Frontier Communications 2006 Annual Report Download - page 40

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
On July 31, 2006, we sold our CLEC business, Electric Lightwave LLC (ELI) for $255.3 million (including
the 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE OF PRIMARY MARKET RISKS AND HOW THEY ARE MANAGED
We are exposed to market risk in the normal course of our business operations due to ongoing investing and
funding activities, including those associated with our pension assets. Market risk refers to the potential change
in fair value of a financial instrument as a result of fluctuations in interest rates and equity and commodity prices.
We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments
for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks
and we are not party to any market risk management agreements other than in the normal course of business or to
hedge long-term interest rate risk.
INTEREST RATE EXPOSURE
Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of
our investment portfolio and interest on our long-term debt. The long-term debt includes various instruments
with various maturities and weighted average interest rates.
Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings
and cash flows and to lower our overall borrowing costs. To achieve these objectives, all but $150.0 million of
our borrowings have fixed interest rates. Consequently, we have limited material future earnings or cash flow
exposures from changes in interest rates on our long-term debt. A hypothetical 10% adverse change in interest
rates 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, 2006, 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, 2006 and 2005, the net cash
interest payment or (savings) resulting from these interest rate swaps totaled approximately $4.2 million and
$(2.5) million, respectively.
Sensitivity analysis of interest rate exposure
At December 31, 2006, the fair value of our long-term debt was estimated to be approximately $4.6 billion,
based on our overall weighted average borrowing rate of 8.19% and our overall weighted maturity of 13 years.
There has been no material change in the weighted average maturity since December 31, 2005.
The overall weighted average interest rate on our long-term debt increased in 2006 by approximately 11
basis points. A hypothetical increase of 82 basis points in our weighted average interest rate (10% of our overall
weighted average borrowing rate) would result in an approximate $238.0 million decrease in the fair value of our
fixed rate obligations or an increase in our annual interest expense of approximately $5.75 million.
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