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Rating Action:

MOODY'S UPGRADED TIME WARNER INC.'S AND TIME WARNER ENTERTAINMENT L.P.'S RATINGS TO Baa3 AND Baa2 (SR. UNSEC.); AND RAISED TIME WARNER ENTERTAINMENT'S COMMERCIAL PAPER RATING TO PRIME-2

13 May 1998
MOODY'S UPGRADED TIME WARNER INC.'S AND TIME WARNER ENTERTAINMENT L.P.'S RATINGS TO Baa3 AND Baa2 (SR. UNSEC.); AND RAISED TIME WARNER ENTERTAINMENT'S COMMERCIAL PAPER RATING TO PRIME-2 New York, 05-13-98 -- Moody's Investors Service has raised the ratings of the Time Warner Group reflecting generally stronger cash flows at most of the operating subsidiaries, and an expectation that the company will generate increasing free cash flows to reduce its high debt levels and further strengthen credit quality over the intermediate term. The Time Warner Group includes Time Warner Inc. (TWI), its wholly owned subsidiaries, Time Warner Companies, Inc. (TWC), Turner Broadcasting System, Inc. (TBS), and TWI's 75% owned Time Warner Entertainment L.P. (TWE). US West owns the remaining 25% of TWE. TWE guarantees the senior unsecured zero coupon debt at Six Flags Entertainment Corporation despite the recent sale of its 49% ownership to Premier Parks, so the rating for those notes were also lifted.
The upgraded ratings are listed as follows:
Time Warner Inc.:
Senior unsecured notes and debentures raised to Baa3 from Ba1;
Senior unsecured shelf raised to (P) Baa3 from (P)Ba1.
Time Warner Companies, Inc.:
Senior unsecured notes and debentures raised to Baa3 from Ba1;
Senior unsecured shelf raised to (P) Baa3 from (P)Ba1;
Convertible subordinated debentures raised to Ba2 from Ba3;
Preferred stock raised to "ba2" from "ba3".
Turner Broadcasting System, Inc.:
Senior unsecured notes and debentures raised to Baa3 from Ba1;
Senior subordinated to Ba2 from Ba3.
Time Warner Capital I (guaranteed by TWI):
Preferred stock raised to "ba2" from "ba3".
Time Warner Pass-Through Asset Trust 1997-1 (guaranteed by TWI):
Senior unsecured notes raised to Baa3 from Ba1.
Time Warner Pass-Through Asset Trust 1997-2 (guaranteed by TWI):
Senior unsecured notes raised to Baa3 from Ba1.
Time Warner Entertainment Company, L.P.:
Senior unsecured notes and debentures raised to Baa2 from Baa3;
Senior unsecured shelf raised to (P) Baa2 from (P)Baa3;
Commercial Paper rating raised to Prime-2 from Prime-3.
Entertainment Property, Inc. (guaranteed by TWE):
Preferred stock raised to "baa2" from "baa3".
Six Flags Entertainment Corporation (guaranteed by TWE):
Senior unsecured notes raised to Baa2 from Baa3.

The rating outlook for all the aforementioned ratings is stable.

Despite large acquisition-driven increases in debt, Time Warner's operating cash flow has moved steadily upward through most of the group, and as a result, debt-protection measures and financial flexibility have improved markedly since the company was last upgraded in 1993. Moody's anticipates this trend to continue over the next few years in concert with continuing economically-driven strength in advertising, as a result of record syndication backlogs at the studios and revenue growth opportunities and a more stable competitive environment for the cable system operations. The company's cable networks are enjoying robust cash flow growth resulting from increasing viewership levels and a vibrant ad marketplace. Additional steps being taken to further bolster these networks such as acquiring the rights to televise theatrical motion picture premiers are expected to move the cable networks closer to advertising rate parity with broadcast networks. The company's publishing business, is also benefiting from the strong advertising climate. TWI's very strong franchises such as Time, People, Fortune and Sports Illustrated among others, operate in a competitive landscape, however, they command a disproportionate share of the industry revenues and profits. This factor mitigates some of the negative impact on cash flow that could occur from advertising contraction during economic downturns. The company's music segment has experienced cash flow deterioration primarily due to a difficult retail environment, a competitive global environment, increasing costs, and a slow if not uncertain transition to new delivery mechanisms (compact discs to DVD). Despite these factors, the segment remains highly profitable with healthy returns on capital. Time Warner has also reduced its annual debt service requirements as a result of longer debt maturities at lower average rates.
Moody's anticipates further reduction in the high debt and preferred stock levels at TWI group (TWC and TBS) resulting from increasing free cash flow and priority capital interest payments from TWE. TWE's financial flexibility is sufficient to support anticipated priority capital payments to TWI and US West, but is not likely to experience as much debt reduction as TWI. Despite the greater levels of expected debt reduction at the TWI group, leverage parity with TWE is not likely to occur during the intermediate term. Additionally, TWE's public debt indentures don't provide strong insulation for bondholders (e.g. permitted capital payments to TWI) that might otherwise afford the debt a higher rating. As a result, Moody's continues to believe that a one notch differential in the ratings between the TWI group and TWE is warranted so long as the current TWE partnership structure remains in place. Moody's also believes that there exists the long-term prospect that the TWE partnership with US West could be restructured in some manner, and at some time. However, the resulting possibilities are difficult to ascertain. Therefore, Moody's will assess the impact on TWE's ratings when and if such a restructuring takes place.
Other events have also combined to improve the group's overall credit quality and to increase the level of protection afforded bondholders. The events include the recent placement of cross guarantees between TWI, TWC, and TBS, which, by assembling separate equally rated credits into one larger and more diverse portfolio, reduces risk for each of the companies' respective bondholders. These events also include acquisitions that have substantially increased the company's scale and diversity while maintaining a healthy balance of cyclical (advertising dependent) and non-cyclical businesses (subscriber based, e.g. cable TV systems). Also, management has embarked on a cost reduction program which should help boost financial performance and mitigate rising costs inherent within the media industry. These improvements together with rising free cash flow and management's commitment to prudent financial management and maintaining stronger debt protection measures provide increased predictability and stability for the companies financial performance and its credit ratings.
The Time Warner Group, with its headquarters in New York, New York, is a global diversified media and entertainment company, with interests in cable television systems, cable television networks, magazine and book publishing, recorded music and music publishing, television and filmed entertainment production and libraries, theme parks, and professional sports teams.

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