Frontier Communications 2006 Annual Report Download - page 39

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Mohave Limited Partnership, insurance proceeds of $4.2 million, a loss of $2.4 million on the exchange of debt
and gains recognized on the extinguishment of approximately $3.5 million of retained liabilities of our disposed
water properties.
Other income, net for the year ended December 31, 2005 increased $52.1 million, or 97%, as compared to
prior year. The increase is primarily due to a pre-tax loss from the early extinguishment of debt of $66.5 million
in 2004 and a net loss on sales of assets of $1.9 million, which is primarily attributable to the loss on the sale of
our corporate aircraft, partially offset by $25.3 million in income from the expiration of certain retained liabilities
at less than face value, which are associated with customer advances for construction from our disposed water
properties. In addition, during 2005 $7.0 million was reserved in the fourth quarter in connection with a lawsuit,
and during the second quarter we incurred a $3.2 million loss on the exchange of debt, partially offset by gains
on our forward rate agreements.
Interest Expense
Interest expense for the year ended December 31, 2006 decreased $2.3 million, or 1%, as compared with the
prior year primarily due to lower average debt levels partially offset by higher short term interest rates that we
pay on our swap agreements ($550.0 million in principal amount is swapped to floating rate at December 31,
2006). Our composite average borrowing rate for the year ended December 31, 2006 as compared with the prior
year was 18 basis points higher, increasing from 7.94% to 8.12%. With the expected acquisition of
Commonwealth and the related incurrence of indebtness we expect our interest expense to increase in 2007. In
December we borrowed $400.0 million in advance of the acquisition and another $150.0 million to be used for
debt retirements. We expect the need to borrow another $200.0—$300.0 million to close the Commonwealth
transaction, pay all closing transaction costs and implementation costs.
Interest expense for the year ended December 31, 2005 decreased $39.6 million, or 10%, as compared with
the prior year primarily due to the retirement and refinancing of debt. Our composite average borrowing rate for
the year ended December 31, 2005 as compared with the prior year was 2 basis points lower, decreasing from
7.96% to 7.94%.
Income Taxes
Income taxes for the year ended December 31, 2006 increased $61.2 million, or 81%, as compared with the
prior year primarily due to changes in taxable income. The effective tax rate for 2006 was 35% as compared with
an effective tax rate of 29% for 2005. We expect to utilize a substantial amount of tax net operating losses as a
result of the sale of ELI and receipt of the RTB proceeds. We expect that in 2007 our cash paid for income taxes
will increase significantly.
Income taxes for the year ended December 31, 2005 increased $71.0 million, as compared with the prior
year primarily due to changes in taxable income and the effective tax rate. The effective tax rate for 2005 was
28.6% as compared with 6.9% for 2004. Our effective tax rate was below statutory rates in both years as a result
of the completion of audits with federal and state taxing authorities and changes in the structure of certain of our
subsidiaries.
DISCONTINUED OPERATIONS
($ in thousands) 2006 2005 2004
Amount Amount Amount
Revenue .................................... $100,612 $163,768 $180,588
Operating income ............................. $ 27,882 $ 22,969 $ 24,809
Income taxes ................................. $ 11,583 $ 9,519 $ 9,132
Net income .................................. $ 18,912 $ 13,266 $ 15,086
Gain on disposal of ELI and CCUSA, net of tax ..... $ 71,635 $ 1,167 $ —
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