Frontier Communications 2007 Annual Report Download - page 42

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
DISCONTINUED OPERATIONS
($ in thousands) 2007 2006 2005
Amount Amount Amount
Revenue ...................................... $ — $100,612 $163,768
Operating income ..............................$—$27,882 $ 22,969
Income taxes ..................................$—$11,583 $ 9,519
Net income ...................................$—$18,912 $ 13,266
Gain on disposal of ELI and CCUSA, net of tax ......$—$71,635 $ 1,167
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 was 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 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 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. Our primary market risk exposures are interest rate risk and equity price risk as
follows:
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 $148.5 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, 2007, 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 entered into interest rate swap agreements. Under the terms of
the agreements, which qualify for hedge accounting, we made semi-annual, floating interest rate payments based
on six month LIBOR and received 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, 2007 and 2006, the net cash interest
payment resulting from these interest rate swaps totaled approximately $2.4 million and $4.2 million,
respectively.
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