FairPoint Communications 2010 Annual Report Download - page 69

Table of Contents
In October 2009, the FASB issued an ASU regarding revenue recognition for multiple deliverable arrangements. This method allows a vendor to allocate
revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists.
Accordingly, the residual method of revenue allocation will no longer be permissible. This ASU must be adopted no later than the beginning of the first fiscal
year beginning on or after June 15, 2010. It is not yet known what impact this ASU will have on our financial statements.
Effective 2011, we will adopt the ASU regarding when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an
entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is
more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment
may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For
public entities, the amendments in this ASU are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. It is not yet known what impact this ASU will have on our financial statements.
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We do not believe inflation has a significant effect on our operations.
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As of December 31, 2010, we had total debt of $2,521.0 million, consisting of both fixed rate and variable rate debt with interest rates ranging from
6.750% to 13.125% per annum, including applicable margins. As of December 31, 2010, the fair value of our debt was approximately $1,539.7 million. Our
Term Loan A Facility and Revolving Credit Facility mature in 2014, our Term Loan B Facility and Delayed Draw Term Loan mature in 2015 and the Pre-
Petition Notes mature in 2018.
On the Effective Date the Pre-Petition Credit Facility and DIP Facility were terminated, and the Exit Borrowers entered into the Exit Credit Agreement. Our
$1,075.0 million Exit Credit Agreement consists of the Exit Revolving Facility and the Exit Term Loans. We drew the full $1,000.0 million under the Exit
Term Loans immediately upon emergence on the Effective Date. The Exit Revolving Loans include a $30.0 million sublimit available for the issuance of letters
of credit. Letters of credit outstanding under the DIP Credit Agreement on the Effective Date were rolled into the Exit Credit Agreement. As of the Effective Date,
we had approximately $1,000.0 million of total debt outstanding. In addition, as of the Effective Date, we had $56.3 million, net of outstanding letters of
credit, available for additional borrowing under our Exit Revolving Loan. Interest payments on the Exit Term Loan are subject to a LIBOR floor of 2.00%.
While LIBOR remains below 2.00% we will incur interest costs above market rates.
We use variable 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,
from time to time, we have entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These Swaps
effectively changed the variable rate on the debt obligations to a fixed rate. Under the terms of the Swaps, we made a payment if the variable rate was below the
fixed rate, or we received a payment if the variable rate was above the fixed rate. Pursuant to our Pre-Petition Credit Facility, we were required to reduce the risk
of interest rate volatility with respect to at least 50% of our Term Loan borrowings.
In connection with the Chapter 11 Cases, all of the Swaps were terminated by the respective counterparties thereto.
We do not hold or issue derivative financial instruments for trading or speculative purposes.
We are also exposed to market risk from changes in the fair value of our pension plan assets. For the year ended December 31, 2010, the actual gain on the
pension plan assets was approximately 11.2%. Net periodic benefit cost for 2010 assumes a weighted average annualized expected return on plan assets of
approximately 8.3%. Should our actual return on plan assets become significantly lower than our expected return assumption, our net periodic benefit cost
may increase in future periods and we may be required to contribute additional funds to our pension plans.
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