Frontier Communications 2005 Annual Report Download - page 70

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F-21
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 2004, EPPICS representing a total principal amount of $147,991,000 had been converted
into 11,622,749 shares of our common stock.
During the twelve months ended December 31, 2003, we executed a series of purchases in the open market of
our outstanding debt securities. The aggregate principal amount of debt securities purchased was $94,895,000 and
they generated a pre-tax loss on the early extinguishment of debt at a premium of approximately $3,117,000 recorded
in other income (loss), net.
Our principal payments and capital lease payments (principal only) for the next five years are as follows:
($ in thousands)
Principal
Payments
ELI Capital
Lease
Payments
2006 . . . . . . 227,693 41
2007 . . . . . . 37,771 110
2008 . . . . . . 700,938 126
2009 . . . . . . 1,006 145
2010 . . . . . . . 4,387 165
(12) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Interest rate swap agreements are used to hedge a portion of our debt that is subject to fixed interest rates.
Under our interest rate swap agreements, we agree to pay an amount equal to a specified variable rate of interest
times a notional principal amount, and to receive in return an amount equal to a specified fixed rate of interest times
the same notional principal amount. The notional amounts of the contracts are not exchanged. No other cash
payments are made unless the agreement is terminated prior to maturity, in which case the amount paid or received
in settlement is established by agreement at the time of termination and represents the market value, at the then
current rate of interest, of the remaining obligations to exchange payments under the terms of the contracts.
The interest rate swap contracts are reflected at fair value in our consolidated balance sheets and the related
portion of fixed-rate debt being hedged is reflected at an amount equal to the sum of its book value and an amount
representing the change in fair value of the debt obligations attributable to the interest rate risk being hedged. Changes
in the fair value of interest rate swap contracts, and the offsetting changes in the adjusted carrying value of the related
portion of the fixed-rate debt being hedged, are recognized in the consolidated statements of operations in interest
expense. The notional amounts of interest rate swap contracts hedging fixed-rate indebtedness as of December 31,
2005 and December 31, 2004 were $500,000,000 and $300,000,000, respectively. Such contracts require us to pay
variable rates of interest (average pay rates of approximately 8.60% and 6.12% as of December 31, 2005 and 2004,
respectively) and receive fixed rates of interest (average receive rates of 8.46% and 8.44% as of December 31, 2005
and 2004, respectively). The fair value of these derivatives is reflected in other assets as of December 31, 2005 and
2004, in the amount of $(8,727,000) and $4,466,000, respectively. The related underlying debt has been decreased in
2005 and increased in 2004 by a like amount. The amounts received during the year ended December 31, 2005 and
2004 as a result of these contracts amounted to $2,522,000 and $9,363,000, respectively, and are included as a
reduction of interest expense.
During September 2005, we entered into a series of separate forward rate agreements with our swap counter-
parties 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. The fair value of these derivatives is reflected in other current assets as of
December 31, 2005, in the amount of $1,129,000. A gain for the changes in the fair value of these forward rate
agreements of $1,851,000 is included in other income (loss), net for the year ended December 31, 2005.