FairPoint Communications 2006 Annual Report Download - page 55

In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No. 06-3, “How Sales Taxes Collected From
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). EITF 06-3 requires a company to disclose
its accounting policy (i.e. gross vs. net basis) relating to the presentation of taxes within the scope of EITF 06-3. Furthermore, for taxes reported on a gross
basis, an enterprise should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is
presented. The guidance is effective for all periods beginning after December 15, 2006. The adoption of this guidance will have no impact on our consolidated
financial statements.
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We do not believe inflation has a significant effect on our operations.

As of December 31, 2006, approximately 90% of our indebtedness bore interest at fixed rates or effectively at fixed rates. Our earnings are affected by
changes in interest rates as our long-term indebtedness under our credit facility has variable interest rates based on either the prime rate or LIBOR. If interest
rates on our variable rate indebtedness (excluding variable rate indebtedness which has its interest rate effectively fixed under interest rate swap agreements)
outstanding at December 31, 2006 increased by 10%, our interest expense would have increased, and our income from continuing operations before taxes
would have decreased, by approximately $0.1 million for the year ended December 31, 2006.
We have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate indebtedness. The fair value of these
swaps was a net asset of approximately $8.6 million at December 31, 2006. The fair value indicates an estimated amount we would have received to cancel the
contracts or transfer them to other parties.
We use variable and fixed-rate debt to finance our operations, capital expenditures and acquisitions. The variable-rate debt obligations expose us to
variability in interest payments due to changes in interest rates. We believe it is prudent to limit the variability of a portion of our interest payments. To meet
this objective, we enter into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the
variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, we pay a variable interest rate plus an
additional payment if the variable rate payment is below a contractual rate, or we receive a payment if the variable rate payment is above the contractual rate.
The chart below provides details of each of our interest rate swap agreements.
  

 
February 8, 2005 $130.0 Million 3.76%5.51%December 31, 2007
February 8, 2005 $130.0 Million 3.98%5.73%December 31, 2008
February 8, 2005 $130.0 Million 4.11%5.86%December 31, 2009
April 29, 2005 $50.0 Million 4.72%6.47%March 31, 2012
June 30, 2005 $50.0 Million 4.69%6.44%March 31, 2011
June 30, 2006 $50.0 Million 5.36%7.11%December 31, 2009
December 31, 2007 $65.0 Million 4.91%6.66%December 30, 2011
December 31, 2008 $100.0 Million 5.02%6.77%December 31, 2010
In addition, effective on September 30, 2005, we amended our credit facility to reduce the effective interest rate margins on the $588.5 million term
facility by 0.25% to 1.75% on Eurodollar loans and to
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