FairPoint Communications 2013 Annual Report Download - page 57

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New Accounting Standards
For details of recent Accounting Standards Updates and our evaluation of their adoption on our consolidated financial
statements, see note (3) "Recent Accounting Pronouncements" to our consolidated financial statements in "Item 8. Financial
Statements and Supplementary Data" included elsewhere in this Annual Report.
Inflation
There are cost of living adjustment clauses in certain of the collective bargaining agreements covering our labor union
employees. Considerable fluctuations in cost of living due to inflation could result in an adverse effect on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 the variable interest rate in our New Credit Agreement and our qualified pension plan assets.
Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates, fixed
income securities and equity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other
financial instruments for trading or speculative purposes. Our primary market risk exposures are interest rate risk and investment
risk as follows:
Interest Rate Risk - Long-Term Debt. We are exposed to interest rate risk, primarily as it relates to the variable interest rates
we are charged under credit agreements to which we are a party. As of December 31, 2013, our interest rate risk exposure was
attributable to the New Credit Agreement, which includes the New Term Loan and the New Revolving Facility, each of which is
subject to variable interest rates. We use our variable rate debt, in addition to fixed rate debt, to finance our operations and capital
expenditures and believe it is prudent to limit the variability of our interest payments on our variable rate debt. To meet this
objective, from time to time, we may enter into interest rate derivative agreements to manage fluctuations in cash flows resulting
from interest rate risk.
As of December 31, 2013, we were party to interest rate swap agreements in connection with borrowings under the New
Credit Agreement covering a combined notional amount of $170.0 million. However, these agreements are not effective until
September 30, 2015. Accordingly, on December 31, 2013, the entire $635.2 million principal balance of the New Term Loan was
subject to interest rate risk. Interest payments on the New Term Loan are subject to a LIBOR floor of 1.25%. As a result, while
LIBOR remains below 1.25%, we incur interest at above market rates. To the extent that LIBOR remains below 1.25%, we are
buffered from the full financial impact of interest rate risk; however, as LIBOR rises, a change in interest rates could materially
affect our consolidated financial statements. For example, with the principal balance of the New Term Loan as of December 31,
2013, a 1% increase in the interest rate above the LIBOR floor of 1.25% would unfavorably impact interest expense and pre-tax
earnings by approximately $6.4 million on an annual basis.
For further information regarding the New Credit Agreement, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources," and note (8) "Long-Term Debt" and note (9)
"Interest Rate Swap Agreements" to our consolidated financial statements in "Item 8. Financial Statements and Supplementary
Data" included elsewhere in this Annual Report.
Interest Rate and Investment Risk - Pension Plans. We are exposed to risks related to the fair value of our pension plan
assets and the discount rate used to value our pension plan liabilities and the amount of lump-sum payments made to participants.
Our pension plan assets consist of a portfolio of fixed income securities, equity securities and cash. Changes in the fair value of
this portfolio can occur due to changes in interest rates and the general economy. In addition, interest rates are a primary factor in
the determination of our actuarially determined liability and the amount of the accrued benefit paid in the form of a lump-sum to
a pension plan retiree when requested. Our qualified pension plan assets have historically funded a large portion of the benefits
paid under our qualified pension plans. Payment of significant lump sum payments, lower returns on plan assets, decrease in the
fair value of plan assets and lower discount rates could negatively impact the funded status of the plan and we may be required
to make larger contributions to the pension plan than currently anticipated. Due to uncertainties in the pension funding calculation,
the amount and timing of pension contributions are unknown other than as disclosed in this Annual Report. For activity in our
qualified pension plan assets, see note (11) "Employee Benefit Plans" to our consolidated financial statements in "Item 8. Financial
Statements and Supplementary Data" included elsewhere in this Annual Report.