Frontier Communications 2008 Annual Report Download - page 28

On December 22, 2006, we issued in a private placement, $400.0 million principal amount of 7.875%
Senior Notes due January 15, 2027. Proceeds from the sale were used to partially finance our acquisition of
Commonwealth. These notes were exchanged for registered securities, as described above.
In December 2006, we borrowed $150.0 million under a senior unsecured term loan agreement. The loan
matures in 2012 and bears interest based on an average prime rate or LIBOR, at our election, plus a margin
which varies depending on our debt leverage ratio. We used the proceeds to partially finance our acquisition of
Commonwealth.
EPPICS
As of December 31, 2008, there was no EPPICS related debt outstanding to third parties. The following
disclosure provides the history regarding this issuance.
In 1996, our consolidated wholly owned subsidiary, Citizens Utilities Trust (the Trust), issued, in an
underwritten public offering, 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible
Preferred Securities due 2036 (Trust Convertible Preferred Securities or EPPICS), representing preferred
undivided interests in the assets of the Trust, with a liquidation preference of $50 per security (for a total
liquidation amount of $201.3 million). These securities had an adjusted conversion price of $11.46 per share of
our common stock. The conversion price was reduced from $13.30 to $11.46 during the third quarter of 2004 as
a result of the $2.00 per share of common stock special, non-recurring dividend. The proceeds from the
issuance of the Trust Convertible Preferred Securities and a Company capital contribution were used to
purchase $207.5 million aggregate liquidation amount of 5% Partnership Convertible Preferred Securities due
2036 from another wholly owned consolidated subsidiary, Citizens Utilities Capital L.P. (the Partnership). The
proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital
contribution were used to purchase from us $211.8 million aggregate principal amount of 5% Convertible
Subordinated Debentures due 2036. The sole assets of the Trust were the Partnership Convertible Preferred
Securities, and our Convertible Subordinated Debentures were substantially all the assets of the Partnership.
Our obligations under the agreements relating to the issuances of such securities, taken together, constituted a
full and unconditional guarantee by us of the Trust’s obligations relating to the Trust Convertible Preferred
Securities and the Partnership’s obligations relating to the Partnership Convertible Preferred Securities.
In accordance with the terms of the issuances, we paid the annual 5% interest in quarterly installments on
the Convertible Subordinated Debentures in 2008, 2007 and 2006. Cash was paid (net of investment returns) to
the Partnership in payment of the interest on the Convertible Subordinated Debentures. The cash was then
distributed by the Partnership to the Trust and then by the Trust to the holders of the EPPICS.
As of December 31, 2008, EPPICS representing a total principal amount of $197.8 million have been
converted into 15,969,645 shares of our common stock. There were no outstanding EPPICS as of December 31,
2008. As a result of the redemption of all outstanding EPPICS as of December 31, 2008, the $10.5 million in
debt with related parties was reclassified by the Company against an offsetting investment.
Interest Rate Management
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 has been
deferred on the consolidated balance sheet, and is being amortized into interest expense over the term of the
associated debt. For 2008, we recognized $5.0 million of deferred gain and anticipate recognizing an additional
$3.4 million of deferred gain during 2009.
The notional amounts of fixed-rate indebtedness hedged as of December 31, 2007 were $400.0 million.
Such contracts required us to pay variable rates of interest (estimated average pay rates of approximately 8.54%
as of December 31, 2007) and receive fixed rates of interest (average receive rate of 8.50% as of December 31,
2007). All swaps were accounted for under SFAS No. 133 (as amended) as fair value hedges. For 2007 and
2006, the interest expense resulting from these interest rate swaps totaled approximately $2.4 million and $4.2
million, respectively.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES