TWC markets its services separately and(primarily in “bundled” packages of multiple services and features. As of September 30, 2013, 60.3% of TWC’s customers subscribed to two or more of its video, high-speed data and voice services, including 26.9% of its customers who subscribed to all three of these services.

TWC believes it will increase annual residential and business services revenue for 2013 and the foreseeable future thereafter.Midwest). The increase in business services revenue isdivestiture transactions are expected to occur contemporaneously with one another and are conditioned upon and will occur following the closing of the Comcast merger. They are also subject to a number of other conditions. The Comcast merger is not conditioned upon the closing of the divestiture transactions and, accordingly, the Comcast merger can be driven by growth in customers, an increasing percentagecompleted regardless of customers purchasing more services, as well as higher-priced tiers of service, and price increases. The increase in residential services revenue is anticipated to be primarily from growth in residential high-speed data revenue, which is expected to increase due to growth inwhether the divestiture transactions are ultimately completed.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

Reportable Segments

Effective in the first quarter of 2014, the Company determined it has three reportable segments: Residential Services, Business Services and Other Operations. The Company’s reportable segments have been determined based on how management evaluates and manages the business. The Company has recast its financial information and disclosures for the prior periods to reflect the segment disclosures as if the current presentation had been in effect throughout all periods presented. For additional information about the components of each of the Company’s reportable segments, as well as shared functions, refer to “—Financial Statement Presentation—Reportable Segments,” below.

Residential Services Segment

TWC offers video, high-speed data and voice services, as well as security and home management services, to residential customers. As of June 30, 2014, the Company served 14.5 million residential services customers and, during the six months ended June 30, 2014, TWC generated approximately $9.2 billion of revenue from the provision of residential services, which represented 81.6% of TWC’s total revenue.

TWC’s video service provides over 300 channels (including, on average, 200 high-definition (“HD”) channels) and 19,000 hours of video-on-demand programming, which, increasingly, consumers can watch on the device of their choosing, both inside and outside the home. TWC’s high-speed data service is available in a range of speed (from up to 2 to 300 megabits per second (“Mbps”) downstream), price and consumption (unlimited, 30 gigabyte (“GB”) and 5 GB) levels and, for most high-speed data customers, includes access to a nationwide network of more than 250,000 Cable WiFi hotspots along with communications and Internet security features. TWC’s voice service provides unlimited calling to the U.S., Canada, Puerto Rico and Mexico and access to popular features in one simple package. TWC’s IntelligentHome service provides state-of-the-art security and home management technology, taking advantage of TWC’s always-on broadband network and around-the-clock security monitoring centers.

Residential Services revenue has benefited from increases in the number of high-speed data subscribers and growth in revenue per residential customer relationship (the latter due to an increasing percentage of subscribers purchasing more advanced, higher-priced tiers of service and increases in prices and high-speed data equipment rental charges. Future revenue growth rates will depend oncharges), offset by losses in residential video subscribers.

Residential Services programming costs represent a significant portion of the Company’s abilityoperating costs and expenses and are expected to attract, retaincontinue to increase, reflecting rate increases on existing programming services and upsellthe carriage of new networks, partially offset by a decline in total video subscribers. TWC expects that its programming costs as a percentage of video revenue will continue to increase, in part due to an increasingly competitive environment.

Business Services Segment

TWC offers a wide range of business high-speed data, networking, voice, video, hosting and cloud computing services. As of June 30, 2014, TWC served 658,000 business customers, including small and medium businesses; large enterprises; government, education and non-profit institutions; and telecommunications carriers. TWC offers business services at retail and wholesale using its own network infrastructure and third-party infrastructure as required to meet customer needs.

During the six months ended June 30, 2014, revenue from the provision of business services increased 23.3% to $1.4 billion, which represented 12.0% of TWC’s total revenue. The Company expects continued strong growth in Business Services revenue driven by an increase in the number of customers (the result of continued penetration of buildings currently on its network and investment to connect new buildings to its network) and revenue per customer (due to growing product penetration, demand for higher-priced tiers of service and price increases). Given the large opportunity and TWC’s still modest share in business services, the Company has established a target of growing Business Services to exceed $5 billion in annual revenue by 2018.

On December 31, 2013, TWC completed its acquisition of DukeNet Communications, LLC (“DukeNet”), a regional fiber optic network company that provides data and high-capacity bandwidth services to wireless carrier, data center, government and enterprise customers in North Carolina and South Carolina, as well as five other states in the Southeast.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Beginning in 2014, the results of DukeNet, which generated revenue of $58 million for the six months ended June 30, 2014, are included in the Business Services segment.

Other Operations Segment

TWC’s Other Operations segment principally consists of (i) Time Warner Cable Media (“TWC Media”), the advertising sales arm of TWC; (ii) the Company’s regional sports networks that carry Los Angeles Lakers’ basketball games and other sports programming (Time Warner Cable SportsNet and Time Warner Cable Deportes and, collectively, the “Lakers’ RSNs”); (iii) the Company’s local sports, news and lifestyle channels (e.g., Time Warner Cable News NY1); (iv) other operating revenue and costs, including those derived from the Advance/Newhouse Partnership and home shopping network-related services; and (v) beginning in 2014, operating revenue and costs associated with SportsNet LA, discussed below. During the six months ended June 30, 2014, TWC generated revenue from Other Operations of $836 million.

As discussed further below in “—Financial Statement Presentation,” TWC Media sells video and online advertising inventory to local, regional and national advertising customers and increase pricing, which can be impactedalso sells advertising inventory on behalf of other video distributors, including, among others, Verizon Communications Inc.’s (“Verizon”) FiOS, AT&T Inc.’s (“AT&T”) U-verse and Charter. Advertising revenue generated by competitive factors,TWC Media is cyclical, benefiting in years that include political elections as a result of political candidate and issue-related advertising.

On February 25, 2014, American Media Productions, LLC (“American Media Productions”), an unaffiliated third party, launched SportsNet LA, a regional sports network carrying the stateLos Angeles Dodgers’ baseball games and other sports programming. In accordance with long-term agreements with American Media Productions, TWC acts as the network’s exclusive advertising and affiliate sales agent and has certain branding and programming rights with respect to the network. In addition, TWC provides certain production and technical services to American Media Productions. As a result of the economylaunch of SportsNet LA, related revenue, including intersegment revenue, and regulation.expenses are included in the Company’s Other Operations segment.

Competition

The operations of each of TWC’s reportable segments face intense competition, both from existing competitors and, as a result of the rapid development of new technologies, services and products, from new entrants.

Residential Services Segment

TWC faces intense competition for residential services customers from a variety of alternative communications, information and entertainment delivery sources. TWC competes with incumbent local telephone companies and other overbuilders across each of its residential services. Some of these competitors offer a broad range of services with features and functions comparable to those provided by TWC and in bundles similar to those offered by TWC, sometimes including wireless service. Each of TWC’s residential services also faces competition from other companies that provide services on a stand-alone basis. TWC’s residential video service faces competition from direct broadcast satellite services, and increasingly from companies that deliver content to consumers over the Internet. TWC’s residential high-speed data and voice services face competition from wireless Internet and voice providers. TWC’s residential voice service also faces competition from “over-the-top” phone services and other alternatives.

Business Services Segment

TWC also competes acrossfaces significant competition as to each of its business services offerings. Its business high-speed data, networking and voice services withface competition from a variety of telecommunication carriers, including incumbent local and long-distance service providers.telephone companies. TWC’s cell tower backhaul service also faces competition from local and long-distance service providers,traditional telephone companies as well as other telecommunications carriers, such as metro and regional fiber providers.fiber-based carriers. TWC’s business video service faces competition from direct broadcast satellite providers. TWC also competes with cloud, hosting and related service providers and application serviceapplication-service providers.

Technological advances and product innovations have increased and will likely continue to increase the number of alternatives available to TWC’s current and potential residential and business services customers, further intensifying competition.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Other Operations Segment

TWC faces intense competition in its advertising business across many different platforms and from a wide range of local and national competitors. Competition has increased and will likely continue to increase as new formats for advertising seek to attract the same advertisers. TWC competes for advertising revenue against, among others, local broadcast stations, national cable and broadcast networks, radio, newspapers, magazines and outdoor advertisers, as well as online advertising companies.

For the nine months ended September 30, 2013, video programming and employee costs represented 34.2% and 34.4%, respectively, of the Company’s total operating expenses. Video programming costs are expected to continue to increase, reflecting rate increases on existing programming services and the carriage of new networks, partially offset by a decline in total video subscribers. TWC expects that its video programming costs as a percentage of video revenue will continue to increase, in part due to the more competitive environment discussed above. Employee costs are also expected to continue to increase as a result of many factors, including higher compensation expenses per employee and headcount, reflecting the Company’s investment in business services, regional sports networks and other areas of growth.

Recent Developments

DukeNet Acquisition

On October 4, 2013, TWC entered into a definitive agreement with Duke Energy Corporation and investment funds managed by Alinda Capital Partners to acquire DukeNet Communications, LLC (“DukeNet”) for $600 million in cash, including the repayment of debt. DukeNet, a regional fiber optic network company, provides data and high-capacity bandwidth services to wireless carrier, data center, government, and enterprise customers in North Carolina and South Carolina, as well as five other states in the Southeast. The transaction, which is subject to various customary closing conditions, including receipt of regulatory approvals, is expected to close in the first quarter of 2014.

Common Stock Repurchase Program

On July 25, 2013,As a result of the Company’s Board of Directors increasedentry into the remaining authorization under its existingmerger agreement with Comcast, the Company’s common stock repurchase program (the “Stock Repurchase Program”), which was $775suspended on February 13, 2014. From the inception of the Stock Repurchase Program in the fourth quarter of 2010 through February 12, 2014, the Company repurchased 92.9 million as of July 24, 2013, to an aggregate of up to $4.0 billionshares of TWC common stock effective July 25, 2013. Purchasesfor $7.744 billion. As of June 30, 2014, the Company had $2.723 billion remaining under the Stock Repurchase Program mayauthorization.

Financial Statement Presentation

Basis of Presentation

Changes in Basis of Presentation

Effective in the first quarter of 2014, the Company determined it has three reportable segments. The Company has recast its financial information and disclosures for the prior periods to reflect the segment disclosures as if the current presentation had been in effect throughout all periods presented. Refer to Note 11 to the accompanying consolidated financial statements for further information regarding the Company’s segment information.

Additionally, during the first quarter of 2014, the Company revised its categorization of operating costs and expenses to be consistent with how such costs and expenses are presented to management and to provide a more meaningful presentation. The Company has recast the accompanying consolidated financial statements, financial information and disclosures of operating costs and expenses for the prior periods to reflect the new categorization, which had no impact on total operating costs and expenses, Operating Income or net income attributable to TWC shareholders for any period presented. The Company’s consolidated operating costs and expenses are presented in the following categories: (i) programming and content, (ii) sales and marketing, (iii) technical operations, (iv) customer care and (v) other operating costs.

Reclassifications

As discussed above, certain reclassifications have been made to the prior period financial information presented herein to conform to the current year presentation.

Consolidated

Revenue.  The Company generates revenue from each of its reportable segments: Residential Services, Business Services and Other Operations, which includes revenue generated by TWC Media, the Lakers’ RSNs, SportsNet LA and other operating revenue, including amounts derived from the Advance/Newhouse Partnership and home shopping network-related services. Each of the reportable segments is discussed below under “Reportable Segments.”

Operating costs and expenses

Programming and content.  Programming and content costs include (i) video programming costs for the Residential Services and Business Services segments and (ii) content costs, which include (a) the content acquisition costs associated with the Lakers’ RSNs and (b) other content production costs for the Lakers’ RSNs and the Company’s local sports, news and lifestyle channels. Beginning in 2014, programming and content costs also include the content acquisition and production costs associated with SportsNet LA. Content acquisition costs for the Los Angeles Lakers’ basketball games and Los Angeles Dodgers’ baseball games are recorded as games are exhibited over the applicable season.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

made from timeSales and marketing.  Sales and marketing costs consist of the costs incurred at the Residential Services, Business Services and Other Operations segments to time onsell and market the open marketCompany’s services. Costs primarily include employee-related and in privately negotiated transactions. The sizethird-party marketing costs (e.g., television, online, print and timingradio advertising). Employee-related costs primarily include costs associated with retail centers and activities related to direct sales and retention sales.

Technical operations.  Technical operations costs consist of the costs incurred at the Residential Services, Business Services and Other Operations segments associated with the installation, repair and maintenance of the Company’s purchases under the Stock Repurchase Program are based on a number of factors, including businessdistribution plant. Costs primarily include employee-related costs and market conditions, financial capacity and TWC’s common stock price. From the inceptionmaterials costs associated with non-capitalizable activities.

Customer care.  Customer care costs consist of the Stock Repurchase Program incosts incurred at the fourth quarterResidential Services and Business Services segments associated with the Company’s customer service activities. Costs primarily include employee-related costs and outsourced customer care costs.

Other operating.  Other operating costs consist of 2010 through October 29, 2013,all other operating costs incurred at the Company repurchased 87.0 million shares of TWC common stock for $6.978 billion, of which $1.968 billion was repurchased during 2013. As of October 29, 2013, the Company had $3.489 billion remaining under the Stock Repurchase Program. Absent any significant events, the Company expects to repurchase at least $2.5 billion of TWC common stock during 2013.Residential Services, Business Services and Other Operations segments that are not specifically identified above, including Residential Services and Business Services video franchise and other fees. Other operating costs also include operating costs associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources). In addition, other operating costs include functions supporting more than one reportable segment that are centrally managed, including costs associated with facilities (e.g., rent, property taxes and utilities), network operations (e.g., employee costs associated with central engineering activities), vehicles and procurement.

SportsNet LAReportable Segments

In early 2014, the Company expects American Media Productions, LLC (“American Media Productions”) to launch SportsNet LA, a regional sports network owned by American Media Productions that will carry the Los Angeles Dodgers’ baseball games and other sports programming. In accordance with TWC’s long-term affiliation agreement with American Media Productions, TWC will act as the network’s exclusive advertising and affiliate sales agent and will have certain branding and programming rights with respect to the network. In addition, TWC will provide certain production and technical services to American Media Productions.

FINANCIAL STATEMENT PRESENTATION

Revenue

The Company’s segment results include intercompany transactions related to programming provided to the Residential Services and Business Services segments by the Lakers’ RSNs, the Company’s local sports, news and lifestyle channels and, beginning in 2014, SportsNet LA. These services are reflected as programming expense for the Residential Services and Business Services segments and as revenue consistsfor the Other Operations segment and are eliminated in consolidation. Additionally, the operating costs described above that are associated with broad “corporate” functions or functions supporting more than one reportable segment are recorded as shared functions and are not allocated to the reportable segments. As such, the reportable segment results reflect how management views such segments in assessing financial performance and allocating resources and are not necessarily indicative of residential services, business services, advertising and other revenue.the results of operations that each segment would have achieved had they operated as stand-alone entities during the periods presented.

Residential services.Services Segment

Revenue.  Residential servicesServices segment revenue consists of revenue from residential video, high-speed data, voice and other services each discussed below.offered to residential subscribers. The Company sells residential video, high-speed data and voice services to residential subscribers separately and in bundled packages at rates lower than if the subscriber purchases each product on an individual basis. Revenue received from such subscribers to bundled packages is allocated to each product in a pro-rata manner based on the standalone selling price of each of the respective services.

Video.  Video revenue includes residential subscriber fees for the Company’s various tiers or packages of video programming services generally distinguished from one another by the number and type of programming networks they include. Video revenue also includes related equipment rental charges, installation charges and fees collected on behalf of local franchising authorities and the Federal Communications Commission (the “FCC”). Additionally, video revenue includes revenue from the sale of premium networks, transactional video-on-demand (e.g., events and movies) and digital video recorder (“DVR”) service.

High-speed data.  High-speed data revenue primarily includes subscriber fees for the Company’s high-speed data services and related equipment rental and installation charges. The Company offers multiple tiers of high-speed data services providing various service speeds, data usage levels and other attributes to meet the different needs of its subscribers. In addition, high-speed data revenue includes fees received from third-party Internet service providers (e.g., Earthlink) whose online services are provided to some of TWC’s customers.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Voice.  Voice revenue includes subscriber fees for the Company’s voice services, along with related installation charges, as well as fees collected on behalf of governmental authorities.

Other.  Other revenue includes revenue from security and home management services and other residential subscriber-related fees.

Operating costs and expenses.  Residential Services segment operating costs and expenses include the operating costs and expenses that management believes are necessary to assess the performance of and allocate resources to the Residential Services segment. Such costs include programming costs, sales and marketing costs, technical operations costs, customer care costs, video franchise and other fees and other operating costs (e.g., events and movies) and digital video recorder (“DVR”) service.

High-speed data.  High-speed data revenue primarily includes residential subscriber fees for the Company’s high-speed data servicesconnectivity costs, voice network costs and bad debt expense). Employee costs directly attributable to the Residential Services segment are included within each operating cost and expense category as applicable. Operating costs and expenses exclude costs and expenses related equipment rentalto “corporate” functions and installation charges. The Company offers multiple tiers of high-speed data services providing various service speeds, data usage levels and other attributes to meet the different needs of its subscribers. In addition, high-speed data revenue includes fees received from third-party Internet service providersfunctions supporting more than one reportable segment that are centrally managed (e.g., Earthlink) whose online servicesfacilities, network operations, vehicles and procurement) and are provided to somenot within the control of TWC’s customers.segment management.

Voice.Business Services Segment  Voice revenue includes residential subscriber fees for the Company’s voice services, along with related installation charges, as well as fees collected on behalf of governmental authorities.

Other.Revenue.  Other revenue includes revenue from security and home management services and other residential subscriber-related fees.

Business services.  Business servicesServices segment revenue consists of revenue from business video, high-speed data, voice, wholesale transport and other services each discussed below.offered to business customers. The Company sells business video, high-speed data and voice services to business subscribers separately and in bundled packages, and the revenue is allocated to each product in a pro-rata manner based on the standalone selling price of each of the respective services.

Video.  Video revenue includes the same fee categories received from business video subscribers as described above under Residential Services video revenue.

High-speed data.  High-speed data revenue primarily includes subscriber fees for the Company’s high-speed data services and related installation charges. High-speed data revenue also includes amounts generated by the sale of commercial networking and point-to-point transport services, such as Metro Ethernet services.

Voice.  Voice revenue includes subscriber fees for the Company’s voice services, along with related installation charges, as well as fees collected on behalf of governmental authorities.

Wholesale transport.  Wholesale transport revenue primarily includes amounts generated by the sale of point-to-point transport services offered to wireless telephone providers (i.e., cell tower backhaul) and other telecommunications carriers.

Other.  Other revenue primarily includes revenue from enterprise-class, cloud-enabled hosting, managed applications and services and other business subscriber-related fees.

Operating costs and expenses.  Business Services segment operating costs and expenses include the operating costs and expenses that management believes are necessary to assess the performance of and allocate resources to the Business Services segment. Such costs are consistent with the operating costs and expense categories described above under residential services.

Video.  Video revenue includesResidential Services operating costs and expenses. Operating costs and expenses exclude costs and expenses related to “corporate” functions and functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) and are not within the same fee categories received from business video subscribers as described above under residential video revenue.control of segment management.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

High-speed data.Other Operations Segment  High-speed data

Revenue

Advertising.  Advertising revenue is generated through TWC Media’s sale of video and online advertising inventory to local, regional and national advertising customers. The Company derives most of its advertising revenue from the sale of advertising inventory on cable networks owned by third parties. The rights to such advertising inventory are acquired by the Company in connection with its agreements to carry such networks or through contractual agreements to sell advertising inventory on behalf of other video distributors (including, among others, Verizon’s FiOS, AT&T’s U-verse and Charter). The Company also generates advertising revenue from the sale of inventory on the Lakers’ RSNs, the Company’s local sports, news and lifestyle channels (e.g., Time Warner Cable News NY1) and, beginning in 2014, SportsNet LA.

Other.  Other revenue primarily includes (i) fees received from distributors of the Lakers’ RSNs; (ii) fees paid to TWC by the Advance/Newhouse Partnership for (a) the ability to distribute the Company’s high-speed data service and (b) TWC’s management of certain functions, including, among others, the acquisition of programming rights, as well as the provision of certain functions, including engineering; (iii) home shopping network-related revenue (including commissions earned on the sale of merchandise and carriage fees); and (iv) beginning in 2014, fees received from distributors of SportsNet LA.

Operating costs and expenses.  Other operating costs and expenses primarily includes business subscriber fees forinclude operating costs associated with TWC Media, the Company’s high-speed data servicesLakers’ RSNs and related installation charges. High-speed data revenue also includes amounts generated by the sale of commercial networking and point-to-point transport services, such as Metro Ethernet services.

Voice.  Voice revenue includes business subscriber fees for the Company’s voice services, along with related installation charges, as well as fees collected on behalf of governmental authorities.

Wholesale transport.  Wholesale transport revenue primarily includes amounts generated by the sale of point-to-point transport services offered to wireless telephone providers (i.e., cell tower backhaul) and other carriers.

Other.  Other revenue primarily includes revenue from enterprise-class, cloud-enabled hosting, managed applications and services and other business subscriber-related fees.

Advertising.  Advertising revenue is generated through the sale of video and online advertising inventory to local, regional and national advertising customers. The Company derives most of its advertising revenue from the sale of advertising inventory on cable networks owned by third parties. The rights to such advertising inventory are acquired by the Company in connection with its agreements to carry such networks or through contractual agreements to sell advertising inventory on behalf of other video distributors (including, among others, Verizon Communications Inc.’s FiOS and AT&T Inc.’s U-verse). The Company also generates advertising revenue from the sale of inventory on its own local sports, news and lifestyle channels and, beginning in 2014, SportsNet LA.

Shared Functions

Operating costs and expenses.  Shared functions operating costs and expenses consist of costs associated with broad “corporate” functions (e.g., Time Warner Cable SportsNetaccounting and Time Warner Cable Deportes (collectively, the “LA RSNs,” discussed further below)finance, information technology, executive management, legal and NY1 News).

Other.  Other revenue primarily includes (i) fees paid to TWC by the Advance/Newhouse Partnership for (a) the ability to distribute the Company’s high-speed data servicehuman resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and (b) TWC’s management of certain functions, including, among others, the acquisition of programming rights,procurement) as well as other activities not attributable to a reportable segment.

Merger-related and restructuring costs.  All merger-related and restructuring costs incurred by the provision of certain functions, including engineering; (ii) beginning in the fourth quarter of 2012, fees from distributors of the LA RSNs, the Company’s two Los Angeles regional sports networks launched on October 1, 2012 that carry Los Angeles Lakers’ basketball games and other sports programming; and (iii) home shopping network-related revenue (including commissions earned on the sale of merchandise and carriage fees).

Costs and Expenses

Cost of revenue includes the following costs directly associated with the delivery of services to subscribers or the maintenance of the Company’s delivery systems: video programming costs; high-speed data connectivity costs; voice network costs; other service-related expenses, including non-administrative labor; franchise fees; and other related costs. Beginning in the fourth quarter of 2012, cost of revenue also includes direct costs associated with the LA RSNs, including content acquisition costs. Content acquisition costs for the Los Angeles Lakers’ basketball gamesCompany are recorded as games are exhibited over the applicable season.shared functions.

Selling, general and administrative expenses include amounts not directly associated with the delivery of services to subscribers or the maintenance of the Company’s delivery systems, such as administrative labor costs, marketing expenses, bad debt expense, billing system charges, non-plant repair and maintenance costs and other administrative overhead costs.

Cost of revenue and selling, general and administrative expenses exclude depreciation expense, which is presented separately in the accompanying consolidated statement of operations.

Use of Operating Income before Depreciation and Amortization

In discussing its segment performance, the Company may use certain measures that are not calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”). These measures include Operating Income before Depreciation and Amortization (“OIBDA”), which the Company defines as Operating Income before depreciation of tangible assets and amortization of intangible assets.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Management uses For additional information regarding the use of segment OIBDA, among other measures, in evaluatingsee Note 11 to the performance of the Company’s business because it eliminates the effects of (i) considerable amounts of noncash depreciation and amortization and (ii) items not within the control of the Company’s operations managers (such as income tax provision, other income (expense), net, and interest expense, net). Performance measures derived from OIBDA are also used in the Company’s annual incentive compensation programs. In addition, this measure is commonly used by analysts, investors and others in evaluating the Company’s performance.

This measure has inherent limitations. For example, OIBDA does not reflect capital expenditures or the periodic costs of certain capitalized assets used in generating revenue. To compensate for such limitations, management evaluates performance through, among other measures, various cash flow measures, which reflect capital expenditure decisions, and net income attributable to TWC shareholders, which reflects the periodic costs of capitalized assets. OIBDA also fails to reflect the significant costs borne by the Company for income taxes and debt servicing costs, the results of the Company’s equity investments and other non-operational income or expense. Management compensates for these limitations by using other analytics such as a review of net income attributable to TWC shareholders.

This non-GAAP measure should be considered in addition to, not as a substitute for, the Company’s Operating Income and net income attributable to TWC shareholders, as well as other measures ofaccompanying consolidated financial performance reported in accordance with GAAP, and may not be comparable to similarly titled measures used by other companies.

Basis of Presentationstatements.

ReclassificationsRecent Accounting Standards

Certain reclassifications have been madeSee Note 2 to the prior yearaccompanying consolidated financial informationstatements for recently issued accounting standards yet to conform to the current year presentation.be adopted.

RESULTS OF OPERATIONS

Three and NineSix Months Ended SeptemberJune 30, 20132014 Compared to Three and NineSix Months Ended SeptemberJune 30, 20122013

The following discussion provides an analysis of the Company’s results of operations and should be read in conjunction with the accompanying consolidated statement of operations, as well as the consolidated financial statements and notes thereto and MD&A included in the 20122013 Form 10-K.10-K, as recast in the Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 24, 2014.

Revenue. Revenue by major category was

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Consolidated Results

The consolidated financial results for the Company for the three and six months ended June 30, 2014 and 2013 were as follows (in millions):

 

                                                                                    
  Three Months Ended       Nine Months Ended       Three Months Ended
June 30,
       Six Months Ended
June 30,
     
  September 30,   %   September 30,   %   2014   2013   % Change   2014   2013   % Change 
  2013   2012   Change   2013(a)   2012   Change(a)   (recast)   (recast) 

Revenue:

        

Residential services

   $4,579    $4,548     0.7%     $13,822     $13,598     1.6%    $4,662    $4,632     0.6%    $9,230    $9,243     (0.1%)  

Business services

   594     493     20.5%     1,696     1,386     22.4%     691     565     22.3%     1,359     1,102     23.3%  

Advertising

   253     264     (4.2%)     741     740     0.1%  

Other

   92     58     58.6%     284     177     60.5%     373     353     5.7%     719     680     5.7%  
  

 

   

 

     

 

   

 

     

 

   

 

     

 

   

 

   

Total

   $5,518    $5,363     2.9%     $  16,543     $  15,901     4.0%  

Total revenue

   5,726     5,550     3.2%     11,308     11,025     2.6%  

Costs and expenses:

            

Programming and content

   1,341     1,234     8.7%     2,650     2,509     5.6%  

Sales and marketing(a)

   544     496     9.7%     1,099     969     13.4%  

Technical operations(a)

   371     363     2.2%     742     735     1.0%  

Customer care(a)

   207     187     10.7%     412     384     7.3%  

Other operating(a)

   1,209     1,233     (1.9%)     2,371     2,479     (4.4%)  

Depreciation

   795     792     0.4%     1,570     1,581     (0.7%)  

Amortization

   35     31     12.9%     68     63     7.9%  

Merger-related and restructuring costs

   61     27     125.9%     141     58     143.1%  
  

 

   

 

     

 

   

 

     

 

   

 

     

 

   

 

   

Total costs and expenses

   4,563     4,363     4.6%     9,053     8,778     3.1%  
  

 

   

 

     

 

   

 

   

Operating Income

   1,163     1,187     (2.0%)     2,255     2,247     0.4%  

Interest expense, net

   (349)     (398)     (12.3%)     (713)     (796)     (10.4%)  

Other income, net

       11     (27.3%)     23     10     130.0%  
  

 

   

 

     

 

   

 

   

Income before income taxes

   822     800     2.8%     1,565     1,461     7.1%  

Income tax provision

   (323)     (319)     1.3%     (587)     (579)     1.4%  
  

 

   

 

     

 

   

 

   

Net income

   499     481     3.7%     978     882     10.9%  

Less: Net income attributable to noncontrolling interests

   —     —     NM      —     —     NM   
  

 

   

 

     

 

   

 

   

Net income attributable to TWC shareholders

  $499    $481     3.7%    $978    $882     10.9%  
  

 

   

 

     

 

   

 

   

NM—Not meaningful.

NM—Not meaningful.

  

          

(a) Amounts include total employee costs, as follows (in millions):

(a) Amounts include total employee costs, as follows (in millions):

         

  Three Months Ended
June 30,
       Six Months Ended
June 30,
     
  2014   2013   % Change   2014   2013   % Change 
      (recast)           (recast)     

Employee costs

  $1,226    $1,186     3.4%     $2,482    $2,421     2.5%   
  

 

   

 

     

 

   

 

   

Revenue.  The increase in revenue for the three months ended June 30, 2014 was due to increases in revenue at all segments. The increase in revenue for the six months ended June 30, 2014 was due to increases in revenue at the Business Services and Other Operations segments, partially offset by a decrease in revenue at the Residential Services segment.

Revenue by segment is discussed in greater detail below in “Segment Results.”

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Costs and expenses

Operating costs and expenses.  The increase in operating costs and expenses for the three and six months ended June 30, 2014 was primarily due to increases in the following, which are discussed further in “Segment Results”: programming costs at the Residential Services segment; content costs at the Other Operations segment; sales and marketing costs at the Residential Services and Business Services segments; customer care costs at the Residential Services segment; and costs associated with advertising inventory sold on behalf of other video distributors (“ad rep agreements”) at the Other Operations segment; partially offset by decreases in voice costs at the Residential Services and Business Services segments. The growth in operating costs and expenses for the three and six months ended June 30, 2014 was reduced by a decrease in pension expense of $27 million and $61 million, respectively.

Depreciation.  Depreciation for the three and six months ended June 30, 2014 was impacted by certain Insight Communications Company, Inc. (“Insight”) assets (acquired on February 29, 2012) that were fully depreciated as of August 2013, offset by an increase associated with certain DukeNet assets (acquired on December 31, 2013) and growth in shorter-lived capitalized software assets.

Merger-related and restructuring costs.  For the three and six months ended June 30, 2014, the Company incurred merger-related costs of $52 million and $115 million, respectively. These costs primarily consisted of Comcast merger-related costs, which, for the three and six months ended June 30, 2014, included employee retention costs of $40 million and $69 million, respectively, and advisory and legal fees of $9 million and $42 million, respectively. Merger-related costs for the three and six months ended June 30, 2014 also included $3 million and $4 million, respectively, incurred in connection with the DukeNet acquisition. During the three and six months ended June 30, 2013, the Company incurred merger-related costs of $5 million and $7 million, respectively, in connection with the Insight acquisition. The Company expects to incur additional merger-related costs during the remainder of 2014 in connection with the Comcast merger.

The Company incurred restructuring costs of $9 million and $26 million for the three and six months ended June 30, 2014, respectively, and $22 million and $51 million for the three and six months ended June 30, 2013, respectively, primarily related to employee terminations and other exit costs. The Company expects to incur additional restructuring costs during the remainder of 2014.

Operating Income.  Operating Income for the three months ended June 30, 2014 decreased primarily due to higher operating cost and expenses and merger-related and restructuring costs, partially offset by growth in revenue, as discussed above. Operating Income for the six months ended June 30, 2014 increased slightly primarily due to growth in revenue, partially offset by higher operating cost and expenses, as well as merger-related and restructuring costs, as discussed above.

Interest expense, net.  Interest expense, net, for the three and six months ended June 30, 2014 decreased primarily due to lower average fixed-rate debt outstanding during the periods as compared to 2013.

Other income, net.  Other income, net, detail is shown in the table below (in millions):

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2014   2013   2014   2013 

Income from equity-method investments, net

  $   $   $22    $14  

Gain (loss) on equity award reimbursement obligation to Time Warner(a)

   —     —         (5)  

Other

   —         —      
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income, net

  $   $11    $23    $10  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

On February 29, 2012,See Note 6 to the Company completedaccompanying consolidated financial statements for a discussion of the Company’s accounting for its acquisition of Insight Communications Company,equity award reimbursement obligation to Time Warner Inc. (together with its subsidiaries, “Insight”(“Time Warner”). As a result, revenue for the nine months ended September 30, 2013 includes two additional months of Insight revenue, as follows (in millions):

Income tax provision. For the three months ended June 30, 2014 and 2013, the Company recorded income tax provisions of $323 million and $319 million, respectively. For the six months ended June 30, 2014 and 2013, the Company recorded income tax provisions of $587 million and $579 million, respectively. The effective tax rates were 39.3% and

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

39.9% for the three months ended June 30, 2014 and 2013, respectively, and 37.5% and 39.6% for the six months ended June 30, 2014 and 2013, respectively.

The income tax provision and effective tax rate for the six months ended June 30, 2014 include a benefit of $24 million as a result of the passage of the New York State budget during the first quarter of 2014 that, in part, lowers the New York State business tax rate beginning in 2016. Absent the impact of this item, the effective tax rates would have been 39.0% and 39.6% for the six months ended June 30, 2014 and 2013, respectively.

Net income attributable to TWC shareholders and net income per common share attributable to TWC common shareholders.   Net income attributable to TWC shareholders and net income per common share attributable to TWC common shareholders were as follows (in millions, except per share data):

                                                                                                            
   Three Months Ended
June 30,
       Six Months Ended
June 30,
     
   2014   2013   % Change   2014   2013   % Change 

Net income attributable to TWC shareholders

  $499    $481     3.7%    $978    $882     10.9%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income per common share attributable to TWC common shareholders:

            

Basic

  $1.77    $1.65     7.3%    $3.48    $3.00     16.0%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted

  $1.76    $1.64     7.3%    $3.46    $2.98     16.1%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income attributable to TWC shareholders for the three and six months ended June 30, 2014 increased primarily due a decrease in interest expense, net, which, for the three months ended June 30, 2014, was partially offset by a decrease in Operating Income. Net income per common share attributable to TWC common shareholders for the three and six months ended June 30, 2014 benefited from lower average common shares outstanding as a result of share repurchases under the Stock Repurchase Program.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Segment Results

Residential Services.  The financial results of the Residential Services segment for the three and six months ended June 30, 2014 and 2013 were as follows (in millions):

                                                                                    
   Three Months Ended
June 30,
      Six Months Ended
June 30,
    
   2014   2013   

% Change

  2014   2013   

% Change

       (recast)          (recast)    

Revenue:

            

Video

  $2,546    $2,674    (4.8%)  $5,041    $5,345    (5.7%)

High-speed data

   1,606     1,424    12.8%    3,164     2,830    11.8% 

Voice

   490     517    (5.2%)   986     1,036    (4.8%)

Other

   20     17    17.6%    39     32    21.9% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenue

   4,662     4,632    0.6%    9,230     9,243    (0.1%)

Operating costs and expenses:

            

Programming

   1,275     1,227    3.9%    2,537     2,453    3.4% 

Sales and marketing(a)

   353     335    5.4%    738     656    12.5% 

Technical operations(a)

   333     330    0.9%    668     673    (0.7%)

Customer care(a)

   174     159    9.4%    346     328    5.5% 

Video franchise and other fees(b)

   118     123    (4.1%)   233     248    (6.0%)

Other(a)

   217     258    (15.9%)   384     514    (25.3%)
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating costs and expenses

   2,470     2,432    1.6%    4,906     4,872    0.7% 
  

 

 

   

 

 

     

 

 

   

 

 

   

OIBDA

  $2,192    $2,200    (0.4%)  $4,324    $4,371    (1.1%)
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(a)      Amounts include total employee costs, as follows (in millions):

            
   Three Months Ended
June 30,
      Six Months Ended
June 30,
    
   2014   2013   

% Change

  2014   2013   

% Change

       (recast)          (recast)    

          Employee costs

  $667    $630    5.9%   $1,339    $1,291    3.7% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Residential services

 $ 165 

Business services

12 

Advertising

Other

— 
(b) 

Video franchise and other fees include fees collected on behalf of franchising authorities and the FCC.

Total

 $      183 

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

Selected residential subscriber-related statistics as of June 30, 2014 and 2013 were as follows (in thousands):

 

                                          
  September 30,       June 30,     
        2013               2012         % Change   2014(a)   2013   % Change 

Residential services:

      

Customer relationships(a)

   14,469     14,714     (1.7%)  

Video(b)

   11,414     12,159     (6.1%)     11,011     11,720     (6.0%)  

High-speed data(c)

   11,050     10,860     1.7%     11,415     11,074     3.1%  

Voice(d)

   4,805     4,990     (3.7%)     4,975     4,933     0.9%  

Business services:

      

Customer relationships(a)

   606     550     10.2%  

Video(b)

   193     185     4.3%  

High-speed data(c)

   500     446     12.1%  

Voice(d)

   262     212     23.6%  

Total:

      

Single play(e)

   5,978     5,936     0.7%     5,656     5,608     0.9%  

Double play(f)

   5,044     5,070     (0.5%)     4,712     4,857     (3.0%)  

Triple play(g)

   4,053     4,258     (4.8%)     4,107     4,135     (0.7%)  
  

 

   

 

     

 

   

 

   

Customer relationships(a)

   15,075     15,264     (1.2%)  

Customer relationships(h)

   14,475     14,600     (0.9%)  
  

 

   

 

     

 

   

 

   

 

(a) 

Customer relationships representThe Company’s subscriber numbers as of June 30, 2014 reflect adjustments related to the numbertreatment of subscribers who purchase at least oneemployee accounts recorded during the second quarter of the Company’s video,2014 that decreased residential high-speed data subscribers by 10,000, residential voice subscribers by 17,000, residential single play subscribers by 19,000, residential double play subscribers by 4,000 and voice services. For example, a subscriber who purchases only high-speed data service and no video service will count as oneresidential customer relationship, and a subscriber who purchases both video and high-speed data services will also count as only one customer relationship.relationships by 23,000.

(b) 

Video subscriber numbers reflect billable subscribers who purchase at least the basic service video programming tier. The determination of whether a video subscriber is categorized as residential or business is based on the type of subscriber purchasing the service.

(c) 

High-speed data subscriber numbers reflect billable subscribers who purchase any of the high-speed data services offered by TWC. The determination of whether a high-speed data subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber. For example, if TWC provides a business service, the subscriber is classified as business.

(d) 

Voice subscriber numbers reflect billable subscribers who purchase an IP-based telephony service, as well as, in 2012, a small number of subscribers acquired from Insight who received traditional, circuit-switched telephone service (which was discontinued during the third quarter of 2013).service. The determination of whether a voice subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber. For example, if TWC provides a business service, the subscriber is classified as business.

(e) 

Single play subscriber numbers reflect customers who subscribe to one of the Company’s video, high-speed data and voice services.

(f) 

Double play subscriber numbers reflect customers who subscribe to two of the Company’s video, high-speed data and voice services.

(g) 

Triple play subscriber numbers reflect customers who subscribe to all three of the Company’s video, high-speed data and voice services.

Residential services revenue. The major components of residential services revenue were as follows (in millions):

       Three Months Ended               Nine Months Ended         
   September 30,   %   September 30,   % 
   2013   2012   Change   2013(a)   2012   Change(a) 

Residential services:

            

Video

   $2,600     $2,722     (4.5%)     $7,945     $8,230     (3.5%)  

High-speed data

   1,461     1,279     14.2%     4,291     3,744     14.6%  

Voice

   498     530     (6.0%)     1,534     1,577     (2.7%)  

Other

   20     17     17.6%     52     47     10.6%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total residential services

   $ 4,579     $ 4,548     0.7%     $ 13,822     $ 13,598     1.6%  
  

 

 

   

 

 

     

 

 

   

 

 

   

(a)(h) 

ResidentialCustomer relationships represent the number of subscribers who purchase at least one of the Company’s video, high-speed data and voice services. For example, a subscriber who purchases only high-speed data service and no video service will count as one customer relationship, and a subscriber who purchases both video and high-speed data services revenue for the nine months ended September 30, 2013 includes two additional months of Insight revenue,will also count as follows (in millions):only one customer relationship.

Residential services:

Video

 $93 

High-speed data

47 

Voice

24 

Other

Total residential services

 $        165 

TIME WARNER CABLE INC.Revenue.  Residential Services segment revenue for the three months ended June 30, 2014 increased primarily due to an increase in high-speed data revenue, partially offset by decreases in video and voice revenue, each of which is discussed further below. Residential Services segment revenue for the six months ended June 30, 2014 declined primarily due to decreases in video and voice revenue, partially offset by an increase in high-speed data revenue, each of which is discussed further below.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

For residential services, averageAverage monthly revenue per unit for the Residential Services segment for the three and six months ended June 30, 2014 and 2013 was as follows:

 

       Three Months Ended               Nine Months Ended         
   September 30,       September 30,     
   2013   2012   % Change   2013   2012   % Change 
                         

Customer relationship(a)

   $105.06     $103.07     1.9%     $105.04     $103.50     1.5%  

Video(b)

   74.90     74.32     0.8%     74.90     74.84     0.1%  

High-speed data(c)

   44.07     39.41     11.8%     43.15     39.17     10.2%  

Voice(d)

   34.06     35.45     (3.9%)     34.44     35.87     (4.0%)  
                                                                                    
   Three Months Ended
June 30,
       Six Months Ended
June 30,
     
   2014   2013   % Change   2014   2013   % Change 

Video(a)

  $76.43    $75.32     1.5%    $75.47    $74.91     0.7%  

High-speed data(b)

   46.92     42.78     9.7%     46.62     42.69     9.2%  

Voice(c)

   33.03     34.68     (4.8%)     33.53     34.62     (3.1%)  

Customer relationship(d)

   106.98     105.21     1.7%     106.22     105.02     1.1%  

 

(a)

Average monthly residential revenue per residential customer relationship represents residential services revenue divided by the corresponding average residential customer relationships for the period.

(b) 

Average monthly residential video revenue per unit represents residential video revenue divided by the corresponding average residential video subscribers for the period.

(c)(b) 

Average monthly residential high-speed data revenue per unit represents residential high-speed data revenue divided by the corresponding average residential high-speed data subscribers for the period.

(d)(c) 

Average monthly residential voice revenue per unit represents residential voice revenue divided by the corresponding average residential voice subscribers for the period.

(d)

Average monthly residential revenue per residential customer relationship represents residential services revenue divided by the corresponding average residential customer relationships for the period.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

The major components of residential video revenue for the three and six months ended June 30, 2014 and 2013 were as follows (in millions):

 

                                                                                    
      Three Months Ended               Nine Months Ended           Three Months Ended
June 30,
         Six Months Ended  
June 30,
     
  September 30,   %   September 30,   %   2014   2013   % Change   2014   2013   % Change 
  2013   2012   Change   2013(a)   2012   Change(a) 

Programming tiers(b)

   $1,692     $1,793     (5.6%)     $5,173     $5,409     (4.4%)  

Programming tiers(a)

  $1,653    $1,741     (5.1%)   $3,277    $3,481     (5.9%) 

Premium networks

   183     203     (9.9%)     577     608     (5.1%)     201     199     1.0%    402     394     2.0% 

Transactional video-on-demand

   70     65     7.7%     202     225     (10.2%)      62     66     (6.1%)    120     132     (9.1%) 

Video equipment rental and installation charges

   359     366     (1.9%)     1,099     1,098     0.1%     352     367     (4.1%)    684     740     (7.6%) 

DVR service

   177     168     5.4%     527     510     3.3%     160     178     (10.1%)     325     350     (7.1%) 

Franchise and other fees(c)

   119     127     (6.3%)     367     380     (3.4%)  

Franchise and other fees(b)

   118     123     (4.1%)    233     248     (6.0%) 
  

 

   

 

     

 

   

 

     

 

   

 

     

 

   

 

   

Total

   $  2,600     $  2,722     (4.5%)     $  7,945     $  8,230     (3.5%)    $2,546    $2,674     (4.8%)   $5,041    $5,345     (5.7%) 
  

 

   

 

     

 

   

 

     

 

   

 

     

 

   

 

   

 

(a)

Residential video revenue for the nine months ended September 30, 2013 includes two additional months of Insight revenue, as follows (in millions):

Programming tiers(b)

 $           68 

Premium networks

Transactional video-on-demand

Video equipment rental and installation charges

DVR service

Franchise and other fees(c)

Total

 $93 

(b) 

Programming tier revenue includes subscriber fees for the Company’s various tiers or packages of video programming services generally distinguished from one another by the number and type of programming networks they include.

(c)(b) 

Franchise and other fees include fees collected on behalf of franchising authorities and the FCC.

The decrease in residential video revenue for the three and ninesix months ended SeptemberJune 30, 20132014 was primarily due to decreasesa decline in video subscribers, and premium network revenue (which, for the three and nine months ended September 30, 2013, was reduced by approximately $15 million of subscriber credits issued in connection with a temporary blackout of a premium network resulting from a dispute with a programming vendor) and, for the nine months ended September 30, 2013, lower transactional video-on-demand revenue. For both periods, these decreases were partially offset by an increase in average revenue per subscriber as a result of price increases and a greater percentage of subscribers purchasing higher-priced tiers of service and, for the nine months ended September 30, 2013, two additional months of Insight revenue.increases.

Residential high-speed data revenue increased for the three and ninesix months ended SeptemberJune 30, 2013 increased2014 due to growth in average revenue per subscriber and an increase in high-speed data subscribers. The increase in average revenue per subscriber was primarily due to an increaseincreases in prices and equipment rental charges and a greater percentage of subscribers purchasing higher-priced tiers of service. Additionally,

The decrease in residential voice revenue for the ninethree and six months ended SeptemberJune 30, 2014 was primarily due to a decrease in average revenue per subscriber.

Operating costs and expenses.  Operating costs and expenses for the three and six months ended June 30, 2014 increased primarily due to increases in programming costs, sales and marketing costs and customer care costs, partially offset by a decline in other operating costs. Selected Residential Services average monthly costs per subscriber for the three and six months ended June 30, 2014 and 2013 residential high-speed data revenue benefitedwere as follows:

                                                                                    
   Three Months Ended
June 30,
         Six Months Ended  
June 30,
     
   2014   2013   % Change   2014   2013   % Change 

Programming costs per video subscriber

  $38.29    $34.55     10.8%    $37.99    $34.37     10.5%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Voice costs per voice subscriber

  $4.37    $8.58     (49.1%)    $4.67    $8.72     (46.4%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

For the three and six months ended June 30, 2014, the increase in programming costs (which include intercompany expense from two additionalthe Other Operations segment for programming costs associated with the Lakers’ RSNs, the Company’s local sports, news and lifestyle channels and, beginning in 2014, SportsNet LA) was primarily due to contractual rate increases and the carriage of SportsNet LA, partially offset by a decline in video subscribers. The Company expects the rate of growth in Residential Services average monthly programming costs per video subscriber in the second half of 2014 to increase compared to the second half of 2013.

Sales and marketing costs for the three and six months of Insight revenue.ended June 30, 2014 increased primarily due to headcount growth and higher compensation costs per employee, including customer retention, and, for the six months ended June 30, 2014, increased marketing activities.

Customer care costs for the three and six months ended June 30, 2014 increased primarily due to growth in employee costs.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

The decrease in residential voice revenueOther operating costs for the three and ninesix months ended SeptemberJune 30, 2013 was2014 decreased due to a decline in average revenue per subscriber and fewer voice subscribers. For the nine months ended September 30, 2013, the decreasecosts, which was partially offset by two additionalhigher bad debt expense for the three months of Insight revenue.

The Company expects that residential services revenue in 2013 (which includes two additionalended June 30, 2014. Voice costs for the three and six months of Insight revenue, as discussed above) will increase compared to 2012,ended June 30, 2014 decreased $63 million and $124 million, respectively, primarily due to growtha decrease in residential high-speed data revenue, which is expected to increasedelivery costs per subscriber as a result of continued growththe replacement of Sprint Corporation as the provider of voice transport, switching and interconnection services (which was completed during the first quarter of 2014). The Company expects Residential Services average monthly voice costs per voice subscriber to decrease in average revenue per subscriber and the numbersecond half of subscribers. The2014 compared to the second half of 2013.

OIBDA.  OIBDA for the three months ended June 30, 2014 decreased slightly due to an increase in residential high-speed data revenue is expected to beoperating costs and expenses, partially offset by revenue growth. OIBDA for the six months ended June 30, 2014 decreased due to an increase in operating costs and expenses and a decline in residential video revenue (primarily as a resultrevenue.

Business Services.  The financial results of a continued decline in residential video subscribers).

the Business services revenue.The major components of business services revenueServices segment for the three and six months ended June 30, 2014 and 2013 were as follows (in millions):

 

       Three Months Ended              Nine Months Ended        
   September 30,      September 30,    
   2013   2012   % Change  2013   2012   % Change

Business services:

            

Video

   $87     $83    4.8%    $258     $240    7.5% 

High-speed data

   282     235    20.0%    806     667    20.8% 

Voice

   110     83    32.5%    308     219    40.6% 

Wholesale transport

   65     47    38.3%    181     132    37.1% 

Other

   50     45    11.1%    143     128    11.7% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total business services

   $  594     $  493    20.5%    $  1,696     $  1,386    22.4% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Business services revenue for the three and nine months ended September 30, 2013 increased primarily due to growth in high-speed data and voice subscribers, as well as increases in cell tower backhaul revenue of $12 million and $32 million, respectively, and Metro Ethernet revenue of $9 million and $23 million, respectively. Business services revenue for the nine months ended September 30, 2013 also benefited from two additional months of Insight revenue.

Advertising revenue.  Advertising revenue for the three months ended September 30, 2013 decreased primarily due to declines in political advertising revenue. For the nine months ended September 30, 2013, advertising revenue was essentially flat as the declines in political advertising revenue were offset by growth in non-political advertising revenue (primarily associated with advertising inventory sold on behalf of other video distributors) and two additional months of Insight revenue. The Company expects advertising revenue in the fourth quarter of 2013 to decrease compared to the fourth quarter of 2012 due to a significant decline in political advertising revenue.

Other revenue. Other revenue for the three and nine months ended September 30, 2013 increased primarily due to fees from distributors of the LA RSNs.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Cost of revenue. The major components of cost of revenue were as follows (in millions, except per subscriber data):

       Three Months Ended    
September 30,
           Nine Months Ended    
September 30,
     
   2013   2012   % Change   2013   2012   % Change 

Video programming

   $    1,203     $    1,170     2.8%    $    3,621     $    3,468     4.4% 

Employee(a)

   765     725     5.5%    2,261     2,132     6.1% 

High-speed data

   42     46     (8.7%)    133     139     (4.3%) 

Voice

   136     151     (9.9%)    442     458     (3.5%) 

Video franchise and other fees(b)

   124     129     (3.9%)    380     390     (2.6%) 

Other direct operating costs(a)

   294     278     5.8%    927     790     17.3% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

   $2,564     $2,499     2.6%    $7,764     $7,377     5.2% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Cost of revenue as a percentage of revenue

   46.5%     46.6%       46.9%     46.4%    
  

 

 

   

 

 

     

 

 

   

 

 

   

Average monthly video programming costs per video subscriber

   $34.10     $31.45     8.4%    $33.60     $31.07     8.1% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Average monthly voice costs per voice subscriber

   $8.83     $9.69     (8.9%)    $9.46     $10.04     (5.8%) 
  

 

 

   

 

 

     

 

 

   

 

 

   
                                                            
   Three Months Ended
June 30,
       Six Months Ended
June 30,
     
   2014   2013   % Change   2014   2013   % Change 
   (recast)   (recast) 

Revenue:

            

Video

  $90    $87     3.4%    $179    $171     4.7% 

High-speed data

   331     268     23.5%     637     524     21.6% 

Voice

   123     102     20.6%     241     198     21.7% 

Wholesale transport

   97     61     59.0%     198     116     70.7% 

Other

   50     47     6.4%     104     93     11.8% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenue

   691     565     22.3%     1,359     1,102     23.3% 

Operating costs and expenses:

            

Programming

   37     33     12.1%     73     65     12.3% 

Sales and marketing(a)

   136     112     21.4%     255     214     19.2% 

Technical operations(a)

   25     20     25.0%     48     37     29.7% 

Customer care(a)

   33     28     17.9%     66     56     17.9% 

Video franchise and other fees(b)

           (25.0%)              

Other(a)

   48     42     14.3%     98     84     16.7% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total operating costs and expenses

   282     239     18.0%     548     464     18.1% 
  

 

 

   

 

 

     

 

 

   

 

 

   

OIBDA

  $409    $326     25.5%    $811    $638     27.1% 
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(a) 

Employee and other direct operatingAmounts include total employee costs, include costs directly associated with the delivery of the Company’s video, high-speed data, voice and other services to subscribers and the maintenance of the Company’s delivery systems.as follows (in millions):

                                    
   Three Months Ended
June 30,
       Six Months Ended
June 30,
     
   2014   2013   % Change   2014   2013   % Change 
       (recast)           (recast)     

Employee costs

  $161    $137     17.5%    $312    $263     18.6%  
  

 

 

   

 

 

     

 

 

   

 

 

   

(b) 

Video franchise and other fees include fees collected on behalf of franchising authorities and the FCC.

Cost of revenue for the three and nine months ended September 30, 2013 increased primarily related to increases in video programming, employee and other direct operating costs, partially offset by a decline in voice costs.

The increase in video programming costs for the three and nine months ended September 30, 2013 was primarily due to contractual rate increases and carriage of new networks, partially offset by a decline in video subscribers. Video programming costs were reduced by approximately $10 million and $20 million for the three and nine months ended September 30, 2013, respectively, and by approximately $5 million and $20 million for the three and nine months ended September 30, 2012, respectively, due to changes in cost estimates for programming services primarily resulting from contract negotiations, changes in programming audit reserves and certain contract settlements. Additionally, video programming costs for the nine months ended September 30, 2013 were impacted by two additional months of Insight costs. The Company expects the rate of growth in video programming costs per video subscriber in the fourth quarter of 2013 to increase compared to the rate of growth in the first nine months of the year.

Employee costs for the three and nine months ended September 30, 2013 increased primarily as a result of increased headcount and higher compensation costs per employee. For the three and nine months ended September 30, 2013, employee medical costs increased $3 million and $19 million, respectively. Additionally, employee costs for the nine months ended September 30, 2013 were impacted by two additional months of Insight costs.

Voice costs consist of the direct costs associated with the delivery of voice services, including network connectivity costs. Voice costs for the three and nine months ended September 30, 2013 decreased primarily due to a decrease in delivery costs per subscriber as a result of the ongoing replacement of Sprint Corporation (“Sprint”) as the provider of voice transport, switching and interconnection services, as well as a decline in voice subscribers. For the nine months ended September 30, 2013, the decrease in voice costs was partially offset by the impact of two additional months of Insight costs. As of September 30, 2013, TWC had replaced Sprint with respect to nearly 70% of TWC’s voice lines, and the Company expects to complete the migration of the remaining voice lines during the fourth quarter of 2013 and the first quarter of 2014. As a result, the Company expects average voice costs per voice subscriber to continue to decrease in the fourth quarter of 2013 compared to the fourth quarter of 2012.

Other direct operating costs for the three and nine months ended September 30, 2013 increased as a result of costs associated with advertising inventory sold on behalf of other video distributors and, for the nine months ended September 30, 2013, the LA RSNs.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

Selling, generalSelected business subscriber-related statistics as of June 30, 2014 and administrative expenses.   The components of selling, general and administrative expenses2013 were as follows (in millions)thousands):

 

       Three Months Ended    
September 30,
           Nine Months Ended    
September 30,
     
   2013   2012   % Change   2013   2012   % Change 

Employee

   $460    $421     9.3%   $1,385     $    1,249     10.9% 

Marketing

   176     165     6.7%    487     472     3.2% 

Bad debt(a)

   30     36     (16.7%)     100     104     (3.8%) 

Other

   283     296     (4.4%)    853     869     (1.8%) 
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

   $    949     $    918     3.4%    $    2,825    $2,694     4.9% 
  

 

 

   

 

 

     

 

 

   

 

 

   
                                                
   June 30,     
   2014   2013   % Change 

Video(a)

   201     191     5.2% 

High-speed data(b)

   550     485     13.4% 

Voice(c)

   302     250     20.8% 

Single play(d)

   336     319     5.3% 

Double play(e)

   249     211     18.0% 

Triple play(f)

   73     62     17.7% 
  

 

 

   

 

 

   

Customer relationships(g)

   658     592     11.1% 
  

 

 

   

 

 

   

 

(a) 

Bad debt expense includes amounts chargedVideo subscriber numbers reflect billable subscribers who purchase at least the basic service video programming tier. The determination of whether a video subscriber is categorized as residential or business is based on the type of subscriber purchasing the service.

(b)

High-speed data subscriber numbers reflect billable subscribers who purchase any of the high-speed data services offered by TWC. The determination of whether a high-speed data subscriber is categorized as residential or business is generally based upon the type of service provided to expense associated withthat subscriber.

(c)

Voice subscriber numbers reflect billable subscribers who purchase an IP-based telephony service. The determination of whether a voice subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber.

(d)

Single play subscriber numbers reflect customers who subscribe to one of the Company’s allowance for doubtful accountsvideo, high-speed data and collection expenses, netvoice services.

(e)

Double play subscriber numbers reflect customers who subscribe to two of late fees billedthe Company’s video, high-speed data and voice services.

(f)

Triple play subscriber numbers reflect customers who subscribe to subscribers. Late fees billed toall three of the Company’s video, high-speed data and voice services.

(g)

Customer relationships represent the number of subscribers were $48 millionwho purchase at least one of the Company’s video, high-speed data and $130 million forvoice services. For example, a subscriber who purchases only high-speed data service and no video service will count as one customer relationship, and a subscriber who purchases both video and high-speed data services will also count as only one customer relationship. Customers who purchase wholesale transport or cloud services but do not purchase one of the three and nine months ended September 30, 2013, respectively, and $39 million and $112 million forCompany’s video, high-speed data or voice services are not included in the three and nine months ended September 30, 2012, respectively.Company’s subscriber results.

Selling, generalRevenue.  Business services revenue for the three and administrativesix months ended June 30, 2014 increased primarily due to growth in high-speed data and voice subscribers, an organic increase in cell tower backhaul revenue of $10 million and $21 million, respectively, and DukeNet revenue of $29 million and $58 million, respectively (the majority of which is included in wholesale transport).

Operating costs and expenses.  Operating costs and expenses for the three and ninesix months ended SeptemberJune 30, 20132014 increased primarily as a result of an increase in employee costs. The growth in employeesales and marketing costs, was primarily the result ofdue to increased headcount and higher compensation costs per employee, and, for the nine months ended September 30, 2013, $10 million of executive severance costs. For the three and nine months ended September 30, 2013, employee medicalas well as costs increased $5 million and $18 million, respectively. Selling, general and administrative expenses for the three months ended September 30, 2013associated with DukeNet. These increases were also impactedpartially offset by higher marketinglower voice costs (which included the impact of increased spending due to temporary blackouts resulting from programming vendor disputes)the in-sourcing of voice transport, switching and lower other operating costs. Selling, general and administrative expenses for the nine months ended September 30, 2013 were also impacted by two additional months of Insight costs.interconnection services.

Merger-related and restructuring costs.OIBDA.  In connection with the Insight acquisition, the Company incurred merger-related costs of $2 million and $9 million  OIBDA for the three and ninesix months ended SeptemberJune 30, 2013, respectively, and $7 million and $50 million for the three and nine months ended September 30, 2012, respectively.

The Company incurred restructuring costs of $21 million and $72 million for the three and nine months ended September 30, 2013, respectively, compared to $25 million and $48 million for the three and nine months ended September 30, 2012, respectively. These restructuring costs were primarily related to employee terminations and other exit costs. The Company expects to incur additional restructuring costs during the remainder of 2013 primarily related to employee terminations in connection with initiatives intended to improve operating efficiency.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Reconciliation of OIBDA to Operating Income. The following table reconciles OIBDA to Operating Income. In addition, the table provides the components from Operating Income to net income attributable to TWC shareholders for purposes of the discussions that follow (in millions):

       Three Months Ended    
September 30,
           Nine Months Ended    
September 30,
     
   2013   2012   % Change   2013   2012   % Change 

OIBDA

   $    1,982     $    1,914     3.6%    $5,873     $5,732     2.5% 

Depreciation

   (790)     (789)     0.1%    (2,371)     (2,377)     (0.3%) 

Amortization

   (32)     (31)     3.2%    (95)     (79)     20.3% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating Income

   1,160     1,094     6.0%    3,407     3,276     4.0% 

Interest expense, net

   (379)     (402)     (5.7%)    (1,175)     (1,204)     (2.4%) 

Other income, net

   —     496     (100.0%)     10     493     (98.0%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

Income before income taxes

   781     1,188     (34.3%)     2,242     2,565     (12.6%)  

Income tax provision

   (249)     (379)     (34.3%)     (828)     (920)     (10.0%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income

   532     809     (34.2%)     1,414     1,645     (14.0%)  

Less: Net income attributable to noncontrolling interests

   —     (1)     (100.0%)     —     (3)     (100.0%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income attributable to TWC shareholders

   $532     $808     (34.2%)     $    1,414     $    1,642     (13.9%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

OIBDA. OIBDA increased principally as a result of revenue growth, partially offset by higher cost of revenue and selling, general and administrative expenses.

Depreciation. Depreciation for the three and nine months ended September 30, 2013 benefited from decreases of $27 million and $130 million, respectively, associated with (i) certain assets acquired in the July 31, 2006 transactions with Adelphia Communications Corporation and Comcast Corporation (“Comcast”) that were fully depreciated as of July 31, 2012 and (ii) certain Insight assets (acquired on February 29, 2012) that were fully depreciated as of August 30, 2013. These benefits were partially offset by the impact of an increase in shorter-lived distribution system and capitalized software assets as well as, for the nine months ended September 30, 2013, the two additional months of Insight costs associated with its property, plant and equipment.

Amortization. For the nine months ended September 30, 2013, amortization increased primarily as a result of two additional months of Insight costs associated with its customer relationship intangible assets.

Operating Income. For the three and nine months ended September 30, 2013, Operating Income2014 increased primarily due to the increase in OIBDA, which, for the nine months ended September 30, 2013, wasrevenue, partially offset by the increase in amortization,higher operating costs and expenses, as discussed above.

Interest expense, net. Interest expense, net, decreased for the three and nine months ended September 30, 2013 primarily due to a decrease in the average debt outstanding during the periods as compared to 2012.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

Other income, net.Operations.  The financial results of the Other income, net, detail is shown inOperations segment for the table belowthree and six months ended June 30, 2014 and 2013 were as follows (in millions):

 

     Three Months Ended  
September 30,
       Nine Months Ended    
September 30,
 
   2013   2012   2013   2012 

Income from equity-method investments, net(a)

   $    $  438    $16     $445  

Gain on sale of investment in Clearwire Corporation

   —     64     —     64  

Loss on equity award reimbursement obligation to Time Warner(b)

   (3)     (7)     (8)     (5)  

Other investment losses(c)

   —     —     —     (12)  

Other

                
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income, net

   $  —      $496     $  10     $  493  
  

 

 

   

 

 

   

 

 

   

 

 

 
                                                                                                
   Three Months Ended
June 30,
   % Change   Six Months Ended
June 30,
   % Change 
   2014   2013     2014   2013   
       (recast)           (recast)     

Revenue:

            

Advertising

  $272    $260     4.6%    $519    $488     6.4%  

Other

   164     143     14.7%     317     292     8.6%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenue

   436     403     8.2%     836     780     7.2%  

Operating costs and expenses(a)

   263     169       55.6%     490     381     28.6%  
  

 

 

   

 

 

     

 

 

   

 

 

   

OIBDA

  $173    $234     (26.1%)    $346    $399     (13.3%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(a)      Amounts include total employee costs, as follows (in millions):

 

          

   Three Months Ended
June 30,
   % Change   Six Months Ended
June 30,
   % Change 
   2014   2013     2014   2013   
       (recast)           (recast)     

Employee costs

  $80    $79         1.3%     $163    $162     0.6%   
  

 

 

   

 

 

     

 

 

   

 

 

   

(a)

Income from equity-method investments, net, for the three and nine months ended September 30, 2012 primarily consists of a pretax gain of $430 million associated with SpectrumCo, LLC’s (“SpectrumCo”) sale of its advanced wireless spectrum licenses to Cellco Partnership (doing business as Verizon Wireless). SpectrumCo is a joint venture between TWC, Comcast and Bright House Networks, LLC.

(b)

See Note 6 to the accompanying consolidated financial statements for a discussion of the Company’s accounting for its equity award reimbursement obligation to Time Warner Inc. (“Time Warner”).

(c)

Other investment losses in 2012 represents an impairment of the Company’s investment in Canoe Ventures LLC, an equity-method investee.

Income tax provision.Revenue.  For the three months ended September 30, 2013 and 2012, the Company recorded income tax provisions of $249 million and $379 million, respectively. For the nine months ended September 30, 2013 and 2012, the Company recorded income tax provisions of $828 million and $920 million, respectively. The decrease in the income tax provision  Advertising revenue for the three and ninesix months ended SeptemberJune 30, 2013 was2014 increased primarily due to growth in political advertising revenue, as well as higher non-political revenue from ad rep agreements for the decrease in income before income taxes, which, as discussed above, included the SpectrumCo-related gain in 2012. The effective tax rates were 31.9% for both the threesix months ended SeptemberJune 30, 2014. The Company expects advertising revenue in the second half of 2014 to increase compared to the second half of 2013 and 2012 and 36.9% and 35.9% for the nine months ended September 30, 2013 and 2012, respectively.due to an increase in political advertising revenue.

The income tax provisions and the effective tax ratesOther revenue for the three and ninesix months ended SeptemberJune 30, 2013 include a benefit2014 increased primarily due to affiliate fees from the Residential Services segment as well as other distributors of $59 million related to statethe Lakers’ RSNs.

Operating costs and local tax matters, including $27 million resulting from income tax reform legislation enacted in North Carolina, which, along with other changes, phases in a reduction in North Carolina’s corporate income tax rate over several years.

The income tax provisionsexpenses.  Operating costs and the effective tax ratesexpenses for the three and ninesix months ended SeptemberJune 30, 2012 include (i) a benefit of $63 million2014 increased primarily related to a changeSportsNet LA content costs and growth in costs associated with ad rep agreements.

OIBDA.  OIBDA for the tax rate appliedthree and six months ended June 30, 2014 decreased due to calculate the Company’s net deferred income tax liabilityan increase in operating costs and expenses, partially offset by higher revenue, as a result of an internal reorganization effective on September 30, 2012; (ii) a benefit of $46 million related to the reversal of a valuation allowance against a deferred income tax assetdiscussed above.

Shared Functions.  Costs and expenses associated with the Company’s investment in Clearwire Corporation (“Clearwire”); and (iii) a chargeshared functions, which consist of $15 million related to the recording of a deferred income tax liabilityoperating costs associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) as well as other activities not directly attributable to a partnership basis difference.

Absent the impacts of the above items, the effective tax rates would have been 39.4% and 39.8%reportable segment, for the three and six months ended SeptemberJune 30, 2014 and 2013 and 2012, respectively, and 39.6% and 39.5% for the nine months ended September 30, 2013 and 2012, respectively.were as follows (in millions):

                                                                                                
   Three Months Ended
June 30,
   % Change   Six Months Ended
June 30,
   % Change 
   2014   2013     2014   2013   
       (recast)           (recast)     

Operating costs and expenses(a)

  $720    $723     (0.4%)   $1,447    $1,459     (0.8%) 

Merger-related and restructuring costs

   61     27     125.9%     141     58     143.1%  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total costs and expenses

  $781    $750     4.1%    $1,588    $1,517     4.7%  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(a)      Amounts include total employee costs, as follows (in millions):

 

          

   Three Months Ended
June 30,
   % Change   Six Months Ended
June 30,
   % Change 
   2014   2013     2014   2013   
       (recast)           (recast)     

Employee costs

  $318    $340     (6.5%)    $668    $705     (5.2%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

Net income attributable to TWC shareholdersOperating costs and net income per common share attributable to TWC common shareholders.expenses. Net income attributable to TWC shareholders  The decrease in operating costs and net income per common share attributable to TWC common shareholders were as follows (in millions, except per share data):

       Three Months Ended    
September 30,
           Nine Months Ended    
September 30,
     
   2013   2012   % Change   2013   2012   % Change 

Net income attributable to TWC shareholders

   $532     $808     (34.2%)     $    1,414     $    1,642     (13.9%)  
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income per common share attributable to TWC common shareholders:

            

Basic

   $1.86     $    2.64     (29.5%)    $4.85    $5.27     (8.0%) 
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted

   $    1.84     $2.60     (29.2%)    $4.81    $5.22     (7.9%) 
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income attributable to TWC shareholdersexpenses for the three and ninesix months ended SeptemberJune 30, 20132014 was driven by operating efficiencies, including decreased primarily due to the decrease in other income, net (which, as discussed above, included SpectrumCoheadcount.

Merger-related and Clearwire-related gainsrestructuring costs.  Merger-related costs of $52 million and $115 million were incurred for the three and ninesix months ended SeptemberJune 30, 2012), partially offset by an increase in Operating Income and decreases in income tax provision and interest expense, net. Net income per common share attributable to TWC common shareholders2014, respectively. These costs primarily consisted of Comcast merger-related costs, which, for the three and ninesix months ended SeptemberJune 30, 2014, included employee retention costs of $40 million and $69 million, respectively, and advisory and legal fees of $9 million and $42 million, respectively. Merger-related costs for the three and six months ended June 30, 2014 also included $3 million and $4 million, respectively, incurred in connection with the DukeNet acquisition. During the three and six months ended June 30, 2013, benefited from lower average common shares outstanding as a resultthe Company incurred merger-related costs of share repurchases under$5 million and $7 million, respectively, in connection with the Stock Repurchase Program.Insight acquisition. The Company expects to incur additional merger-related costs during the remainder of 2014 in connection with the Comcast merger.

Restructuring costs were $9 million and $26 million for the three and six months ended June 30, 2014, respectively, and $22 million and $51 million for the three and six months ended June 30, 2013, respectively, primarily related to employee terminations and other exit costs. The Company expects to incur additional restructuring costs during the remainder of 2014.

FINANCIAL CONDITION AND LIQUIDITY

Management believes that cash generated by or available to TWC should be sufficient to fund its capital and liquidity needs for the next twelve months and for the foreseeable future thereafter, including the pending DukeNet acquisition, quarterly dividend payments common stock repurchases and maturities of long-term debt. TWC’s sources of cash include cash and equivalents on hand, short-term investments in U.S. Treasury securities, cash provided by operating activities and borrowing capacity under the Company’s $3.5 billion senior unsecured five-year revolving credit facility (the “Revolving Credit Facility”) and the Company’s $2.5 billion unsecured commercial paper program (which is supported by unused committed capacity under the Revolving Credit Facility), as well as access to capital markets.

In accordance with the Company’s investment policy of diversifying its investments and limiting the amount of its investments in a single entity or fund, the Company may invest its cash and equivalents in a combination of money market and government funds and U.S. Treasury securities, as well as other similar instruments. As of September 30, 2013, the majority of the Company’s cash and equivalents was invested in money market funds and income earning bank deposits, including certificates of deposit. Additionally, as of September 30, 2013, the Company held short-term investments in U.S. Treasury securities.

TWC’s unused committed financial capacity was $4.561$2.696 billion as of SeptemberJune 30, 2013,2014, reflecting $876$403 million of cash and equivalents $250 million of short-term investments in U.S. Treasury securities and $3.435$2.293 billion of available borrowing capacity under the Revolving Credit Facility.

Current Financial Condition

As of SeptemberJune 30, 2013,2014, the Company had $25.032$24.580 billion of debt, $876$403 million of cash and equivalents $250 million of short-term investments in U.S. Treasury securities (net debt of $23.906$24.177 billion, defined as total debt less cash and equivalentsequivalents) and short-term investments in U.S. Treasury securities) and $6.662$7.410 billion of total TWC shareholders’ equity. As of December 31, 2012,2013, the Company had $26.689$25.052 billion of debt, $3.304 billion$525 million of cash and equivalents $150 million of short-term investments in U.S. Treasury securities (net debt of $23.235$24.527 billion), $300 million of mandatorily redeemable non-voting Series A Preferred Equity Membership Units (the “TW NY Cable Preferred Membership Units”) issued by a subsidiary of TWC, Time Warner NY Cable LLC (“TW NY Cable”), and $7.279$6.943 billion of total TWC shareholders’ equity.

The following table shows the significant items contributing to the change in net debt from December 31, 2013 to June 30, 2014 (in millions):

Balance as of December 31, 2013

$24,527 

Cash provided by operating activities

(3,092)

Capital expenditures

2,074 

Dividends paid

428 

Repurchases of common stock

259 

Proceeds from exercise of stock options

(118)

All other, net

99 

Balance as of June 30, 2014

$24,177 

On July 24, 2014, the Company’s Board of Directors declared a quarterly cash dividend of $0.75 per share of TWC common stock, payable in cash on September 15, 2014 to stockholders of record at the close of business on August 29, 2014.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

The following table shows the significant items contributing to the change in net debt from December 31, 2012 to September 30, 2013 (in millions):

Balance as of December 31, 2012

$        23,235 

Cash provided by operating activities

(4,154)

Capital expenditures

2,371 

Repurchases of common stock

1,856 

Dividends paid

573 

Redemption of mandatorily redeemable preferred equity

300 

Decrease in the fair value of debt subject to interest rate swaps(a)

(159)

Proceeds from exercise of stock options

(124)

All other, net

Balance as of September 30, 2013

 $23,906 

(a)

The decrease in the fair value of debt subject to interest rate swaps is equal to the net decrease in the fair value of the underlying swaps, which are separately recorded on a gross basis as assets and liabilities in the accompanying consolidated balance sheet. See Note 6 to the accompanying consolidated financial statements for a discussion of the Company’s accounting for its interest rate swaps.

On April 28, 2011, TWC filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (the “SEC”) that allows TWC to offer and sell from time to time a variety of securities.

As previously discussed, on October 4, 2013, TWC entered into a definitive agreement to acquire DukeNet for $600 million in cash, including the repayment of debt. The transaction, which is subject to various customary closing conditions, including receipt of regulatory approvals, is expected to close in the first quarter of 2014.

On October 24, 2013, the Company’s Board of Directors declared a quarterly cash dividend of $0.65 per share of TWC common stock, payable in cash on December 16, 2013 to stockholders of record at the close of business on November 29, 2013.

From the inception of the Stock Repurchase Program in the fourth quarter of 2010 through October 29, 2013, the Company repurchased 87.0 million shares of TWC common stock for $6.978 billion and, as of October 29, 2013, the Company had $3.489 billion remaining under the Stock Repurchase Program.

Cash Flows

Cash and equivalents decreased $2.428 billion$122 million and $1.324 billion$681 million for the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, respectively. Components of these changes are discussed below in more detail.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

Operating Activities

Details of cash provided by operating activities are as follows (in millions):

 

       Nine Months Ended    
September 30,
 
   2013   2012 

OIBDA

   $5,873     $5,732  

Noncash equity-based compensation

   100     104  

Net interest payments(a)

   (1,304)     (1,302)  

Net income tax payments(b)

   (471)     (291)  

Pension plan contributions

   (5)     (152)  

All other, net, including working capital changes

   (39)     24  
  

 

 

   

 

 

 

Cash provided by operating activities

   $        4,154    $        4,115  
  

 

 

   

 

 

 
                                                    
   Six Months Ended June 30, 
   2014   2013 

Operating Income

  $2,255    $2,247  

Depreciation

   1,570     1,581  

Amortization

   68     63  

Noncash equity-based compensation

   93     74  

Cash paid for interest, net(a)

   (745)     (802)  

Cash paid for income taxes, net(b)

   (95)     (190)  

All other, net, including working capital changes

   (54)     (28)  
  

 

 

   

 

 

 

Cash provided by operating activities

  $3,092    $2,945  
  

 

 

   

 

 

 

 

(a) 

Amounts include interest income received (including amounts received under interest rate swap contracts) of $121$74 million and $131$78 million for the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, respectively.

(b) 

Amounts include cash refunds of income tax refunds receivedtaxes of $1$3 million and $9$1 million for the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, respectively.

Cash provided by operating activities increased from $4.115$2.945 billion for the ninesix months ended SeptemberJune 30, 20122013 to $4.154$3.092 billion for the ninesix months ended SeptemberJune 30, 2013.2014. This increase was primarily related to an increasedecreases in OIBDAcash paid for income taxes, net, and cash paid for interest, net.

Cash paid for income taxes, net, for the six months ended June 30, 2014 decreased primarily as a decreaseresult of certain capital expenditure-related deductions, including the tangible repair regulations (e.g., de minimus expensing) released in pension plan contributions,late 2013, which was partially offset by an increase in net income tax payments and a change in working capital requirements.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted, which provides for the extension of 2012 bonus depreciation deductions of 50% of the cost of the Company’s qualified capital expenditures for 2013. This extension largely offsets the Company’s increase in net income tax payments in 2013 from thecontinued reversal of bonus depreciation benefits recorded in prior years. As discussed in the 2012 Form 10-K, net income tax payments in 2012 benefited from a number of deductions that will not recur in 2013 (including, for the nine months ended September 30, 2012, certain Insight-related items) and, as a result, theThe Company expects that cash paid for income taxes, net, income tax payments in 20132014 will increasedecrease compared to 2012.2013.

NetCash paid for interest, paymentsnet, for the ninesix months ended SeptemberJune 30, 2013 were essentially flat2014 decreased primarily as a result of the maturitiesmaturity of TWC’s 5.400%6.200% senior notes due July 20122013 ($1.5 billion in aggregate principal amount), Time Warner Cable Enterprises LLC’s (“TWCE”) 8.875% senior notes due October 2012 ($350 million in aggregate principal amount) and Time Warner Entertainment Company, L.P.’s (“TWE”), a subsidiary of the Company at the maturity date, 10.150% senior notes due May 2012 ($250 million in aggregate principal amount), partially offset by interest payments related to TWC’s 4.500% senior unsecured debentures due 2042 ($1.25 billion in aggregate principal amount) issued in August 2012 and 5.250% senior unsecured notes due 2042 (£650 million in aggregate principal amount) issued in June 2012..

The Company has not made anyno cash contributions to its qualified defined benefit pension plans (the “qualified pension plans”) during the ninesix months ended SeptemberJune 30, 2013.2014. As of SeptemberJune 30, 2013,2014, the qualified pension plans were estimated to be overfunded by $441$328 million, and the Company does not expect to make any discretionary cash contributions to the qualified pension plans during the remainder of 2013.2014. For the nonqualified defined benefit pension plan (the “nonqualified pension plan”), the Company will continue to make contributions during the remainder of 2014 to the extent benefits are paid.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

Investing Activities

Details of cash used by investing activities are as follows (in millions):

 

       Nine Months Ended    
September 30,
 
   2013   2012 

Capital expenditures

   $(2,371)     $        (2,191)  

Business acquisitions, net of cash acquired:

    

Insight

   —     (1,339)  

All other

   —     (1)  

Purchases of investments:

    

Short-term investments in U.S. Treasury securities

   (575)     —  

Loan to Sterling Entertainment Enterprises, LLC(a)

   —     (40)  

All other

   (11)     (17)  

Return of capital from investees(b)

       1,112  

Proceeds from sale, maturity and collection of investments

   476     —  

Acquisition of intangible assets

   (30)     (27)  

Other investing activities

   19     21  
  

 

 

   

 

 

 

Cash used by investing activities

   $        (2,485)     $(2,482)  
  

 

 

   

 

 

 

(a)

Amount represents a loan made to Sterling Entertainment Enterprises, LLC (doing business as SportsNet New York), an equity-method investee, in the first quarter of 2012 that was repaid during the fourth quarter of 2012.

(b)

Amount for 2012 represents the proceeds from SpectrumCo’s sale of its advanced wireless spectrum licenses.

                                                    
   Six Months Ended June 30, 
   2014   2013 

Capital expenditures

  $(2,074)    $(1,597)  

Purchases of investments:

    

Short-term investments in U.S. Treasury securities

   —     (575)  

All other

   (2)     (6)  

Return of capital from investees

   —      

Proceeds from sale, maturity and collection of investments

   18     151  

Acquisition of intangible assets

   (24)     (20)  

Other investing activities

   15     13  
  

 

 

   

 

 

 

Cash used by investing activities

  $(2,067)    $(2,027)  
  

 

 

   

 

 

 

Cash used by investing activities was $2.485increased from $2.027 billion for the ninesix months ended SeptemberJune 30, 2013 compared to $2.482$2.067 billion for the ninesix months ended SeptemberJune 30, 2012. Cash used by investing activities for the nine months ended September 30, 2013 primarily consisted of2014, principally due to an increase in capital expenditures, andpartially offset by the 2013 purchases of short-term investments in U.S. Treasury securities (net of maturities). Cash used by investing activities for the nine months ended September 30, 2012 primarily consisted of capital expenditures and the acquisition of Insight, partially offset by the proceeds from the sale of SpectrumCo licenses.

TWC’s capital expenditures by major category were as follows (in millions):

 

                                                    
      Nine Months Ended    
September 30,
   Six Months Ended June 30, 
  2013   2012   2014   2013 

Customer premise equipment(a)

   $829     $832    $794    $572  

Scalable infrastructure(b)

   592     537     538     421  

Line extensions(c)

   421     280     321     253  

Upgrades/rebuilds(d)

   85     69     75     53  

Support capital(e)

   444     473     346     298  
  

 

   

 

   

 

   

 

 

Total capital expenditures

   $        2,371     $        2,191    $2,074    $1,597  
  

 

   

 

   

 

   

 

 

 

(a) 

Amounts represent costs incurred in the purchase and installation of equipment that resides at a customer’s home or business for the purpose of receiving/sending video, high-speed data and/or voice signals. Such equipment includes set-top boxes, remote controls, high-speed data modems (including wireless), telephone modems and the costs of installing such new equipment. Customer premise equipment also includes materials and labor costs incurred to install the “drop” cable that connects a customer’s dwelling or business to the closest point of the main distribution network.

(b) 

Amounts represent costs incurred in the purchase and installation of equipment that controls signal reception, processing and transmission throughout TWC’s distribution network, as well as controls and communicates with the equipment residing at a customer’s home or business. Also included in scalable infrastructure is certain equipment necessary for content aggregation and distribution (video-on-demand equipment) and equipment necessary to provide certain video, high-speed data and voice service features (voicemail, email, etc.).

(c) 

Amounts represent costs incurred to extend TWC’s distribution network into a geographic area previously not served. These costs typically include network design, the purchase and installation of fiber optic and coaxial cable and certain electronic equipment.

(d) 

Amounts primarily represent costs incurred to upgrade or replace certain existing components or an entire geographic area of TWC’s distribution network. These costs typically include network design, the purchase and installation of fiber optic and coaxial cable and certain electronic equipment.

(e) 

Amounts represent all other capital purchases required to run day-to-day operations. These costs typically include vehicles, land and buildings, computer hardware/software, office equipment, furniture and fixtures, tools and test equipment. Amounts include capitalized software costs of $235$162 million and $205$164 million for the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, respectively.

The Company expects capital expenditures to be nearly $4.0 billion in 2014 as the Company invests to improve network reliability, upgrade older customer premise equipment and expand its network to additional residences, commercial buildings and cell towers.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

 

The Company expects capital expenditures to be approximately $3.2 billion in 2013.

Financing Activities

Details of cash used by financing activities are as follows (in millions):

 

                                                    
      Nine Months Ended    
September 30,
   Six Months Ended June 30, 
  2013   2012   2014   2013 

Proceeds from issuance of long-term debt

   $—     $2,258  

Short-term borrowings, net

  $1,147    $—  

Repayments of long-term debt

   (1,500)     (1,750)     (1,750)     —  

Repayments of long-term debt assumed in acquisitions

   —     (1,730)  

Debt issuance costs

   —     (25)  

Redemption of mandatorily redeemable preferred equity

   (300)     —  

Dividends paid

   (428)     (386)  

Repurchases of common stock

   (1,856)     (1,287)     (259)     (1,304)  

Dividends paid

   (573)     (529)  

Proceeds from exercise of stock options

   124     124     118     88  

Excess tax benefit from equity-based compensation

   81     73     99     66  

Taxes paid in cash in lieu of shares issued for equity-based compensation

   (64)     (43)     (68)     (55)  

Other financing activities

   (9)     (48)     (6)     (8)  
  

 

   

 

   

 

   

 

 

Cash used by financing activities

   $        (4,097)     $        (2,957)    $(1,147)    $(1,599)�� 
  

 

   

 

   

 

   

 

 

Cash used by financing activities was $4.097$1.147 billion for the ninesix months ended SeptemberJune 30, 20132014 compared to $2.957$1.599 billion for the ninesix months ended SeptemberJune 30, 2012.2013. Cash used by financing activities for the ninesix months ended SeptemberJune 30, 20132014 primarily consisted of repurchases of TWC common stock, the repaymentrepayments of TWC’s 6.200%8.25% senior notes due July 2013,February 2014 ($750 million in aggregate principal amount) and 7.50% senior notes due April 2014 ($1.0 billion in aggregate principal amount), the payment of quarterly cash dividends and repurchases of TWC common stock (prior to the redemptionsuspension of the TW NY Cable Preferred Membership Units.Stock Repurchase Program in connection with the announcement of the Comcast merger), partially offset by borrowings under the Company’s commercial paper program. Cash used by financing activities for the ninesix months ended SeptemberJune 30, 20122013 primarily consisted of the repayments of TWE’s 10.150% senior notes due May 2012 and TWC’s 5.400% senior notes due July 2012, the repayment of Insight’s senior credit facility and senior notes, repurchases of TWC common stock and the payment of quarterly cash dividends, partially offset by the net proceeds of the public debt issuances in June and August 2012.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

dividends.

Outstanding Debt and Mandatorily Redeemable Preferred Equity and Available Financial Capacity

Debt and mandatorily redeemable preferred equity as of SeptemberJune 30, 20132014 and December 31, 2012 were2013 was as follows:

 

                                                                                                        
         Outstanding Balance as of   Maturity  Interest Rate Outstanding Balance as of 
  Maturity  Interest Rate   September 30,
2013
   December 31,
2012
    June 30,
2014
   December 31,
2013
 
         (in millions)       (in millions) 

TWC notes and debentures(a)

  2014-2042   5.735%(b)    $22,937     $    24,594    2015-2042  5.705%(b) $21,280    $22,938  

TWCE debentures(c)

  2023-2033   7.878%(b)     2,066     2,070    2023-2033  7.891%(b)  2,063     2,065  

Revolving credit facility(d)

  2017     —     —    2017    —     —  

Commercial paper program(d)

  2017     —     —    2017  0.316%(b)  1,147     —  

Capital leases

  2016-2032     29     25    2016-2042    90     49  
      

 

   

 

      

 

   

 

 

Total debt(e)

       25,032     26,689       $24,580    $25,052  

Mandatorily redeemable preferred equity(e)

     8.210%     —     300  
      

 

   

 

      

 

   

 

 

Total debt and mandatorily redeemable preferred equity

       $    25,032    $26,989  
      

 

   

 

 

 

(a) 

Outstanding balance amounts of the TWC notes and debentures as of SeptemberJune 30, 20132014 and December 31, 20122013 each include £1.267 billion and £1.266 billion, respectively, of senior unsecured notes valued at $2.050$2.168 billion and $2.058$2.098 billion, respectively, using the exchange rates at each date.

(b) 

Rate represents a weighted-average effective interest rate as of SeptemberJune 30, 20132014 and, for the TWC notes and debentures, includes the effects of interest rate swaps and cross-currency swaps.

(c) 

Outstanding balance amounts of the TWCETime Warner Cable Enterprises LLC (“TWCE”) debentures as of SeptemberJune 30, 20132014 and December 31, 20122013 include an unamortized fair value adjustment of $66$63 million and $70$65 million, respectively, primarily consisting of the fair value adjustment recognized as a result of the 2001 merger of America Online, Inc. (now known as AOL Inc.) and Time Warner Inc. (now known as Historic TW Inc.).

(d) 

As of SeptemberJune 30, 2013,2014, the Company had $3.435$2.293 billion of available borrowing capacity under the Revolving Credit Facility (which reflects a reduction of $65$60 million for outstanding letters of credit backed by the Revolving Credit Facility).

(e) 

Outstanding balance amounts of total debt as of SeptemberJune 30, 20132014 and December 31, 20122013 include current maturities of long-term debt of $1.771$1.663 billion and $1.518$1.767 billion, respectively. Additionally, as of December 31, 2012, the TW NY Cable Preferred Membership Units, which matured and were redeemed on August 1, 2013, were classified as a current liability in the accompanying consolidated balance sheet.

See the 20122013 Form 10-K for further details regarding the Company’s outstanding debt and mandatorily redeemable preferred equity and other financing arrangements, including certain information about maturities, covenants and rating triggers related to such debt and financing arrangements. As of SeptemberJune 30, 2013,2014, TWC was in compliance with the leverage ratio covenant of the Revolving Credit Facility, with a ratio of consolidated total debt as of SeptemberJune 30, 20132014 to consolidated EBITDA for the twelve months ended SeptemberJune 30, 20132014 of

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

approximately 3.0 times. In accordance with the Revolving Credit Facility agreement, consolidated total debt as of SeptemberJune 30, 20132014 was calculated as (a) total debt per the accompanying consolidated balance sheet less the TWCE unamortized fair value adjustment (discussed above) and the fair value of debt subject to interest rate swaps, less (b) total cash and short-term investments in U.S. Treasury securities per the accompanying consolidated balance sheet in excess of $25 million. In accordance with the Revolving Credit Facility agreement, consolidated EBITDA for the twelve months ended SeptemberJune 30, 20132014 was calculated as OIBDAOperating Income plus depreciation, amortization and equity-based compensation expense.

Contractual and Other Obligations

Contractual Obligations

The Company has obligations to make future payments for goods and services under certain contractual arrangements. These contractual obligations secure the future rights to various assets and services to be used in the normal course of the Company’s operations. For example, the Company is contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with applicable accounting rules, the future rights and obligations pertaining to firm commitments, such as operating lease obligations and certain purchase obligations under contracts, are not reflected as assets or liabilities in the accompanying consolidated balance sheet.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

The following table summarizes the Company’s aggregate contractual obligations outstanding as of September 30, 2013, and the estimated timing and effect that such obligations are expected to have on the Company’s liquidity and cash flows in future periods (in millions):

   2013(a)   2014-2015   2016-2017   Thereafter   Total 

Programming and content purchases(b)

   $1,256     $        8,512     $6,449     $14,436     $        30,653  

Outstanding debt obligations(c)

   —     2,255     2,006     20,706     24,967  

Interest and dividends(d)

   315     3,012     2,858     16,057     22,242  

Operating leases(e)

   38     281     223     352     894  

Voice connectivity(f)

   25         —     —     27  

Data processing services

   17     132     91     —     240  

High-speed data connectivity(g)

   16     54     11     58     139  

Other(h)

   137     184     49     60     430  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $        1,804     $14,432     $        11,687    $        51,669     $79,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(a)

2013 amounts represent the Company’s contractual obligations for the three months ended December 31, 2013.

(b)

Programming and content purchases represent contracts that the Company has with cable television networks and broadcast stations to provide programming services to its subscribers. The amounts included above represent estimates of the future programming costs for these contract requirements and commitments based on subscriber numbers and tier placement as of September 30, 2013 applied to the per-subscriber rates contained in these contracts. Actual amounts due under such contracts may differ from the amounts above based on the actual subscriber numbers and tier placements. These amounts also include programming rights negotiated directly with content owners for distribution on TWC-owned or managed channels or networks.

(c)

Outstanding debt obligations represent principal amounts due on outstanding debt obligations as of September 30, 2013. Amounts do not include any fair value adjustments, bond premiums, discounts, interest rate derivatives, interest payments or dividends.

(d)

Amounts are based on the outstanding debt balances, respective interest or dividend rates and maturity schedule of the respective instruments as of September 30, 2013. Interest ultimately paid on these obligations may differ based on any potential future refinancings entered into by the Company.

(e)

The Company has lease obligations under various operating leases including minimum lease obligations for real estate and operating equipment.

(f)

Voice connectivity obligations relate to transport, switching and interconnection services, primarily provided by Sprint, that allow for the origination and termination of local and long-distance telephony traffic. These expenses also include related technical support services. As discussed in “Results of Operations—Three and Nine Months Ended September 30, 2013 Compared to Three and Nine Months Ended September 30, 2012—Cost of Revenue,” the Company is in an ongoing process of replacing Sprint as the provider of transport, switching and interconnection services. There is generally no obligation to purchase these services if the Company is not providing voice service. The amounts included above are estimated based on the number of voice subscribers as of September 30, 2013 and the per-subscriber contractual rates contained in the contracts that were in effect as of September 30, 2013 and also reflect the replacement of Sprint, which is expected to be completed in the first quarter of 2014.

(g)

High-speed data connectivity obligations are based on the contractual terms for bandwidth circuits that were in use as of September 30, 2013.

(h)

Other contractual obligations does not include the Company’s reserve for uncertain tax positions and related accrued interest and penalties, which as of September 30, 2013 totaled $94 million, as the specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenue, OIBDA,Operating Income, cash provided by operating activities and other financial measures. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. These forward-looking statements are included throughout this report and are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are subject to uncertainty and changes in circumstances.

TIME WARNER CABLE INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS

OF OPERATIONS AND FINANCIAL CONDITION—(Continued)

The Company operates in a highly competitive, consumer and technology driven and rapidly changing business that is affected by government regulation and economic, strategic, political and social conditions. Various factors could adversely affect the operations, business or financial results of TWC in the future and cause TWC’s actual results to differ materially from those contained in the forward-looking statements, including those factors discussed in detail in Item 1A, “Risk Factors,” in the 20122013 Form 10-K, and in TWC’s other filings made from time to time with the SEC after the date of this report. In addition, important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include:

 

increased competition from video, high-speed data, networking and voice providers, particularly direct broadcast satellite operators, local and long-distance service providers,telecommunication carriers, companies that deliver programming over broadband Internet connections, and wireless broadband and phone providers;

 

the Company’s ability to deal effectively with the current challenging economic environment or further deterioration in the economy, which may negatively impact customers’ demand for the Company’s services and also result in a reduction in the Company’s advertising revenue;

 

the Company’s continued ability to exploit new and existing technologies that appeal to residential and business services customers and advertisers;

 

changes in the regulatory and tax environments in which the Company operates, including, among others, regulation of broadband Internet services, “net neutrality” legislation or regulation and federal, state and local taxation;

 

increased difficulty negotiating programming and retransmission agreements on favorable terms, resulting in increased costs to the Company and/or the loss of popular programming; and

 

changes in, or impediments to executing on, the Company’s plans, initiatives and strategies.strategies, including the proposed Comcast merger.

Any forward-looking statements made by the Company in this document speak only as of the date on which they are made. The Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of changes in circumstances, new information, subsequent events or otherwise.

TIME WARNER CABLE INC.

ITEM 4. CONTROLS AND PROCEDURES.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 20132014 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

TIME WARNER CABLE INC.

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

                                                
  September 30,
2013
   December 31,
2012
   June 30,
2014
   December 31,
2013
 
  (in millions)   (in millions) 

ASSETS

        

Current assets:

        

Cash and equivalents

   $876     $3,304    $403    $525  

Short-term investments in U.S. Treasury securities

   250     150  

Receivables, less allowances of $91 million and $65 million
as of September 30, 2013 and December 31, 2012, respectively

   892     883  

Receivables, less allowances of $131 million and $77 million as of June 30, 2014 and December 31, 2013, respectively

   906     954  

Deferred income tax assets

   309     317     348     334  

Other current assets

   329     223     331     331  
  

 

   

 

   

 

   

 

 

Total current assets

   2,656     4,877     1,988     2,144  

Investments

   83     87     68     56  

Property, plant and equipment, net

   14,627     14,742     15,604     15,056  

Intangible assets subject to amortization, net

   573     641     576     552  

Intangible assets not subject to amortization

   26,012     26,011     26,012     26,012  

Goodwill

   2,886     2,889     3,137     3,196  

Other assets

   594     562     1,071     1,257  
  

 

   

 

   

 

   

 

 

Total assets

   $47,431     $49,809    $48,456    $48,273  
  

 

   

 

   

 

   

 

 

LIABILITIES AND EQUITY

        

Current liabilities:

        

Accounts payable

   $468     $647    $565    $565  

Deferred revenue and subscriber-related liabilities

   192     183     195     188  

Accrued programming expense

   897     872  

Accrued programming and content expense

   895     869  

Current maturities of long-term debt

   1,771     1,518     1,663     1,767  

Mandatorily redeemable preferred equity issued by a subsidiary

   —     300  

Other current liabilities

   1,636     1,805     1,956     1,837  
  

 

   

 

   

 

   

 

 

Total current liabilities

   4,964     5,325     5,274     5,226  

Long-term debt

   23,261     25,171     22,917     23,285  

Deferred income tax liabilities, net

   11,714     11,280     12,162     12,098  

Other liabilities

   826     750     689     717  

Commitments and contingencies (Note 13)

    

Commitments and contingencies (Note 12)

    

TWC shareholders’ equity:

        

Common stock, $0.01 par value, 282.9 million and 297.7 million shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively

        

Common stock, $0.01 par value, 279.3 million and 277.9 million shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

        

Additional paid-in capital

   7,056     7,576     6,940     6,951  

Retained earnings

   119     363  

Accumulated other comprehensive loss, net

   (516)     (663)  

Retained earnings (accumulated deficit)

   539     (55)  

Accumulated other comprehensive income (loss), net

   (72)     44  
  

 

   

 

   

 

   

 

 

Total TWC shareholders’ equity

   6,662     7,279     7,410     6,943  

Noncontrolling interests

                
  

 

   

 

   

 

   

 

 

Total equity

   6,666     7,283     7,414     6,947  
  

 

   

 

   

 

   

 

 

Total liabilities and equity

   $47,431     $49,809    $48,456    $48,273  
  

 

   

 

   

 

   

 

 

See accompanying notes.

TIME WARNER CABLE INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

       Three Months Ended    
September 30,
       Nine Months Ended    
September 30,
 
         2013               2012               2013               2012       
   (in millions, except per share data) 

Revenue

   $          5,518     $          5,363     $          16,543     $          15,901  

Costs and expenses:

        

Cost of revenue(a)

   2,564     2,499     7,764     7,377  

Selling, general and administrative(a)

   949     918     2,825     2,694  

Depreciation

   790     789     2,371     2,377  

Amortization

   32     31     95     79  

Merger-related and restructuring costs

   23     32     81     98  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   4,358     4,269     13,136     12,625  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

   1,160     1,094     3,407     3,276  

Interest expense, net

   (379)     (402)     (1,175)     (1,204)  

Other income, net

   —     496     10     493  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   781     1,188     2,242     2,565  

Income tax provision

   (249)     (379)     (828)     (920)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   532     809     1,414     1,645  

Less: Net income attributable to noncontrolling interests

   —     (1)     —     (3)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

   $532     $808     $1,414     $1,642  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share attributable to TWC common shareholders:

        

Basic

   $1.86     $2.64     $4.85     $5.27  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $1.84     $2.60     $4.81     $5.22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding:

        

Basic

   285.0     305.7     289.9     310.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   289.0     310.2     293.8     314.8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share of common stock

   $0.65     $0.56     $1.95     $1.68  
  

 

 

   

 

 

   

 

 

   

 

 

 

(a)

Cost of revenue and selling, general and administrative expenses exclude depreciation.

                                                        
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2014   2013   2014   2013 
       (recast)       (recast) 
   (in millions, except per share data) 

Revenue

  $5,726    $5,550    $11,308    $11,025  

Costs and expenses:

        

Programming and content

   1,341     1,234     2,650     2,509  

Sales and marketing

   544     496     1,099     969  

Technical operations

   371     363     742     735  

Customer care

   207     187     412     384  

Other operating

   1,209     1,233     2,371     2,479  

Depreciation

   795     792     1,570     1,581  

Amortization

   35     31     68     63  

Merger-related and restructuring costs

   61     27     141     58  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   4,563     4,363     9,053     8,778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

   1,163     1,187     2,255     2,247  

Interest expense, net

   (349)     (398)     (713)     (796)  

Other income, net

       11     23     10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   822     800     1,565     1,461  

Income tax provision

   (323)     (319)     (587)     (579)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   499     481     978     882  

Less: Net income attributable to noncontrolling interests

   —     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

  $499    $481    $978    $882  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share attributable to TWC common shareholders:

        

Basic

  $1.77    $1.65    $3.48    $3.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $1.76    $1.64    $3.46    $2.98  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding:

        

Basic

   278.8     289.6     278.3     292.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   282.4     293.3     282.1     296.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share of common stock

  $0.75    $0.65    $1.50    $1.30  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

TIME WARNER CABLE INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

                                            
      Three Months Ended    
September 30,
       Nine Months Ended    
September 30,
   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
          2013                   2012                   2013                   2012           2014   2013   2014   2013 
  (in millions)   (in millions) 

Net income

   $532     $809     $1,414     $1,645    $499    $481    $978    $882  

Change in accumulated unrealized losses on pension benefit obligation, net of tax

   10         56      

Change in accumulated deferred gains (losses) on cash flow hedges, net of tax

   77     46     91      

Change in accumulated unrealized losses on pension benefit obligation, net of income tax benefit (provision) of $16 million and $(21) million for the three months ended June 30, 2014 and 2013, respectively, and $16 million and $(28) million for the six months ended June 30, 2014 and 2013, respectively

   (24)     34     (25)     46  

Change in accumulated deferred gains (losses) on cash flow hedges, net of income tax benefit (provision) of $28 million and $(3) million for the three months ended June 30, 2014 and 2013, respectively, and $57 million and $(10) million for the six months ended June 30, 2014 and 2013, respectively

   (46)         (91)     14  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other comprehensive income

   87     53     147     18  

Other comprehensive income (loss)

   (70)     37     (116)     60  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income

   619     862     1,561     1,663     429     518     862     942  

Less: Comprehensive income attributable to noncontrolling interests

   —     (1)     —     (3)     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income attributable to TWC shareholders

   $619     $861     $1,561     $1,660    $429    $518    $862    $942  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

See accompanying notes.

TIME WARNER CABLE INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

                                        
      Nine Months Ended    
September 30,
   Six Months Ended
June 30,
 
          2013                   2012           2014   2013 
  (in millions)   (in millions) 

OPERATING ACTIVITIES

        

Net income

   $1,414     $1,645    $978    $882  

Adjustments for noncash and nonoperating items:

        

Depreciation

   2,371     2,377     1,570     1,581  

Amortization

   95     79     68     63  

Pretax gain on sale of investment in Clearwire Corporation

   —     (64)  

Income from equity-method investments, net of cash distributions

   (9)     (433)     (16)     (9)  

Deferred income taxes

   353     409     123     224  

Equity-based compensation expense

   100     104     93     74  

Excess tax benefit from equity-based compensation

   (81)     (73)     (99)     (66)  

Changes in operating assets and liabilities, net of acquisitions and dispositions:

        

Receivables

   17     (31)     41     30  

Accounts payable and other liabilities

   (137)     105     326     138  

Other changes

   31     (3)         28  
  

 

   

 

   

 

   

 

 

Cash provided by operating activities

   4,154     4,115     3,092     2,945  
  

 

   

 

 

INVESTING ACTIVITIES

        

Capital expenditures

   (2,371)     (2,191)     (2,074)     (1,597)  

Business acquisitions, net of cash acquired

   —     (1,340)  

Purchases of investments

   (586)     (57)     (2)     (581)  

Return of capital from investees

       1,112     —      

Proceeds from sale, maturity and collection of investments

   476     —     18     151  

Acquisition of intangible assets

   (30)     (27)     (24)     (20)  

Other investing activities

   19     21     15     13  
  

 

   

 

   

 

   

 

 

Cash used by investing activities

   (2,485)     (2,482)     (2,067)     (2,027)  
  

 

   

 

 

FINANCING ACTIVITIES

        

Proceeds from issuance of long-term debt

   —     2,258  

Short-term borrowings, net

   1,147     —  

Repayments of long-term debt

   (1,500)     (1,750)     (1,750)     —  

Repayments of long-term debt assumed in acquisitions

   —     (1,730)  

Debt issuance costs

   —     (25)  

Redemption of mandatorily redeemable preferred equity

   (300)     —  

Dividends paid

   (428)     (386)  

Repurchases of common stock

   (1,856)     (1,287)     (259)     (1,304)  

Dividends paid

   (573)     (529)  

Proceeds from exercise of stock options

   124     124     118     88  

Excess tax benefit from equity-based compensation

   81     73     99     66  

Taxes paid in cash in lieu of shares issued for equity-based compensation

   (64)     (43)     (68)     (55)  

Other financing activities

   (9)     (48)     (6)     (8)  
  

 

   

 

   

 

   

 

 

Cash used by financing activities

   (4,097)     (2,957)     (1,147)     (1,599)  
  

 

   

 

   

 

   

 

 

Decrease in cash and equivalents

   (2,428)     (1,324)     (122)     (681)  

Cash and equivalents at beginning of period

   3,304     5,177     525     3,304  
  

 

   

 

   

 

   

 

 

Cash and equivalents at end of period

   $876     $3,853    $403    $2,623  
  

 

   

 

   

 

   

 

 

See accompanying notes.

TIME WARNER CABLE INC.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

                                                               
  TWC
  Shareholders’  
Equity
   Non-
    controlling    
Interests
   Total
        Equity        
 
      (in millions)     

Balance as of December 31, 2011

   $7,530     $    $7,537  

Net income

   1,642         1,645  

Change in accumulated unrealized losses on pension benefit obligation,
net of income tax provision of $8 million

       —      

Change in accumulated deferred gains (losses) on cash flow hedges,
net of income tax provision of $6 million

       —      
  

 

   

 

   

 

 

Other comprehensive income

   18     —     18  
  

 

   

 

   

 

 

Comprehensive income

   1,660         1,663  

Equity-based compensation expense

   104     —     104  

Repurchase and retirement of common stock

   (1,293)     —     (1,293)  

Cash dividends declared ($1.68 per common share)

   (529)     —     (529)  

Shares issued upon exercise of stock options

   124     —     124  

Taxes paid in lieu of shares issued for equity-based compensation

   (43)     —     (43)  

Excess tax benefit realized from equity-based compensation

   55     —     55  

Other changes

       (2)     (1)  
  

 

   

 

   

 

 

Balance as of September 30, 2012

   $7,609     $    $7,617  
  

 

   

 

   

 

   TWC
Shareholders’
Equity
   Non-
controlling
Interests
   Total
Equity
 
  (in millions) 

Balance as of December 31, 2012

   $7,279     $    $7,283    $7,279    $4   $7,283  

Net income

   1,414     —     1,414     882         882  

Change in accumulated unrealized losses on pension benefit obligation,
net of income tax provision of $36 million

   56     —     56  

Change in accumulated deferred gains (losses) on cash flow hedges,
net of income tax provision of $58 million

   91     —     91  
  

 

   

 

   

 

 

Other comprehensive income

   147     —     147     60         60  
  

 

   

 

   

 

 

Comprehensive income

   1,561     —     1,561  

Cash dividends declared ($1.30 per common share)

   (385)         (385)  

Repurchase and retirement of common stock

   (1,298)         (1,298)  

Equity-based compensation expense

   100     —     100     74         74  

Repurchase and retirement of common stock

   (1,844)     —     (1,844)  

Cash dividends declared ($1.95 per common share)

   (573)     —     (573)  

Excess tax benefit realized from equity-based compensation

   66         66  

Shares issued upon exercise of stock options

   124     —     124     88         88  

Taxes paid in lieu of shares issued for equity-based compensation

   (64)     —     (64)     (55)         (55)  

Excess tax benefit realized from equity-based compensation

   81     —     81  

Other changes

   (2)     —     (2)     (3)         (3)  
  

 

   

 

   

 

   

 

   

 

   

 

 

Balance as of September 30, 2013

   $6,662     $    $6,666  

Balance as of June 30, 2013

  $6,708    $4   $6,712  
  

 

   

 

   

 

   

 

   

 

   

 

 

Balance as of December 31, 2013

  $6,943    $4   $6,947  

Net income

   978         978  

Other comprehensive loss

   (116)         (116)  

Cash dividends declared ($1.50 per common share)

   (428)         (428)  

Repurchase and retirement of common stock

   (208)         (208)  

Equity-based compensation expense

   93         93  

Excess tax benefit realized from equity-based compensation

   99         99  

Shares issued upon exercise of stock options

   118         118  

Taxes paid in lieu of shares issued for equity-based compensation

   (68)         (68)  

Other changes

   (1)         (1)  
  

 

   

 

   

 

 

Balance as of June 30, 2014

  $7,410    $4   $7,414  
  

 

   

 

   

 

 

See accompanying notes.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Time Warner Cable Inc. (together with its subsidiaries, “TWC” or the “Company”) is among the largest providers of video, high-speed data and voice services in the U.S., with technologically advanced, well-clustered cable systems located mainly in five geographic areas – New York State (including New York City), the Carolinas, the Midwest (including Ohio, Kentucky and Wisconsin), Southern California (including Los Angeles) and Texas. TWC’s mission is to connect its customers to the world—simply, reliably and with superior service. TWC offers video, high-speed data and voice services to residential and business services customers over the Company’s broadband cable systems.customers. TWC’s residential services also include security and home management services, and TWC’s business services also include networking and transport services (including cell tower backhaul services) and enterprise-class, cloud-enabled hosting, managed applications and services. TWC also sells video and online advertising inventory to a variety of national,local, regional and localnational customers.

On February 12, 2014, the Company entered into an Agreement and Plan of Merger with Comcast Corporation (“Comcast”) whereby the Company agreed to merge with and into a 100% owned subsidiary of Comcast. Refer to Note 3 for further details regarding the merger with Comcast.

On April 25, 2014, Comcast entered into a binding agreement with Charter Communications, Inc., (“Charter”), which contemplates three transactions: (1) a contribution, spin-off and merger transaction, (2) an asset exchange and (3) a sale of assets, all of which are subject to a number of conditions. Refer to Note 3 for further details regarding Comcast’s transactions with Charter.

Basis of Presentation

Changes in Basis of Presentation

Effective in the first quarter of 2014, the Company determined it has three reportable segments: Residential Services, Business Services and Other Operations. The Company’s reportable segments have been determined based on how management evaluates and manages the business. The Company has recast its financial information and disclosures for the prior periods to reflect the segment disclosures as if the current presentation had been in effect throughout all periods presented. Refer to Note 11 for further information regarding the Company’s segment information.

Additionally, during the first quarter of 2014, the Company revised its categorization of operating costs and expenses to be consistent with how such costs and expenses are presented to management and to provide a more meaningful presentation. The Company has recast the consolidated financial statements, financial information and disclosures of operating costs and expenses for the prior periods to reflect the new categorization, which had no impact on total operating costs and expenses, Operating Income or net income attributable to TWC shareholders for any period presented. The Company’s operating costs and expenses are presented in the following categories: (i) programming and content, (ii) sales and marketing, (iii) technical operations, (iv) customer care and (v) other operating costs.

Basis of Consolidation

The consolidated financial statements include all of the assets, liabilities, revenue, expenses and cash flows of TWC and all entities in which TWC has a controlling voting interest. The consolidated financial statements include the results of the Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”) only for the TWE-A/N cable systems that are controlled by TWC and for which TWC holds an economic interest. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Significant estimates inherent in the preparation of the consolidated financial statements include accounting for allowances for doubtful accounts, depreciation and amortization, business combinations, derivative financial instruments, pension benefits, equity-based compensation, income taxes, loss contingencies, certain programming arrangements and asset impairments. Allocation methodologies used to prepare the consolidated financial statements are based on estimates and have been described in the notes, where appropriate.

Reclassifications

CertainAs discussed above, certain reclassifications have been made to the prior yearperiod financial information to conform to the current year presentation.

Interim Financial Statements

The consolidated financial statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements of TWC included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.2013 as recast in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 24, 2014.

 

2.

RECENT ACCOUNTING STANDARDS

Accounting Standards Not Yet Adopted

Revenue from Contracts with Customers

In May 2014, the FASB issued authoritative guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. This guidance will be effective for TWC on January 1, 2017 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.

3.

COMCAST MERGER

On February 12, 2014, the Company entered into an Agreement and Plan of Merger with Comcast whereby the Company agreed to merge with and into a 100% owned subsidiary of Comcast (the “Comcast merger”). Upon completion of the Comcast merger, all of the outstanding shares of the Company will be cancelled and each issued and outstanding share will be converted into the right to receive 2.875 shares of Class A common stock of Comcast. Merger integration planning is underway, with the Company and Comcast working toward a closing by year-end 2014, subject to receipt of shareholder and regulatory approvals, as well as satisfaction of certain other closing conditions.

On April 25, 2014, Comcast entered into a binding agreement with Charter, which contemplates three transactions (the “divestiture transactions”): (1) a contribution, spin-off and merger transaction, (2) an asset exchange and (3) a sale of assets. The completion of the divestiture transactions will result in the combined company divesting a net total of approximately 3.9 million video subscribers, a portion of which are TWC subscribers (primarily in the Midwest). The divestiture transactions are expected to occur contemporaneously with one another and are conditioned upon and will occur following the closing of the Comcast merger. They are also subject to a number of other conditions. The Comcast merger is not conditioned upon the closing of the divestiture transactions and, accordingly, the Comcast merger can be completed regardless of whether the divestiture transactions are ultimately completed.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

4.

EARNINGS PER SHARE

Basic net income per common share attributable to TWC common shareholders is determined using the two-class method and is computed by dividing net income attributable to TWC common shareholders by the weighted average of common shares outstanding during the period. The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Diluted net income per common share attributable to TWC common shareholders reflects the more dilutive earnings per share amount calculated using the treasury stock method or the two-class method.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Set forth below is a reconciliation of net income attributable to TWC common shareholders per basic and diluted common share (in millions, except per share data):

 

                                                                        
      Three Months Ended    
September 30,
       Nine Months Ended    
September 30,
   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
          2013                   2012                   2013                   2012           2014   2013   2014   2013 

Net income attributable to TWC common shareholders

   $529     $806     $1,406     $1,634    $494    $479    $969    $877  

Net income allocated to participating securities(a)

                                
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net income attributable to TWC shareholders

   $532     $808     $1,414     $1,642    $499    $481    $978    $882  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Average basic common shares outstanding

   285.0     305.7     289.9     310.2  

Weighted-average basic common shares outstanding

   278.8     289.6     278.3     292.4  

Dilutive effect of nonparticipating equity awards

   1.9     2.0     1.7     2.0     1.8     1.6     1.9     1.7  

Dilutive effect of participating equity awards(a)

   2.1     2.5     2.2     2.6     1.8     2.1     1.9     2.2  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Average diluted common shares outstanding

   289.0     310.2     293.8     314.8  

Weighted-average diluted common shares outstanding

   282.4     293.3     282.1     296.3  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net income per common share attributable to TWC common shareholders:

                

Basic

   $1.86     $2.64     $4.85     $5.27    $1.77    $1.65    $3.48    $3.00  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Diluted

   $1.84     $2.60     $4.81     $5.22    $1.76    $1.64    $3.46    $2.98  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(a) 

The Company’s restricted stock units granted to employees and non-employee directors are considered participating securities with respect to regular quarterly cash dividends.

Diluted net income per common share attributable to TWC common shareholders for the nine months ended September 30, 2012 excludes 2.6 million common shares that may be issued under the Company’s equity-based compensation plan because they do not have a dilutive effect. For the three months ended September 30, 2013 and 2012 and for the nine months ended September 30, 2013, antidilutive common shares related to the equity-based compensation plan were insignificant.

 

3.5.

DUKENET ACQUISITION

On October 4, 2013, TWC entered into a definitive agreement with Duke Energy Corporation and investment funds managed by Alinda Capital Partners to acquire DukeNet Communications, LLC (“DukeNet”) for $600 million in cash, including the repayment of debt. DukeNet, a regional fiber optic network company, provides data and high-capacity bandwidth services to wireless carrier, data center, government, and enterprise customers in North Carolina and South Carolina, as well as five other states in the Southeast. The transaction, which is subject to various customary closing conditions, including receipt of regulatory approvals, is expected to close in the first quarter of 2014.

4.

ANNUAL IMPAIRMENT ANALYSIS FOR GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

AsIn the first quarter of 2014, in connection with the Company’s July 1, 2013 annual testing date and based on its qualitative assessment,determination that it has three reportable segments, the Company determinedperformed an evaluation of its reporting units and concluded that it was not more likely than not that its cable franchise rights and goodwill were impaired and, therefore, the Company did not perform a quantitative assessmenthas three reporting units (Residential Services, Business Services and TWC Media). The Company reallocated its goodwill to the new reporting units based upon the relative fair value of each reporting unit as part of its annual impairment testing. In makingJanuary 1, 2014. The Company determined that determination, management identified and analyzed qualitative factors, including factors that would most significantly impact a discounted cash flow (“DCF”) valuation of the fair values of the cable franchise rights and the fair value of each of the Company’s reporting units. This processunits was significantly in excess of the respective carrying value.

The estimated fair value of each reporting unit for purposes of re-allocating goodwill was performed using a combination of a discounted cash flows (“DCF”) analysis and a market-based approach, which utilized significant unobservable inputs (Level 3) within the fair value hierarchy. The inputs used in the DCF analysis included a review offorecasted cash flows under the Company’s most recent long-range projections, analysis of operating results versus the prior year, changes in market values, changes in discount rates that reflect the risks inherent in each reporting unit and changes in terminal growth rate assumptions.rates. The market-based approach imputed the value of the reporting units after considering trading multiples for other publicly traded cable companies, telecommunications providers, and advertisers that are similar to the Company’s reporting units.

In addition, the Company performed a quantitative impairment test of its cable franchise rights resulting in the conclusion that the fair value of these assets were significantly in excess of their carrying value. The quantitative impairment test for cable franchise rights was performed using a DCF analysis. The inputs used in the DCF analysis included forecasted cash flows under the Company’s most recent long-range projections attributable to the cable franchise rights and discount rates that reflect the risks inherent in the cable franchise rights.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5.

MANDATORILY REDEEMABLE PREFERRED EQUITY

In connection with the financing of the acquisition of substantially all of the cable assets of Adelphia Communications Corporation in 2006, Time Warner NY Cable LLC (“TW NY Cable”), a subsidiary of TWC, issued $300 million of its Series A Preferred Membership Units (the “TW NY Cable Preferred Membership Units”) to a limited number of third parties. On August 1, 2013, all of the TW NY Cable Preferred Membership Units were redeemed by TW NY Cable as required pursuant to their terms for an aggregate redemption price of $300 million plus accrued dividends. The TW NY Cable Preferred Membership Units paid cash dividends at an annual rate equal to 8.210% of the sum of the liquidation preference thereof on a quarterly basis.

6.

DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair values of assets and liabilities associated with the Company’s derivative financial instruments recorded in the consolidated balance sheet as of SeptemberJune 30, 20132014 and December 31, 2012 were as follows2013 consisted of the following (in millions):

 

                                                                                                
  Assets   Liabilities   Assets   Liabilities 
  September 30,
2013
   December 31,
2012
   September 30,
2013
 December 31,
2012
   June 30,
2014
   December 31,
2013
   June 30,
2014
   December 31,
2013
 

Interest rate swaps(a)(b)

   $166     $295     $31   $1   $123    $135    $22    $50  

Cross-currency swaps(a)(c)

   252     112            242     321     —     —  

Equity award reimbursement obligation(d)

   —     —     12   19    —     —     —     11  
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Total

   $418     $407     $43   $20   $365    $456    $22    $61  
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

 

(a) 

The Company’s interest rate swap and cross-currency swap contracts with multiple counterparties are subject to contractual terms that provide for the net settlement of all such contracts with each counterparty, including cash collateral received or paid, through a single payment in the event of default on or termination of any one contract by either party. The fair values of the assets and liabilities associated with interest rate swaps and cross-currency swaps are presented on a gross basis in the consolidated balance sheet and are classified as current or noncurrent based on the maturity date of the respective contract.

(b) 

Of the total amount of interest rate swap assets recorded as of SeptemberJune 30, 20132014 and December 31, 2012, $192013, $7 million and $16$8 million, respectively, is recorded in other current assets in the consolidated balance sheet. The total amount of interest rate swap liabilities recorded as of SeptemberJune 30, 20132014 and December 31, 20122013 is recorded in other liabilities in the consolidated balance sheet.

(c) 

The fair values of the assets and liabilities associated with cross-currency swaps are recorded in other assets and other liabilities, respectively, in the consolidated balance sheet.

(d) 

The fair value of the equity award reimbursement obligation iswas recorded in other current liabilities in the consolidated balance sheet.sheet as of December 31, 2013.

Fair Value Hedges

The Company uses interest rate swaps to manage interest rate risk by effectively converting fixed-rate debt into variable-rate debt. Under such contracts, the Company is entitled to receive semi-annual interest payments at fixed rates and is required to make semi-annual interest payments at variable rates, without exchange of the underlying principal amount. Such contracts are designated as fair value hedges. The Company recognizesrecognized no gain or loss related to its interest rate swaps because the changes in the fair values of such instruments arewere completely offset by the changes in the fair values of the hedged fixed-rate debt. The fair value of interest rate swaps was determined using a DCF analysis based on the terms of the contract and expected forward interest rates, and incorporates the credit risk of the Company and each counterparty (a Level 2 fair value measurement). The following table summarizes the terms of the Company’s existing fixed to variable interest rate swaps as of SeptemberJune 30, 20132014 and December 31, 2012:2013:

 

                                                
  September 30,
2013
 December 31,
2012
   June 30,
2014
   December 31,
2013
 

Maturities

   2014-2019   2013-2018    2015-2019     2014-2019  

Notional amount (in millions)

  $7,550  $7,750   $6,100    $7,850  

Weighted-average pay rate (variable based on LIBOR plus variable margins)

   4.82%    4.35%     4.76%     4.89%  

Weighted-average receive rate (fixed)

   6.80%    6.43%     6.58%     6.86%  

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.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Cash Flow Hedges

The Company uses cross-currency swaps to manage foreign exchange risk related to foreign currency denominated debt by effectively converting foreign currency denominated debt, including annual interest payments and the payment of principal at maturity, to U.S. dollar denominated debt. Such contracts are designated as cash flow hedges. The Company has

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

entered into cross-currency swaps to effectively convert its £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency swaps have maturities of June 2031 and July 2042. The fair value of cross-currency swaps was determined using a DCF analysis based on expected forward interest and exchange rates, and incorporates the credit risk of the Company and each counterparty (a Level 2 fair value measurement). The following table summarizes the deferred gain (loss) activity related to cash flow hedges recognized in accumulated other comprehensive loss,income (loss), net, duringand reclassified into other income, net, for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 (in millions):

 

       Three Months Ended    
September 30,
       Nine Months Ended    
September 30,
 
         2013               2012               2013               2012       

Deferred gains (losses) recognized:

        

Cross-currency swaps

   $249     $140     $140     $80  

Other cash flow hedges

   —     (1)     —     (1)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deferred gains recognized

   249     139     140     79  

Deferred (gains) losses reclassified to income:

        

Cross-currency swaps(a)

   (124)     (63)         (64)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net deferred gains recognized

   125     76     149     15  

Income tax provision

   (48)     (30)     (58)     (6)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net deferred gains recognized, net of tax

   $77     $46     $91     $ 
  

 

 

   

 

 

   

 

 

   

 

 

 
                                                                        
   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
   2014   2013   2014   2013 

Deferred gains (losses) recognized:

        

Cross-currency swaps

  $(17)    $   $(79)    $(109)  

Deferred (gains) losses reclassified into earnings:

        

Cross-currency swaps(a)

   (57)     (2)     (69)     133  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net deferred gains (losses) recognized

   (74)         (148)     24  

Income tax (provision) benefit

   28     (3)     57     (10)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net deferred gains (losses) recognized, net of tax

  $(46)    $   $(91)    $14  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

Deferred gains (losses) on cross-currency swaps were reclassified from accumulated other comprehensive loss,income (loss), net, to other income, net, which offsets the re-measurement gains (losses) recognized in other income, net, on the British pound sterling denominated debt.

Any ineffectiveness related to the Company’s cash flow hedges has been and is expected to be immaterial.

Equity Award Reimbursement Obligation

Prior to 2007, some of TWC’s employees were granted options to purchase shares of Time Warner Inc. (“Time Warner”) common stock in connection with their past employment with subsidiaries and affiliates of Time Warner, including TWC. Upon the exercise of Time Warner stock options held by TWC employees, TWC iswas obligated to reimburse Time Warner for the excess of the market price of Time Warner common stock on the day of exercise over the option exercise price (the “intrinsic” value of the award). The Company recordsrecorded the equity award reimbursement obligation at fair value in other current liabilities in the consolidated balance sheet, which is estimated using the Black-Scholes model.sheet. The change in the equity award reimbursement obligation fluctuatesfluctuated primarily with the fair value and expected volatility of Time Warner common stock and changes in fair value arewere recorded in other income, net, in the period of change. As of September 30, 2013, the weighted-averageOn March 12, 2014, all remaining contractual term of outstanding Time Warner stock options held by TWC employees expired and the Company was 0.42 years. Changes inobligated to reimburse Time Warner $6 million, which consisted of the intrinsic value of awards exercised through March 12, 2014 for which payment had not yet been made. As of March 12, 2014, the Company no longer viewed this obligation as a derivative financial instrument valued using Level 3 fair value ofmeasurements as the equity award reimbursement obligation are discussed in Note 7 below.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

7.

FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair values of derivative financial instruments classified as assets and liabilities as of September 30, 2013 and December 31, 2012 were as follows (in millions):

   September 30, 2013   December 31, 2012 
       Fair Value Measurements       Fair Value Measurements 
   Fair Value   Level 2   Level 3   Fair Value   Level 2   Level 3 

Assets:

            

Interest rate swaps

   $166     $166     $            —      $295     $            295     $—   

Cross-currency swaps

   252     252     —     112     112     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $418     $418     $—      $407     $407     $—   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

            

Interest rate swaps

   $31     $31     $—      $    $    $—   

Equity award reimbursement obligation

   12     —     12     19     —     19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $            43     $            31     $12     $            20     $    $            19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of interest rate swaps, classified as Level 2, utilized a DCF analysis based on the terms of the contract and expected forward interest rates, and incorporates the credit risk of the Company and each counterparty. The fair value of cross-currency swaps, classified as Level 2, utilized a DCF analysis based on expected forward interest and exchange rates, and incorporates the credit risk of the Company and each counterparty. The fair value of the equity award reimbursement obligation, classified as Level 3, utilized a Black-Scholes model to determine the estimated weighted-average fair value of Time Warner stock options outstanding, which$6 million remaining liability was $28.90 per option as of September 30, 2013. The weighted-average assumptions used in the Black-Scholes model were as follows: expected volatility of Time Warner common stock of 24.87%, expected term of 0.36 years, risk-free rate of 0.01% and expected dividend yield of 1.75%.fixed.

Changes in the fair value of the equity award reimbursement obligation, valued using significant unobservable inputs (Level 3), from January 1 through SeptemberJune 30 are presented below (in millions):

 

                                    
  2013   2012   2014   2013 

Balance at beginning of period

   $19     $        22    $11    $19  

Losses recognized in other income, net

        

(Gains) losses recognized in other income, net

   (1)      

Payments to Time Warner for awards exercised

   (15)     (4)     (4)     (13)  

Transfer out of Level 3

   (6)     —  
  

 

   

 

   

 

   

 

 

Balance at end of period

   $        12     $23    $—    $11  
  

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s assets measured at fair value on a nonrecurring basis include equity-method investments, long-lived assets, indefinite-lived intangible assets and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as of July 1 for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be reduced to its fair value. Refer to Note 45 for further details regarding the resultsCompany’s fair value analysis of the Company’s annual impairment test.cable franchise rights and goodwill.

Fair Value of Other Financial Instruments

The Company’s other financial instruments not measured at fair value on a recurring basis include (a) cash and equivalents, receivables, accounts payable, accrued liabilities and as of December 31, 2012, mandatorily redeemable

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

preferred equity,borrowings under the Company’s commercial paper program, which are reflected at cost in the consolidated balance sheet, and (b) short-term investments in U.S. Treasury securitiesTWC senior notes and long-term debtdebentures and Time Warner Cable Enterprises LLC (“TWCE”) senior debentures (collectively, the “senior notes and debentures”) not subject to fair value hedge accounting, which are reflected at amortized cost in the consolidated balance sheet. With the exception of long-term debt, costthe senior notes and amortizeddebentures, cost approximates fair value for these instruments due to their short-term nature. The carrying value and related estimated fair value of the Company’s long-term debt, excluding capital leases,senior notes and debentures was $25.003$23.343 billion and $25.044$27.751 billion, respectively, as of SeptemberJune 30, 20132014 and $26.664$25.003 billion and $31.759$25.187 billion, respectively, as of December 31, 2012.2013. Estimated fair values for long-term debt have generally beenthe senior notes and debentures are determined by reference to the market value of the instrument as quoted on a national securities exchange or in an over-the-counter market. In cases where a quoted market value is not available,(a Level 1 fair value is based on an estimate using a DCF analysis value or other valuation techniques.measurement).

 

8.7.

TWC SHAREHOLDERS’ EQUITY

Changes in Common Stock

Changes in the Company’s common stock from January 1 through SeptemberJune 30 are presented below (in millions):

 

                                
  2013   2012   2014   2013 

Balance at beginning of period

   297.7     315.0     277.9     297.7  

Shares issued under equity-based compensation plan

   3.8     4.4  

Shares issued under the Company’s equity-based compensation plan

   2.9     3.2  

Shares repurchased and retired

   (18.6)     (16.1)     (1.5)     (13.7)  
  

 

   

 

   

 

   

 

 

Balance at end of period

               282.9                 303.3     279.3     287.2  
  

 

   

 

   

 

   

 

 

Common Stock Repurchase Program

On July 25, 2013,As a result of the Company’s Board of Directors increasedentry into the remaining authorization under its existingmerger agreement with Comcast, the Company’s $4.0 billion common stock repurchase program (the “Stock Repurchase Program”), which was $775 million as of July 24, 2013,suspended on February 13, 2014. Prior to an aggregate of up to $4.0 billion of TWC common stock effective July 25, 2013. As of September 30, 2013, the Company had $3.614 billion remaining under the Stock Repurchase Program. Purchases under the Stock Repurchase Program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of the Company’s purchases under the Stock Repurchase Program are based on a number of factors, including business and market conditions, financial capacity and TWC’s common stock price. For the nine months ended September 30, 2013,merger agreement with Comcast, the Company repurchased 18.61.5 million shares of TWC common stock for $1.844$208 million during 2014. As of June 30, 2014, the Company had $2.723 billion including 0.2 million shares repurchased for $21 million that settled in October 2013.remaining under the Stock Repurchase Program authorization.

Accumulated Other Comprehensive Loss, Net

Changes in accumulated other comprehensive loss, net, included in TWC shareholders’ equity from January 1 through September 30 are presented below (in millions):

   2013   2012 

Balance at beginning of period

   $            (663)     $            (559)  

Other comprehensive income before reclassifications, net of tax

   105     30  

Amounts reclassified from accumulated other comprehensive loss, net of tax

   42     (12)  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

   147     18  
  

 

 

   

 

 

 

Balance at end of period

   $(516)     $(541)  
  

 

 

   

 

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Accumulated Other Comprehensive Income (Loss), Net

Changes in accumulated other comprehensive income (loss), net, included in TWC shareholders’ equity from January 1 through June 30 are presented below (in millions):

   2014   2013 

Balance at beginning of period

  $44    $(663)  

Other comprehensive loss before reclassifications, net of tax

   (74)     (42)  

Amounts reclassified into earnings, net of tax

   (42)     102  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

   (116)     60  
  

 

 

   

 

 

 

Balance at end of period

  $(72)    $(603)  
  

 

 

   

 

 

 

The following table summarizes the changes in the components of accumulated other comprehensive loss,income (loss), net, (e.g., unrealized losses on pension benefit obligation and deferred gains (losses) on cash flow hedges) included in TWC shareholders’ equity from January 1 through SeptemberJune 30 (in millions):

 

   2013   2012 

Accumulated unrealized losses on pension benefit obligation:

    

Balance at beginning of period

   $            (708)     $            (541)  

Other comprehensive income (loss) before reclassifications, net of tax

   21    (17)  

Amounts reclassified from accumulated other comprehensive loss, net of tax:

    

Amortization of actuarial loss(a)

   56     44  

Income tax benefit

   (21)     (18)  
  

 

 

   

 

 

 

Amortization of actuarial loss, net of tax

   35     26  

Other comprehensive income, net of tax

   56      
  

 

 

   

 

 

 

Balance at end of period

   $(652)    $(532)  
  

 

 

   

 

 

 

Accumulated deferred gains (losses) on cash flow hedges:

    

Balance at beginning of period

   $45     $(18)  

Other comprehensive income before reclassifications, net of tax

   84     47  

Amounts reclassified from accumulated other comprehensive loss, net of tax:

    

Effective portion of (gain) loss on cash flow hedges(b)

       (64)  

Income tax provision (benefit)

   (2)     26  
  

 

 

   

 

 

 

Effective portion of (gain) loss on cash flow hedges, net of tax

       (38)  

Other comprehensive income, net of tax

   91      
  

 

 

   

 

 

 

Balance at end of period

   $136     $(9)  
  

 

 

   

 

 

 
   2014   2013 

Unrealized losses on pension benefit obligation:

    

Balance at beginning of period

  $(104)    $(708)  

Other comprehensive income (loss) before reclassifications, net of tax

   (25)     23  

Amounts reclassified into earnings, net of tax:

    

Amortization of actuarial (gain) loss(a)

   (1)     37  

Income tax (benefit) provision

       (14)  
  

 

 

   

 

 

 

Amortization of actuarial loss, net of tax

   —     23  

Other comprehensive income (loss), net of tax

   (25)     46  
  

 

 

   

 

 

 

Balance at end of period

  $(129)    $(662)  
  

 

 

   

 

 

 

Deferred gains (losses) on cash flow hedges:

    

Balance at beginning of period

  $149    $45  

Other comprehensive loss before reclassifications, net of tax

   (49)     (65)  

Amounts reclassified into earnings, net of tax:

    

Effective portion of (gain) loss on cash flow hedges(b)

   (69)     133  

Income tax (benefit) provision

   27     (54)  
  

 

 

   

 

 

 

Effective portion of (gain) loss on cash flow hedges, net of tax

   (42)     79  

Other comprehensive income (loss), net of tax

   (91)     14  
  

 

 

   

 

 

 

Balance at end of period

  $58    $59  
  

 

 

   

 

 

 

Other changes:

    

Balance at beginning and end of period

  $(1)    $—  
  

 

 

   

 

 

 

 

(a) 

Amounts are included in the computation of net periodic benefit costs as discussed further in Note 10.9.

(b) 

Amounts are recorded in other income, net, in the consolidated statement of operations as discussed further in Note 6.

 

9.8.

EQUITY-BASED COMPENSATION

TWC is authorized under the Company’s stock incentive plan (the “2011 Plan”), to grant restricted stock units (“RSUs”) and options to purchase shares of TWC common stock to its employees and non-employee directors. As of SeptemberJune 30, 2013,2014, the 2011 Plan provides for the issuance of up to 20.0 million shares of TWC common stock, of which 12.18.7 million shares were available for grant.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Equity-based compensation expense recognized for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 was as follows (in millions):

 

  Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
  2013   2012   2013   2012   2014   2013   2014   2013 

Restricted stock units(a)

   $19     $            18     $69     $67    $38    $22    $81    $50  

Stock options

           31     37         10     12     24  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total equity-based compensation expense(a)

   $            26     $26     $            100     $            104    $43    $32    $93    $74  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

(a)

For the three and six months ended June 30, 2014, amounts include $14 million and $23 million, respectively, of equity-based compensation expense recognized in merger-related and restructuring costs in the consolidated statement of operations.

Restricted Stock Units

For the ninesix months ended SeptemberJune 30, 2013,2014, TWC granted 1.2003.676 million RSUs at a weighted-average grant date fair value of $87.30$135.42 per RSU, including 142,000which included 143,000 RSUs subject to performance-based vesting conditions (“PBUs”) at a weighted-average grant date fair value of $87.31$135.31 per PBU. For the ninesix months ended SeptemberJune 30, 2012,2013, TWC granted 1.4411.186 million RSUs at a weighted-average grant date fair value of $77.07$86.95 per RSU, including 196,000which included 142,000 PBUs at a weighted-average grant date fair value of $77.13$87.31 per PBU. Total unrecognized compensation cost related to unvested RSUs as of SeptemberJune 30, 2013,2014, without taking into account expected forfeitures, was $153$533 million, which the Company expects to recognize over a weighted-average period of 2.63 years.4.00 years, without taking into account acceleration of vesting.

TIME WARNER CABLE INC.As a result of the planned Comcast merger, the Company advanced the timing of its annual grants that would have been made in 2015 and 2016 into 2014. As a result, eligible employees were granted additional RSUs having a value equal to (and with vesting terms consistent with) those that these employees otherwise would have received in each of 2015 and 2016 (the “retention grants”), but without performance-based vesting conditions. Specifically, the retention grant corresponding to the 2015 annual grant will vest 50% in February of 2018 and 50% in February of 2019; the retention grant corresponding to the 2016 annual grant will vest 50% in February of 2019 and 50% in February of 2020, in each case subject to continued employment. Like the Company’s other equity awards, if a grantee’s employment is terminated without cause or for good reason within 24 months following the closing of the Comcast merger, the retention grants will vest in full. However, if the merger has not yet closed and the grantee’s employment is terminated prior to the date on which either retention grant would have normally been made (i.e., February 2015 or 2016, as appropriate), such retention grant will be forfeited. Employees who received retention grants will generally not be eligible for additional equity awards in 2015 or 2016. Consequently, absent the closing of the Comcast merger, both the employees and the Company would generally be in the same position they would have been in had the additional RSUs been granted in 2015 and 2016, rather than in 2014.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

With the exception of the retention grants discussed above, RSUs, including PBUs, generally vest equally50% on each of the third and fourth anniversary of the grant date, subject to continued employment and, in the case of PBUs, subject to the satisfaction and certification of the applicable performance conditions. RSUs generally provide for accelerated vesting upon the grantee’s termination of the grantee’s employment after reaching a specified age and years of service or upon certain terminations of the grantee’s employment within 24 months following the closing of the Comcast merger and, in the case of PBUs, subject to the satisfaction and certification of the applicable performance conditions. PBUs are subject to forfeiture if the applicable performance condition is not satisfied. RSUs awarded to non-employee directors are not subject to vesting or forfeiture restrictions and the shares underlying the RSUs will generally be issued in connection with a director’s termination of service as a director. Pursuant to the directors’ compensation program, certain directors with more than three years of service on the Board of Directors have elected an in-service vesting period for their RSU awards. Holders of RSUs are generally entitled to receive cash dividend equivalents or retained distributions related to regular cash dividends or other distributions, respectively, paid by TWC. In the case of PBUs, the receipt of the dividend equivalents is subject to the satisfaction and certification of the applicable performance conditions. Retained distributions are subject to the vesting requirements of the underlying RSUs. Upon the vesting of a RSU, shares of TWC common stock may be issued from authorized but unissued shares or from treasury stock, if any.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Stock Options

For the ninesix months ended SeptemberJune 30, 2014, TWC granted no stock options. For the six months ended June 30, 2013, TWC granted 2.5392.493 million stock options at a weighted-average grant date fair value of $15.66$15.49 per option, includingwhich included 302,000 stock options subject to performance-based vesting conditions (“PBOs”) at a weighted-average grant date fair value of $15.57 per PBO. For the nine months ended September 30, 2012, TWC granted 3.017 million stock options at a weighted-average grant date fair value of $16.85 per option, including 372,000 PBOs at a weighted-average grant date fair value of $16.85 per PBO. Total unrecognized compensation cost related to unvested stock options as of SeptemberJune 30, 2013,2014, without taking into account expected forfeitures, is $54was $33 million, which the Company expects to recognize over a weighted-average period of 2.59 years.2.09 years, without taking into account acceleration of vesting.

Stock options, including PBOs, have exercise prices equal to the fair market value of TWC common stock at the date of grant. Generally, stock options vest ratably over a four-year vesting period and expire ten years from the date of grant, subject to continued employment and, in the case of PBOs, subject to the satisfaction and certification of the applicable performance condition. Certain stock option awards provide for accelerated vesting upon the grantee’s termination of the grantee’s employment after reaching a specified age and years of service or upon certain terminations of the grantee’s employment within 24 months following the closing of the Comcast merger and, in the case of PBOs, subject to the satisfaction and certification of the applicable performance conditions. PBOs are subject to forfeiture if the applicable performance condition is not satisfied. Upon the exercise of a stock option, shares of TWC common stock may be issued from authorized but unissued shares or from treasury stock, if any.

The table below presents the assumptions used to value stock options at their grant date for the ninesix months ended SeptemberJune 30, 2013 and 2012 and reflects the weighted average of all awards granted within eachthe period:

 

   Nine Months Ended
September 30,
 
   2013   2012 

Expected volatility

           26.14%             30.03%  

Expected term to exercise from grant date (in years)

   5.94     6.43  

Risk-free rate

   1.19%     1.35%  

Expected dividend yield

   2.97%     2.91%  

Expected volatility

26.14%

Expected term to exercise from grant date (in years)

5.94

Risk-free rate

1.18%

Expected dividend yield

2.99%

 

10.9.

PENSION COSTS

TWC sponsors the Time Warner Cable Pension Plan (the “TWC Pension Plan”) and the Time Warner Cable Union Pension Plan (the “Union Pension Plan” and, together with the TWC Pension Plan, the “qualified pension plans”), both qualified defined benefit pension plans, that together provide pension benefits to a majority of the Company’s employees. TWC also provides a nonqualified defined benefit pension plan for certain employees (the “nonqualified pension plan” and, together with the qualified pension plans, the “pension plans”). Pension benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. TWC uses a December 31 measurement date

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

for its pension plans. The components of net periodic benefit costs for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 is as follows (in millions):

 

                                                                                                                
      Three Months Ended    
September 30,
     Nine Months Ended    
September 30,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
  2013 2012 2013 2012   2014   2013   2014   2013 

Service cost

   $            51   $            43   $153   $            127   $43    $49    $86    $102  

Interest cost

   35   33   104   98    36     34     72     69  

Expected return on plan assets

   (54)    (44)    (160)    (132)     (58)     (53)     (116)     (106)  

Amounts amortized

   19   14   56   44    —     18     (1)     37  
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net periodic benefit costs

   $51   $46   $            153   $137   $21    $48    $41    $102  
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

The Company has not made anyno cash contributions to itsthe qualified pension plans during the ninesix months ended SeptemberJune 30, 20132014, and does not expect to make any discretionary cash contributions to the qualified pension plans during the remainder of 2013.2014. For the nonqualified pension plan, the Company contributed $5 million during the nine months ended September 30, 2013 and will continue to make contributions during the remainder of 20132014 to the extent benefits are paid.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11.10.

MERGER-RELATED AND RESTRUCTURING COSTS

Merger-related and restructuring costs for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 consisted of the following (in millions):

 

                                                                                                                                                                                    
      Three Months Ended    
September 30,
     Nine Months Ended    
September 30,
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
  2013 2012 2013 2012   2014   2013   2014   2013 

Merger-related costs

   $2   $7   $9   $50   $52    $   $115    $ 

Restructuring costs

   21   25   72   48        22     26     51  
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total merger-related and restructuring costs

   $            23   $            32   $            81   $            98   $61    $27    $141    $58  
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Merger-related Costs

Through SeptemberFor the three and six months ended June 30, 2014, the Company incurred merger-related costs of $52 million and $115 million, respectively. These costs primarily consisted of Comcast merger-related costs, which, for the three and six months ended June 30, 2014, included employee retention costs of $40 million and $69 million, respectively, and advisory and legal fees of $9 million and $42 million, respectively. Merger-related costs for the three and six months ended June 30, 2014 also included $3 million and $4 million, respectively, incurred in connection with the acquisition of DukeNet Communications, LLC. During the three and six months ended June 30, 2013, the Company incurred merger-related costs of $63$5 million primarily due to severance costs and legal, professional and other fees incurred$7 million, respectively, in connection with the acquisition of Insight Communications Company, Inc. and made cash paymentsThe Company expects to incur additional merger-related costs during the remainder of $56 million.2014 in connection with the Comcast merger. Changes in the Company’s accruals for merger-related costs are presented below (in millions):

 

                                                                                    
   Employee
Termination
Costs
  Other Costs  Total 

Costs incurred

   $            22   $            32   $            54  

Cash paid(a)

   (15)    (25)    (40)  
  

 

 

  

 

 

  

 

 

 

Remaining liability as of December 31, 2012

   7   7   14  

Costs incurred

      9    

Cash paid

   (4)    (12)    (16)  
  

 

 

  

 

 

  

 

 

 

Remaining liability as of September 30, 2013(b)

   $3   $4   $ 
  

 

 

  

 

 

  

 

 

 

                                                   
   Employee
Costs
   Other
Costs
   Total 

Remaining liability as of December 31, 2012

  $   $   $14  

Costs incurred

   —     13     13  

Cash paid(a)

   (4)     (17)     (21)  
  

 

 

   

 

 

   

 

 

 

Remaining liability as of December 31, 2013

            

Costs incurred

   49     43     92  

Cash paid

   (4)     (33)     (37)  
  

 

 

   

 

 

   

 

 

 

Remaining liability as of June 30, 2014(b)

  $48    $13    $61  
  

 

 

   

 

 

   

 

 

 

 

(a) 

Of the total cash paid in 2012, $372013, $12 million was paid during the ninesix months ended SeptemberJune 30, 2012.2013.

(b) 

Of theThe remaining $61 million liability as of SeptemberJune 30, 2013, $6 million2014 is classified as a current liability with the remaining amount classified as a noncurrent liability in the consolidated balance sheet. Amounts are expected to be paid through January 2015.

In addition to the cash settled liabilities shown in the table above, the Company also issued retention RSUs, as discussed in Note 8, which resulted in additional merger-related costs of $14 million and $23 million for the three and six months ended June 30, 2014, respectively.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Restructuring Costs

Through September 30, 2013, theThe Company incurred restructuring costs to improve operating efficiency of $326$9 million and made cash payments of $302 million.$26 million for the three and six months ended June 30, 2014, respectively, and $22 million and $51 million for the three and six months ended June 30, 2013, respectively, primarily related to employee terminations and other exit costs. The Company expects to incur additional restructuring costs during the remainder of 2013 primarily related to employee terminations in connection with initiatives intended to improve operating efficiency.2014. Changes in the Company’s restructuring reserves are presented below (in millions):

 

                                                                                                                  
  Employee
Termination
Costs
   Other
Exit
Costs
   Total   Employee
Termination
Costs
   Other
Exit
Costs
   Total 

Remaining liability as of December 31, 2011

   $    29     $    4     $    33  

Remaining liability as of December 31, 2012

  $24    $   $27  

Costs incurred

   46     15     61     88     18     106  

Cash paid(a)

   (51)     (16)     (67)     (73)     (17)     (90)  
  

 

   

 

   

 

   

 

   

 

   

 

 

Remaining liability as of December 31, 2012

   24         27  

Remaining liability as of December 31, 2013

   39         43  

Costs incurred

   59     13     72     14     12     26  

Cash paid

   (63)     (12)     (75)     (34)     (16)     (50)  
  

 

   

 

   

 

   

 

   

 

   

 

 

Remaining liability as of September 30, 2013(b)

   $20     $    $24  

Remaining liability as of June 30, 2014(b)

  $19    $—    $19  
  

 

   

 

   

 

   

 

   

 

   

 

 

 

(a) 

Of the total cash paid in 2012, $552013, $52 million was paid during the ninesix months ended SeptemberJune 30, 2012.2013.

(b) 

Of the remaining liability as of SeptemberJune 30, 2013, $222014, $16 million is classified as a current liability, with the remaining amount classified as a noncurrent liability in the consolidated balance sheet. Amounts are expected to be paid through March 2016.2018.

 

12.11.

INCOME TAXESSEGMENT INFORMATION

ForEffective in the three months ended September 30, 2013 and 2012,first quarter of 2014, the Company recorded income tax provisions of $249 milliondetermined it has three reportable segments, which have been determined based on how management evaluates and $379 million, respectively. Formanages the nine months ended September 30, 2013business. The Company has recast its financial information and 2012, the Company recorded income tax provisions of $828 million and $920 million, respectively. The effective tax rates were 31.9% for both the three months ended September 30, 2013 and 2012 and 36.9% and 35.9%disclosures for the nine months ended September 30, 2013 and 2012, respectively.

The income tax provisions andprior periods to reflect the effective tax rates forsegment disclosures as if the three and nine months ended September 30, 2013 include a benefit of $59 million related to state and local tax matters, including $27 million resulting from income tax reform legislation enactedcurrent presentation had been in North Carolina, which, along with other changes, phases in a reduction in North Carolina’s corporate income tax rate over several years.

The income tax provisions and the effective tax rates for the three and nine months ended September 30, 2012 include a benefit of $63 million related to a change in the tax rate applied to calculate the Company’s net deferred income tax liability as a result of an internal reorganization effective on September 30, 2012 and a benefit of $46 million related to the reversal of a valuation allowance against a deferred income tax asset associated with the Company’s investment in Clearwire Corporation (“Clearwire”).

13.

COMMITMENTS AND CONTINGENCIES

Contractual Obligationseffect throughout all periods presented.

The Company has obligationsclassifies its operations into the following reportable segments:

Residential Services, which principally consists of video, high-speed data and voice services provided to make future payments for goodsresidential customers as well as other residential services, including security and home management services.

Business Services, which principally consists of data, video and voice services under certain contractual arrangements. These contractual obligations secureprovided to business customers as well as other business services, including enterprise-class, cloud-enabled hosting, managed applications and services.

Other Operations, which principally consists of (i) Time Warner Cable Media (“TWC Media”), the future rights to various assetsadvertising sales arm of TWC, (ii) TWC-owned and/or operated regional sports networks (“RSNs”) and serviceslocal sports, news and lifestyle channels (e.g., Time Warner Cable News NY1) and (iii) other operating revenues and costs, including those derived from the Advance/Newhouse Partnership and home shopping network-related services. The business units reflected in the Other Operations segment individually do not meet the thresholds to be usedreported as separate reportable segments.

In addition to the above reportable segments, the Company has shared functions (referred to as “Shared Functions”) that include activities not attributable to a specific reportable segment. Shared Functions consists of operating costs and expenses associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) as well as other activities not attributable to a reportable segment. As such, the reportable segment results reflect how management views such segments in the normal courseassessing financial performance and allocating resources and are not necessarily indicative of the Company’s operations. For example,results of operations that each segment would have achieved had they operated as stand-alone entities during the Company is contractually committed to make certain minimum lease payments for the use of property under operating lease agreements. In accordance with applicable accounting rules, the future rights and obligations pertaining to firm commitments, such as operating lease obligations and certain purchase obligations under contracts, are not reflected as assets or liabilities in the consolidated balance sheet.periods presented.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

AsIn evaluating the profitability of September 30, 2013, the minimum rental commitments under long-term operating leases duringCompany’s segments, the next five yearscomponents of net income (loss) below OIBDA, as defined below, are $38 millionnot separately evaluated by management at the segment level. Due to the nature of the Company’s operations, a majority of its assets, including its distribution systems, are utilized across the Company’s operations and are not segregated by segment. In addition, segment assets are not reported to, or used by, management to allocate resources or assess the performance of the Company’s segments. Accordingly, the Company has not disclosed asset information by segment.

Segment information for the three and six months ended December 31,June 30, 2014 and 2013 $146 million in 2014, $135 million in 2015, $126 million in 2016, $97 million in 2017 and $352 million thereafter.

The following table summarizes the Company’s aggregate contractual obligations outstandingis as of September 30, 2013 under certain programming and content, voice and high-speed data connectivity and other agreements and the estimated timing and effect that such obligations are expected to have on the Company’s liquidity and cash flows in future periodsfollows (in millions):

 

2013(a)

 $        1,451 

2014-2015

8,884 

2016-2017

6,600 

Thereafter

14,554 

Total

 $31,489 

                                                                                                                        
   Three Months Ended June 30, 2014 
   Residential
Services
Segment
   Business
Services
Segment
   Other
Operations
Segment
   Shared
Functions
   Intersegment
Eliminations
   Total
Consolidated
 

Revenue(a)

  $4,662    $691    $436    $—    $(63)    $5,726  

Operating costs and expenses

   (2,470)     (282)     (263)     (720)     63     (3,672)  

Merger-related and restructuring costs

   —     —     —     (61)     —     (61)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OIBDA

  $2,192    $409    $173    $(781)    $—     1,993  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation

             (795)  

Amortization

             (35)  
            

 

 

 

Operating Income

            $1,163  
            

 

 

 
   Three Months Ended June 30, 2013 
   Residential
Services
Segment
   Business
Services
Segment
   Other
Operations
Segment
   Shared
Functions
   Intersegment
Eliminations
   Total
Consolidated
 

Revenue(a)

  $4,632    $565    $403    $—    $(50)    $5,550  

Operating costs and expenses

   (2,432)     (239)     (169)     (723)     50     (3,513)  

Merger-related and restructuring costs

   —     —     —     (27)     —     (27)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OIBDA

  $2,200    $326    $234    $(750)    $—     2,010  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation

             (792)  

Amortization

             (31)  
            

 

 

 

Operating Income

            $1,187  
            

 

 

 
   Six Months Ended June 30, 2014 
   Residential
Services
Segment
   Business
Services
Segment
   Other
Operations
Segment
   Shared
Functions
   Intersegment
Eliminations
   Total
Consolidated
 

Revenue(a)

  $9,230    $1,359    $836    $—    $(117)    $11,308  

Operating costs and expenses

   (4,906)     (548)     (490)     (1,447)     117     (7,274)  

Merger-related and restructuring costs

   —     —     —     (141)     —     (141)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OIBDA

  $4,324    $811    $346    $(1,588)    $—     3,893  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation

             (1,570)  

Amortization

             (68)  
            

 

 

 

Operating Income

            $2,255  
            

 

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

                                                                                                                              
   Six Months Ended June 30, 2013 
   Residential
Services
Segment
   Business
Services
Segment
   Other
Operations
Segment
   Shared
Functions
   Intersegment
Eliminations
   Total
Consolidated
 

Revenue(a)

  $9,243    $1,102    $780    $—    $(100)    $11,025  

Operating costs and expenses

   (4,872)     (464)     (381)     (1,459)     100     (7,076)  

Merger-related and restructuring costs

   —     —     —     (58)     —     (58)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OIBDA

  $4,371    $638    $399    $(1,517)    $—     3,891  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Depreciation

             (1,581)  

Amortization

             (63)  
            

 

 

 

Operating Income

            $2,247  
            

 

 

 

 

(a) 

2013 amounts representRevenue derived from outside the Company’s contractual obligationsU.S. was insignificant in all periods presented. No single customer accounted for the three months ended December 31, 2013.a significant amount of revenue in any period presented.

ProgrammingIntersegment Eliminations relates to the programming provided to the Residential Services and content purchases represent contracts thatBusiness Services segments by the Company’s RSNs and local sports, news and lifestyle channels. These services are reflected as programming expense for the Residential Services and Business Services segments and as revenue for the Other Operations segment.

Intersegment revenue for the three and six months ended June 30, 2014 and 2013 consisted of the following (in millions):

                                                        
   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
   2014   2013   2014   2013 

Residential Services

  $   $   $   $ 

Business Services

                

Other Operations

   63    50    117    100 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total intersegment revenue

  $63   $50   $117   $100 
  

 

 

   

 

 

   

 

 

   

 

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company’s revenue for the three and six months ended June 30, 2014 and 2013 was derived from the following sources (in millions):

                                                                
   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
   2014   2013   2014   2013 

Residential Services revenue:

        

Video

  $2,546    $2,674    $5,041    $5,345  

High-speed data

   1,606     1,424     3,164     2,830  

Voice

   490     517     986     1,036  

Other

   20     17     39     32  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential Services revenue

   4,662     4,632     9,230     9,243  

Business Services revenue:

        

Video

   90     87     179     171  

High-speed data

   331     268     637     524  

Voice

   123     102     241     198  

Wholesale transport

   97     61     198     116  

Other

   50     47     104     93  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Services revenue

   691     565     1,359     1,102  

Other Operations revenue:

        

Advertising

   272     260     519     488  

Other

   164     143     317     292  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Operations revenue

   436     403     836     780  

Intersegment eliminations

   (63)     (50)     (117)     (100)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $5,726    $5,550    $11,308    $11,025  
  

 

 

   

 

 

   

 

 

   

 

 

 

Use of OIBDA

Management uses Operating Income before Depreciation and Amortization (“OIBDA”), among other measures, in evaluating the segment’s performance because it eliminates the effects of (i) considerable amounts of noncash depreciation and amortization and (ii) items not within the control of the Company’s operations managers (such as income tax provision, other income (expense), net, and interest expense, net). Management also uses this measure to evaluate the Company’s consolidated operating performance and to allocate resources and capital to the segments. Performance measures derived from OIBDA are also used in the Company’s annual incentive compensation programs. In addition, this measure is commonly used by analysts, investors and others in evaluating the Company’s performance.

This measure has inherent limitations. For example, OIBDA does not reflect capital expenditures or the periodic costs of certain capitalized assets used in generating revenue. To compensate for such limitations, management evaluates the Company’s consolidated performance through, among other measures, various cash flow measures, which reflect capital expenditure decisions, and net income attributable to TWC shareholders, which reflects the periodic costs of capitalized assets. OIBDA also fails to reflect the significant costs borne by the Company has with cable television networksfor income taxes and broadcast stations to provide programming services to its subscribers. The amounts included above represent estimatesdebt servicing costs, the results of the future programming costsCompany’s equity investments and other non-operational income or expense. Management compensates for these contract requirements and commitments based on subscriber numbers and tier placementlimitations by using other analytics such as a review of September 30, 2013 appliednet income attributable to the per-subscriber rates containedTWC shareholders.

This non-GAAP measure should be considered in these contracts. Actual amounts due under such contracts may differ from the amounts above based on the actual subscriber numbers and tier placements. These amounts also include programming rights negotiated directly with content owners for distribution on TWC-owned or managed channels or networks.

Voice connectivity obligations relateaddition to, transport, switching and interconnection services, primarily provided by Sprint Corporation (“Sprint”), that allownot as a substitute for, the originationCompany’s Operating Income and terminationnet income attributable to TWC shareholders, as well as other measures of localfinancial performance reported in accordance with GAAP, and long-distance telephony traffic. These expenses also include related technical support services. The Company is in an ongoing process of replacing Sprint as the provider of transport, switching and interconnection services. There is generally no obligationmay not be comparable to purchase these services if the Company is not providing voice service. The amounts included above are estimated based on the number of voice subscribers as of September 30, 2013 and the per-subscriber contractual rates contained in the contracts that were in effect as of September 30, 2013 and also reflect the replacement of Sprint, which is expected to be completed in the first quarter of 2014.similarly titled measures used by other companies.

High-speed data connectivity obligations are based on the contractual terms for bandwidth circuits that were in use as of September 30, 2013.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

12.

COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Following the announcement of the Comcast merger on February 13, 2014, eight putative class action complaints challenging the merger were filed on behalf of purported TWC stockholders, seven in the Supreme Court of the State of New York, County of New York and one in the Court of Chancery of the State of Delaware. These complaints were captioned:Barrett v. Time Warner Cable Inc., et al. (N.Y. Sup. Ct.);Karl Graulich IRA v. Marcus, et al.(N.Y. Sup. Ct.);Wedeking v. Time Warner Cable Inc., et al. (N.Y. Sup. Ct.);Lassoff v. Time Warner Cable Inc., et al.(N.Y. Sup. Ct.);Thomas v. Marcus, et al. (N.Y. Sup. Ct.);Tangarone v. Time Warner Cable Inc., et al. (N.Y. Sup. Ct.);Louisiana Municipal Police Employees’ Retirement System v. Black, et al. (Del. Ch.); andEmpire State Supply Corp. v. Time Warner Cable Inc., et al. (N.Y. Sup. Ct.). On March 25, 2014, the plaintiff inTangarone v. Time Warner Cable Inc. voluntarily discontinued the action in the New York Supreme Court and re-filed the action in the Court of Chancery of the State of Delaware under the captionTangarone v. Time Warner Cable Inc., et al. (Del. Ch.). Likewise, on March 26, 2014, the plaintiffs inEmpire State Supply Corp. v. Time Warner Cable Inc., et al. voluntarily discontinued the action in the New York Supreme Court, and re-filed the action on March 27, 2014 in the Court of Chancery of the State of Delaware under the captionEmpire State Supply Corp. v. Time Warner Cable Inc., et al. (Del. Ch.). On March 28, 2014, the plaintiffs inLouisiana Municipal Police Employees’ Retirement System v. Black, et al. (Del. Ch.) filed an amended complaint. On April 2, 2014, the Court orally granted a motion to consolidate the pending actions in the New York Supreme Court under the captionBarrett, et al.v.Time Warner Cable Inc., et al. (N.Y. Sup. Ct.), which the Court did formally by written order on April 15, 2014. On April 3, 2014, the plaintiffs inBarrett, et al. v. Time Warner Cable Inc., et al. (N.Y. Sup. Ct.) filed a consolidated amended complaint. The various complaints name as defendants the Company, the members of the Company’s Board of Directors, Comcast and Tango Acquisition Sub, Inc. (“Merger Sub”). The complaints assert that the members of the Company’s Board of Directors breached their fiduciary duties to the Company’s stockholders during the Comcast merger negotiations and by entering into the Comcast merger agreement and approving the Comcast merger, and that Comcast and Merger Sub aided and abetted such breaches of fiduciary duties. The complaints also allege that the Company and its Board of Directors failed to disclose in the registration statement related to the Comcast merger material facts relating to the merger. The complaints seek, among other relief, injunctive relief enjoining the shareholder vote on the Comcast merger and the Comcast merger, unspecified declaratory and equitable relief, compensatory damages in an unspecified amount, and costs and fees. On July 22, 2014, the parties to the litigation entered into a memorandum of understanding reflecting the terms of an agreement, subject to final approval by the New York Supreme Court and certain other conditions, to settle all of the outstanding litigation challenging the merger. The Company believes that the claims asserted against it in the lawsuits are without merit and, if the settlement does not receive final approval by the New York Supreme Court or otherwise is not consummated, intends to defend the litigation vigorously.

On December 11, 2013, Constellation Technologies LLC, a wholly owned subsidiary of Rockstar Consortium US LP (“Rockstar”), filed a complaint in the U.S. District Court for the Eastern District of Texas alleging that the Company and its subsidiary, TWCE, infringe six patents purportedly relating to the Company’s use of various technologies, including switched digital technology for video delivery, Multiprotocol Label Switching (“MPLS”) networks and data routing techniques, Ethernet passive optical networks and IP Multimedia Subsystem (“IMS”) protocols to provide video, high-speed data and voice services. Rockstar acquired these patents and others from Nortel Networks Limited, a wholly owned subsidiary of Nortel Networks Corporation, in 2011. The plaintiff is seeking unspecified monetary damages. On January 3, 2014, the plaintiff filed an Amended Complaint, and on February 7, 2014, the Company moved to dismiss certain allegations in the Amended Complaint. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this lawsuit or reasonably estimate a range of possible loss.

On December 19, 2011, Sprint Communications Company L.P. filed a complaint in the U.S. District Court for the District of Kansas alleging that the Company infringes 12 patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. The plaintiff is seeking unspecified monetary damages as well as injunctive relief. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this lawsuit or reasonably estimate a range of possible loss.

The Company is the defendant inIn re: Set-Top Cable Television Box Antitrust Litigation, ten purported class actions filed in federal district courts throughout the U.S. These actions are subject to a Multidistrict Litigation (“MDL”) Order transferring the cases for pretrial proceedings to the U.S. District Court for the Southern District of New York. On July 26,

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

2010, the plaintiffs filed a third amended consolidated class action complaint (the “Third Amended Complaint”), alleging that the Company violated Section 1 of the Sherman Antitrust Act, various state antitrust laws and state unfair/deceptive trade practices statutes by tying the sales of premium cable television services to the leasing of set-top converter boxes. The plaintiffs are seeking, among other things, unspecified treble monetary damages and an injunction to cease such alleged practices. On September 30, 2010, the Company filed a motion to dismiss the Third Amended Complaint, which the court granted on April 8, 2011. On June 17, 2011, the plaintiffs appealed this decision to the U.S. Court of Appeals for the Second Circuit. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this lawsuit or reasonably estimate a range of possible loss.

On August 9, 2010, the plaintiffs inMichelle Downs and Laurie Jarrett, et al. v. Insight Communications Company, L.P. filed a second amended complaint in a purported class action in the U.S. District Court for the Western District of Kentucky alleging that Insight Communications Company, L.P. violated Section 1 of the Sherman Antitrust Act by tying the sales of

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

premium cable television services to the leasing of set-top converter boxes, which is similar to the federal claim against the Company inIn re: Set-Top Cable Television Box Antitrust Litigation, discussed above. The plaintiffs are seeking, among other things, unspecified treble monetary damages and an injunction to cease such alleged practices. On July 19, 2013, the Company filed a motion for summary judgment, which argued that Insight Communications Company, L.P. did not coerce the plaintiffs to lease a set-top converter box, a necessary element of the plaintiffs’ claim.claim, which the court granted on July 29, 2014. The time to appeal this decision has not yet expired. If the decision is appealed, the Company intends towill defend against this lawsuit vigorously, but is unable to predict the outcome of this lawsuit or reasonably estimate a range of possible loss.

On August 7, 2009, the plaintiffs inJessica Fink, et al. v. Time Warner Cable Inc. filed an amended complaint in a purported class action in the U.S. District Court for the Southern District of New York alleging that the Company uses a throttling technique which intentionally delays and/or blocks a user’s high-speed data service. The plaintiffs sought unspecified monetary damages, injunctive relief and attorneys’ fees. On December 23, 2011, the district court granted with prejudice the Company’s motion to dismiss the plaintiffs’ second amended complaint and, on May 6, 2013, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s decision. The plaintiffs did not appeal the decision and the action is terminated.

vigorously. The Company is the defendant in three purported class action lawsuits alleging breach of contract and violation of various state consumer protection statutes in connection with the Company’s high-speed data modem fee. On November 30, 2012, the plaintiffs inFred W. Elmore v. Time Warner Cable Inc. (the “Elmore lawsuit”) filed a complaint in a purported class action in the U.S. District Court for the District of South Carolina alleging that the Company breached its contract with customers and violated South Carolina state consumer protection statutes by charging a fee for the provision of a high-speed data modem. On February 4, 2013, the plaintiffs in Mark Cox v. Time Warner Cable Inc. (the “Cox lawsuit”) filed an amended complaint in a purported class action in the U.S. District Court for the District of South Carolina alleging that the Company breached its contract with customers whose high-speed data service is provided as part of a promotional package by charging a fee for the provision of a high-speed data modem. On February 26, 2013, the plaintiffs in Lorraine Damato, et al. v. Time Warner Cable Inc. (the “Damato lawsuit”) filed a complaint in a purported class action in the U.S. District Court for the Eastern District of New York alleging that the Company breached its contract with customers and violated New York, New Jersey and California state consumer protection statutes by charging a fee for the provision of a high-speed data modem. In each case, the plaintiffs are seeking, among other things, unspecified monetary damages and an injunction to prevent the Company from charging a fee for the provision of a high-speed data modem. On July 30, 2013, the U.S. District Court for the Eastern District of New York stayed the action and granted the Company’s motion to compel arbitration in the Damato lawsuit and, on September 30, 2013, the U.S. District Court for the District of South Carolina granted the Company’s motions to dismiss and compel arbitration in each of the Elmore and Cox lawsuits. Each of the arbitrations is limited to the named plaintiffs. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of the lawsuits or reasonably estimate a range of possible loss.

On December 19, 2011, Sprint Communications Company L.P. filed a complaint in the U.S. District Court for the District of Kansas alleging that the Company infringes 12 patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. The plaintiff is seeking unspecified monetary damages as well as injunctive relief. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this lawsuit or reasonably estimate a range of possible loss.

On September 1, 2006, Ronald A. Katz Technology Licensing, L.P. (“Katz”) filed a complaint in the U.S. District Court for the District of Delaware alleging that the Company and several other cable operators, among other defendants, infringe 18 patents purportedly relating to the Company’s customer call center operations and/or voicemail services. The plaintiff is seeking unspecified monetary damages as well as injunctive relief. On March 20, 2007, this case, together with other lawsuits filed by Katz, was made subject to a MDL Order transferring the cases for pretrial proceedings to the U.S. District Court for the Central District of California. In April 2008, TWC and other defendants filed “common” motions for summary judgment, which argued, among other things, that a number of claims in the patents at issue are invalid under Sections 112 and 103 of the Patent Act. On June 19, 2008 and August 4, 2008, the court issued orders granting, in part, and denying, in part, those motions. The defendants filed additional individual motions for summary judgment in August 2008, which argued, among other things, that the defendants’ respective products do not infringe the surviving claims in the plaintiff’s patents. On August 13, 2009, the district court found one additional patent invalid, but denied the defendants’ motions for summary judgment on three remaining patents and, on October 27, 2009, the district court denied the defendants’ requests for reconsideration of the

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

decision. Based on motions for summary judgment brought by other defendants, the district court found, in decisions on January 29, 2010 and December 3, 2010, two of the three remaining patents invalid with respect to those defendants. The Company intends to defend against this lawsuit vigorously, but is unable to predict the outcome of this lawsuit or reasonably estimate a range of possible loss.

From time to time, the Company receives notices from third parties and, in some cases, is party to litigation alleging that certain of the Company’s services or technologies infringe the intellectual property rights of others. Claims of intellectual property infringement could require TWC to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question. In addition, certain agreements entered into by the Company may require it to indemnify the other party for certain third-party intellectual property infringement claims, which could increase the Company’s damages and its costs of defending against such claims. Even if the claims are without merit, defending against the claims can be time consuming and costly.

Other Matters

The California Attorney General and the Alameda County, California District Attorney are investigating whether certain of the Company’s waste disposal policies, procedures and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. These entities are seeking injunctive relief, unspecified civil penalties and attorneys’ fees. TheWhile the Company is unable to predict the outcome of this investigation, it does not believe that the outcome will have a material effect on its results of operations, financial condition or reasonably estimate a range of possible loss.

The Federal Trade Commission (the “FTC”) served the Company with a civil investigative demand (“CID”) on June 18, 2012 and another CID on August 2, 2012, each addressing the Company’s practices and policies relating to the use of credit bureaus. TWC has responded to portions of the CIDs as well as a few supplemental requests from the FTC. On February 12, 2013, TWC received a supplemental CID from the FTC, requesting additional information about how the Company informs customers who, based on a review of their credit scores, are required to pay a deposit or make an advance payment. The Company has settled this investigation, subject to final FTC and court approval, on terms that are not material to the Company.cash flows.

In March 2003, the interests in cable networks and filmed entertainment held by Time Warner Entertainment Company, L.P. (“TWE”) were transferred to Time Warner and all of Time Warner’s interests in cable systems were transferred to the Company (the “TWE Restructuring”). As part of the TWE Restructuring, Time Warner agreed to indemnify the Company from and against any and all liabilities relating to, arising out of or resulting from specified litigation matters brought against the TWE non-cable businesses. Although Time Warner has agreed to indemnify the Company against such liabilities, TWE remains a named party in certain litigation matters. In connection with an internal reorganization on September 30, 2012, TWE merged with and into Time Warner Cable Enterprises LLC (“TWCE”),TWCE, with TWCE as the surviving entity.

The costs and other effects of future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in pending matters (including those matters described above), and developments or assertions by or against the Company relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on the Company’s business, financial condition and operating results.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

14.13.

ADDITIONAL FINANCIAL INFORMATION

Other Current Assets

Other current assets as of SeptemberJune 30, 20132014 and December 31, 20122013 consisted of the following (in millions):

 

  September 30, December 31,                                       
  2013 2012   June 30,
2014
   December 31,
2013
 

Prepaid income taxes

    $112   $23   $67    $142  

Other prepaid expenses

   172   165    228     155  

Other current assets

   45   35    36     34  
  

 

  

 

   

 

   

 

 

Total other current assets

   $    329   $    223   $331    $331  
  

 

  

 

   

 

   

 

 

Other Current Liabilities

Other current liabilities as of SeptemberJune 30, 20132014 and December 31, 20122013 consisted of the following (in millions):

 

  September 30,  December 31, 
  2013  2012 

Accrued interest

  $438   $586 

Accrued compensation and benefits

  363   384 

Accrued insurance

  180   169 

Accrued franchise fees

  145   168 

Accrued sales and other taxes

  127   99 

Other accrued expenses

  383   399 
 

 

 

  

 

 

 

Total other current liabilities

  $    1,636   $    1,805 
 

 

 

  

 

 

 

Revenue

Revenue for the three and nine months ended September 30, 2013 and 2012 consisted of (in millions):

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2013  2012  2013  2012 

Residential services

  $4,579   $4,548   $13,822   $13,598 

Business services

  594   493   1,696   1,386 

Advertising

  253   264   741   740 

Other

  92   58   284   177 
 

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

  $        5,518   $        5,363   $        16,543   $        15,901 
 

 

 

  

 

 

  

 

 

  

 

 

 
                                          
   June 30,
2014
   December 31,
2013
 

Accrued interest

  $481    $529  

Accrued compensation and benefits

   385     394  

Accrued insurance

   195     185  

Accrued sales and other taxes

   297     132  

Accrued franchise fees

   145     155  

Other accrued expenses

   453     442  
  

 

 

   

 

 

 

Total other current liabilities

  $1,956    $1,837  
  

 

 

   

 

 

 

Interest Expense, Net

Interest expense, net, for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 consisted of the following (in millions):

 

 Three Months Ended Nine Months Ended                                                         
 September 30, September 30,   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
 2013 2012 2013 2012   2014   2013   2014   2013 

Interest expense

  $(379)    $(404)   $(1,178)    $(1,210)    $(349)    $(399)    $(713)    $(799)  

Interest income

     2   3   6    —         —      
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Interest expense, net

  $       (379)    $       (402)    $       (1,175)    $       (1,204)    $(349)    $(398)    $(713)    $(796)  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Other Income, Net

Other income, net, for the three and six months ended June 30, 2014 and 2013 consisted of the following (in millions):

                                                        
   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
   2014   2013   2014   2013 

Income from equity-method investments, net

  $   $   $22    $14  

Gain (loss) on equity award reimbursement obligation to Time Warner

   —     —         (5)  

Other

   —         —      
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income, net

  $   $11    $23    $10  
  

 

 

   

 

 

   

 

 

   

 

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other Income, Net

Other income, net, for the three and nine months ended September 30, 2013 and 2012 consisted of (in millions):

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2013  2012  2013  2012 

Income from equity-method investments, net(a)

  $   $438    $16   $445  

Gain on sale of investment in Clearwire

  —    64       64  

Loss on equity award reimbursement obligation to Time Warner

  (3)     (7)     (8)    (5)   

Other investment losses(b)

     —       (12)   

Other

        2    
 

 

 

  

 

 

  

 

 

  

 

 

 

Other income, net

  $          —    $          496    $          10   $          493  
 

 

 

  

 

 

  

 

 

  

 

 

 

(a)

Income from equity-method investments, net, for the three and nine months ended September 30, 2012 primarily consists of a pretax gain of $430 million associated with SpectrumCo, LLC’s (“SpectrumCo”) sale of its advanced wireless spectrum licenses to Cellco Partnership (doing business as Verizon Wireless). SpectrumCo is a joint venture between TWC, Comcast Corporation and Bright House Networks, LLC.

(b)

Other investment losses in 2012 represents an impairment of the Company’s investment in Canoe Ventures LLC, an equity-method investee.

Related Party Transactions

A summary of TWC’sThe Company’s transactions with related parties (e.g.(i.e., equity-method investees) for the three and ninesix months ended SeptemberJune 30, 2014 and 2013 and 2012 is as followsconsisted of the following (in millions):

 

     Three Months Ended         Nine Months Ended     
 September 30, September 30,   Three Months Ended
June 30,
     Six Months Ended  
June 30,
 
 2013 2012 2013 2012   2014   2013   2014   2013 

Revenue

  $          2    $          3    $          6   $          8    $   $   $   $ 

Cost of revenue

  (49)     (56)     (162)    (183)   
  

 

   

 

   

 

   

 

 

Costs and expenses:

        

Programming and content

  $(48)    $(64)    $(93)    $(105)  

Other operating

   (4)     (2)     (10)     (8)  
  

 

   

 

   

 

   

 

 

Total costs and expenses

  $(52)    $(66)    $(103)    $(113)  
  

 

   

 

   

 

   

 

 

Supplemental Cash Flow Information

Additional financial information with respect to cash (payments) and receipts for the ninesix months ended SeptemberJune 30, 20132014 and 20122013 is as follows (in millions):

 

                                  
 Nine Months Ended
September 30,
   Six Months Ended
June 30,
 
 2013 2012   2014   2013 

Cash paid for interest

  $(1,425)    $(1,433)     $(819)    $(880)  

Interest income received(a)

  121   131     74     78  
 

 

  

 

   

 

   

 

 

Cash paid for interest, net

  $    (1,304)    $    (1,302)     $(745)    $(802)  
 

 

  

 

   

 

   

 

 

Cash paid for income taxes

  $(472)    $(300)     $(98)    $(191)  

Cash refunds of income taxes

  1            
 

 

  

 

   

 

   

 

 

Cash paid for income taxes, net

  $(471)    $(291)     $(95)    $(190)  
 

 

  

 

   

 

   

 

 

 

(a) 

Interest income received includes amounts received under interest rate swap contracts.

The consolidated statement of cash flows for the ninesix months ended SeptemberJune 30, 2013 includes (a) purchases of short-term investments in U.S. Treasury securities of $575 million (included in purchases of investments), which have original maturities of six months, and (b) proceeds from the maturity of short-term investments in U.S. Treasury securities of $475$150 million (included in proceeds from sale, maturity and collection of investments). As of September 30, 2013 and December 31, 2012, short-term investments in U.S. Treasury securities, classified as held-to-maturity, have amortized costs of $250 million and $150 million, respectively, which approximates fair value.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The consolidated statement of cash flows for the ninesix months ended SeptemberJune 30, 2013 and 2012 does not reflect $21$26 million and $24 million, respectively, of common stock repurchases that were included in other current liabilities as of SeptemberJune 30, 2013 and 2012, respectively, for which payment was made in October 2013 and 2012, respectively.July 2013.

 

15.14.

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations (including comprehensive income) and cash flows of (i) Time Warner Cable Inc. (the “Parent Company”), (ii) TW NY Cable Holding Inc. (“TW NY”), Time Warner Cable Enterprises LLC (“TWCE”) and Time Warner Cable Internet Holdings II LLC (“TWC Internet Holdings II” and, together with TW NY and TWCE, or the “Guarantor Subsidiaries”Subsidiary”), on a combined basis,direct 100% owned subsidiary of the Parent Company, (iii) the direct and indirect non-guarantor subsidiaries of the Parent Company (the “Non-Guarantor Subsidiaries”) on a combined basis and (iv) the eliminations necessary to arrive at the information for Time Warner Cable Inc. on a consolidated basis. TW NY is a direct 100% owned subsidiary of the Parent Company. TWCE and TWC Internet Holdings II are indirect 100% owned subsidiaries of the Parent Company. The Guarantor Subsidiaries haveSubsidiary has fully and unconditionally jointly and severally, directly, guaranteed the debt securities issued by the Parent Company in its 2007 registered exchange offer and subsequent public offerings. The Parent Company directly owns all of the voting and economic interests directly or indirectly, of the Guarantor Subsidiaries.Subsidiary.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

There are no legal or regulatory restrictions on the Parent Company’s ability to obtain funds from any of its 100% owned subsidiaries through dividends, loans or advances.

These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of Time Warner Cable Inc.

Basis of Presentation

As discussed in Note 1, during the first quarter of 2014, the Company revised its categorization of operating costs and expenses to be consistent with how such costs and expenses are presented to management and to provide a more meaningful presentation. As such, the Company has recast operating costs and expenses in the consolidating statement of operations for the prior period to reflect the new categorization. Refer to Note 1 for further details.

On November 1, 2013, the Company completed the second phase of an internal reorganization to simplify its organizational structure. As part of this phase of the reorganization, on November 1, 2013, TW NY Cable Holding Inc. merged with and into the Parent Company, with the Parent Company as the surviving entity, and TWC Internet Holdings II merged with and into TWCE, with TWCE as the surviving entity and a direct 100% owned subsidiary of the Parent Company. As a result of this phase of the reorganization, the presentation of the condensed consolidating statement of operations, comprehensive income and cash flows for the prior period has been recast to reflect TWCE as the sole subsidiary guarantor of debt securities issued by the Parent Company.

In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Parent Company’s interests in the Guarantor SubsidiariesSubsidiary and the Non-Guarantor Subsidiaries and (ii) the Guarantor Subsidiaries’Subsidiary’s interests in the Non-Guarantor Subsidiaries and (iii) the Non-Guarantor Subsidiaries interests in the Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All intercompany balances and transactions between the Parent Company, the Guarantor SubsidiariesSubsidiary and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.” All assets and liabilities have been allocated to the Parent Company, the Guarantor SubsidiariesSubsidiary and the Non-Guarantor Subsidiaries generally based on legal entity ownership. Certain administrative costs have been allocated to the Parent Company, the Guarantor SubsidiariesSubsidiary and the Non-Guarantor Subsidiaries based on revenue recorded at the respective entity. ABeginning December 1, 2013, the Parent Company began allocating 100% of its third-party interest expense, net of interest income received from intercompany loans, to the Guarantor Subsidiary. Prior to December 1, 2013, a portion of the interest expense incurred by the Parent Company andwas allocated to the Guarantor Subsidiaries has been allocated toSubsidiary and the Non-Guarantor Subsidiaries based on revenue recorded at the respective entity. The income tax provision has been presented based on each subsidiary’s legal entity activity including income tax benefits related to allocated administrative costs and interest expense. Deferred income taxes have been presented based upon the temporary differences between the carrying amounts of the respective assets and liabilities of the applicable entities.

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The Company’s condensed consolidating financial information as of SeptemberJune 30, 20132014 and December 31, 20122013 and for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 is as follows (in millions):

Condensed Consolidating Balance Sheet as of SeptemberJune 30, 20132014

 

                                                                                                                        
  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

ASSETS

                    

Current assets:

                    

Cash and equivalents

   $656     $—     $220     $—     $876    $184    $—    $219    $—    $403  

Short-term investments in U.S. Treasury securities

   250     —     —     —     250  

Receivables, net

   45     —     847     —     892     34     —     872     —     906  

Receivables from affiliated parties

   128     —     28     (156)      —     210     —     27     (237)     —  

Deferred income tax assets

           298     —     309         —     341     (1)     348  

Other current assets

   133     15     181     —     329     39     49     243     —     331  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total current assets

   1,216     22     1,574     (156)      2,656     475     49     1,702     (238)     1,988  

Investments in and amounts due from consolidated subsidiaries

   41,913     33,488     6,218     (81,619)      —     43,582     44,793     7,641     (96,016)     —  

Investments

   16     54     13     —     83     —     55     13     —     68  

Property, plant and equipment, net

   —     31     14,596     —     14,627     —     29     15,575     —     15,604  

Intangible assets subject to amortization, net

   —         566     —     573     —         571     —     576  

Intangible assets not subject to amortization

   —     —     26,012     —     26,012     —     —     26,012     —     26,012  

Goodwill

   —     —     2,886     —     2,886     —     —     3,137     —     3,137  

Other assets

   510     —     84     —     594     990     —     81     —     1,071  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

   $43,655     $33,602     $51,949     $(81,775)      $47,431    $45,047    $44,931    $54,732    $(96,254)    $48,456  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

LIABILITIES AND EQUITY

                    

Current liabilities:

                    

Accounts payable

   $—     $—     $468     $—     $468    $—    $—    $565    $—    $565  

Deferred revenue and subscriber-related liabilities

   —     —     192     —     192  

Deferred revenue and subscriber- related liabilities

   —     —     195     —     195  

Payables to affiliated parties

   28     —     128     (156)      —     27     207         (237)     —  

Accrued programming expense

   —     —     897     —     897  

Accrued programming and content expense

   —     —     895     —     895  

Current maturities of long-term debt

   1,769     —         —     1,771     1,654     —         —     1,663  

Other current liabilities

   476     66     1,094     —     1,636     702     64     1,191     (1)     1,956  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total current liabilities

   2,273     66     2,781     (156)      4,964     2,383     271     2,858     (238)     5,274  

Long-term debt

   21,168     2,066     27     —     23,261     20,774     2,063     80     —     22,917  

Deferred income tax liabilities, net

   40     325     11,349     —     11,714     278     150     11,734     —     12,162  

Long-term payables to affiliated parties

   7,641     —     8,702     (16,343)      —     7,641     14,702     —     (22,343)     —  

Other liabilities

   345         480     —     826     117     94     478     —     689  

TWC shareholders’ equity:

                    

Due to (from) TWC and subsidiaries

   5,526     (11)      (5,515)      —     —     6,444     860     (7,304)     —     —  

Other TWC shareholders’ equity

   6,662     31,155     34,121     (65,276)      6,662     7,410     26,791     46,882     (73,673)     7,410  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total TWC shareholders’ equity

   12,188     31,144     28,606     (65,276)      6,662     13,854     27,651     39,578     (73,673)     7,410  

Noncontrolling interests

   —     —         —         —     —         —      
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total equity

   12,188     31,144     28,610     (65,276)      6,666     13,854     27,651     39,582     (73,673)     7,414  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities and equity

   $    43,655     $    33,602     $    51,949     $    (81,775)      $    47,431    $45,047    $44,931    $54,732    $(96,254)    $48,456  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Balance Sheet as of December 31, 20122013

 

                                                                                                                        
  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations   TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

ASSETS

                   

Current assets:

                   

Cash and equivalents

   $2,174     $—     $1,130     $—    $3,304    $316    $—    $209    $—    $525  

Short-term investments in U.S. Treasury securities

   150     —     —     —    150  

Receivables, net

   49     —     834     —    883     63         890     —     954  

Receivables from affiliated parties

   35     —     29     (64)    —     158     —     28     (186)     —  

Deferred income tax assets

           308     —    317             320     —     334  

Other current assets

   54     —     169     —    223     120     42     169     —     331  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total current assets

   2,467         2,470     (64)    4,877     662     52     1,616     (186)     2,144  

Investments in and amounts due from consolidated subsidiaries

   40,656     32,103     6,161     (78,920)    —     42,492     43,285     7,641     (93,418)     —  

Investments

   17     58     12     —    87     —     43     13     —     56  

Property, plant and equipment, net

   —     33     14,709     —    14,742     —     30     15,026     —     15,056  

Intangible assets subject to amortization, net

   —     10     631     —    641     —         546     —     552  

Intangible assets not subject to amortization

   —     —     26,011     —    26,011     —     —     26,012     —     26,012  

Goodwill

   —     —     2,889     —    2,889     —     —     3,196     —     3,196  

Other assets

   580     —     53     (71)    562     1,165     —     92     —     1,257  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

   $43,720     $32,208     $52,936     $(79,055)    $49,809    $44,319    $43,416    $54,142    $(93,604)    $48,273  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

LIABILITIES AND EQUITY

                   

Current liabilities:

                   

Accounts payable

   $    $—     $646     $—    $647    $—    $—    $565    $—    $565  

Deferred revenue and subscriber-related liabilities

   —     —     183     —    183  

Deferred revenue and subscriber- related liabilities

   —     —     188     —     188  

Payables to affiliated parties

   29     —     35     (64)    —     28     155         (186)     —  

Accrued programming expense

   —     —     872     —    872  

Accrued programming and content expense

   —     —     869     —     869  

Current maturities of long-term debt

   1,516     —         —    1,518     1,758     —         —     1,767  

Mandatorily redeemable preferred equity

   —     —     300     —    300  

Other current liabilities

   631     61     1,113     —    1,805     591     67     1,179     —     1,837  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total current liabilities

   2,177     61     3,151     (64)    5,325     2,377     222     2,813     (186)     5,226  

Long-term debt

   23,078     2,070     23     —    25,171     21,179     2,065     41     —     23,285  

Deferred income tax liabilities, net

   —     267     11,084     (71)    11,280     359     161     11,578     —     12,098  

Long-term payables to affiliated parties

   7,641     —     8,702     (16,343)    —     7,641     14,702     —     (22,343)     —  

Other liabilities

   275         472     —    750     140     89     488     —     717  

TWC shareholders’ equity:

                   

Due to (from) TWC and subsidiaries

   3,270     120     (3,390)      —    —     5,680     453     (6,133)     —     —  

Other TWC shareholders’ equity

   7,279     29,687     32,890     (62,577)    7,279     6,943     25,724     45,351     (71,075)     6,943  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total TWC shareholders’ equity

   10,549     29,807     29,500     (62,577)    7,279     12,623     26,177     39,218     (71,075)     6,943  

Noncontrolling interests

   —     —         —        —     —         —      
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total equity

   10,549     29,807     29,504     (62,577)    7,283     12,623     26,177     39,222     (71,075)     6,947  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities and equity

   $43,720     $32,208     $52,936     $(79,055)    $49,809    $44,319    $43,416    $54,142    $(93,604)    $48,273  
  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Statement of Operations for the Three Months Ended SeptemberJune 30, 20132014

 

   Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
 

Revenue

   $—     $—     $5,518     $—    $5,518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

   —     —     2,564     —     2,564  

Selling, general and administrative

   —     —     949     —     949  

Depreciation

   —     —     790     —     790  

Amortization

   —     —     32     —     32  

Merger-related and restructuring costs

   —     —     23     —     23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   —     —     4,358     —     4,358  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

   —     —     1,160     —     1,160  

Equity in pretax income (loss) of consolidated subsidiaries

   834     763     (2)      (1,595)      —  

Interest expense, net

   (53)      (1)      (325)      —     (379)   

Other income (expense), net

   —     (2)          —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   781     760     835     (1,595)      781  

Income tax provision

   (249)      (252)      (245)      497     (249)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   532     508     590     (1,098)      532  

Less: Net income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

   $532     $508     $590     $(1,098)      $532  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2013

                                                                                                         
  Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Revenue

  $—    $—    $5,726    $—    $5,726  

Costs and expenses:

          

Programming and content

   —     —     1,341     —     1,341  

Sales and marketing

   —     —     544     —     544  

Technical operations

   —     —     371     —     371  

Customer care

   —     —     207     —     207  

Other operating

   —     —     1,209     —     1,209  

Depreciation

   —     —     795     —     795  

Amortization

   —     —     35     —     35  

Merger-related and restructuring costs

       —     53     —     61  
  

 

   

 

   

 

   

 

   

 

 

Total costs and expenses

       —     4,555     —     4,563  
  

 

   

 

   

 

   

 

   

 

 

Operating Income (Loss)

   (8)     —     1,171     —     1,163  

Equity in pretax income of consolidated subsidiaries

   879     1,224     —     (2,103)     —  

Interest income (expense), net

   (49)     (352)     52     —     (349)  

Other income, net

   —             —      
  

 

   

 

   

 

   

 

   

 

 

Income before income taxes

   822     876     1,227     (2,103)     822  

Income tax provision

   (323)     (341)     (323)     664     (323)  
  

 

   

 

   

 

   

 

   

 

 

Net income

   499     535     904     (1,439)     499  

Less: Net income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

 

Net income attributable to TWC shareholders

  $499    $535    $904    $(1,439)    $499  
  

 

   

 

   

 

   

 

   

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2014

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2014

  

  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Net income

   $532     $508     $590     $(1,098)      $532    $499    $535    $904    $(1,439)    $499  

Change in accumulated unrealized losses on pension benefit obligation, net of tax

   10     —     —     —     10     (24)     —     —     —     (24)  

Change in accumulated deferred gains (losses) on cash flow hedges, net of tax

   77     —     —     —     77     (46)     —     —     —     (46)  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other comprehensive income

   87     —     —     —     87  

Other comprehensive loss

   (70)     —     —     —     (70)  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income

   619     508     590     (1,098)      619     429     535     904     (1,439)     429  

Less: Comprehensive income attributable to noncontrolling interests

   —     —     —     —     —     —     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income attributable to TWC shareholders

   $619     $508     $590     $(1,098)      $619    $429    $535    $904    $(1,439)    $429  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Statement of Operations for the Three Months Ended SeptemberJune 30, 20122013

(recast)

 

   Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
 

Revenue

   $—     $—     $5,363     $—     $5,363  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

   —     —     2,499     —     2,499  

Selling, general and administrative

   —     —     918     —     918  

Depreciation

   —     —     789     —     789  

Amortization

   —     —     31     —     31  

Merger-related and restructuring costs

       —     30     —     32  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

       —     4,267     —     4,269  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

   (2)      —     1,096     —     1,094  

Equity in pretax income of consolidated subsidiaries

   1,255     803     232     (2,290)      —  

Interest expense, net

   (67)      (46)      (289)      —     (402)   

Other income, net

       432     63     —     496  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   1,187     1,189     1,102     (2,290)      1,188  

Income tax provision

   (379)      (431)      (307)      738     (379)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   808     758     795     (1,552)      809  

Less: Net income attributable to noncontrolling interests

   —     —     (1)      —     (1)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

   $808     $758     $794     $(1,552)      $808  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2012

                                                                                                         
  Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Revenue

  $—    $—    $5,550    $—    $5,550  

Costs and expenses:

          

Programming and content

   —     —     1,234     —     1,234  

Sales and marketing

   —     —     496     —     496  

Technical operations

   —     —     363     —     363  

Customer care

   —     —     187     —     187  

Other operating

   —     —     1,233     —     1,233  

Depreciation

   —     —     792     —     792  

Amortization

   —     —     31     —     31  

Merger-related and restructuring costs

   —     —     27     —     27  
  

 

   

 

   

 

   

 

   

 

 

Total costs and expenses

   —     —     4,363     —     4,363  
  

 

   

 

   

 

   

 

   

 

 

Operating Income

   —     —     1,187     —     1,187  

Equity in pretax income of consolidated subsidiaries

   850     923     —     (1,773)     —  

Interest expense, net

   (50)     (129)     (219)     —     (398)  

Other income, net

   —             —     11  
  

 

   

 

   

 

   

 

   

 

 

Income before income taxes

   800     800     973     (1,773)     800  

Income tax provision

   (319)     (316)     (176)     492     (319)  
  

 

   

 

   

 

   

 

   

 

 

Net income

   481     484     797     (1,281)     481  

Less: Net income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

 

Net income attributable to TWC shareholders

  $481    $484    $797    $(1,281)    $481  
  

 

   

 

   

 

   

 

   

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2013

(recast)

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2013

(recast)

  

  

  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Net income

   $808     $758     $795     $(1,552)      $809    $481    $484    $797    $(1,281)    $481  

Change in accumulated unrealized losses on pension benefit obligation, net of tax

       —     —     —         34     —     —     —     34  

Change in accumulated deferred gains (losses) on cash flow hedges, net of tax

   46     —     —     —     46         —     —     —      
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other comprehensive income

   53     —     —     —     53     37     —     —     —     37  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income

   861     758     795     (1,552)      862     518     484     797     (1,281)     518  

Less: Comprehensive income attributable to noncontrolling interests

   —     —     (1)      —     (1)      —     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income attributable to TWC shareholders

   $861     $758     $794     $(1,552)      $861    $518    $484    $797    $(1,281)    $518  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Statement of Operations for the NineSix Months Ended SeptemberJune 30, 20132014

 

   Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
 

Revenue

   $—     $—     $16,543     $—     $16,543  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

   —     —     7,764     —     7,764  

Selling, general and administrative

   —     —     2,825     —     2,825  

Depreciation

   —     —     2,371     —     2,371  

Amortization

   —     —     95     —     95  

Merger-related and restructuring costs

   —     —     81     —     81  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   —     —     13,136     —     13,136  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

   —     —     3,407     —     3,407  

Equity in pretax income (loss) of consolidated subsidiaries

   2,424     2,288     (1)     (4,711)     —  

Interest expense, net

   (183)     (2)     (990)     —     (1,175)  

Other income, net

               —     10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   2,242     2,287     2,424     (4,711)     2,242  

Income tax provision

   (828)     (854)     (797)     1,651     (828)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   1,414     1,433     1,627     (3,060)     1,414  

Less: Net income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

   $1,414     $1,433     $1,627     $(3,060)     $1,414  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2013

   Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
 

Net income

   $1,414     $1,433     $1,627     $(3,060)     $1,414  

Change in accumulated unrealized losses on pension benefit obligation, net of tax

   56     —     —     —     56  

Change in accumulated deferred gains (losses) on cash flow hedges, net of tax

   91     —     —     —     91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

   147     —     —     —     147  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   1,561     1,433     1,627     (3,060)     1,561  

Less: Comprehensive income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to TWC shareholders

   $1,561     $1,433     $1,627     $(3,060)     $1,561  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                                                                               
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Revenue

  $—    $—    $11,308    $—    $11,308  

Costs and expenses:

          

Programming and content

   —     —     2,650     —     2,650  

Sales and marketing

   —     —     1,099     —     1,099  

Technical operations

   —     —     742     —     742  

Customer care

   —     —     412     —     412  

Other operating

   —     —     2,371     —     2,371  

Depreciation

   —     —     1,570     —     1,570  

Amortization

   —     —     68     —     68  

Merger-related and restructuring costs

   41     —     100     —     141  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   41     —     9,012     —     9,053  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

   (41)     —     2,296     —     2,255  

Equity in pretax income of consolidated subsidiaries

   1,703     2,376     —     (4,079)     —  

Interest income (expense), net

   (97)     (718)     102     —     (713)  

Other income, net

   —         14     —     23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   1,565     1,667     2,412     (4,079)     1,565  

Income tax provision

   (587)     (625)     (618)     1,243     (587)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   978     1,042     1,794     (2,836)     978  

Less: Net income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

  $978    $1,042    $1,794    $(2,836)    $978  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2014 
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Net income

  $978    $1,042    $1,794    $(2,836)    $978  

Change in accumulated unrealized losses
on pension benefit obligation, net of
tax

   (25)     —     —     —     (25)  

Change in accumulated deferred gains (losses) on cash flow hedges, net of tax

   (91)     —     —     —     (91)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

   (116)     —     —     —     (116)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   862     1,042     1,794     (2,836)     862  

Less: Comprehensive income attributable
to noncontrolling interests

   —     —     —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to
TWC shareholders

  $862    $1,042    $1,794    $(2,836)    $862  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Statement of Operations for the Nine Months Ended September 30, 2012

   Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
 

Revenue

   $—     $—     $15,901     $—     $15,901  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

   —     —     7,377     —     7,377  

Selling, general and administrative

   —     —     2,694     —     2,694  

Depreciation

   —     —     2,377     —     2,377  

Amortization

   —     —     79     —     79  

Merger-related and restructuring costs

   24     —     74     —     98  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   24     —     12,601     —     12,625  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

   (24)     —     3,300     —     3,276  

Equity in pretax income of consolidated subsidiaries

   2,814     2,474     163     (5,451)     —  

Interest expense, net

   (230)     (145)     (829)     —     (1,204)  

Other income, net

       417     75     —     493  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   2,561     2,746     2,709     (5,451)     2,565  

Income tax provision

   (919)     (1,043)     (878)     1,920     (920)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   1,642     1,703     1,831     (3,531)     1,645  

Less: Net income attributable to noncontrolling interests

   —     —     (3)     —     (3)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to TWC shareholders

   $1,642     $1,703     $1,828     $(3,531)     $1,642  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2012

                                                                                               

Condensed Consolidating Statement of Operations for the Six Months Ended June 30, 2013

(recast)

Condensed Consolidating Statement of Operations for the Six Months Ended June 30, 2013

(recast)

 
  Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Revenue

  $—    $—    $11,025    $—    $11,025  

Costs and expenses:

          

Programming and content

   —     —     2,509     —     2,509  

Sales and marketing

   —     —     969     —     969  

Technical operations

   —     —     735     —     735  

Customer care

   —     —     384     —     384  

Other operating

   —     —     2,479     —     2,479  

Depreciation

   —     —     1,581     —     1,581  

Amortization

   —     —     63     —     63  

Merger-related and restructuring costs

   —     —     58     —     58  
  

 

   

 

   

 

   

 

   

 

 

Total costs and expenses

   —     —     8,778     —     8,778  
  

 

   

 

   

 

   

 

   

 

 

Operating Income

   —     —     2,247     —     2,247  

Equity in pretax income of consolidated subsidiaries

   1,590     1,692     —     (3,282)     —  

Interest expense, net

   (130)     (166)     (500)     —     (796)  

Other income, net

               —     10  
  

 

   

 

   

 

   

 

   

 

 

Income before income taxes

   1,461     1,529     1,753     (3,282)     1,461  

Income tax provision

   (579)     (603)     (370)     973     (579)  
  

 

   

 

   

 

   

 

   

 

 

Net income

   882     926     1,383     (2,309)     882  

Less: Net income attributable to noncontrolling interests

   —     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

 

Net income attributable to TWC shareholders

  $882    $926    $1,383    $(2,309)    $882  
  

 

   

 

   

 

   

 

   

 

 

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2013

(recast)

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2013

(recast)

 
  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Net income

   $1,642     $1,703     $1,831     $(3,531)     $1,645    $882    $926    $1,383    $(2,309)    $882  

Change in accumulated unrealized losses on pension benefit obligation, net of tax

       —     —     —         46     —     —     —     46  

Change in accumulated deferred gains (losses) on cash flow hedges, net of tax

       —     —     —         14     —     —     —     14  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other comprehensive income

   18     —     —     —     18     60     —     —     —     60  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income

   1,660     1,703     1,831     (3,531)     1,663     942     926     1,383     (2,309)     942  

Less: Comprehensive income attributable to noncontrolling interests

   —     —     (3)     —     (3)     —     —     —     —     —  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Comprehensive income attributable to TWC shareholders

   $1,660     $1,703     $1,828     $(3,531)     $1,660    $942    $926    $1,383    $(2,309)    $942  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Statement of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20132014

 

                                                                                                                             
  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiary
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Cash provided (used) by operating activities

   $(239)     $(361)     $4,754     $—     $4,154    $161    $(690)    $3,621    $—    $3,092  

INVESTING ACTIVITIES

                    

Capital expenditures

   —     —     (2,371)     —     (2,371)     —     —     (2,074)     —     (2,074)  

Purchases of investments

   (575)     (11)     —     —     (586)     —     (2)     —     —     (2)  

Return of capital from investees

   —         —     —      

Proceeds from sale, maturity and collection of investments

   476     —     —     —     476     18     —     —     —     18  

Acquisition of intangible assets

   —     (3)     (27)     —     (30)     —     (3)     (21)     —     (24)  

Other investing activities

   —     —     19     —     19     —     (2)     17     —     15  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash used by investing activities

   (99)     (7)     (2,379)     —     (2,485)  
  

 

   

 

   

 

   

 

   

 

 

Cash provided (used) by investing activities

   18     (7)     (2,078)     —     (2,067)  

FINANCING ACTIVITIES

                    

Short-term borrowings, net

   1,147     —     —     —     1,147  

Repayments of long-term debt

   (1,500)     —     —     —     (1,500)     (1,750)     —     —     —     (1,750)  

Redemption of mandatorily redeemable preferred equity

   —     —     (300)     —     (300)  

Repurchases of common stock

   (1,856)     —     —     —     (1,856)     (259)     —     —     —     (259)  

Dividends paid

   (573)     —     —     —     (573)     (428)     —     —     —     (428)  

Proceeds from exercise of stock options

   124     —     —     —     124     118     —     —     —     118  

Excess tax benefit from equity-based compensation

   81     —     —     —     81     99     —     —     —     99   

Taxes paid in cash in lieu of shares issued for equity-based compensation

   —     —     (64)     —     (64)     —      —      (68)     —     (68)  

Net change in investments in and amounts due from consolidated subsidiaries

   2,552     368     (2,920)     —     —     763     697     (1,460)     —     —  

Other financing activities

   (8)     —     (1)     —     (9)     (1)     —     (5)     —     (6)  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash provided (used) by financing activities

   (1,180)     368     (3,285)     —     (4,097)     (311)     697     (1,533)     —     (1,147)  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Decrease in cash and equivalents

   (1,518)     —     (910)     —     (2,428)  

Increase (decrease) in cash and equivalents

   (132)     —     10     —     (122)  

Cash and equivalents at beginning of period

   2,174     —     1,130     —     3,304     316     —     209     —     525  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash and equivalents at end of period

   $656     $—     $220     $—     $876    $184    $—    $219    $—    $403  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Condensed Consolidating Statement of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20122013

(recast)

 

                                                                                                                             
  Parent
    Company    
   Guarantor
  Subsidiaries  
   Non-
Guarantor
  Subsidiaries  
     Eliminations     TWC
  Consolidated  
   Parent
Company
   Guarantor
Subsidiaries
   Non-
Guarantor
Subsidiaries
   Eliminations   TWC
Consolidated
 

Cash provided (used) by operating activities

   $41     $(661)     $4,735     $—     $4,115    $18    $(323)    $3,250    $—    $2,945  

INVESTING ACTIVITIES

                    

Capital expenditures

   —     —     (2,191)     —     (2,191)     —     —     (1,597)     —     (1,597)  

Business acquisitions, net of cash acquired

   (1,350)     —     10     —     (1,340)  

Purchases of investments

   —     (16)     (41)     —     (57)     (575)     (6)     —     —     (581)  

Return of capital from investees

   —     1,112     —     —     1,112     —         —     —      

Proceeds from sale, maturity and collection of investments

   151     —     —     —     151  

Acquisition of intangible assets

   (3)     —     (24)     —     (27)     —     —     (20)     —     (20)  

Investments in (distributions and sale proceeds from) consolidated subsidiaries

   —     —     (363)     363     —  

Other investing activities

   —     —     21     —     21     —     —     13     —     13  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash provided (used) by investing activities

   (1,353)     1,096     (2,588)     363     (2,482)     (424)         (1,604)     —     (2,027)  
  

 

   

 

   

 

   

 

   

 

 

FINANCING ACTIVITIES

                    

Short-term borrowings, net

   363     —     —     (363)     —  

Proceeds from issuance of long-term debt

   2,258     —     —     —     2,258  

Repayments of long-term debt

   (1,500)     (250)     —     —     (1,750)  

Repayments of long-term debt assumed in acquisitions

   —     —     (1,730)     —     (1,730)  

Debt issuance costs

   (25)     —     —     —     (25)  

Repurchases of common stock

   (1,287)     —     —     —     (1,287)     (1,304)     —     —     —     (1,304)  

Dividends paid

   (529)     —     —     —     (529)     (386)     —     —     —     (386)  

Proceeds from exercise of stock options

   124     —     —     —     124     88     —     —     —     88  

Excess tax benefit from equity-based compensation

   55     —     18     —     73     66     —     —     —     66  

Taxes paid in cash in lieu of shares issued for equity-based compensation

   —     —     (43)     —     (43)     —     —     (55)     —     (55)  

Net change in investments in and amounts due from consolidated subsidiaries

   292     (185)     (107)     —     —     2,204     322     (2,526)     —     —  

Other financing activities

   (16)     —     (32)     —     (48)     (8)     —     —     —     (8)  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash used by financing activities

   (265)     (435)     (1,894)     (363)     (2,957)  
  

 

   

 

   

 

   

 

   

 

 

Cash provided (used) by financing activities

   660     322     (2,581)     —     (1,599)  

Increase (decrease) in cash and equivalents

   (1,577)     —     253     —     (1,324)     254     —     (935)     —     (681)  

Cash and equivalents at beginning of period

   4,372     —     805     —     5,177     2,174     —     1,130     —     3,304  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Cash and equivalents at end of period

   $2,795     $—     $1,058     $—     $3,853    $2,428    $—    $195    $—    $2,623  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Part II. Other Information

Item 1. Legal Proceedings.

The information set forth under Note 1312 to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors.

There have been no material changes in the Company’s risk factors from those disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information aboutAs a result of the Company’s purchases ofentry into the merger agreement with Comcast Corporation, the Company’s common stock repurchase program (the “Stock Repurchase Program”) was suspended on February 13, 2014. The Company did not purchase any equity securities registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended SeptemberJune 30, 2013.2014 and, as of June 30, 2014, the Company had $2.723 billion remaining under the Stock Repurchase Program authorization.

   Total Number of
Shares
Purchased
   Average
Price Paid
Per Share(a)
   Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs(b)
   Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs(c)
 

July 1, 2013 - July 31, 2013

   1,808,366     $        114.42     1,808,366     $  3,952,508,556  

August 1, 2013 - August 31, 2013

   1,708,729     111.62     1,708,729     3,761,772,756  

September 1, 2013 - September 30, 2013

   1,329,973     111.28     1,329,973     3,613,773,912  
  

 

 

     

 

 

   

Total

           4,847,068     112.57     4,847,068    
  

 

 

     

 

 

   

(a)

The calculation of the average price paid per share does not give effect to any fees, commissions and other costs associated with the repurchase of such shares.

(b)

In the fourth quarter of 2010, the Company’s Board of Directors authorized a stock repurchase program. On July 25, 2013, the Company’s Board of Directors increased the remaining authorization under the stock repurchase program, which was $775 million as of July 24, 2013, to an aggregate of up to $4.0 billion of TWC common stock effective July 25, 2013. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of the Company’s purchases will be based on a number of factors, including business and market conditions, financial capacity and TWC’s common stock price.

(c)

This amount does not reflect the fees, commissions and other costs associated with the stock repurchase program.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On July 24, 2014, the Company’s Board of Directors approved a reduction in its size from 13 members to 12, eliminating the vacancy that resulted from Glenn A. Britt’s death in June 2014.

Item 6. Exhibits.

The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TIME WARNER CABLE INC.
By: /s/ Arthur T. Minson, Jr.
 

Name:  Arthur T. Minson, Jr.

Title:    Executive Vice President and

             Chief Financial Officer

Date: OctoberJuly 31, 20132014

EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

 

Exhibit

Number

  

Description

  10.1

Employment Agreement, entered into on, and effective as of, July 25, 2013, between Time Warner Cable Inc. and Robert D. Marcus (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 25, 2013 and filed with the Securities and Exchange Commission (the “SEC”) on July 29, 2013).*

31.1  

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2013.2014.

31.2  

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2013.2014.

32  

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2013.2014.

101  

The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2013,2014, filed with the SEC on OctoberJuly 31, 2013,2014, formatted in eXtensible Business Reporting Language:

(i) Consolidated Balance Sheet as of SeptemberJune 30, 20132014 and December 31, 2012,2013, (ii) Consolidated Statement of Operations for the three and ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, (iii) Consolidated Statement of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, (iv) Consolidated Statement of Cash Flows for the ninesix months ended SeptemberJune 30, 20132014 and 2012,2013, (v) Consolidated Statement of Equity for the ninesix months ended SeptemberJune 30, 20132014 and 20122013 and (vi) Notes to Consolidated Financial Statements.

 

 

*

Incorporated by reference.

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

5357