Frontier Communications 2007 Annual Report Download - page 76

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Interest rate swap agreements were used to hedge a portion of our debt that is subject to fixed interest rates.
Under our interest rate swap agreements, we agree to pay an amount equal to a specified variable rate of interest
times a notional principal amount, and to receive in return an amount equal to a specified fixed rate of interest
times the same notional principal amount. The notional amounts of the contracts are not exchanged. No other
cash payments are made unless the agreement is terminated prior to maturity, in which case the amount paid or
received in settlement is established by agreement at the time of termination and represents the market value, at
the then current rate of interest, of the remaining obligations to exchange payments under the terms of the
contracts.
On January 15, 2008, we terminated all of our interest rate swap agreements representing $400.0 million
notional amount of indebtedness associated with our Senior Notes due in 2011 and 2013. Cash proceeds on the
swap terminations of approximately $15.5 million were received in January 2008. The related gain will be
deferred on the balance sheet, and amortized into income over the term of the associated debt.
As of January 16, 2008, we no longer have any derivative instruments. The following disclosure is
necessary to understand our historical financial statements.
The interest rate swap contracts are reflected at fair value in our consolidated balance sheets and the related
portion of fixed-rate debt being hedged is reflected at an amount equal to the sum of its book value and an
amount representing the change in fair value of the debt obligations attributable to the interest rate risk being
hedged. Changes in the fair value of interest rate swap contracts, and the offsetting changes in the adjusted
carrying value of the related portion of the fixed-rate debt being hedged, are recognized in the consolidated
statements of operations in interest expense. The notional amounts of interest rate swap contracts hedging fixed-
rate indebtedness as of December 31, 2007 and 2006 were $400.0 million and $550.0 million, respectively. Such
contracts require us to pay variable rates of interest (average pay rates of approximately 8.54% and 9.02% as of
December 31, 2007 and 2006, respectively) and receive fixed rates of interest (average receive rates of 8.50%
and 8.26% as of December 31, 2007 and 2006, respectively). The fair value of these derivatives is reflected in
other assets as of December 31, 2007 and other liabilities as of December 31, 2006, in the amount of $7.9 million
and ($10.3 million), respectively. The related underlying debt has been increased in 2007 and decreased in 2006
by a like amount. For the years ended December 31, 2007 and 2006, the interest expense resulting from these
interest rate swaps totaled approximately $2.4 million and $4.2 million, respectively. For the year ended
December 31, 2005, our interest expense was reduced by $2.5 million.
(13) INVESTMENT INCOME:
The components of investment income for the years ended December 31, 2007, 2006 and 2005 are as
follows:
($ in thousands) 2007 2006 2005
Interest and dividend income .......................................... $32,986 $22,172 $15,822
Gain from Rural Telephone Bank dissolution ............................. — 61,428 —
Equity earnings/minority interest in joint ventures, net ...................... 2,795 (4,164) (3,599)
Total investment income ......................................... $35,781 $79,436 $12,223
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