Frontier Communications 2005 Annual Report Download - page 91

F-42
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
is 10%. If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, then the remaining
members of the VJO, including us, may be required to pay for a substantially larger share of the VJO’s total power
purchase obligation for the remainder of the agreement (which runs through 2015). Paragraph 13 of FIN 45 requires
that we disclose “the maximum potential amount of future payments (undiscounted) the guarantor could be required
to make under the guarantee.” Paragraph 13 also states that we must make such disclosure “… even if the likelihood
of the guarantor’s having to make any payments under the guarantee is remote…” As noted above, our obligation
only arises as a result of default by another VJO member, such as upon bankruptcy. Therefore, to satisfy the
“maximum potential amount” disclosure requirement we must assume that all members of the VJO simultaneously
default, a highly unlikely scenario given that the two members of the VJO that have the largest potential payment
obligations are publicly traded with credit ratings equal to or superior to ours, and that all VJO members are regulated
utility providers with regulated cost recovery. Regardless, despite the remote chance that such an event could occur,
or that the State of Vermont could or would allow such an event, assuming that all the members of the VJO defaulted
on January 1, 2007 and remained in default for the duration of the contract (another 9 years), we estimate that our
undiscounted purchase obligation for 2007 through 2015 would be approximately $1,264,000,000. In such a scenario
the Company would then own the power and could seek to recover its costs. We would do this by seeking to recover
our costs from the defaulting members and/or reselling the power to other utility providers or the northeast power
grid. There is an active market for the sale of power. We could potentially lose money if we were unable to sell the
power at cost. We caution that we cannot predict with any degree of certainty any potential outcome.
At December 31, 2005, we have outstanding performance letters of credit as follows:
($ in thousands)
CNA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,404
State of New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,993
ELI projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,447
CNA serves as our agent with respect to general liability claims (auto, workers compensation and other insured
perils of the Company). As our agent, they administer all claims and make payments for claims on our behalf. We
reimburse CNA for such services upon presentation of their invoice. To serve as our agent and make payments on
our behalf, CNA requires that we establish a letter of credit in their favor. CNA could potentially draw against this
letter of credit if we failed to reimburse CNA in accordance with the terms of our agreement. The value of the letter
of credit is reviewed annually and adjusted based on claims history.
None of the above letters of credit restrict our cash balances.
(26) SUBSEQUENT EVENT:
In February 2006, we entered into a definitive agreement to sell all of the outstanding membership interests in
ELI, our CLEC business, to Integra Telecom Holdings, Inc. (Integra), for $247,000,000, including $243,000,000 in
cash plus the assumption of approximately $4,000,000 in capital lease obligations, subject to customary adjustments
under the terms of the agreement. This transaction is expected to close during the third quarter of 2006 and is subject
to regulatory and other customary approvals and conditions, as well as the funding of Integra’s fully committed
financing. We expect that for periods subsequent to December 31, 2005, ELI will be accounted for as a discontinued
operation.