Frontier Communications 2008 Annual Report Download - page 42

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taxable income. Our effective tax rate for 2007 was 37.4% as compared with an effective tax rate of 34.9% for
2006. The Company’s effective tax rate increased in 2007 mainly due to changes in permanent difference items
and tax contingencies.
DISCONTINUED OPERATIONS
($ in thousands) Amount
2006
Revenue.................................................... $100,612
Operating income ........................................... $ 27,882
Income taxes ............................................... $ 11,583
Net income . ................................................ $ 18,912
Gain on disposal of ELI, net of tax .......................... $ 71,635
On July 31, 2006, we sold our CLEC business, Electric Lightwave, LLC (ELI) for $255.3 million
(including a later 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.
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.
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. Our long-term debt as of December 31, 2008 was approximately 94% fixed rate debt
with minimal exposure to interest rate changes after the termination of our remaining interest rate swap
agreements on January 15, 2008.
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 $281.0
million of our borrowings at December 31, 2008 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. An
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, 2008, a near-term change in interest rates would not materially affect our
consolidated financial position, results of operations or cash flows.
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.
41
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES