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MEDIACOM LLC - 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 396,000 video customers, 443,000 high-speed data ("HSD") customers and 179,000 phone customers, aggregating 1.02 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 service 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 and our wireless home gateway service. 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 may 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 in 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 February 5, 2014, we entered into a new $225 million revolving credit facility, terminated our existing revolving credit commitments, and completed a new term loan in the aggregate principal amount of $250 million ("Term Loan F"). On the same date, we repaid $400 million of principal amount outstanding under an existing term loan with net proceeds from such new term loan and borrowings under our revolving credit commitments. On August 15, 2014, we completed a new term loan in the aggregate principal amount of $350 million ("Term Loan G") and, on the same date, used the net proceeds to substantially fund the redemption of the entire $350 million principal amount outstanding under our 9 1/8% senior notes due August 2019 (the "9 1/8% Notes"). See "Liquidity and Capital Resources - Capital Structure - 2014 Financings" and Note 6 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 and equipment 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 $ 177,858 $ 176,596 0.7 % $ 532,440 $ 523,209 1.8 % Costs and expenses: Service costs 79,481 75,869 4.8 % 233,520 227,594 2.6 % Selling, general and administrative expenses 29,824 31,105 (4.1 %) 90,763 89,365 1.6 % Management fee expense 2,700 3,200 (15.6 %) 9,100 9,200 (1.1 %) Depreciation and amortization 29,557 29,211 1.2 % 87,107 86,368 0.9 % Operating income 36,296 37,211 (2.5 %) 111,950 110,682 1.1 % Interest expense, net (21,052 ) (23,845 ) (11.7 %) (68,568 ) (71,105 ) (3.6 %) Gain on derivatives, net 5,075 2,835 NM 13,695 13,962 NM Loss on early extinguishment of debt (23,046 ) - NM (23,046 ) - NM Investment income from affiliate 4,500 4,500 NM 13,500 13,500 NM Other expense, net (796 ) (638 ) NM (1,450 ) (1,654 ) NM Net income $ 977 $ 20,063 (95.1 %) $ 46,081 $ 65,385 (29.5 %) OIBDA $ 65,853 $ 66,422 (0.9 %) $ 199,057 $ 197,050 1.0 % 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 $ 65,853 $ 66,422 (0.9 %) $ 199,057 $ 197,050 1.0 % Depreciation and amortization (29,557 ) (29,211 ) 1.2 % (87,107 ) (86,368 ) 0.9 % Operating income $ 36,296 $ 37,211 (2.5 %) $ 111,950 $ 110,682 1.1 % 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 $ 86,374 $ 89,424 (3.4 %) $ 261,121 $ 265,972 (1.8 %) HSD 54,777 51,444 6.5 % 162,530 152,206 6.8 % Phone 14,037 14,800 (5.2 %) 42,847 44,815 (4.4 %) Business services 18,610 16,788 10.9 % 54,597 48,822 11.8 % Advertising 4,060 4,140 (1.9 %) 11,345 11,394 (0.4 %) Total $ 177,858 $ 176,596 0.7 % $ 532,440 $ 523,209 1.8 % Average total monthly revenue per PSU (1) $ 58.12 $ 57.15 1.7 % $ 57.86 $ 56.83 1.8 % (1) Represents average total monthly revenues for the period divided by average PSUs for such period. September 30, 2014 2013 % Change Video customers 396,000 425,000 (6.8 %) HSD customers 443,000 427,000 3.7 % Phone customers 179,000 176,000 1.7 % Primary service units (PSUs) 1,018,000 1,028,000 (1.0 %) Revenues increased 0.7% and 1.8% for the three and nine months ended September 30, 2014, respectively, primarily due to greater HSD and, to a lesser extent, business services revenues, mostly offset by declines in video and, to a lesser extent, phone revenues. Average total monthly revenue per PSU increased 1.7% to $58.12 and 1.8% to $57.86 for the three and nine months ended September 30, 2014, respectively. Video Video revenues decreased 3.4% and 1.8% 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 lesser extent, greater installation fee revenues. We lost 8,000 and 21,000 video customers during the three and nine months ended September 30, 2014, compared to declines of 9,000 and 17,000, respectively, in the comparable prior year periods. As of September 30, 2014, we served 396,000 video customers, or 30.3% of our estimated homes passed. As of the same date, 61.6% of our video customers were digital customers, and 46.9% of our digital customers took our DVR service. HSD HSD revenues grew 6.5% and 6.8% for the three and nine months ended September 30, 2014, respectively, primarily 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 4,000 and 12,000 HSD customers during the three and nine months ended September 30, 2014, respectively, compared to increases of 3,000 and 17,000, respectively, in the comparable prior year periods. As of September 30, 2014, we served 443,000 HSD customers, or 33.9% of our estimated homes passed, and 30.2% of our HSD customers took our wireless home gateway service. Phone Phone revenues decreased 5.2% and 4.4% for the three and nine months ended September 30, 2014, respectively, principally due to lower revenues per phone customer. Phone customer growth was flat during the each of the three and nine months ended September 30, 2014, compared to increases of 2,000 and 10,000, respectively in the comparable prior year periods. As of September 30, 2014, we served 179,000 phone customers, or 13.7% of our estimated homes passed. 18-------------------------------------------------------------------------------- Table of Contents Business Services Business services revenues rose 10.9% and 11.8% for the three and nine months ended September 30, 2014, respectively, principally due to small- to medium-sized commercial customer growth. Advertising Advertising revenues declined 1.9% and 0.4% for the three and nine months ended September 30, 2014, respectively, mainly due to lower levels of automotive and other local advertising. Costs and Expenses Service Costs Service costs increased 4.8% for the three months ended September 30, 2014, primarily due to higher programming and field operating expenses. Programming expenses increased 3.8%, mainly due to higher contractual rates charged by our programming vendors and greater retransmission consent fees charged by local broadcasters, offset in part by video customer losses. Field operating expenses grew 7.5%, principally due to a greater use of outside contractors for customer installations. Service costs as a percentage of revenues were 44.7% and 43.0% for the three months ended September 30, 2014 and 2013, respectively. Service costs increased 2.6% for the nine months ended September 30, 2014, principally due to higher programming and, to a lesser extent, HSD delivery expenses, offset in part by lower phone service delivery expenses. Programming expenses increased 2.3%, mainly due to greater retransmission consent fees charged by local broadcasters and higher contractual rates charged by our programming vendors, offset in part by video customer losses. HSD delivery expenses rose 24.0%, primarily due to a greater number of equipment maintenance contracts and higher bandwidth consumption by our HSD customers. Phone service delivery costs fell 14.3% principally due to lower connectivity costs and long distance rates. Service costs as a percentage of revenues were 43.9% and 43.5% for the nine months ended September 30, 2014 and 2013, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses declined 4.1% for the three months ended September 30, 2014, mainly due to lower taxes and fees and, to a lesser extent, marketing and bad debt expenses. Taxes and fees fell 23.1%, primarily due to lower franchise fees associated with the decline in video revenues and decreased property taxes in certain of our service areas. Marketing expenses declined 5.5%, mainly due to reductions in retail marketing and telemarketing. Bad debt expense decreased 8.2%, principally due to a lower number of written off accounts. Selling, general and administrative expenses as a percentage of revenues were 16.8% and 17.6% for the three months ended September 30, 2014 and 2013, respectively. Selling, general and administrative expenses increased 1.6% for the nine months ended September 30, 2014, mainly due to higher bad debt, office and employee expenses, offset in part by lower taxes and fees. Bad debt expense rose 8.0%, principally due to the aging of certain business customer accounts. Office expenses grew 7.2%, primarily due to higher equipment maintenance and cleaning costs. Employee costs increased 2.1%, largely as a result of the re-designation of certain business services employees as service costs. Taxes and fees declined 7.8%, primarily due to lower franchise fees associated with the decline in video revenues and decreased property taxes in certain of our service areas. Selling, general and administrative expenses as a percentage of revenues were 17.0% and 17.1% for the nine months ended September 30, 2014 and 2013, respectively. Management Fee Expense Management fee expense declined 15.6% and 1.1% for the three and nine months ended September 30, 2014, respectively, reflecting lower fees charged by MCC. Management fee expense as a percentage of revenues was 1.5% and 1.8% for the three months ended September 30, 2014 and 2013, respectively, and 1.7% and 1.8% for the nine months ended September 30, 2014 and 2013, respectively. Depreciation and Amortization Depreciation and amortization was 1.2% and 0.9% higher for the three and nine months ended September 30, 2014, respectively, 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 declined 0.9% for the three months ended September 30, 2014, as higher service costs were mostly offset by greater revenues and the decrease in selling, general and administrative expenses and, to a lesser extent, management fees. 19 -------------------------------------------------------------------------------- Table of Contents OIBDA grew 1.0% for the nine months ended September 30, 2014, as the increase in revenues and, to a much lesser extent, the decline in selling, general and administrative expenses were mostly offset by greater service costs. Operating Income Operating income was 2.5% lower for the three months ended September 30, 2014, as a result of the decline in OIBDA and higher depreciation and amortization. Operating income increased 1.1% for the nine months ended September 30, 2014, as the growth in OIBDA was offset in part by higher depreciation and amortization. Interest Expense, Net Interest expense, net, fell 11.7% and 3.6% for the three and nine months ended September 30, 2014, respectively, mainly due to lower average outstanding indebtedness and, for the three months ended September 30, 2014, a lower cost of debt. Gain on Derivatives, Net As a result of the changes in the mark-to-market valuations on these interest rate swaps, based on information provided by our counterparties, we recorded a net gain on derivatives of $5.1 million and $2.8 million for the three months ended September 30, 2014 and 2013, respectively, and $13.7 million and $14.0 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 $23.0 million for the three and nine months ended September 30, 2014, which represented the $16.0 million redemption price paid above par and the write-off of $7.0 million of unamortized financing costs associated with the 9 1/8% Notes. Investment Income from Affiliate Investment income from affiliate was $4.5 million for each of the three months ended September 30, 2014 and 2013, and $13.5 million for each of the nine months ended September 30, 2014 and 2013. These amounts represent the investment income on our $150.0 million preferred membership interest in Mediacom Broadband LLC. See Note 7 in our Notes to Consolidated Financial Statements. Other Expense, Net Other expense, net, was $0.8 million for the three months ended September 30, 2014, representing $0.4 million of commitment fees related to the delayed funding of Term Loan G, $0.1 million of revolving credit commitment fees and $0.3 million of other fees, and $0.6 million for the three months ended September 30, 2013, representing $0.4 million of revolving credit commitment fees and $0.2 million of other fees. Other expense, net, was $1.5 million for the nine months ended September 30, 2014, representing $0.5 million of revolving credit commitment fees, $0.4 million of commitment fees related to the delayed funding of Term Loan G and $0.6 million of other fees, and $1.7 million for the nine months ended September 30, 2013, representing $1.0 million of revolving credit commitment fees and $0.7 million of other fees. Net Income As a result of the factors described above, we recognized net income of $1.0 million and $20.1 million for the three months ended September 30, 2014 and 2013, respectively, and $46.1 million and $65.4 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 $2.6 million during the remainder of 2014, and the remaining $198.9 million balance under Term Loan C, which has a scheduled maturity of January 31, 2015. As of the same date, our sources of liquidity included $8.5 million of cash and $70.2 million of unused and available commitments under our $225.0 million revolving credit facility, after giving effect to $145.9 million of outstanding loans and $8.9 million of letters of credit issued to various parties as collateral. 20 -------------------------------------------------------------------------------- Table of Contents On February 5, 2014, we repaid $400.0 million of principal amount outstanding under Term Loan C with proceeds from borrowings under a new term loan and our revolving credit commitments, and in March, June and September 2014, we repaid $0.5 million, $4.5 million and $0.6 million, respectively, under Term Loan C with internally generated funds. As of September 30, 2014, the remaining balance under Term Loan C was $198.9 million. We plan to repay the remaining balance under Term Loan C on, or prior to, its scheduled maturity of January 31, 2015 through some combination of internally generated funds, borrowings under our revolving credit commitments, proceeds received from future financing transactions and funds made available to us by our parent, MCC. We believe that cash generated by, or available to, us will be sufficient to meet our other anticipated capital and liquidity needs, including the repayment of the remaining balance under Term Loan C, for the next twelve months. 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 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 $122.1 million for the nine months ended September 30, 2014, primarily due to OIBDA of $199.1 million and, to a much lesser extent, investment income from affiliate of $13.5 million, offset in part by interest expense of $68.6 million and the $7.3 million net change in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily due to decreases in accounts payable, accrued expenses and other current liabilities of $10.2 million, in accounts payable to affiliates of $2.7 million and an increase in prepaid expenses and other assets of $1.0 million, offset in part by a decline in accounts receivable, net, of $6.1 million and an increase in deferred revenue of $0.5 million. Net cash flows provided by operating activities were $120.8 million for the nine months ended September 30, 2013, primarily due to OIBDA of $197.1 million and, to a much lesser extent, investment income from affiliate of $13.5 million, offset in part by interest expense of $71.1 million and the $19.4 million net change in our operating assets and liabilities. The net change in our operating assets and liabilities was primarily due to a decrease in accounts payable, accrued expenses and other current liabilities of $9.3 million and increases in accounts receivable from affiliates of $7.1 million, in prepaid expenses and other assets of $2.6 million and in accounts receivable, net, of $1.2 million, offset in part by an increase in deferred revenue of $0.8 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 $93.6 million for the nine months ended September 30, 2014, comprising $93.9 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 $94.9 million for the nine months ended September 30, 2013, comprising $95.6 million of capital expenditures, slightly offset by a net change in accrued property, plant and equipment of $0.7 million. The $1.7 million decline in capital expenditures largely reflected reduced outlays for the conversion to all-digital video platform and cell tower backhaul, mostly offset 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 $29.8 million for the nine months ended September 30, 2014, comprising the $350.0 million redemption of senior notes, $9.9 million of financing costs and $3.5 million of capital distributions to our parent, MCC, offset in part by $330.9 million of net borrowings under the credit facility, including the funding of Term Loan G, $2.0 million of capital contributions from our parent, MCC, and $0.7 million of other financing activities. See "Capital Structure - 2014 Financings" below and Note 6 in our Notes to Consolidated Financial Statements for more information on such redemption of senior notes and net borrowings under the credit facility. 21-------------------------------------------------------------------------------- Table of Contents Net cash flows used in financing activities were $27.7 million for the nine months ended September 30, 2013, comprising $25.0 million of net repayments under the credit facility and $3.8 million of capital distributions to our parent, MCC, offset in part by $1.1 million of other financing activities. Capital Structure As of September 30, 2014, our total indebtedness was $1.433 billion, of which approximately 66% 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 $82.3 million, net of capitalized interest. 2014 Financings On February 5, 2014, we entered into a new $225.0 million revolving credit facility (the "new revolver"), terminated our existing revolving credit commitments (the "old revolver"), and completed Term Loan F in the aggregate principal amount of $250.0 million. After giving effect to $4.7 million of financing costs, net proceeds of $245.3 million from Term Loan F, together with $161.0 million of borrowings under the new revolver, were used to repay $400.0 million of the principal amount outstanding under the existing Term Loan C and the entire $6.3 million principal amount outstanding under the old revolver. On July 16, 2014, we called for the redemption of the entire $350.0 million principal amount outstanding under the 9 1/8% Notes. On August 15, 2014, we completed Term Loan G in the aggregate principal amount of $350.0 million and, on the same date, after giving effect to $5.2 million of financing costs, net proceeds of $344.8 million from Term Loan G were used to substantially fund the redemption of the 9 1/8% Notes. The 9 1/8% Notes were redeemed at a price equal to $1,045.63 for each $1,000 principal amount outstanding, for an aggregate redemption price of $366.0 million. See Note 6 in our Notes to Consolidated Financial Statements. Bank Credit Facility As of September 30, 2014, we maintained a $1.262 billion bank credit facility (the "credit facility"), comprising $1.037 billion of term loans with maturities ranging from January 2015 to June 2021, and a $225.0 million revolving credit facility with a scheduled expiry of February 5, 2019. 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 4.1 to 1.0 and an interest coverage ratio of 3.3 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 $700 million of borrowings at a rate of 3.0%, of which $400 million and $300 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 $200 million of borrowings at a rate of 3.0% 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 4.5%. Senior Notes As of September 30, 2014, we had $250 million of outstanding senior notes, all of which comprised our 7 1/4% senior notes due February 2022 (the "7 1/4% Notes"). Our senior notes are unsecured obligations, and the indenture governing our 7 1/4% Notes (the "indenture") limits the incurrence of additional indebtedness based upon a maximum debt to operating cash flow ratio (as defined in the indenture) of 8.5 to 1.0. For all periods through September 30, 2014, we were in compliance with covenants under the indenture including, as of the same date, a debt to operating cash flow ratio of 5.1 to 1.0. We do not believe that we will have any difficulty complying with any of the covenants under the indenture 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 The following table updates scheduled debt maturities and interest expense under our previously disclosed contractual obligations and commercial commitments, on an adjusted basis, for the periods subsequent to September 30, 2014 and thereafter per the items noted in "Liquidity and Capital Resources - Capital Structure - 2014 Financings" and Note 6 in our Notes to Consolidated Financial Statements (dollars in thousands): Scheduled Interest Debt Maturities Expense(1) Total October 1, 2014 - December 31, 2014 $ 2,636 $ 18,132 $ 20,768 January 1, 2015 - December 31, 2016 215,364 111,100 326,464 January 1, 2017 - December 31, 2018 483,875 83,446 567,321 Thereafter 731,000 88,055 819,055 Total cash obligations $ 1,432,875 $ 300,733 $ 1,733,608 (1) Interest payments on floating rate debt and interest rate swaps are estimated using amounts outstanding as of September 30, 2014, and the average interest rates applicable under such debt obligations. Interest expense amounts are net of capitalized interest expense. 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 LLC reporting unit, which has negative equity carrying value. We last evaluated the qualitative factors surrounding our Mediacom LLC 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. 23-------------------------------------------------------------------------------- Table of Contents 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. |