FairPoint Communications 2007 Annual Report Download - page 85

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Table of Contents


deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment, as well as all positive and
negative evidence that would affect the recoverability of deferred tax assets. When considered together with the Company’s history of
producing positive operating results and other evidence affecting the recoverability of deferred tax assets, the Company expects that future
taxable income will more likely than not be sufficient to recover net deferred tax assets.

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that
may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management
control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding and forecasted debt obligations.
The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the
expected impact of changes in interest rates on the Company’s future cash flows.
The Company uses variable and fixed-rate debt to finance its operations, capital expenditures and acquisitions. The variable-rate
debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company believes it is
prudent to limit the variability of a portion of its interest payments. To meet this objective, from time to time, the Company enters 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, the Company pays a variable
interest rate plus an additional payment if the variable rate payment is below a contractual rate, or it receives a payment if the variable rate
payment is above the contractual rate. The chart below provides details of each of the Company’s interest rate swap agreements.

    
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, 2007 $ 75.0 Million 5.46% 7.21% December 31, 2010
December 31, 2008 $ 100.0 Million 5.02% 6.77% December 31, 2010
December 31, 2009 $ 150.0 Million 5.65% 7.40% December 31, 2011
As a result of these swap agreements, as of December 31, 2007, approximately 89% of the Company’s indebtedness bore interest at
fixed rates rather than variable rates. Effective on September 30, 2005, the Company amended the terms of its credit facility. This
amendment reduced the effective interest rate margins applicable to the Company’s interest rate swap agreements by 0.25% to 1.75%.
The aforementioned interest rate swaps qualify as cash flow hedges for accounting purposes. The effect of hedge ineffectiveness on
net income was insignificant for the year ended December 31, 2007. At December 31, 2007, the fair value of these swaps was a
$16.9 million liability which has been recorded, net of tax of $6.4 million, as a decrease to accumulated other comprehensive (loss)
income. Of the $16.9 million, $2.9 million is classified as current and $14.0 million is classified as long term on the consolidated
balance sheet.
83