FairPoint Communications 2006 Annual Report Download - page 69

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realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment, as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the
offering, the Company has reduced its aggregate long term debt and expects a significant reduction in its annual interest expense. When considered together
with the Company’s history of producing positive operating results and other evidence affecting the recoverability of deferred tax assets, the Company expects
that future taxable income will more likely than not be sufficient to recover net deferred tax assets.
(m) Interest Rate Swap Agreements
The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate
cash flow risk attributable to both the Company’s outstanding and forecasted debt obligations. The risk management control systems involve the use of
analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash
flows.
The Company uses variable and fixed-rate debt to finance its operations, capital expenditures, and acquisitions. The variable-rate debt obligations expose
the Company to variability in interest payments due to changes in interest rates. The Company believes it is prudent to limit the variability of a portion of its
interest payments. To meet this objective, the Company enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest
rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the
Company pays a variable interest rate plus an additional payment if the variable rate payment is below a contractual rate, or it receives a payment if the
variable rate payment is above the contractual rate. The chart below provides details of each of the Company’s interest rate swap agreements.
  
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 
February 8, 2005 $130.0 Million 3.76%5.51%December 31, 2007
February 8, 2005 $130.0 Million 3.98%5.73%December 31, 2008
February 8, 2005 $130.0 Million 4.11%5.86%December 31, 2009
April 29, 2005 $50.0 Million 4.72%6.47%March 31, 2012
June 30, 2005 $50.0 Million 4.69%6.44%March 31, 2011
June 30, 2006 $50.0 Million 5.36%7.11%December 31, 2009
As a result of these swap agreements, as of December 31, 2006, approximately 90% of the Company’s indebtedness bore interest at fixed rates rather
than variable rates. Effective on September 30, 2005, the Company amended the terms of its credit facility. This amendment reduced the effective interest rate
margins applicable to the Company’s interest rate swap agreements by 0.25% to 1.75%.
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