Frontier Communications 2005 Annual Report Download - page 42

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40
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
would increase the amount that we pay on our variable obligations and could result in fluctuations in the fair value
of our fixed rate obligations. Based upon our overall interest rate exposure at December 31, 2005, a near-term change
in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.
In order to manage our interest expense, we have entered into interest rate swap agreements. Under the terms
of the agreements, which qualify for hedge accounting, we make semi-annual, floating rate interest payments based
on six month LIBOR and receive a fixed rate on the notional amount. The underlying variable rate for these interest
rate swaps is set in arrears. For the years ended December 31, 2005 and 2004, the cash interest savings resulting from
these interest rate swaps totaled approximately $2.5 million and $9.4 million, respectively.
During September 2005, we entered into a series of forward rate agreements that fixed the underlying variable
rate component of some of our swaps at the market rate as of the date of execution for certain future rate-setting
dates. At December 31, 2005, the rates obtained under these forward rate agreements were below market rates. A
gain for the changes in the fair value of these forward rate agreements of $1.9 million is included in other income
(loss) net for the year ended December 31, 2005.
Sensitivity analysis of interest rate exposure
At December 31, 2005, the fair value of our long-term debt and capital lease obligations was estimated to be
approximately $4.0 billion, based on our overall weighted average borrowing rate of 8.05% and our overall weighted
maturity of 12 years. There has been no material change in the weighted average maturity since December 31,
2004.
The overall weighted average interest rate increased in 2005 by approximately 22 basis points. A hypothetical
increase of 81 basis points in our weighted average interest rate (10% of our overall weighted average borrowing rate)
would result in an approximate $210.3 million decrease in the fair value of our fixed rate obligations.
EQUITY PRICE EXPOSURE
Our exposure to market risks for changes in equity prices as of December 31, 2005 is limited to our investment
in Adelphia, and our pension assets of $762.2 million.
As of December 31, 2005 and December 31, 2004, we owned 3,059,000 shares of Adelphia common stock. The
stock price of Adelphia was $0.04 and $0.39 at December 31, 2005 and December 31, 2004, respectively.
Sensitivity analysis of equity price exposure
At December 31, 2005, the fair value of the equity portion of our investment portfolio was estimated to be $0.1
million. A hypothetical 10% decrease in quoted market prices would result in an approximate $12,000 decrease in
the fair value of the equity portion of our investment portfolio.
Disclosure of limitations of sensitivity analysis
Certain shortcomings are inherent in the method of analysis presented in the computation of fair value of
financial instruments. Actual values may differ from those presented should market conditions vary from assumptions
used in the calculation of the fair value. This analysis incorporates only those exposures that exist as of December
31, 2005. It does not consider those exposures or positions which could arise after that date. As a result, our ultimate
exposure with respect to our market risks will depend on the exposures that arise during the period and the fluctuation
of interest rates and quoted market prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Report:
1. Financial Statements, See Index on page F-1.
2. Supplementary Data, Quarterly Financial Data is included in the Financial Statements (see 1. above).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.