Frontier Communications 2006 Annual Report Download - page 29

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Divestitures
On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services
businesses, which included gas, electric and water and wastewater businesses. We have sold all of these
properties. All of the agreements relating to the sales provide that we will indemnify the buyer against certain
liabilities (typically liabilities relating to events that occurred prior to sale), including environmental liabilities,
for claims made by specified dates and that exceed threshold amounts specified in each agreement.
Discontinued Operations
On July 31, 2006, we sold our CLEC business Electric Lightwave LLC (ELI) for $255.3 million (including
a later sale of associated real estate) in cash plus the assumption of approximately $4.0 million in capital lease
obligations. We recognized a pre-tax gain on the sale of ELI of approximately $116.7 million. Our after-tax gain
on the sale was $71.6 million. Our cash liability for taxes as a result of the sale is expected to be approximately
$5.0 million due to the utilization of existing tax net operating losses on both the federal and state level.
On March 15, 2005, we completed the sale of Conference Call USA, LLC (CCUSA) for $43.6 million in
cash. The pre-tax gain on the sale of CCUSA was $14.1 million. Our after-tax gain was $1.2 million. The book
income taxes recorded upon sale are primarily attributable to a low tax basis in the assets sold.
Critical Accounting Policies and Estimates
We review all significant estimates affecting our consolidated financial statements on a recurring basis and
record the effect of any necessary adjustment prior to their publication. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of financial statements; accordingly, it is possible that
actual results could differ from those estimates and changes to estimates could occur in the near term. The
preparation of our financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates
and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets,
intangible assets, depreciation and amortization, employee benefit plans, income taxes, contingencies, and
pension and postretirement benefits expenses among others.
Management has discussed the development and selection of these critical accounting estimates with the Audit
Committee of our Board of Directors and our Audit Committee has reviewed our disclosures relating to them.
Telecommunications Bankruptcies
Our estimate of anticipated losses related to telecommunications bankruptcies is a “critical accounting
estimate.” We have significant on-going normal course business relationships with many telecom providers,
some of which have filed for bankruptcy. We generally reserve approximately 95% of the net outstanding
pre-bankruptcy balances owed to us and believe that our estimate of the net realizable value of the amounts owed
to us by bankrupt entities is appropriate. In 2006 and 2005, we had no “critical estimates” related to
telecommunications bankruptcies.
Asset Impairment
In 2006 and 2005, we had no “critical estimates” related to asset impairments.
Depreciation and Amortization
The calculation of depreciation and amortization expense is based on the estimated economic useful lives of
the underlying property, plant and equipment and identifiable intangible assets. An independent study of the
estimated useful lives of our plant assets was completed in 2005 and updated in 2006. We adopted the lives
proposed in the study effective October 1, 2005 and as revised on October 1, 2006.
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