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MEDIACOM BROADBAND CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our unaudited consolidated financial statements as of, and for the three and nine months ended, September 30, 2014 and 2013, and with our annual report on Form 10-K for the year ended December 31, 2013. Overview We are a wholly-owned subsidiary of Mediacom Communications Corporation ("MCC"), the nation's eighth largest cable company based on the number of customers who purchase one or more video services, also known as video customers. As of September 30, 2014, we served approximately 504,000 video customers, 554,000 high-speed data ("HSD") customers and 213,000 phone customers, aggregating 1.27 million primary service units ("PSUs"). We provide residential and commercial customers with a wide variety of services, including video, HSD and phone. We believe our customers prefer the cost savings of the bundled services we offer, as well as the convenience of having a single provider contact for ordering, provisioning, billing and customer care. We also provide network and transport services to medium- and large-sized businesses, governments, and educational institutions, including cell tower backhaul for wireless telephone providers, and sell advertising time to local, regional and national advertisers. Over the past several years, losses in our residential video customer base have been primarily responsible for slower growth in our residential revenues, while we have rapidly increased our business services revenues through customer gains. We expect to continue to grow revenues through customer additions in business services and, to a lesser extent, in residential services. Business services revenues are expected to grow through HSD and phone sales to small- and medium-sized businesses and a greater number of cell tower backhaul sites and large enterprise customers. Revenues from residential services are expected to grow as a result of HSD and phone customer growth, and greater revenue per PSU, as more HSD customers take higher speed tiers and our wireless home gateway service and more video customers take our digital video recorder ("DVR") and other advanced video services. Our recent performance has been affected by softer than expected economic conditions in a post-recession period and significant video competition. We believe the slow economic recovery from the recession, including the uneven gains in consumer spending, household income, occupied housing, and new housing starts, has largely contributed to lower sales and connect activity for all of our residential services and negatively impacted our residential customer and revenue growth. While we expect improvement as the economy recovers further, a continuation or broadening of such effects may adversely impact our results of operations, cash flows and financial position. Our residential video service principally competes with direct broadcast satellite ("DBS") providers, who offer video programming substantially similar to ours. Over the past several years, we have experienced meaningful video customer losses, as DBS competitors have deployed aggressive marketing campaigns, including deeply discounted promotional packages, more advanced customer premise equipment and exclusive sports programming. Recently, the overall focus in our residential services reflects a greater emphasis on higher quality customer relationships, concentrating sales and marketing more on single family homes, which we believe are more likely to purchase multiple services and stay with us longer. We have generally reduced tactical discounts for customers not likely to purchase two or more services or to stay with us for an extended period. Our recent introduction of next generation set-tops and an interactive guide are aimed at regaining video market share. If we are unsuccessful with this strategy and cannot offset video customer losses through higher average unit pricing and greater penetration of our advanced video services, we may experience future annual declines in video revenues. Our residential HSD service competes primarily with digital subscriber line ("DSL") services offered by local phone companies, or local exchange carriers ("LECs"). Based upon the speeds we offer, we believe our HSD service is generally superior to DSL offerings in our service areas. As consumers' bandwidth requirements have dramatically increased in the past few years, a trend many industry experts expect to continue, we believe our ability to offer a HSD service today with downstream speeds of up to 150Mbps in substantially all of our services areas gives us a competitive advantage compared to the DSL service offered by the local telephone companies. We expect to continue to grow HSD revenues through residential customer growth and more customers taking higher HSD speed tiers. Our residential phone service mainly competes with substantially comparable phone services offered by LECs and cellular phone services offered by national wireless providers. If we are unable to grow residential phone customers at a rate sufficient to offset unit pricing pressure caused by such competition, or at all, we may experience declines in phone revenues. Our business services, including cell tower backhaul, largely compete with LECs. Developments and advancements in products and services by new, emerging companies may intensify competition. We have experienced strong growth rates of business services revenues in the past several years, which we believe will continue. 14 -------------------------------------------------------------------------------- Table of Contents We face significant competition in our advertising business from a wide range of national, regional and local competitors. Competition will likely elevate as new formats for advertising are introduced into our markets. We compete for advertising revenues principally against local broadcast stations, national cable and broadcast networks, radio, newspapers, magazines, outdoor display and Internet companies. Advertising revenues are sensitive to the political election cycle, and we believe advertising revenues will increase for the full year 2014, as this is an election year. Video programming has represented our single largest expense in recent years, and we have experienced substantial increases in video programming costs per video customer, particularly for sports and local broadcast programming, well in excess of the inflation rate or the change in the consumer price index. We expect to experience high single- to low double-digit growth in video programming costs per video customer for the full year 2014, similar to our experience in 2013. We also believe these expenses will continue to grow at a significant rate in the future because of the demands of large media conglomerates or other owners of most of the popular cable networks and major market local broadcast stations, and of large independent television broadcast groups, who own or control a significant number of local broadcast stations across the country and, in some cases, own or negotiate for multiple stations in the same market. Moreover, many of those powerful owners of programming require us to purchase their networks and stations in bundles and effectively dictate how we offer them to our customers, given the contractual economic penalties if we fail to comply. Consequently, we have little or no ability to individually or selectively negotiate for networks or stations, to forego purchasing networks or stations that generate low customer interest, to offer sports programming services, such as ESPN and regional sports networks, on one or more separate tiers, or to offer networks or stations on an a la carte basis to give our customers more choice and potentially lower their costs. While such growth in programming expenses can be offset, in whole or in part, by rate increases, we expect our video gross margins will continue to decline if increases in programming costs outpace any growth in video revenues. 2014 Financings On March 17, 2014, we issued $200.0 million of 5 1/2% senior notes due 2021 (the "5 1/2% Notes") and, on the same date, used the net proceeds to substantially repay $200.0 million of principal amount outstanding under the existing Term Loan D under our bank credit facility (the "credit facility"). On June 20, 2014, we completed $550.0 million of new term loans and, on the same date, used the net proceeds to repay the remaining $542.5 million of principal amount outstanding under Term Loan D. On October 10, 2014, we terminated our existing $216.0 million of revolving credit commitments and received $216.0 million of new revolving credit commitments. See "Liquidity and Capital Resources - Capital Structure - 2014 Financings" and Notes 6 and 12 in our Notes to Consolidated Financial Statements. Revenues Video Video revenues primarily represent monthly subscription fees charged to residential video customers, which vary according to the level of service and equipment taken, and revenue from the sale of video-on-demand content and pay-per-view events. Video revenues also include installation, reconnection and wire maintenance fees, franchise and late payment fees, and other ancillary revenues. HSD HSD revenues primarily represent monthly subscription fees charged to residential HSD customers, which vary according to the level of HSD service taken. Phone Phone revenues principally represent monthly subscription fees charged to residential phone customers for our phone service. Business Services Business services revenues primarily represent monthly fees charged to commercial video, HSD and phone customers, which vary according to the level of service taken, and fees charged to medium- and large-sized businesses, governments and educational institutions, including revenues from cell tower backhaul and enterprise class services. Advertising Advertising revenues primarily represent revenues from selling advertising time we receive under programming license agreements to local, regional and national advertisers for the placement of commercials on channels offered on our video services. 15 -------------------------------------------------------------------------------- Table of Contents Costs and Expenses Service Costs Service costs consist of the costs related to providing and maintaining services to our customers. Significant service costs comprise video programming; HSD service, including bandwidth connectivity; phone service, including leased circuits and long distance; our enterprise networks business, including leased access; technical personnel who maintain the cable network, perform customer installation activities and provide customer support; network operations center; utilities, including pole rental; and field operations, including outside contractors, vehicle fuel and maintenance and leased fiber for regional fiber networks. Programming costs, which are generally paid on a per video customer basis, have historically represented our single largest expense. In recent years, we have experienced substantial increases in the per-unit cost of programming, which we believe will continue to grow due to the increasing contractual rates and retransmission consent fees demanded by large programmers and independent broadcasters. Our HSD costs fluctuate depending on customers' bandwidth consumption and customer growth. Phone service costs are mainly determined by network configuration, customers' long distance usage and net termination payments to other carriers. Our other service costs generally rise as a result of customer growth and inflationary cost increases for personnel, outside vendors and other expenses. Personnel and related support costs may increase as the percentage of expenses that we capitalize declines due to lower levels of new service installations. We anticipate that service costs, with the exception of programming expenses, will remain fairly consistent as a percentage of our revenues. Selling, General and Administrative Expenses Significant selling, general and administrative expenses comprise call center, customer service, marketing, business services, support and administrative personnel; franchise fees and other taxes; bad debt; billing; marketing; advertising; and general office administration. These expenses generally rise due to customer growth and inflationary cost increases for personnel, outside vendors and other expenses. We anticipate that selling, general and administrative expenses will remain fairly consistent as a percentage of our revenues. Service costs and selling, general and administrative expenses exclude depreciation and amortization, which we present separately. Management Fee Expense Management fee expense reflects compensation paid to MCC for the performance of services it provides us in accordance with management agreements between MCC and our operating subsidiaries. Use of Non-GAAP Financial Measures "OIBDA" is not a financial measure calculated in accordance with generally accepted accounting principles ("GAAP") in the United States. We define OIBDA as operating income before depreciation and amortization. OIBDA has inherent limitations as discussed below. OIBDA is one of the primary measures used by management to evaluate our performance and to forecast future results. We believe OIBDA is useful for investors because it enables them to assess our performance in a manner similar to the methods used by management, and provides a measure that can be used to analyze value and compare the companies in the cable industry. A limitation of OIBDA, however, is that it excludes depreciation and amortization, which represents the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business. Management uses a separate process to budget, measure and evaluate capital expenditures. OIBDA should not be regarded as an alternative to operating income or net income as an indicator of operating performance, or to the statement of cash flows as a measure of liquidity, nor should it be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. We believe that operating income is the most directly comparable GAAP financial measure to OIBDA. 16 -------------------------------------------------------------------------------- Table of Contents Actual Results of Operations Three and Nine Months Ended September 30, 2014 compared to Three and Nine Months Ended September 30, 2013 The table below sets forth our consolidated statements of operations and OIBDA for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands and percentage changes that are not meaningful are marked NM): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Revenues $ 237,611 $ 231,252 2.7 % $ 706,953 $ 686,698 2.9 % Costs and expenses: Service costs 97,592 91,786 6.3 % 285,979 276,956 3.3 % Selling, general and administrative expenses 46,652 47,762 (2.3 %) 136,175 138,244 (1.5 %) Management fee expense 4,300 4,300 0.0 % 12,900 12,300 4.9 % Depreciation and amortization 38,738 39,018 (0.7 %) 117,429 117,176 0.2 % Operating income 50,329 48,386 4.0 % 154,470 142,022 8.8 % Interest expense, net (26,590 ) (23,155 ) 14.8 % (74,264 ) (72,691 ) 2.2 % Gain on derivatives, net 6,329 3,945 NM 17,426 17,565 NM Loss on early extinguishment of debt, net - - NM (300 ) (832 ) NM Other expense, net (445 ) (435 ) NM (1,298 ) (947 ) NM Net income $ 29,623 $ 28,741 3.1 % $ 96,034 $ 85,117 12.8 % OIBDA $ 89,067 $ 87,404 1.9 % $ 271,899 $ 259,198 4.9 % The table below represents a reconciliation of OIBDA to operating income, which we believe is the most directly comparable GAAP measure (dollars in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change OIBDA $ 89,067 $ 87,404 1.9 % $ 271,899 $ 259,198 4.9 % Depreciation and amortization (38,738 ) (39,018 ) (0.7 %) (117,429 ) (117,176 ) 0.2 % Operating income $ 50,329 $ 48,386 4.0 % $ 154,470 $ 142,022 8.8 % 17 -------------------------------------------------------------------------------- Table of Contents Revenues The tables below set forth our revenues and selected customer and average monthly revenue statistics as of, and for the three and nine months ended, September 30, 2014 and 2013 (dollars in thousands, except per unit data): Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Video $ 111,245 $ 114,547 (2.9 %) $ 338,371 $ 343,460 (1.5 %) HSD 66,568 62,140 7.1 % 197,629 184,343 7.2 % Phone 15,708 16,331 (3.8 %) 47,630 49,566 (3.9 %) Business services 29,645 26,283 12.8 % 85,519 74,018 15.5 % Advertising 14,445 11,951 20.9 % 37,804 35,311 7.1 % Total $ 237,611 $ 231,252 2.7 % $ 706,953 $ 686,698 2.9 % Average total monthly revenue per PSU (1) $ 62.22 $ 60.60 2.7 % $ 61.85 $ 60.53 2.2 % (1) Represents average total monthly revenues for the period divided by average PSUs for such period. September 30, 2014 2013 % Change Video customers 504,000 535,000 (5.8 %) HSD customers 554,000 529,000 4.7 % Phone customers 213,000 204,000 4.4 % Primary service units (PSUs) 1,271,000 1,268,000 0.2 % Revenues increased 2.7% and 2.9% for the three and nine months ended September 30, 2014, respectively, primarily due to greater HSD, business services and advertising revenues, offset in part by declines in video and, to a lesser extent, phone revenues. Average total monthly revenue per PSU increased 2.7% to $62.22 and 2.2% to $61.85 for the three and nine months ended September 30, 2014, respectively. Video Video revenues decreased 2.9% and 1.5% for the three and nine months ended September 30, 2014, respectively, mainly a result of residential video customer losses, offset in part by rate adjustments and, to a much lesser extent, greater installation fee revenues. We lost 11,000 and 24,000 video customers during the three and nine months ended September 30, 2014, respectively, compared to declines of 14,000 and 23,000 in the comparable prior year periods. As of September 30, 2014, we served 504,000 video customers, or 33.6% of our estimated homes passed. As of the same date, 61.5% of our video customers were digital customers, and 47.2% of our digital customers took our DVR service. HSD HSD revenues grew 7.1% and 7.2% for the three and nine months ended September 30, 2014, respectively, largely due to residential HSD customer growth and, to a much lesser extent, revenues from data usage overage charges, which were implemented in late 2013, and a greater number of customers taking our wireless home gateway service. We gained 6,000 and 20,000 HSD customers during the three and nine months ended September 30, 2014, respectively, compared to increases of 4,000 and 24,000 in the comparable prior year periods. As of September 30, 2014, we served 554,000 HSD customers, or 37.0% of our estimated homes passed, and 29.7% of our HSD customers took our wireless home gateway service. Phone Phone revenues decreased 3.8% and 3.9% for the three and nine months ended September 30, 2014, respectively, principally due to lower revenues per phone customer. We gained 1,000 and 6,000 phone customers during the three and nine months ended September 30, 2014, respectively, compared to increases of 2,000 and 14,000, respectively, in the comparable prior year periods. As of September 30, 2014, we served 213,000 phone customers, or 14.2% of our estimated homes passed. 18 -------------------------------------------------------------------------------- Table of Contents Business Services Business services revenues rose 12.8% and 15.5% for the three and nine months ended September 30, 2014, respectively, principally due to small- to medium-sized commercial customer growth and greater revenues from cell tower backhaul. Advertising Advertising revenues rose 20.9% and 7.1% for the three and nine months ended September 30, 2014, respectively, principally due to a higher level of political advertising. Costs and Expenses Service Costs Service costs increased 6.3% for the three months ended September 30, 2014, mainly due to higher programming, employee and field operating expenses. Programming expenses rose 3.4%, primarily due to greater retransmission consent fees charged by local broadcasters and higher contractual rates charged by our programming vendors, offset in part by a lower video customer base. Employee costs were 14.8% higher, largely a result of the re-designation of certain business services employees previously included in selling, general and administrative expenses. Field operating costs grew 9.6%, principally due to a greater use of outside contractors for customer installations. Service costs as a percentage of revenues were 41.1% and 39.7% for the three months ended September 30, 2014 and 2013, respectively. Service costs increased 3.3% for the nine months ended September 30, 2014, largely as a result of higher employee, field operating and HSD delivery expenses. Employee costs were 11.8% higher, largely a result of the re-designation of certain business services employees previously included in selling, general and administrative expenses. Field operating costs grew 5.4%, principally due to a greater use of outside contractors for customer installations, offset in part by lower costs associated with our network operating center. HSD delivery costs rose 25.9%, primarily due to a greater number of equipment maintenance contracts and higher bandwidth consumption by our HSD customers. Service costs as a percentage of revenues were 40.5% and 40.3% for the nine months ended September 30, 2014 and 2013, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses declined 2.3% for the three months ended September 30, 2014, primarily due to lower employee and bad debt expenses. Employee expenses decreased 3.9%, largely as a result of the re-designation of certain business services employees as service costs. Bad debt expense fell 9.0%, principally due to a lower number of written off accounts. Selling, general and administrative expenses as a percentage of revenues were 19.6% and 20.7% for the three months ended September 30, 2014 and 2013, respectively. Selling, general and administrative expenses declined 1.5% for the nine months ended September 30, 2014, mainly due to lower employee and, to a lesser extent, office expenses, offset in part by higher marketing costs. Employee costs decreased 5.9%, principally due to lower staffing levels. Office expenses fell 10.5%, mainly due to lower rent and telecommunications costs. Marketing costs grew 3.0%, largely as a result of greater levels of direct mail marketing and television advertising, offset in part by a reduction in contracted direct sales marketing and telemarketing and lower costs associated with retail sales channels. Selling, general and administrative expenses as a percentage of revenues were 19.3% and 20.1% for the nine months ended September 30, 2014 and 2013, respectively. Management Fee Expense Management fee expense was unchanged for the three months ended September 30, 2014, and grew 4.9% for the nine months ended September 30, 2014, reflecting higher fees charged by MCC. Management fee expense as a percentage of revenues was 1.8% and 1.9% for the three months ended September 30, 2014 and 2013, respectively, and 1.8% for each of the nine months ended September 30, 2014 and 2013, respectively. 19 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Depreciation and amortization was 0.7% lower for the three months ended September 30, 2014, as certain assets becoming fully depreciated were mostly offset by the depreciation of investments in customer premise equipment, HSD bandwidth expansion and our business services offerings. Depreciation and amortization was 0.2% higher for the nine months ended September 30, 2014, as the depreciation of investments in customer premise equipment, HSD bandwidth expansion and our business services offerings were substantially offset by certain assets becoming fully depreciated. OIBDA OIBDA increased 1.9% and 4.9% for the three and nine months ended September 30, 2014, respectively, as the increase in revenues and, to a much lesser extent, the decline in selling, general and administrative expenses, were offset in part by greater service costs. Operating Income Operating income increased 4.0% and 8.8% for the three and nine months ended September 30, 2014, respectively, principally due to the growth in OIBDA. Interest Expense, Net Interest expense, net, increased 14.8% and 2.2% for the three and nine months ended September 30, 2014, respectively, as a higher average cost of debt was offset in part by lower average outstanding indebtedness. Gain on Derivatives, Net As a result of the changes in the mark-to-market valuations on our interest rate swaps, based on information provided by our counterparties, we recorded a net gain on derivatives of $6.3 million and $3.9 million for the three months ended September 30, 2014 and 2013, respectively, and $17.4 million and $17.6 million for the nine months ended September 30, 2014 and 2013, respectively. See Notes 3 and 6 in our Notes to Consolidated Financial Statements. Loss on Early Extinguishment of Debt Loss on early extinguishment of debt totaled $0.3 and $0.8 million for the nine months ended September 30, 2014 and 2013, respectively, which represented the write-off of certain unamortized financing costs as a result of the repayment of certain term loans. Other Expense, Net Other expense, net, was $0.4 million for the three months ended September 30, 2014, substantially representing revolving credit commitment fees, and $0.4 million for the three months ended September 30, 2013, representing $0.3 million of revolving credit commitment fees and $0.1 million of other fees. Other expense, net, was $1.3 million for the nine months ended September 30, 2014, representing $1.1 million of revolving credit commitment fees and $0.2 million of other fees, and $0.9 million for the nine months ended September 30, 2013, representing $0.7 million of revolving credit commitment fees and $0.2 million of other fees. Net Income As a result of the factors described above, we recognized net income of $29.6 million and $28.7 million for the three months ended September 30, 2014 and 2013, respectively, and $96.0 million and $85.1 million for the nine months ended September 30, 2014 and 2013, respectively. Liquidity and Capital Resources Our net cash flows provided by operating activities are primarily used to fund investments to enhance the capacity and reliability of our network and further expand our products and services, as well as for scheduled repayments of our indebtedness and periodic distributions to MCC. As of September 30, 2014, our near-term liquidity requirements included scheduled term loan principal repayments of $3.4 million during the remainder of 2014, and $13.5 million during each of the years ending December 31, 2015 and 2016. As of the same date, our sources of liquidity included $11.1 million of cash and $205.6 million of unused and available 20 -------------------------------------------------------------------------------- Table of Contents commitments under our $216.0 million revolving credit facility, after giving effect to no outstanding loans and $10.4 million of letters of credit issued to various parties as collateral. We believe that cash generated by, or available to, us will meet our anticipated capital and liquidity needs for the next twelve months. In December 2014, as permitted by our debt arrangements, we may make a capital distribution to MCC in an amount up to $150 million, to fund, in part, the repayment of certain maturing term loans at Mediacom LLC, another wholly-owned subsidiary of MCC. We expect to fund such distribution, if completed, with borrowings under our revolving credit facility and, to a lesser extent, with internally generated funds. In the longer term, we may not generate sufficient net cash flows from operations to fund our maturing term loans and senior notes. If we are unable to obtain sufficient future financing on acceptable terms, or at all, we may need to take other actions to conserve or raise capital that we would not take otherwise. However, we have accessed the debt markets for significant amounts of capital in the past, including the issuance of new senior notes and term loans in 2014, and expect to continue to be able to access these markets in the future as necessary. Net Cash Flows Provided by Operating Activities Net cash flows provided by operating activities were $212.7 million for the nine months ended September 30, 2014, primarily due to OIBDA of $271.9 million and, to a much lesser extent, the $12.0 million net change in our operating assets and liabilities, offset in part by interest expense of $74.3 million. The net change in our operating assets and liabilities was primarily due to increases in accounts payable, accrued expenses and other current liabilities of $15.1 million and, to a much lesser extent, a decline in accounts receivable from affiliates of $1.0 million, offset in part by increases in accounts receivable, net, of $3.1 million and in prepaid expenses and other assets of $1.2 million. Net cash flows provided by operating activities were $186.7 million for the nine months ended September 30, 2013, primarily due to OIBDA of $259.2 million, offset in part by interest expense of $72.7 million and the $2.9 million net change in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily due to increases in prepaid expenses and other assets of $3.0 million, in accounts receivable, net, of $2.1 million and in accounts receivable from affiliates of $1.2 million, offset in part by increases in accounts payable, accrued expenses and other current liabilities of $2.5 million and in deferred revenue of $0.9 million. Net Cash Flows Used in Investing Activities Capital expenditures continue to be our primary use of capital resources and generally comprise substantially all of our net cash flows used in investing activities. Net cash flows used in investing activities were $107.9 million for the nine months ended September 30, 2014, comprising $108.2 million of capital expenditures, slightly offset by a net change in accrued property, plant and equipment of $0.3 million. Net cash flows used in investing activities were $116.0 million for the nine months ended September 30, 2013, comprising $116.7 million of capital expenditures, slightly offset by a net change in accrued property, plant and equipment of $0.7 million. The $8.5 million decline in capital expenditures principally reflected investments in the prior year period associated with the purchase of an office building that we previously leased and reduced outlays for cell tower backhaul and the conversion to an all-digital video platform, offset in part by greater spending on our next-generation set-top and HSD bandwidth expansion. Net Cash Flows Used in Financing Activities Net cash flows used in financing activities were $105.0 million for the nine months ended September 30, 2014, as $270.9 million of net repayments under the credit facility, $13.5 million of dividend payments on preferred members' interest, $10.5 million of financing costs, $9.7 million of capital distributions to our parent, MCC, and $0.5 million of other financing activities were funded, in part, by the $200.0 million issuance of new senior notes. See "Capital Structure - 2014 Financings" below and Note 6 in our Notes to Consolidated Financial Statements for more information on such net repayments under the credit facility and issuance of new senior notes. Net cash flows used in financing activities were $68.9 million for the nine months ended September 30, 2013, comprising net repayments of $35.0 million under the credit facility, $14.0 million of capital distributions to our parent, MCC, $13.5 million of dividend payments on preferred members' interest, $5.3 million of financing costs and $1.1 million of other financing activities. 21-------------------------------------------------------------------------------- Table of Contents Capital Structure As of September 30, 2014, our total indebtedness was $1.837 billion, of which approximately 71% was at fixed interest rates or had interest rate swaps that fixed the corresponding variable portion of debt. During the nine months ended September 30, 2014, we paid cash interest of $59.4 million, net of capitalized interest. 2014 Financings On March 17, 2014, we issued the 5 1/2% Notes in the aggregate principal amount of $200.0 million. After giving effect to $3.8 million of financing costs, net proceeds of $196.2 million from the 5 1/2% Notes substantially funded a $200.0 million partial repayment of the existing Term Loan D under the credit facility. On June 20, 2014, we completed new term loans in the aggregate principal amount of $550.0 million (the "new term loans"). After giving effect to $6.6 million of financing costs, net proceeds of $543.4 million from the new term loans were substantially used to fund the full repayment of the remaining $542.5 million balance under Term Loan D. On October 10, 2014, we terminated our existing $216.0 million of revolving credit commitments and entered into an incremental facility agreement under the credit agreement, which provided for $216.0 million of new revolving credit commitments (the "new revolver"), with such commitments scheduled to expire on October 10, 2019. See Notes 6 and 12 in our Notes to Consolidated Financial Statements. Bank Credit Facility As of September 30, 2014, we maintained a $1.553 billion credit facility, comprising $1.337 billion of term loans with maturities ranging from June 2017 to June 2021 and a $216.0 million revolving credit facility with a scheduled expiry of December 31, 2016. On October 10, 2014, we terminated our existing revolving credit facility and completed the new revolver, which has a scheduled expiration of October 10, 2019. See Note 12. The credit facility is collateralized by our ownership interests in our operating subsidiaries, and is guaranteed by us on a limited recourse basis to the extent of such ownership interests. The credit agreement governing the credit facility (the "credit agreement") requires our operating subsidiaries to maintain a total leverage ratio (as defined in the credit agreement) of no more than 5.0 to 1.0 and an interest coverage ratio (as defined in the credit agreement) of no less than 2.0 to 1.0. For all periods through September 30, 2014, our operating subsidiaries were in compliance with all covenants under the credit agreement including, as of the same date, a total leverage ratio of 3.6 to 1.0 and an interest coverage ratio of 2.7 to 1.0. We do not believe that our operating subsidiaries will have any difficulty complying with any of the covenants under the credit agreement in the near future. Interest Rate Swaps We have entered into several interest rate swaps with various banks to fix the variable rate of borrowings to reduce the potential volatility in our interest expense that may result from changes in market interest rates. As of September 30, 2014, we had interest rate swaps that fixed the variable rate of $800 million of borrowings at a rate of 3.3%, of which $600 million and $200 million expire during December 2014 and 2015, respectively. As of the same date, we also had forward starting interest rate swaps that will fix the variable rate of $300 million of borrowings at a rate of 2.6% for a one year period commencing December 2014. As of September 30, 2014, the weighted average interest rate on outstanding borrowings under the credit facility, including the effect of our interest rate swaps, was 5.2%. Senior Notes As of September 30, 2014, we had $500 million of outstanding senior notes, comprising $200 million of 5 1/2% senior notes due April 2021 and $300 million of 6 3/8% senior notes due April 2023. Our senior notes are unsecured obligations, and the indentures governing our senior notes (the "indentures") limit the incurrence of additional indebtedness based upon a maximum debt to operating cash flow ratio (as defined in the indentures) of 8.5 to 1.0. For all periods through September 30, 2014, we were in compliance with covenants under the indentures including, as of the same date, a debt to operating cash flow ratio of 5.2 to 1.0. We do not believe that we will have any difficulty complying with any of the covenants under the indentures in the near future. 22-------------------------------------------------------------------------------- Table of Contents Debt Ratings MCC's corporate credit rating is B1 by Moody's, with a positive outlook, and BB- by Standard and Poor's ("S&P"), with a stable outlook. Our senior unsecured rating is B3 by Moody's, with a positive outlook, and B by S&P, with a stable outlook. There can be no assurance that Moody's or S&P will maintain their ratings on MCC and us. A negative change to these credit ratings could result in higher interest rates on future debt issuance than we currently experience, or adversely impact our ability to raise additional funds. There are no covenants, events of default, borrowing conditions or other terms in the credit agreement or indenture that are based on changes in our credit rating assigned by any rating agency. Contractual Obligations and Commercial Commitments Other than certain items which were updated in our quarterly report on Form 10-Q for the three and six months ended June 30, 2014, there have been no material changes to our contractual obligations and commercial commitments as previously disclosed in our annual report on Form 10-K for the year ended December 31, 2013. Critical Accounting Policies The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Periodically, we evaluate our estimates, including those related to doubtful accounts, long-lived assets, capitalized costs and accruals. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results may differ from these estimates under different assumptions or conditions. We believe that the application of the critical accounting policies requires significant judgments and estimates on the part of management. For a summary of our critical accounting policies, please refer to our annual report on Form 10-K for the year ended December 31, 2013. Goodwill and Other Intangible Assets In accordance with the Financial Accounting Standards Board's Accounting Standards Codification No. 350 Intangibles - Goodwill and Other ("ASC 350"), the amortization of goodwill and indefinite-lived intangible assets is prohibited and requires such assets to be tested annually for impairment, or more frequently if impairment indicators arise. We have determined that our cable franchise rights and goodwill are indefinite-lived assets and therefore not amortizable. In accordance with Accounting Standards Update 2010-28 ("ASU 2010-28") - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force), and ASU 2011-08 - Intangibles - Goodwill and Other (Topic 350), we have evaluated the qualitative factors surrounding our Mediacom Broadband reporting unit. We last evaluated the qualitative factors surrounding our Mediacom Broadband reporting unit as of October 1, 2013, and did not believe that it was "more likely than not" that a goodwill impairment existed at that time and, as such, we did not perform Step 2 of the goodwill impairment test. Because we believe there has not been a meaningful change in the long-term fundamentals of our business during the first nine months of 2014, we determined that there has been no triggering event under ASC 350 and, as such, no interim impairment test was required as of September 30, 2014. Inflation and Changing Prices Our costs and expenses are subject to inflation and price fluctuations. Such changes in costs and expenses can generally be passed through to customers. Programming costs have historically increased at rates in excess of inflation and are expected to continue to do so. We believe that under the Federal Communications Commission's existing cable rate regulations we may increase rates for cable television services to more than cover any increases in programming. However, competitive conditions and other factors in the marketplace may limit our ability to increase our rates. |