-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Igong/O9xzhlWBIH/E7xGdtG0FDwk3uMG4rGfkKQpq34O7g/8T/uI/VRYevVgjDy QbZ4fo/VpboYD7+QeUfpIA== 0000020520-01-500027.txt : 20020410 0000020520-01-500027.hdr.sgml : 20020410 ACCESSION NUMBER: 0000020520-01-500027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS COMMUNICATIONS CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11001 FILM NUMBER: 1785397 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 STREET 2: P O BOX 3801 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2033298800 MAIL ADDRESS: STREET 1: HIGH RIDGE PARK BLDG NO 3 CITY: STAMFORD STATE: CT ZIP: 06905 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS UTILITIES CO DATE OF NAME CHANGE: 19920703 10-Q 1 cc3qtr10q.txt CITIZENS 3QTR 10Q CITIZENS COMMUNICATIONS COMPANY FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to__________ Commission file number 001-11001 --------- CITIZENS COMMUNICATIONS COMPANY ------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0619596 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3 High Ridge Park P.O. Box 3801 Stamford, Connecticut 06905 --------------------------- (Address, zip code of principal executive offices) Registrant's telephone number, including area code (203) 614-5600 ----------------- NO CHANGES ---------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No ----- ----- The number of shares outstanding of the registrant's class of common stock as of October 31, 2001 was 280,074,616. CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Index to Consolidated Financial Statements
Page No. Part I. Financial Information (Unaudited) Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 2 Consolidated Statements of Income for the three months ended September 30, 2001 and 2000 3 Consolidated Statements of Income for the nine months ended September 30, 2001 and 2000 4 Consolidated Statements Comprehensive Loss for the three and nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Shareholders' Equity for the year ended December 31, 2000 and the nine months ended September 30, 2001 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Quantitative and Qualitative Disclosures about Market Risk 35 Part II. Other Information Legal Proceedings 37 Changes in Securities and Use of Proceeds 37 Defaults upon Senior Securities 37 Submission of Matters to a Vote of Security Holders 37 Other Information 37 Exhibits and Reports on Form 8-K 38 Signature 39
PART I. FINANCIAL INFORMATION CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands except per-share amounts) Unaudited
September 30, 2001 December 31, 2000 ASSETS - ------ Current assets: Cash $ 38,922 $ 31,223 Accounts receivable, net 339,382 243,304 Short-term investments 141,496 38,863 Other current assets 42,844 52,545 Assets held for sale 1,093,939 1,212,307 Assets of discontinued operations 743,238 673,515 ------------------- ------------------ Total current assets 2,399,821 2,251,757 Property, plant and equipment, net 4,537,291 3,520,712 Intangibles 2,864,454 633,268 Investments 117,124 214,359 Regulatory assets - 175,949 Other assets 466,441 158,961 ------------------- ------------------ Total assets $ 10,385,131 $ 6,955,006 =================== ================== LIABILITIES AND EQUITY - ---------------------- Current liabilities: Long-term debt due within one year $ 155,967 $ 181,014 Accounts payable and other current liabilities 516,520 330,383 Liabilities related to assets held for sale 214,090 290,575 Liabilities of discontinued operations 219,568 190,496 ------------------- ------------------ Total current liabilities 1,106,145 992,468 Deferred income taxes 408,975 490,487 Customer advances for construction and contributions in aid of construction 206,332 205,604 Other liabilities 232,702 108,321 Regulatory liabilities - 24,573 Equity units 460,000 - Long-term debt 5,783,591 3,062,289 ------------------- ------------------ Total liabilities 8,197,745 4,883,742 Equity forward contracts - 150,013 Company Obligated Mandatorily Redeemable Convertible Preferred Securities* 201,250 201,250 Shareholders' equity: Common stock, $.25 par value (600,000,000 authorized shares; 280,036,000 and 262,661,000 outstanding and 292,344,000 and 265,768,000 issued at September 30, 2001 and December 31, 2000, respectively) 73,086 66,442 Additional paid-in capital 1,936,607 1,471,816 Retained earnings 238,179 233,196 Accumulated other comprehensive income (loss) (59,147) 418 Treasury stock (202,589) (51,871) ------------------- ------------------ Total shareholders' equity 1,986,136 1,720,001 ------------------- ------------------ Total liabilities and equity $ 10,385,131 $ 6,955,006 =================== ==================
* Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. The accompanying Notes are an integral part of these Consolidated Financial Statements. 2 PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands, except per-share amounts) Unaudited
2001 2000 -------------- -------------- Revenue $ 661,121 $ 452,710 Operating expenses: Cost of services 123,214 114,497 Depreciation and amortization 193,662 95,859 Other operating expenses 267,892 187,373 Restructuring expenses 13,002 - Acquisition assimilation expense 5,119 12,539 -------------- -------------- Total operating expenses 602,889 410,268 -------------- -------------- Operating income 58,232 42,442 Investment and other income, net 3,070 5,096 Gain on sale of assets 139,304 - Interest expense 123,452 49,559 -------------- -------------- Income (loss) from continuing operations before income taxes, dividends on convertible preferred securities and extraordinary expense 77,154 (2,021) Income tax expense (benefit) 39,610 (202) -------------- -------------- Income (loss) from continuing operations before dividends on convertible preferred securities and extraordinary expense 37,544 (1,819) Dividends on convertible preferred securities, net of income tax benefit 1,553 1,553 -------------- -------------- Income (loss) from continuing operations before extraordinary expense 35,991 (3,372) Income from discontinued operations, net of tax 7,199 4,838 -------------- -------------- Income before extraordinary expense 43,190 1,466 Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax 43,631 - -------------- -------------- Net income (loss) $ (441) $ 1,466 ============== ============== Carrying cost of equity forward contracts 1,003 - -------------- -------------- Available for common shareholders $ (1,444) $ 1,466 ============== ============== Basic income (loss) per common share: Earnings from continuing operations $ 0.12 $ (0.01) Earnings from discontinued operations 0.03 0.02 Extraordinary expense (0.15) - Available for common shareholders (0.01) 0.01 Diluted income (loss) per common share: Earnings from continuing operations $ 0.12 $ (0.01) Earnings from discontinued operations 0.02 0.02 Extraordinary expense (0.15) - Available for common shareholders (0.01) 0.01
The accompanying Notes are an integral part of these Consolidated Financial Statements. 3 PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands, except per-share amounts) Unaudited
2001 2000 -------------- -------------- Revenue $ 1,791,144 $ 1,320,019 Operating expenses: Cost of services 477,107 338,839 Depreciation and amortization 413,734 278,483 Other operating expenses 662,972 563,427 Restructuring expenses 13,002 - Acquisition assimilation expense 17,665 24,130 -------------- -------------- Total operating expenses 1,584,480 1,204,879 -------------- -------------- Operating income 206,664 115,140 Investment and other income, net 16,495 14,913 Gain on sale of assets 139,304 - Minority interest - 12,222 Interest expense 258,033 128,899 -------------- -------------- Income from continuing operations before income taxes, dividends on convertible preferred securities and extraordinary expense 104,430 13,376 Income tax expense 49,183 5,096 -------------- -------------- Income from continuing operations before dividends on convertible preferred securities and extraordinary expense 55,247 8,280 Dividends on convertible preferred securities, net of income tax benefit 4,658 4,658 -------------- -------------- Income from continuing operations before extraordinary expense 50,589 3,622 Income from discontinued operations, net of tax 11,675 8,182 -------------- -------------- Income before extraordinary expense 62,264 11,804 Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax 43,631 - -------------- -------------- Net income $ 18,633 $ 11,804 ============== ============== Carrying cost of equity forward contracts 13,650 - -------------- -------------- Available for common shareholders $ 4,983 $ 11,804 ============== ============== Basic income per common share: Earnings from continuing operations $ 0.14 $ 0.01 Earnings from discontinued operations 0.04 0.03 Extraordinary expense (0.16) - Available for common shareholders 0.02 0.05 Diluted income per common share: Earnings from continuing operations $ 0.13 $ 0.01 Earnings from discontinued operations 0.04 0.03 Extraordinary expense (0.16) - Available for common shareholders 0.02 0.04
The accompanying Notes are an integral part of these Consolidated Financial Statements. 4 PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands) Unaudited
For the three months ended September 30, For the nine months ended September 30, ----------------------------------------- ----------------------------------------- 2001 2000 2001 2000 ------------------ ------------------- ------------------- ------------------- Net income $ (441) $ 1,466 $ 18,633 $ 11,804 Other comprehensive loss, net of tax (34,696) (28,704) (59,565) (69,097) ------------------ ------------------- ------------------- ------------------- Total comprehensive income (loss) $ (35,137) $ (27,238) $ (40,932) $ (57,293) ================== =================== =================== ===================
The accompanying Notes are an integral part of these Consolidated Financial Statements. 5 PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (In thousands, except per-share amounts) Unaudited
Accumulated Common Additional Other Total Stock Paid-In Retained Comprehensive Treasury Shareholders' ($0.25 par) Capital Earnings Income (Loss) Stock Equity ------------ ------------- ------------- -------------------------- ------------- Balances January 1, 2000 $ 65,519 $1,577,903 $ 261,590 $ 14,923 $ - $ 1,919,935 Acquisitions 28 1,770 - - 1,861 3,659 Treasury stock acquisitions - - - - (49,209) (49,209) Stock plans 895 42,156 - - (4,523) 38,528 Equity forward contracts - (150,013) - - - (150,013) Net loss - - (28,394) - - (28,394) Other comprehensive loss, net of tax - - - (14,505) - (14,505) ------------ ------------- ------------- ------------ ------------ ------------- Balances December 31, 2000 66,442 1,471,816 233,196 418 (51,871) 1,720,001 Stock plans 355 26,538 - - (705) 26,188 Common stock offering 6,289 283,272 - - - 289,561 Equity units offering - 4,968 - - - 4,968 Settlement of equity forward contracts - 150,013 (13,650) - (150,013) (13,650) Net income - - 18,633 - - 18,633 Other comprehensive loss, net of tax - - - (59,565) - (59,565) ------------ ------------- ------------- ------------ ------------ ------------- Balances September 30, 2001 $ 73,086 $1,936,607 $ 238,179 $ (59,147) $ (202,589) $ 1,986,136 ============ ============= ============= ============ ============ =============
The accompanying Notes are an integral part of these Consolidated Financial Statements. 6 PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (In thousands)
2001 2000 ---------------- ---------------- Net cash provided by continuing operating activities $ 403,443 $ 262,962 Cash flows from investing activities: Acquisitions (3,369,517) (644,300) Proceeds from sale of assets 363,436 - Capital expenditures (350,480) (409,342) Securities purchased (104,018) (52,589) Securities sold 1,218 129,396 Securities matured - 10,400 ELI share purchases - (38,748) Other 940 18 ---------------- ---------------- Net cash used by investing activities (3,458,421) (1,005,165) Cash flows from financing activities: Long-term debt borrowings 3,503,060 819,869 Long-term debt principal payments (956,821) (35,183) Issuance of equity units 460,000 - Debt issuance cost (67,499) - Common stock offering 289,561 - Issuance of common stock for employee plans 23,490 22,176 Settlement of equity forward contracts (163,663) - Common stock buybacks - (49,209) Customer advances for construction and contributions in aid of construction 3,525 14,159 ---------------- ---------------- Net cash provided by financing activities 3,091,653 771,812 Cash used by discontinued operations (28,976) (20,787) ---------------- ---------------- Increase in cash 7,699 8,822 Cash at January 1, 31,223 37,141 ---------------- ---------------- Cash at September 30, $ 38,922 $ 45,963 ================ ================ Non-cash investing and financing activities: Increase in capital lease asset $ 33,985 $ 98,555
The accompanying Notes are an integral part of these Consolidated Financial Statements. 7 PART I. FINANCIAL INFORMATION CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies: ------------------------------------------ (a) Basis of Presentation: Citizens Communications Company and its subsidiaries are referred to as "we", "us" or "our" in this report. The unaudited consolidated financial statements include our accounts and have been prepared in conformity with generally accepted accounting principles and should be read in conjunction with the consolidated financial statements and notes included in our 2000 Annual Report on Form 10-K. These unaudited consolidated financial statements include all adjustments, which consist of normal recurring accruals necessary to present fairly the results for the interim periods shown. Certain information and footnote disclosures have been condensed pursuant to Securities and Exchange Commission rules and regulations. The results of the interim periods are not necessarily indicative of the results for the full year. Certain reclassifications of balances previously reported have been made to conform to current presentation. (b) Regulatory Assets and Liabilities: Certain of our local exchange telephone operations were, and all of our public utilities services operations are, subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation". For these entities, regulators can establish regulatory assets and liabilities that are required to be reflected on the balance sheet in anticipation of future recovery through the ratemaking process. In the third quarter of 2001, due to the continued process of deregulation and the introduction of competition to our rural local exchange telephone properties and our expectation that these trends will continue, we concluded it was appropriate to discontinue the application of SFAS 71 (see Note 11) for our local exchange telephone properties. (c) Revenue Recognition: Incumbent Local Exchange Carrier (ILEC) - Revenue is recognized when services are provided or when products are delivered to customers. Revenue that is billed in advance includes: monthly recurring network access services, special access services and monthly recurring local line charges. The unearned portion of this revenue is initially deferred as a component of accrued expenses on our balance sheet and recognized in revenue over the period that the services are provided. Revenue that is billed in arrears includes: non-recurring network access services, switched access services, non-recurring local services and long-distance services. The earned but unbilled portion of this revenue is recognized in revenue on our statement of income and accrued in accounts receivable in the period that the services are provided. Excise taxes are recognized as a liability when billed. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceed installation fee revenue. Electric Lightwave, Inc. (ELI) - Revenue is recognized when the services are provided. Revenue from long-term prepaid network services agreements are deferred and recognized on a straight-line basis over the terms of the related agreements. Installation fees and related costs (up to the amount of installation revenue) are deferred and recognized over the average customer life. Installation related costs in excess of installation fees are expensed when incurred. Public Utilities Services - Revenue is recognized when services are provided for public utilities services. Certain revenue is based upon consumption while other revenue is based upon a flat fee. Earned but unbilled public utilities services revenue is accrued for and included in accounts receivable and revenue. (d) Net Income Per Common Share: Basic net income per common share is computed using the weighted average number of common shares outstanding during the period being reported on. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock at the beginning of the period being reported on (see Note 8). 8 (2) Property, Plant and Equipment, Net: ----------------------------------- Property, plant and equipment, net at September 30, 2001 and December 31, 2000 is as follows:
($ in thousands) September 30, 2001 December 31, 2000 -------------------- -------------------- Property, plant and equipment $ 6,593,191 $ 5,307,427 Less accumulated depreciation (2,055,900) (1,786,715) -------------------- -------------------- Property, plant and equipment, net $ 4,537,291 $ 3,520,712 ==================== ====================
At September 30, 2001, approximately $1,132,069,000 of net property, plant and equipment was related to our acquisition of Frontier Corp. which was completed on June 29, 2001 (see Note 3). At December 31, 2000, approximately $197,952,000 of net property, plant and equipment was related to our Louisiana gas operations which were disposed of on July 2, 2001 (see Note 5). Depreciation expense, calculated using the straight-line method, is based upon the estimated service lives of various classifications of property, plant and equipment. Depreciation expense was $141,709,000 and $92,004,000 for the three months ended September 2001 and 2000, respectively, and $335,452,000 and $273,198,000 for the nine months ended September 30, 2001 and 2000, respectively. We ceased to record depreciation expense on the gas assets held for sale effective October 1, 2000 and on the electric assets held for sale effective January 1, 2001 (see Note 5). (3) Acquisitions: ------------- From May 27, 1999 through July 12, 2000, we entered into several agreements to acquire telephone access lines. These transactions have been and will be accounted for using the purchase method of accounting. The results of operations of the acquired properties have been and will be included in our financial statements from the dates of acquisition of each property. These agreements and the status of each transaction are described as follows: Verizon Acquisition ------------------- Between May and December 1999, we announced agreements to purchase from Verizon Communications Inc., formerly GTE Corp. (Verizon), approximately 381,200 telephone access lines (as of December 31, 2000) in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska for approximately $1,171,000,000 in cash. To date, we have closed on approximately 317,500 telephone access lines. We have received all necessary regulatory approvals and expect that the acquisition of the remaining access lines in Arizona and California will close during 2002. Our expected cash requirement to complete the Verizon acquisitions is $222,800,000. Qwest Acquisition - termination ------------------------------- In June 1999, we announced agreements to purchase from Qwest approximately 556,800 telephone access lines (as of December 31, 2000) in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash and the assumption of certain liabilities. To date, we have closed on the purchase of approximately 17,000 telephone access lines in North Dakota for approximately $38,000,000 in cash. On July 20, 2001, we notified Qwest that we were terminating eight acquisition agreements with Qwest relating to telephone exchanges in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska and Wyoming for the remaining 539,800 telephone access lines. Qwest subsequently filed a notice of claim for arbitration in Denver, Colorado under the rules of the American Arbitration Association with respect to the terminated acquisition agreements. Qwest asserts that we wrongfully terminated these agreements and is seeking approximately $64,000,000, which is the aggregate of liquidation damages under letters of credit established in the terminated acquisition agreements. We have filed a notice of claim in the same arbitration proceeding, contesting Qwest's asserted claims and asserting substantial claims against Qwest for material breaches of representations, warranties and covenants in the terminated acquisition agreements and in the acquisition agreement relating to North Dakota assets that we purchased from Qwest. 9 Frontier Acquisition -------------------- On June 29, 2001, we purchased from Global Crossing Ltd. (Global) 100% of the stock of Frontier Corp.'s local exchange carrier subsidiaries, which owned approximately 1,096,700 telephone access lines (as of December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and Wisconsin, for approximately $3,370,000,000 in cash, subject to adjustment. The operations of Frontier are included in our financial statements from the date of acquisition. In conjunction with the Frontier acquisition, we are evaluating our facilities to take advantage of operational and functional synergies between the two companies with the objective of concentrating our resources in the areas where we have the most customers, to better serve those customers. Accordingly, we intend to close our operations support center in Plano, Texas by April 2002 (see note 7). The following pro forma financial information for the nine months ended September 30, 2001 and 2000 present the combined results of our operations and the Frontier, Verizon and Qwest acquisitions as if the acquisitions had occurred at the beginning of the year prior to their acquisition. Pro Forma financial information for the nine months ended September 30, 2001 includes approximatley $29 million of revenues for long distance services provided to customers of Frontier subsequent to the date of acquisition. The pro forma financial information does not include long distance services revenue prior to such date. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had we constituted a single entity during such periods. The sale of our Louisiana Gas operations (see note 5) is not presented on a pro forma basis.
($ in thousands, except per share amounts) For the nine months ended September 30, ------------------------------------------ 2001 2000 -------------------- ------------------- Revenue $ 2,178,940 $ 2,015,403 Net income (loss) $ (53,522) $ (44,711) Net income (loss) available to common shareholders per share $ (0.25) $ (0.16)
(4) Intangibles: ------------ Intangibles at September 30, 2001 and December 31, 2000 are as follows:
($ in thousands) September 30, 2001 December 31, 2000 -------------------- -------------------- Goodwill $ 490,012 $ 488,435 Customer base and other 195,243 144,833 Excess of cost over net assets acquired 2,179,199 - ------------------- -------------------- Total intangibles $ 2,864,454 $ 633,268 ==================== ====================
We have reflected assets acquired at fair market values in accordance with purchase accounting standards. Our allocations are based upon an independent appraisal of the respective property. We have not received a valuation of our Frontier purchase and have allocated, temporarily, approximately $2.2 billion of the purchase price to "excess of cost over net assets acquired". Upon receipt of a final valuation, the excess of cost over historical net assets acquired for the Frontier acquisition will be allocated to property, plant and equipment, customer base, other identifiable intangibles and goodwill. (5) Discontinued Operations and Net Assets Held for Sale: ----------------------------------------------------- On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services businesses, which include gas, electric and water and wastewater businesses. Currently, we have agreements to sell all our water and wastewater operations, one of our electric operations and one of our natural gas operations and we have sold another of our natural gas operations. We have received proceeds on the sale of assets of $363,400,000, and have agreements to sell assets for an aggregate of $1,026,000,000 plus the assumption of certain liabilities and debt. The purchase price under one of these agreements may be reduced. These agreements and the status of each transaction are described as follows: 10 Water and Wastewater -------------------- On October 18, 1999, we announced the agreement to sell our water and wastewater operations to American Water Works, Inc. for $745,000,000 in cash and $90,000,000 of assumed debt. This transaction is expected to close in the fourth quarter of 2001. Electric -------- On February 15, 2000, we announced that we had agreed to sell our electric utility operations. The Arizona and Vermont electric divisions were under contract to be sold to Cap Rock Energy Corp. (Cap Rock). The agreement with Cap Rock was terminated on March 7, 2001. We intend to pursue the disposition of the Vermont and Arizona electric divisions with alternative buyers. In August 2000, the Hawaii Public Utilities Commission denied the initial application requesting approval of the purchase of our Kauai electric division by the Kauai Island Electric Co-op for $270,000,000 in cash including the assumption of certain liabilities. We are discussing a reduction of the purchase price and other options. Our agreement for the sale of this division may be terminated if regulatory approval is not received before February 2002. Gas --- On July 2, 2001, we completed on the sale of our Louisiana Gas operations to Atmos Energy Corporation for $363,436,000 in cash. The pre-tax gain on the sale recognized in the third quarter was $139,304,000. In July 2001, an agreement was signed to sell the Colorado Gas division to Kinder Morgan for $11,000,000 in cash. This transaction has received all necessary regulatory approvals and is expected to close in the fourth quarter of 2001. Discontinued operations in the consolidated statements of income reflect the results of operations of the water/wastewater properties including allocated interest expense for the periods presented. Interest expense was allocated to the discontinued operations based on the outstanding debt specifically identified with these businesses. The long-term debt presented in liabilities of discontinued operations represents the only liability to be assumed by the buyer pursuant to the water and wastewater asset sale agreements. We initially accounted for the planned divestiture of all the public utilities services properties as discontinued operations. Currently, we do not have agreements to sell our entire gas and electric segments. Consequently, we reclassified all of our gas (on September 30, 2000) and electric (on December 31, 2000) assets and their related liabilities to "assets held for sale" and "liabilities related to assets held for sale," respectively. We also reclassified the results of these operations from discontinued operations to their original income statement captions as part of continuing operations. Additionally, we ceased to record depreciation expense on the gas assets effective October 1, 2000 and on the electric assets effective January 1, 2001. Such depreciation expense would have been an additional $11,400,000 and $39,500,000 for the three and nine months ended September 30, 2001, respectively. We continue to actively pursue buyers for our remaining gas and electric businesses. Summarized financial information for the water/wastewater operations (discontinued operations) is set forth below: ($ in thousands) September 30, 2001 December 31, 2000 ------------------ ------------------- Current assets $ 20,424 $ 18,578 Net property, plant and equipment 667,741 639,994 Other assets 55,073 14,943 ------------------ ------------------ Total assets $ 743,238 $ 673,515 ================== ================== Current liabilities $ 25,547 $ 21,062 Long-term debt 90,448 90,546 Other liabilities 103,573 78,888 ------------------ ------------------ Total liabilities $ 219,568 $ 190,496 ================== ================== 11 ($ in thousands) For the three months ended September 30, ------------------------------------------ 2001 2000 ------------------ ------------------ Revenue $ 34,451 $ 29,272 Operating income $ 14,832 $ 9,716 Income tax expense $ 4,571 $ 2,413 Net income $ 7,199 $ 4,838 ($ in thousands) For the nine months ended September 30, ------------------------------------------ 2001 2000 ------------------ ------------------ Revenue $ 87,880 $ 79,913 Operating income $ 26,777 $ 19,746 Income tax expense $ 6,730 $ 3,924 Net income $ 11,675 $ 8,182 Summarized financial information for the gas and electric operations (held for sale) is set forth below:
($ in thousands) September 30, 2001 December 31, 2000 -------------------- -------------------- Current assets $ 76,832 $ 127,495 Net property, plant and equipment 794,456 953,328 Other assets 222,651 131,484 -------------------- -------------------- Total assets held for sale $ 1,093,939 $ 1,212,307 ==================== ==================== Current liabilities $ 69,975 $ 169,066 Long-term debt 43,400 43,980 Other liabilities 100,715 77,529 -------------------- -------------------- Total liabilities related to assets held for sale $ 214,090 $ 290,575 ==================== ====================
(6) Security Issuances: ------------------ We issued the following securities during the nine months ended September 30, 2001 under our $3,800,000,000 shelf registration statement and in a private placement. The net proceeds from these issuances were used to repay bank borrowings, fund the Frontier Acquisition (see note 3), to settle the equity forward contract (see note 12) and for general corporate purposes. We have $825,600,000 remaining on our shelf registration after these issuances. Long-Term Debt -------------- On May 18, 2001, we issued an aggregate of $1.75 billion of notes consisting of $700 million principal amount of 8.50% notes, due May 15, 2006 and $1.05 billion principal amount of 9.25% notes due May 15, 2011. The net proceeds of this issuance was $1,726,000,000 (after underwriting discounts and commissions and before offering expenses). Equity Units ------------ On June 13, 2001, we issued 18,400,000 equity units at $25 per unit for net proceeds of $446,200,000 (after underwriting discounts and commissions and before offering expenses). Each equity unit initially consists of a 6.75% senior note due 2006 and a purchase contract (warrant) for our common stock. The purchase contract obligates the holder to purchase from us, no later than August 17, 2004 for a purchase price of $25, the following number of shares of our common stock: o 1.7218 shares, if the average closing price of our common stock over the 20-day trading period ending on the third trading day prior to August 17, 2004 equals or exceeds $14.52; o A number of shares having a value, based on the average closing price over that period, equal to $25, if the average closing price of our common stock over the same period is less than $14.52, but greater than $12.10; and o 2.0661 shares, if the average closing price of our common stock over the same period is less than or equal to $12.10. The equity units trade on The New York Stock Exchange under the symbol "CZB." 12 Common Stock ------------ On June 13, 2001, we issued 25,156,250 shares of our common stock at $12.10, for net proceeds of $289,561,000 (after underwriting discounts and commissions). Private Placement ----------------- In August 2001, through a sale by private placement to Rule 144A qualified investors, we issued an aggregate of $1.75 billion of notes consisting of $300 million principal amount of 6.375% notes due 2004, $750 million principal amount of 7.625% notes due 2008 and $700 million principal amount of 9.000% notes due 2031. The net proceeds of this issuance were $1,728,900,000 (after placement agent discounts and commissions and before offering expenses). We have filed a registration statement with the Securities and Exchange Commission (SEC) on Form S-4 in September 2001 to register a public exchange of publicly traded notes with substantially identical terms to the notes sold in the private placement, except for transfer restriction and registration rights relating to the initial notes. The registration statement has not yet been declared effective by the SEC.
Following is the activity in our long-term debt from December 31, 2000 to September 30, 2001: For the nine months ended ----------------------------------------- Remarketing/ Interest Rate at December 31, Borrowings/ Change in September 30, September 30, ($ in thousands) 2000 Acquisitions Current Portion Payments 2001 2001* -------------------------------------------------------------------------------------- Fixed Rate Rural Utilities Service Loan Contracts ILEC $ 90,129 $ 1,430 - $ (3,355) $ 88,204 6.378% Frontier - 43,246 - - 43,246 5.531% ----------- ----------- ------------ --------- ----------- Subtotal 90,129 44,676 - (3,355) 131,450 ----------- ----------- ------------ --------- ----------- Debentures 1,000,000 - - (50,000) 950,000 7.464% 2001 Notes 8.500% Due 2006 - 700,000 - - 700,000 8.740% 9.250% Due 2011 - 1,050,000 - - 1,050,000 9.340% 6.375% Due 2004 - 300,000 - - 300,000 6.649% 7.625% Due 2008 - 750,000 - - 750,000 7.835% 9.000% Due 2031 - 700,000 - - 700,000 9.148% ----------- ----------- ----------- ---------- ---------- Subtotal - 3,500,000 - - 3,500,000 ----------- ----------- ----------- ---------- ---------- Equity Units 6.750% Due 2006 - 460,000 - - 460,000 7.480% ----------- ----------- ----------- ---------- ---------- Subtotal - 460,000 - - 460,000 ----------- ----------- ----------- ---------- ---------- Senior Unsecured Notes ILEC 36,000 - - - 36,000 8.050% Frontier - 74,415 - (787) 73,628 7.610% ----------- ----------- ----------- ---------- ---------- Subtotal 36,000 74,415 - (787) 109,628 ----------- ----------- ----------- ---------- ---------- ELI notes 325,000 - - - 325,000 6.232% ELI capital leases 132,248 33,985 - (28,283) 137,950 11.765% Industrial Development Revenue Bonds 263,595 - $ (14,400) - 249,195 6.435% Other 308 - - (251) 57 12.986% ----------- ----------- ----------- ---------- ---------- Total fixed rate 1,847,280 4,113,076 (14,400) (82,676) 5,863,280 ----------- ----------- ----------- ---------- ---------- Variable Rate Commercial Paper Notes Payable 109,145 - - (109,145) - Bank Credit Facility 765,000 - - (765,000) - ELI Bank Credit Facility 400,000 - - - 400,000 3.822% Industrial Development Revenue Bonds 121,878 - 14,400 - 136,278 5.221% ----------- ----------- ----------- --------- ---------- Total variable rate 1,396,023 - $ 14,400 (874,145) 536,278 ----------- ----------- ---------- --------- ---------- Total $ 3,243,303 $ 4,113,076 - $(956,821) $ 6,399,558 =========== =========== ========== ========= ==========
* Interest rate includes amortization of debt issuance expenses, debt premiums or discounts. The interest rate for Rural Utilities Service Loan Contracts, Debentures, ILEC Senior Unsecured Notes, and Industrial Development Revenue Bonds represent a weighted average of multiple issuances. The interest rates on the commercial paper notes payable and the bank credit facility at December 30, 2000 were 6.81% and 7.19%, respectively. 13 (7) Restructuring Charges: ---------------------- 2001 ---- In the second quarter of 2001, we approved a plan to close our operations support center in Plano, Texas by April 2002. In connection with this plan, we recorded a pre-tax charge of $13,002,000 in other operating expenses in the third quarter of 2001. The restructuring resulted in the reduction of 749 employees. We communicated with all affected employees during July 2001. Certain employees will be relocated; others will be offered severance, job training and/or outplacement counseling. We intend to sell our Plano office building. As of September 30, 2001, approximately $453,000 was paid and 30 employees were terminated. We expect to incur additional costs of approximately $3,128,000 through the first quarter of 2002. 1999 ---- In the fourth quarter of 1999, we approved a plan to restructure our corporate office activities. In connection with this plan, we recorded a pre-tax charge of $5,760,000 in other operating expenses in the fourth quarter of 1999. The restructuring resulted in the reduction of 49 corporate employees. All affected employees were communicated with in the early part of November 1999. As of September 30, 2001, approximately $4,413,000 has been paid, 42 employees were terminated and 6 employees who were expected to be terminated took other positions within the company. The remaining employee will be terminated during 2001. At December 31, 2000, we adjusted our original accrual down by $1,008,000 and the remaining accrual of $339,000 is included in other current liabilities at September 30, 2001. These costs are expected to be paid in the fourth quarter of 2001.
Original Accrued Amount Remaining Amount Paid to Date Adjustments Accrual ---------------- ------------ ------------ ------------ 2001 Restructuring $ 13,002,000 $ 453,000 $ - $ 12,549,000 1999 Restructuring 5,760,000 4,413,000 (1,008,000) 339,000
(8) Net Income Per Common Share: ---------------------------- The reconciliation of the net income per common share calculation for the three and nine months ended September 30, 2001 and 2000, respectively, is as follows:
(In thousands, except per-share amounts) For the three months ended September 30, -------------------------------------------------------------------------- 2001 2000 ------------------------------------- ----------------------------------- Weighted Weighted Average Average Net Income Shares Per Share Net Income Shares Per Share ------------------------ ----------- ------------------------ ---------- Net income per common share: Basic $ (441) 285,615 $ 1,466 260,309 Carrying cost of equity forward contracts 1,003 - - - ----------- ----------- ----------- ------------ Available for common shareholders $ (1,444) 285,615 $ (0.01) $ 1,466 260,309 $ 0.01 Effect of dilutive options - 3,438 - - 7,551 - ----------- ----------- ----------- ------------ Diluted $ (1,444) 289,053 $ (0.01) $ 1,466 267,860 $ 0.01 =========== =========== =========== ============ (In thousands, except per-share amounts) For the nine months ended September 30, -------------------------------------------------------------------------- 2001 2000 ------------------------------------- ----------------------------------- Weighted Weighted Average Average Net Income Shares Per Share Net Income Shares Per Share ------------------------ ----------- ------------------------ ---------- Net income per common share: Basic $ 18,633 271,346 $ 11,804 260,046 Carrying cost of equity forward contracts 13,650 - - - ----------- ----------- ----------- ------------ Available for common shareholders $ 4,983 271,346 $ 0.02 $ 11,804 260,046 $ 0.05 Effect of dilutive options - 6,941 - - 7,404 - ----------- ----------- ----------- ------------ Diluted $ 4,983 278,287 $ 0.02 $ 11,804 267,450 $ 0.04 =========== =========== =========== ============
14 All share amounts represent weighted average shares outstanding for each respective period. The diluted net income per common share calculation excludes the effect of potentially dilutive shares when their effect is antidilutive. At September 30, 2001, we have 4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible Preferred Securities which are convertible into common stock at a 3.76 to 1 ratio at an exercise price of $13.30 per share and 9,434,000 potentially dilutive stock options at a range of $12.91 to $21.47 per share that are not included in the calculation as they are antidilutive. Restricted stock awards of 1,150,000 shares and 1,672,000 shares at September 30, 2001 and 2000, respectively, are excluded from our basic weighted average shares outstanding and included in our dilutive shares until the shares are no longer contingent upon the satisfaction of all specified conditions. See Note 12 regarding carrying costs of equity forward contracts. (9) Segment Information: ------------------- We operate in four segments, Incumbent Local Exchange Carrier (ILEC), ELI (a competitive local exchange carrier, or CLEC), gas and electric. The ILEC segment provides both regulated and competitive communications services to residential, business and wholesale customers and is the incumbent carrier in its service areas. Our gas and electric segments are intended to be sold and are classified as "assets held for sale" and "liabilities related to assets held for sale." We own all of the Class B Common Stock and 27,571,332 shares of Class A Common Stock of ELI, a facilities based integrated communications provider offering a broad range of communications services in the western United States. This ownership interest represents 85% of the economic interest and a 96% voting interest. ELI's Class B Common Stock votes on a 10 to 1 basis with the Class A Common Stock, which is publicly traded. We also guarantee all of ELI's long-term debt, one of its capital leases and one of its operating leases. ELI is part of our consolidated federal tax return. In order to maintain that consolidation, we must maintain an ownership and voting interest in excess of 80%. During 2000, as a result of the exercise of employee stock options, our ownership interest dropped and we purchased 2,288,000 shares in the open market to bring our economic ownership interest back to 85%. 15 Adjusted EBITDA is operating income (loss) plus depreciation and amortization. EBITDA is a measure commonly used to analyze companies on the basis of operating performance. It is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity and may not be comparable to similarly titled measures of other companies.
($ in thousands) For the three months ended September 30, 2001 ------------------------------------------------------------------------------------------- Total ILEC ELI Gas Electric Eliminations Segments -------------- -------------- --------------- ------------- ------------- ------------- Revenue $ 507,202 $ 53,330 $ 37,717 $ 63,953 $ (1,081)(1) $ 661,121 Depreciation and Amortization 173,014 19,919 152 335 242 (2) 193,662 Operating Income (Loss) 64,602 (22,042) 3,717 11,648 307 (2)(3) 58,232 Adjusted EBITDA 237,616 (2,123) 3,869 11,983 549 (3) 251,894 ($ in thousands) For the three months ended September 30, 2000 ------------------------------------------------------------------------------------------- Total ILEC ELI Gas Electric Eliminations Segments -------------- -------------- --------------- ------------- ------------- ------------- Revenue $ 246,767 $ 63,610 $ 80,332 $ 62,770 $ (769)(1) $ 452,710 Depreciation and Amortization 65,857 16,306 6,707 6,729 260 (2) 95,859 Operating Income (Loss) 45,106 (11,530) 1,210 7,685 (29)(2)(3) 42,442 Adjusted EBITDA 110,963 4,776 7,917 14,414 231 (3) 138,301 ($ in thousands) For the nine months ended September 30, 2001 ------------------------------------------------------------------------------------------- Total ILEC ELI Gas Electric Eliminations Segments -------------- -------------- --------------- ------------- ------------- ------------- Revenue $1,083,335 $ 176,321 $ 360,387 $ 174,114 $ (3,013)(1) $ 1,791,144 Depreciation and Amortization 347,703 58,647 457 6,135 792 (2) 413,734 Operating Income (Loss) 187,957 (53,413) 42,213 28,607 1,300 (2)(3) 206,664 Adjusted EBITDA 535,660 5,234 42,670 34,742 2,092 (3) 620,398 ($ in thousands) For the nine months ended September 30, 2000 ------------------------------------------------------------------------------------------- Total ILEC ELI Gas Electric Eliminations Segments -------------- -------------- --------------- ------------- ------------- ------------- Revenue $ 700,475 $181,008 $270,753 $169,879 $ (2,096)(1) $ 1,320,019 Depreciation and Amortization 195,628 43,782 19,076 19,806 191 (2) 278,483 Operating Income (Loss) 116,462 (47,106) 24,160 21,073 551 (2)(3) 115,140 Adjusted EBITDA 312,090 (3,324) 43,236 40,879 742 (3) 393,623
1 Represents revenue received by ELI from our ILEC operations. 2 Represents amortization of the capitalized portion of intercompany interest related to our guarantees of ELI debt and leases and amortization of goodwill related to our purchase of ELI stock. 3 Represents the administrative services fee charged to ELI pursuant to our management services agreement with ELI. 16 (10) Supplemental Segment Information: -------------------------------- Supplemental segment income statement information for the nine months ended September 30, 2001 is as follows:
( $ in thousands) Discontinued Corporate and Consolidated ILEC ELI Gas Electric Operations Eliminations Total ----------- ----------- ---------- ----------- ---------- ------------ ----------- Revenue $ 1,083,335 $ 176,321 $360,387 $174,114 $ - $ (3,013) $1,791,144 Operating expenses: Cost of services 80,994 51,014 252,065 95,804 - (2,770) 477,107 Depreciation and amortization 347,703 58,647 457 6,135 - 792 413,734 Other operating expenses 436,014 120,073 65,652 43,568 - (2,335) 662,972 Restructuring expenses 13,002 - - - - - 13,002 Acquisition assimilation expense 17,665 - - - - - 17,665 ----------- ----------- ---------- ----------- ------------- --------- ----------- Total operating expenses 895,378 229,734 318,174 145,507 - (4,313) 1,584,480 ----------- ----------- ---------- ----------- ------------- --------- ----------- Operating income (loss) 187,957 (53,413) 42,213 28,607 - 1,300 206,664 Investment and other income, net 14,035 387 2,271 (198) - - 16,495 Gain on sale of assets - - - - - 139,304 139,304 Interest expense 191,189 71,788 14,032 12,964 - (31,940) 258,033 ----------- ----------- ---------- ----------- ------------- --------- ----------- Income (loss) from continuing operations before income taxes, dividends on convertible preferred securities and extraordinary expense 10,803 (124,814) 30,452 15,445 - 172,544 104,430 Income tax expense 4,030 449 11,359 5,761 - 27,584 49,183 ----------- ----------- ---------- ----------- ------------- --------- ----------- Income (loss) from continuing operations before dividends on convertible preferred securities and extraordinary expense 6,773 (125,263) 19,093 9,684 - 144,960 55,247 Dividends on convertible preferred securities, net of income tax benefit 4,658 - - - - - 4,658 ----------- ----------- ---------- ----------- ------------- --------- ----------- Income (loss) from continuing operations before extraordinary expense 2,115 (125,263) 19,093 9,684 - 144,960 50,589 Income from discontinued operations, net of tax - - - - 11,675 - 11,675 ----------- ----------- ---------- ----------- ------------- --------- ----------- Net income (loss) before extraordinary item 2,115 (125,263) 19,093 9,684 11,675 144,960 62,264 Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax - - - - - 43,631 43,631 ----------- ----------- ---------- ----------- ---------------------- ----------- Net income (loss) $ 2,115 $ (125,263) $ 19,093 $ 9,684 $ 11,675 $101,329 $ 18,633 =========== =========== ========== =========== ====================== ===========
(11) Discontinuation of SFAS 71: --------------------------- We have historically applied SFAS 71 in the preparation of our financial statements because our incumbent local exchange telephone properties (properties we owned prior to the 2000 and 2001 acquisitions of the Verizon, Qwest and Frontier properties) were predominantly regulated in the past following a cost of service/rate of return approach. Beginning in the third quarter of 2001, these properties no longer met the criteria for application of SFAS 71 due to the continuing process of deregulation and the introduction of competition to our existing rural local exchange telephone properties, and our expectation that these trends will continue for all our properties. Currently, pricing for a majority of our revenues is based upon price cap plans that limit prices to changes in general inflation and estimates of productivity for the industry at large, or upon market pricing, rather than on the specific costs of operating our business, a requirement for the application of SFAS 71. These trends in the deregulation of pricing and the introduction of competition are expected to continue in the near future as additional states adopt price cap forms of regulation. 17 Discontinued application of SFAS 71 required us to write off all of the regulatory assets and liabilities of our incumbent local exchange telephone operations. A non-cash extraordinary charge is reflected in our financial statements in the third quarter of 2001 as follows: ($ in thousands) Assets: Deferred income tax assets $ 31,480 Deferred cost of extraordinary plant retirements 25,348 Deferred charges 6,885 Liabilities: Plant related (10,259) Deferred income tax liabilities (2,531) -------- Pre-tax charge 50,923 Income tax benefit 7,292 -------- Extraordinary expense $ 43,631 ======== Under SFAS 71, we depreciated our telephone plant for financial reporting purposes over asset lives approved by the regulatory agencies setting regulated rates. As part of the discontinuance of SFAS 71, we revised the depreciation lives of our core technology assets to reflect their estimated economic useful lives. Based upon our evaluation of the pace of technology change that is estimated to occur in certain components of our rural telephone networks, we have concluded that minor modifications in our asset lives for the major network technology assets as follows: Average Remaining Life in Years ------------------------------- Regulated Economic Life Life ---- ------ Switching Equipment 6.4 5.6 Circuit Equipment 4.3 4.9 Copper Cable 8.5 7.7 Upon discontinuation of SFAS 71, we tested the balances of property, plant and equipment associated with the incumbent local exchange telephone properties for impairment under SFAS 121 (as required by SFAS 101). No impairment charge was required. To reflect the expectation that competitive entry will occur over time for certain of our properties acquired in prior purchase business combinations, we have shortened the amortization life for franchise rights related to these properties to 20 years. This action was taken to reflect the fact that our dominant position in the market related to the existence of the prior monopoly in incumbent local exchange telephone service may be reduced over time as competitors enter our markets. (12) Equity Forward Contract: ------------------------ During 2000, we entered into a forward contract to purchase 9,140,000 shares of our common stock. These purchases and others made by us for cash during 2000 were made in open-market transactions. The forward amount to be paid in the future included a carrying cost, based on LIBOR plus a spread, and the dollar amount paid for the shares purchased. Our forward contract was a temporary financing arrangement that gave us the flexibility to purchase our stock and pay for those purchases in future periods. Pursuant to transition accounting rules, commencing December 31, 2000 through June 30, 2001 we were required to report our equity forward contract as a reduction to shareholders' equity and as a component of temporary equity for the gross settlement amount of the contract ($150,013,000). On June 28, 2001, we entered into a master confirmation agreement that amended the equity forward contract to no longer permit share settlement of the contract. On June 29, 2001, we accrued $42,995,000 net cash to settle a portion of the contract, plus $12,647,000 in associated carrying costs. In September 2001, we settled the contract by paying the redemption amount of $107,018,000 plus $1,003,000 in associated carrying costs and took possession of our shares. 18 (13) Commitments and Contingencies: ------------------------------ At September 30, 2001, we have outstanding performance letters of credit as follows: ($ in thousands) Qwest $ 64,280 Insurance letters of credit to CNA 12,672 Water/wastewater projects 2,588 ELI projects 60 -------- Total $ 79,600 ======== None of the above letters of credit restrict our cash balances. In addition, we have issued $281,680 of letters of credit where we are required to maintain restricted cash balances in the same amount. This amount has been segregated from cash on our balance sheet and is included as a component of other current assets. During the past two years the decrease in the availability of power in certain areas of the country has caused power supply costs to increase substantially, forcing companies to pay higher operating costs to operate their electric businesses. As a result, companies have attempted to offset these increased costs by either renegotiating prices with their power suppliers or passing these additional costs on to their customers through a rate proceeding. In Arizona, excessive power costs charged by our power supplier in the amount of approximately $98 million through September 30, 2001 have been incurred. We are allowed to recover these charges from ratepayers through the Purchase Power Fuel Adjustment clause. However, in an attempt to limit "rate shock" to our customers, we requested in September 2001 that this deferred amount, plus interest, be recovered over a seven-year period. As a result, we have deferred these costs on the balance sheet in anticipation of recovery through the regulatory process. On July 16, 2001, we terminated our existing contract with Arizona Public Service and entered into a new seven-year purchase power agreement. This agreement allows us to purchase all power required for operations at a fixed rate per kilowatt hour. This agreement is retroactive to June 1, 2001 and will mitigate further increases in the deferred power cost account. 19 PART I. FINANCIAL INFORMATION CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements contained in this quarterly report on Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Reform Act of 1995. In addition, words such as "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to: o Our ability to obtain new financing on favorable terms; o Our ability to effectively manage our growth, including the integration of newly acquired operations into our operations, and otherwise monitor our operations, costs, regulatory compliance and service quality; o Our ability to divest our public utilities services businesses; o Our ability to successfully introduce new product offerings on a timely and cost effective basis, including our ability to offer bundled service packages on terms attractive to our customers, and our ability to offer second lines and enhanced services to markets currently under-penetrated; o Our ability to expand through attractively priced acquisitions; o Our ability to identify future markets and successfully expand existing ones; o The effects of greater than anticipated competition requiring new pricing, marketing strategies or new product offerings and the risk that we will not respond on a timely or profitable basis; o Electric Lightwave, Inc.'s (ELI's) ability to complete a public or private financing that would provide the funds necessary to finance its cash requirements; o The effects of rapid technological changes, including the lack of assurance that our ongoing network improvements will be sufficient to meet or exceed the capabilities and quality of competing networks; o The effects of changes in regulation in the telecommunications industry as a result of the Telecommunications Act of 1996 and other similar federal and state legislation and regulation; o The effects of more general factors, including changes in economic conditions; changes in the capital markets; changes in industry conditions; changes in our credit ratings; and changes in accounting policies or practices adopted voluntarily or as required by generally accepted accounting principles. You should consider these important factors in evaluating any statement in this Form 10-Q or otherwise made by us or on our behalf. These forward-looking statements are made as of the date of this report based upon current expectations, and we undertake no obligation to update this information. The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes included in this report and as presented in our 2000 Annual Report on Form 10-K. (a) Liquidity and Capital Resources ------------------------------- For the three and nine months ended September 30, 2001, we used cash flow from operations, cash on hand and proceeds from the sale of securities to fund capital expenditures and acquisitions of additional telephone access lines. In May 2001, we filed a $3.8 billion shelf registration statement with the Securities and Exchange Commission (SEC) on Form S-3 that permits us to offer from time to time common stock, preferred stock, depositary shares, debt securities, warrants to purchase these types of securities and units of the foregoing. The net proceeds from the sale of these securities have been and are expected to be used to refinance our bank borrowings and other extensions of credit, to expand our networks, services and related infrastructure and fund working capital and pending and future acquisitions, and make further investments in related telecommunications businesses as well as general corporate purposes. After the offerings discussed below, we have a remaining shelf registration of $825.6 million. 20 In May 2001, we issued an aggregate of $1.75 billion of notes consisting of $700 million principal amount of 8.50% notes due May 15, 2006 and $1.05 billion principal amount of 9.25% notes due May 15, 2011. This offering was made under the $3.8 billion shelf registration statement. Net proceeds of $1,726.0 million (after underwriting discounts and commissions and before offering expenses) were used to repay bank borrowings and the remainder was used for general corporate purposes and to finance acquisitions. In June 2001, we issued equity securities in two concurrent public offerings. The first offering consisted of 25,156,250 shares of our common stock. The net proceeds of $289.6 million (after underwriting discounts and commissions and before offering expenses) were used to partially fund the acquisition of Frontier Corp. The second offering consisted of $460 million of equity units. The net proceeds of $446.2 million (after underwriting discounts and commissions and before offering expenses) were used to partially fund the acquisition of Frontier Corp. Each equity unit initially consists of a senior note and a purchase contract for our common stock. The price for the common stock under the purchase contract will be based upon the average trading price of the stock at the time the contract is exercised. These offerings were made under the $3.8 billion shelf registration statement. In August 2001, we issued an aggregate of $1.75 billion of notes consisting of $300 million principal amount of 6.375% notes due 2004, $750 million principal amount of 7.625% notes due 2008 and $700 million principal amount of 9.000% notes due 2031. The notes were issued in a private offering. The proceeds were used to repay our forward equity contract and to refinance outstanding indebtedness and for general corporate purposes. In September 2001, we filed a $1.75 billion registration statement with the SEC on Form S-4 that consists of an exchange offer entitling the holders to exchange the initial notes for new notes with substantially identical terms as the initial notes, except for transfer restrictions and registration rights relating to the initial notes. The registration statement has not yet been declared effective. On September 30, 2001, we had available lines of credit with financial institutions in the amounts of $2.0 billion with associated facility fees of 0.125% per annum and $450 million with no associated facility fees. These credit facilities were in addition to credit commitments under which we may borrow up to $200 million, with associated facility fees of 0.15% per annum, that expire on December 16, 2003. As of September 30, 2001, no borrowings were outstanding under these credit facilities. On October 24, 2001, we replaced these credit facilities with available revolving lines of credit with financial institutions in the amounts of $680 million and $100 million. An additional $25 million was provided by a lender who was added to the credit facilities after October 24, 2001, for total available commitments of $805 million. The credit facilities have similar terms and conditions. Associated facility fees vary depending on our credit ratings and currently are 0.25% per annum. The expiration dates are October 24, 2006. During the term of the facilities we may borrow, repay and reborrow funds. In addition, on October 24, 2001, we borrowed $200 million on an unsecured basis from the Rural Telephone Finance Cooperative (RTFC). This note is due on October 24, 2011 and has a fixed 6.27% rate of interest, payable quarterly. ELI has $400 million of committed revolving lines of credit with commercial banks, which expire November 21, 2002. It has borrowed $400 million under these lines at September 30, 2001. The ELI credit facility has an associated facility fee of 0.08% per annum. We have guaranteed all of ELI's obligations under these revolving lines of credit. We have committed to continue to finance ELI's cash requirements until December 31, 2002. We extended a revolving credit facility to ELI for $450 million with an interest rate of 15% and a final maturity of October 30, 2005. Funds for general corporate purposes of $260 million are available to be drawn until December 31, 2002. The remaining balance may be drawn by ELI to pay interest expense due under the facility. As of September 30, 2001, we have advanced $150 million to ELI under this facility. In January 2001, one of our subsidiaries, Citizens Utilities Rural Company, was advanced $1.0 million under its Rural Utilities Services Loan Contract. The initial interest rate on the advance was 5.4125% with an ultimate maturity date of November 1, 2016. In April 2001, we converted and remarketed $14.4 million of 1991 series industrial development revenue bonds as money market bonds with an initial interest rate of 5.25% and a maturity date of April 1, 2026. In May 2001, we converted and remarketed $23.325 million of the Illinois 1997 series of environmental facilities revenue bonds due May 1, 2032 at an initial interest rate of 5.85%. We also converted and remarketed $18.250 million of the Northampton (Pennsylvania) 1998 series of industrial development revenue bonds due September 1, 2018 at an initial interest rate of 5.75%. 21 On June 29, 2001, we completed the acquisition of Frontier Corp. from Global Crossing for $3,370.0 million in cash (see Acquisitions below). The acquisition was financed on an interim basis by the draw down of our bank credit facility of $1,780.0 million with the remainder derived from the proceeds of our registered securities offerings as discussed above. On July 2, 2001, we completed the sale of our Louisiana Gas operations to Atmos Energy Corp for $363.4 million in cash. The proceeds were used to repay a portion of the borrowings under our bank credit facility. During 2000, we entered into a forward contract to purchase 9,140,000 shares of our common stock. These purchases and others made by us for cash during 2000 were made in open-market transactions. The forward amount to be paid in the future included a carrying cost, based on LIBOR plus a spread, and the dollar amount paid for the shares purchased. Our forward contract was a temporary financing arrangement that gave us the flexibility to purchase our stock and pay for those purchases in future periods. Pursuant to transition accounting rules, commencing December 31, 2000 through June 30, 2001 we were required to report our equity forward contract as a reduction to shareholders' equity and as a component of temporary equity for the gross settlement amount of the contract ($150,013,000). On June 28, 2001, we entered into a master confirmation agreement that amended the equity forward contract to no longer permit share settlement of the contract. On June 29, 2001, we accrued $42,995,000 net cash to settle a portion of the contract, plus $12,647,000 in associated carrying costs. In September 2001, we settled the contract by paying the redemption amount of $107,018,000 plus $1,003,000 in associated carrying costs and took possession of our shares. On September 4, 2001, our $50 million debentures matured at par and were repaid with cash. On October 1, 2001, $99.2 million of our $100 million debentures due in 2034 were tendered for redemption at par in accordance with the put option granted to debenture holders at the time of issuance. These debentures were also repaid with cash. For the nine months ended September 30, 2001, our actual capital expenditures were $256.0 million for the ILEC segment, $43.9 million for the ELI segment and $71.3 million for the public utilities services segments which includes $20.7 million for the water and wastewater segment. We anticipate that the funds necessary for our 2001 capital expenditures will be provided from operations and from commercial paper notes payable, debt, equity and other financing at appropriate times and borrowings under credit facilities. Capital expenditures for discontinued operations and assets held for sale will be funded through requisitions of Industrial Development Revenue Bond construction fund trust accounts and from parties desiring utility service. Upon disposition, we will receive reimbursement of certain 1999, 2000 and 2001 capital expenditures pursuant to the terms of each respective sales agreement. Covenants - --------- The terms and conditions contained in our indentures and credit facility agreements are of a general nature, and do not impose significant financial performance criteria on us. These general covenants include the timely and punctual payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and record in accordance with Generally Accepted Accounting Principles (GAAP), restrictions on the allowance of liens on our assets, and restrictions on asset sales and transfers, mergers and other changes in corporate control. We currently have no restrictions on the payment of dividends by us either by contract, rule or regulation. The principal financial performance covenant under our $805 million credit facility and our $200 million loan facility with the rural telephone finance cooperative which were entered into on October 24, 2001 requires the maintenance of a minimum net worth of $1.5 billion. Under the rural telephone finance cooperative loan facility, in the event that our credit rating from either Moody's Investors Service or Standard & Poor's declines below investment grade (Baa3/BBB-, respectively), we would also be required to maintain an interest coverage ratio of 2.00 to 1 or greater and a leverage ratio of 6.00 to 1 or lower. 22 Acquisitions - ------------ From May 27, 1999 through July 12, 2000, we entered into several agreements to acquire telephone access lines. These transactions have been and will be accounted for using the purchase method of accounting. The results of operations of the acquired properties have been and will be included in our financial statements from the dates of acquisition of each property. These agreements and the status of each transaction are described as follows: Verizon Acquisition ------------------- Between May and December 1999, we announced agreements to purchase from Verizon Communications Inc., formerly GTE Corp. (Verizon), approximately 381,200 telephone access lines (as of December 31, 2000) in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska for approximately $1,171.0 million in cash. To date, we have closed on approximately 317,500 telephone access lines. We have received all necessary regulatory approvals and expect that the acquisition of the remaining access lines in Arizona and California will close during 2002. Our expected cash requirement to complete the Verizon acquisitions is $222.8 million. Qwest Acquisition - termination ------------------------------- In June 1999, we announced agreements to purchase from Qwest approximately 556,800 telephone access lines (as of December 31, 2000) in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650.0 million in cash and the assumption of certain liabilities. To date, we have closed on the purchase of approximately 17,000 telephone access lines in North Dakota for approximately $38.0 million in cash. On July 20, 2001, we notified Qwest that we were terminating eight acquisition agreements with Qwest relating to telephone exchanges in Arizona, Colorado, Idaho/Washington, Iowa, Minnesota, Montana, Nebraska and Wyoming for the remaining 539,800 telephone access lines. Qwest subsequently filed a notice of claim for arbitration in Denver, Colorado under the rules of the American Arbitration Association with respect to the terminated acquisition agreements. Qwest asserts that we wrongfully terminated these agreements and is seeking approximately $64.0 million, which is the aggregate of liquidation damages under letters of credit established in the terminated acquisition agreements. We have filed a notice of claim in the same arbitration proceeding, contesting Qwest's asserted claims and asserting substantial claims against Qwest for material breaches of representations, warranties and covenants in the terminated acquisition agreements and in the acquisition agreement relating to North Dakota assets that we purchased from Qwest. Frontier Acquisition -------------------- On June 29, 2001, we purchased from Global Crossing Ltd. (Global) 100% of the stock of Frontier Corp.'s (Frontier) local exchange carrier subsidiaries, which owned approximately 1,096,700 telephone access lines (as of December 31, 2000) in Alabama/Florida, Georgia, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, New York, Pennsylvania and Wisconsin, for approximately $3,370.0 million in cash, subject to adjustment. The operations of Frontier are included in our financial statements from the date of acquisition. Divestitures - ------------ On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services businesses, which include gas, electric and water and wastewater businesses. Currently, we have agreements to sell all our water and wastewater operations, one of our electric operations and one of our natural gas operations and we have sold another of our natural gas operations. We have received proceeds on the sale of assets of $363.4 million, and have agreements to sell assets for an aggregate of $1,026.0 million plus the assumption of certain liabilities and debt. The purchase price under one of these agreements may be reduced. These agreements and the status of each transaction are described as follows: Water and Wastewater -------------------- On October 18, 1999, we announced the agreement to sell our water and wastewater operations to American Water Works, Inc. for $745.0 million in cash and $90.0 million of assumed debt. This transaction is expected to close in the fourth quarter of 2001. Electric -------- On February 15, 2000, we announced that we had agreed to sell our electric utility operations. The Arizona and Vermont electric divisions were under contract to be sold to Cap Rock Energy Corp. (Cap Rock). The agreement with Cap Rock was terminated on March 7, 2001. We intend to pursue the disposition of the Vermont and Arizona electric divisions with alternative buyers. In August 2000, the Hawaii Public Utilities Commission denied the initial application requesting approval of the purchase of our Kauai 23 electric division by the Kauai Island Electric Co-op for $270.0 million in cash including the assumption of certain liabilities. We are discussing a reduction of the purchase price and other options. Our agreement for the sale of this division may be terminated if regulatory approval is not received before February 2002. Gas --- On July 2, 2001, we completed the sale of our Louisiana Gas operations to Atmos Energy Corporation for $363.4 million in cash. The pre-tax gain on the sale recognized in the third quarter was approximately $139.3 million. In July 2001, an agreement was signed to sell the Colorado Gas division to Kinder Morgan for $11.0 million in cash. This transaction has received all necessary regulatory approvals and is expected to close in the fourth quarter of 2001. Discontinued operations in the consolidated statements of income reflect the results of operations of the water/wastewater properties including allocated interest expense for the periods presented. Interest expense was allocated to the discontinued operations based on the outstanding debt specifically identified with these businesses. The long-term debt presented in liabilities of discontinued operations represents the only liability to be assumed by the buyer pursuant to the water and wastewater asset sale agreements. We initially accounted for the planned divestiture of all the public utilities services properties as discontinued operations. Currently, we do not have agreements to sell our entire gas and electric segments. Consequently, we reclassified all of our gas and electric assets and their related liabilities to "assets held for sale" and "liabilities related to assets held for sale," respectively. We also reclassified the results of these operations from discontinued operations to their original income statement captions as part of continuing operations. Additionally, we ceased to record depreciation expense on the gas assets effective October 1, 2000 and on the electric assets effective January 1, 2001. Such depreciation expense would have been an additional $11.4 million and $39.5 million for the three and nine months ended September 30, 2001, respectively. We continue to actively pursue buyers for our remaining gas and electric businesses. Discontinuation of SFAS 71 - -------------------------- Prior to the 2000 and 2001 acquisitions of the Verizon, Qwest and Frontier Properties, our incumbent local exchange telephone properties have been predominantly regulated following a cost of service/rate of return approach. Accordingly, we have applied the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 in the preparation of our financial statements. Currently, pricing for a majority of our revenues in our previously existing incumbent local exchange telephone properties is based upon price cap plans that limit prices to changes in general inflation and estimates of productivity for the industry at large or upon market pricing rather than on the specific costs of operating our business, a requirement for the application of SFAS 71. These trends in the deregulation of pricing and the introduction of competition are expected to continue as additional states adopt price cap forms of regulation. We intend to operate all of our properties as competitive enterprises, to meet competitive entry and maximize revenue by providing a broad range of products and services, such as data services. Many of these future services will not be regulated, further increasing the percentage of our revenue provided by our networks that is not based upon historical cost/rate of return regulation. In the third quarter of 2001, we concluded based on the factors mentioned above, that the provisions of SFAS 71 were no longer applicable to our incumbent local exchange telephone properties (properties we owned prior to the 2000 and 2001 acquisitions of the Verizon, Qwest and Frontier properties). As part of the discontinuation of SFAS 71, we will no longer recognize in our financial statements certain activities of regulators. As discussed further in Note 11 of the financial statements, we recorded a non-cash extraordinary charge of $43.6 million net of tax in our income statement, to write-off regulatory assets and liabilities recorded on our balance sheet in the past. Based upon our evaluation of the pace of technology change that is estimated to occur in certain components of our rural telephone networks, we have concluded that minor modifications in our asset lives are required for the major network technology assets and expect that depreciation and amortization expense will not differ significantly from that currently recorded. In accordance with the provisions of SFAS 101 and SFAS 121, we performed a test of the impairment of the property, plant and equipment accounts for our properties discontinuing SFAS 71 and found that based upon our expectations of future changes in sales volumes and prices and the anticipated rate of entry of additional competition into our markets, we concluded that an asset impairment is not warranted under SFAS 121 at this time. 24 New Accounting Pronouncements - ----------------------------- In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations." This statement requires that all business combinations be accounted for under the purchase method of accounting. SFAS 141 requires that the purchase method of accounting be used for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method of accounting. The Frontier acquisition, which closed on June 29, 2001, is accounted for using the purchase method. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets." This statement requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. Impairment tests are required to be performed at least annually. The amortization of goodwill ceases upon adoption of the statement. The statement is effective for fiscal years beginning after December 15, 2001 for companies whose annual reporting period ends on December 31, 2001 and applies to all goodwill and other intangible assets recognized in the statement of financial position at that date, regardless of when the assets were initially recognized. We will cease to recognize amortization of the goodwill portion of intangibles starting January 1, 2002. Amortization of intangibles for the three and nine months ended September 30, 2001 was $52.0 million and $78.3 million, respectively. We will be required to test for impairment of goodwill annually starting January 1, 2002. The amount of any future impairment, if any, cannot be estimated at this time. In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." This statement addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and reported as a liability. This statement is effective for fiscal years beginning after June 15, 2002. We are currently evaluating the impact of the adoption of SFAS 143. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. This statement is effective for fiscal years beginning after December 15, 2001. We are currently evaluating the impact of the adoption of SFAS 144. 25 (b) Results of Operations --------------------- REVENUE Consolidated revenue for the three and nine months ended September 30, 2001 increased $208.4 million, or 46%, and $471.1 million, or 36%, respectively, as compared with the prior year periods. The increases are primarily due to the $260.4 million and $382.9 million increases in telecommunications revenue in the respective periods. The increase in the three months ended September 30, 2001 was partially offset by a decrease of $42.6 million in gas revenue primarily due to the sale of our Louisiana gas operations on July 2, 2001.
ILEC REVENUE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Network access services $ 189,034 $ 114,725 65% $ 461,549 $ 330,018 40% Local network services 194,398 83,633 132% 390,802 231,557 69% Long distance and data services 71,860 26,422 172% 135,144 75,404 79% Directory services 25,253 9,376 169% 46,942 27,299 72% Other 26,657 12,611 111% 48,898 36,197 35% -------------- ------------- ------------- -------------- $ 507,202 $ 246,767 106% $ 1,083,335 $ 700,475 55% ============== ============= ============= ==============
We acquired the Verizon Nebraska access lines on June 30, 2000, the Verizon Minnesota access lines on August 31, 2000, the Qwest North Dakota access lines on October 31, 2000 and the Verizon Illinois/Wisconsin access lines on November 30, 2000 and Frontier on June 29, 2001 (collectively referred to as the Acquisitions). The Acquisitions contributed $245.5 million and $350.3 million to the increase in revenue for the three and nine months ended September 30, 2001, respectively, as compared with the prior year periods. The following revenue and expense discussion identifies as acquisition activity only that activity for which there was no corresponding amount in the prior period (for example, the Verizon Nebraska results are not presented in "Acquisitions" for the three months ended September 30, 2001).
ACCESS LINES As of September 30, --------------------------------------------- 2001 2000 % Change -------------- ------------ ------------- Excluding acquisitions 1,261,406 1,223,876 3% Acquisitions 1,229,058 - --------------- ------------ Total 2,490,464 1,223,876 =============== ============
MINUTES OF USE* (In millions) For the three months ended September 30, For the nine months ended September 30, ------------------------------------------- ------------------------------------------- 2001 2000 % Change 2001 2000 % Change ------------- ------------- -------------- ------------ ------------- ------------- Excluding acquisitions 1,676 1,454 15% 5,037 4,157 21% Acquisitions 1,426 - 1,817 - ------------- ------------- ------------ ------------- Total 3,102 1,454 6,854 4,157 ============= ============= ============ =============
*Acquisitions represent minutes of use from entities acquired after September 30, 2000. Network access services revenue for the three months ended September 30, 2001 increased $74.3 million, or 65%, as compared with the prior year period primarily due to the impact of the Acquisitions which contributed $62.9 million to the increase. Growth in special access and subsidies contributed $8.1 million and $4.9 million, respectively. These increases were partially offset by $3.3 million in rate decreases in effect as of July 1, 2001. Network access also includes a reclassification of $4.0 million in revenue reported as local network services revenue in the prior year. 26 Network access services revenue for the nine months ended September 30, 2001 increased $131.5 million, or 40%, as compared with the prior year period primarily due to the impact of the Acquisitions which contributed $107.4 million to the increase. Growth in minutes of use contributed $3.7 million and growth in special access and subsidies contributed $11.5 million and $12.3 million, respectively. These increases were partially offset by $7.7 million from the effect of the FCC's CALLS mandate which reduced access charges paid by long distance companies and $3.3 million in rate decreases in effect as of July 1, 2001. Network access also includes a reclassification of $10.3 million in revenue reported as local network services revenue in the prior year. Local network services revenue for the three months ended September 30, 2001 increased $110.8 million, or 132%, as compared with the prior year period primarily due to the impact of the Acquisitions which contributed $110.6 million to the increase and growth in enhanced services of $3.2 million. Local network services revenue also reflects a reduction for the reclassification of $4.0 million in revenue reported as network access revenue in the prior year. Local network services revenue for the nine months ended September 30, 2001 increased $159.2 million, or 69%, as compared with the prior year period primarily due to the impact of the Acquisitions which contributed $161.9 million to the increase and growth in enhanced services of $5.5 million. Local network services revenue also reflects a reduction for the reclassification of $10.3 million in revenue reported as network access revenue in the prior year. Long distance and data services revenue for the three months ended September 30, 2001 increased $45.4 million, or 172%, as compared with the prior year period primarily due to the impact of the Acquisitions, including the long-distance revenue associated with Frontier, which contributed $38.5 million to the increase, growth in Digital Subscriber Line (DSL) and Internet services of $2.1 million, growth related to data and dedicated circuits of $1.8 million and growth in long distance services of $1.4 million. Long distance and data services revenue for the nine months ended September 30, 2001 increased $59.7 million, or 79%, as compared with the prior year period primarily due to the impact of the Acquisitions, principally the long-distance and data revenue associated with Frontier, which contributed $41.6 million to the increase, growth in DSL and Internet services of $4.9 million, growth related to data and dedicated circuits of $4.3 million and growth in long distance services of $6.8 million. Directory services revenue for the three months ended September 30, 2001 increased $15.9 million, or 169%, as compared with the prior year period primarily due to the impact of the Acquisitions which contributed $15.2 million to the increase and growth of $0.7 million. Directory services revenue for the nine months ended September 30, 2001 increased $19.6 million, or 72%, as compared with the prior year period primarily due to the impact of the Acquisitions which contributed $18.5 million to the increase and growth of $1.2 million. Other revenue for the three months ended September 30, 2001 increased $14.0 million, or 111%, as compared with the prior year period. The Acquisitions contributed $18.3 million to the increase which was partially offset by a decrease of $5.4 million in miscellaneous revenue categories. Other revenue for the nine months ended September 30, 2001 increased $12.7 million, or 35%, as compared with the prior year period. The Acquisitions contributed $20.9 million to the increase which was partially offset by a decrease of $8.2 million in miscellaneous revenue categories. 27
ELI REVENUE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Network services $ 26,077 $ 21,627 21% $ 77,966 $ 54,804 42% Local telephone services 14,450 25,187 -43% 58,114 75,412 -23% Long distance services 3,131 3,728 -16% 9,314 12,590 -26% Data services 9,672 13,068 -26% 30,927 38,202 -19% -------------- ------------- ------------- -------------- 53,330 63,610 -16% 176,321 181,008 -3% Intersegment revenue * (1,081) (769) N/A (3,013) (2,096) N/A -------------- ------------- ------------- -------------- $ 52,249 $ 62,841 -17% $ 173,308 $ 178,912 -3% ============== ============= ============= ==============
*Intersegment revenue reflects revenue received by ELI from our ILEC operations. Included in revenue for the three and nine months ended September 30, 2001 is approximately $0.2 million and $4.0 million, respectively, of revenue representing a "net settlement" of past billing disputes between ELI and Qwest. Additionally, we are currently providing service to customers that have filed for protection under Chapter 11 of the Bankruptcy Code. Of our largest twenty-five customers, two are under Chapter 11 protection. These two customers contribute approximately $0.4 million of revenue monthly. Network services include Private Line Interstate (Long Haul) and Private Line Intrastate (MAN). Network services revenue for the three and nine months ended September 30, 2001 increased $4.4 million, or 21%, and $23.2 million, or 42%, respectively, as compared with the prior year periods. The increase is due to continued growth in our network and sales of additional circuits to new and existing customers. Revenue for the three and nine months ended September 30, 2001 from our Long Haul services decreased $0.1 million, or .4%, and increased $5.8 million, or 21%, respectively, as compared with the prior year periods. Revenue for the three and nine months ended September 30, 2001 from our MAN services increased $4.5 million, or 43%, and $17.4 million, or 63%, respectively, as compared with the prior year periods. Local telephone services revenue for the three and nine months ended September 30, 2001 decreased $10.7 million, or 43%, and $17.3 million, or 23%, respectively, as compared with the prior year periods. Local telephone services include ISDN PRI, dial tone, Carrier Access Billings and reciprocal compensation.
($ In thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- ISDN PRI $ 6,788 $ 9,296 -27% $ 21,572 $ 25,527 -15% Dial tone 3,614 5,509 -34% 12,845 14,258 -10% Carrier access billings 1,351 1,180 14% 5,275 6,399 -18% Reciprocal compensation 2,697 9,202 -71% 18,422 29,228 -37% -------------- ------------- ------------- -------------- $ 14,450 $ 25,187 -43% $ 58,114 $ 75,412 -23% ============== ============= ============= ==============
ISDN PRI revenue for the three and nine months ended September 30, 2001 decreased $2.5 million, or 27%, and $3.9 million, or 15%, respectively, as compared with the prior year periods primarily due to a decrease in ISDN revenue to three customers resulting from less demand for ISDN PRI trunks servicing internet routers. Dial tone revenue decreased $1.9 million, or 34%, and $1.4 million, or 10%, respectively, as compared with the prior year periods, primarily due to the bankruptcy of a customer, and decreased installation fees resulting from fewer new customers. 28 Reciprocal compensation revenue for the three and nine months ended September 30, 2001 decreased $6.5 million, or 71%, and $10.8 million, or 37%, respectively, as compared with the prior year periods. The decrease is due to a decrease in average monthly minutes processed of 211.0 million, or 18%, and 93.3 million, or 8%, for the three and nine months ended September 30, 2001, respectively, as compared with the prior year periods and lower weighted average rates per minute. ELI has various interconnection agreements with Qwest, Verizon and PacBell, the ILECs in the states in which it operates. These agreements govern reciprocal compensation relating to the transport and termination of traffic between the ILEC's networks and our network. We recognize reciprocal compensation revenues as earned, based on the terms of the interconnection agreements. Long distance services revenue for the three and nine months ended September 30, 2001 decreased $0.6 million, or 16%, and $3.3 million, or 26%, respectively, as compared with the prior year periods. The decrease is due to a decrease in wholesale average monthly minutes processed of 3.3 million, or 20%, and 4.5 million or 25%, for the three and nine months ended September 30, 2001, as compared to prior year periods. The decrease is also attributable to the discontinuation of the Voice Solutions portion of our business. Data services include Internet, RSVP, Frame Relay and other services. Data services revenue for the three and nine months ended September 30, 2001 decreased $3.4 million, or 26%, and $7.3 million, or 19%, respectively, as compared with the prior year periods, primarily due to the expiration on February 28, 2001 of an 18-month take-or-pay contract with a significant customer. This take-or-pay contract was not renewed.
GAS REVENUE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Gas revenue $ 37,717 $ 80,332 -53% $ 360,387 270,753 33%
Gas revenue for the three months ended September 30, 2001 decreased $42.6 million, or 53%, as compared with the prior year period primarily due to the sale of our Louisiana gas operations. There was no revenue from the Louisiana gas operations for the three months ended September 30, 2001 since the sale closed on July 2, 2001. Gas revenue for the nine months ended September 30, 2001 increased $89.6 million, or 33%, as compared with the prior year period, primarily due to higher purchased gas costs and increased consumption. Under tariff provisions, increases in our costs of gas purchased are largely passed on to customers. The increase was partially offset by decreased revenue due to the sale of our Louisiana gas operations on July 2, 2001. Included in gas revenue is approximately $203.5 million for the nine months ended September 30, 2001 of revenue from our Louisiana gas operations. This revenue will not continue since the sale closed on July 2, 2001.
ELECTRIC REVENUE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Electric revenue $ 63,953 $ 62,770 2% $ 174,114 $ 169,879 2%
Electric revenue for the three and nine months ended September 30, 2001 increased $1.2 million, or 2%, and $4.2 million, or 2%, respectively, as compared with the prior year periods, primarily due to customer growth and increased consumption due to warmer weather conditions. 29
COST OF SERVICES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Gas purchased $ 24,988 $ 48,182 -48% $ 252,065 $ 148,238 70% Electric energy and fuel oil purchased 36,149 32,540 11% 95,804 84,514 13% Network access 63,078 34,544 83% 132,008 108,183 22% Eliminations * (1,001) (769) N/A (2,770) (2,096) N/A -------------- ------------- ------------- -------------- $ 123,214 $ 114,497 8% $ 477,107 $338,839 41% ============== ============= ============= ==============
*Eliminations represent expenses incurred by our ILEC operations related to network services provided by ELI. Gas purchased for the three months ended September 30, 2001 decreased $23.2 million, or 48%, as compared with the prior year period, primarily due to the sale of our Louisiana gas operations. There was no gas purchased for the Louisiana gas operations for the three months ended September 30, 2001 since the sale closed on July 2, 2001. Gas purchased for the nine months ended September 30, 2001 increased $103.8 million, or 70%, as compared with the prior year period, primarily due to an increase in the cost of gas. Under tariff provisions, increases in our costs of gas purchased are largely passed on to customers. The increase was partially offset by decreased gas purchased due to the sale of our Louisiana gas operations on July 2, 2001. Included in gas purchased is approximately $161.3 million for the nine months ended September 30, 2001, respectively, of gas purchased by our Louisiana gas operations. This cost will not continue since the sale of our Louisiana gas operations closed on July 2, 2001. Electric energy and fuel oil purchased for the three and nine months ended September 30, 2001 increased $3.6 million, or 11%, and $11.3 million, or 13%, respectively, as compared with the prior year periods, primarily due to higher purchased power prices, customer growth and increased consumption due to warmer weather conditions. During the past two years the decrease in the availability of power in certain areas of the country has caused power supply costs to increase substantially, forcing companies to pay higher operating costs to operate their electric businesses. As a result, companies have attempted to offset these increased costs by either renegotiating prices with their power suppliers or passing these additional costs on to their customers through a rate proceeding. In Arizona, excessive power costs charged by our power supplier in the amount of approximately $98 million through September 30, 2001 have been incurred. We are allowed to recover these charges from ratepayers through the Purchase Power Fuel Adjustment clause. However, in an attempt to limit "rate shock" to our customers, we requested in September 2001 that this deferred amount, plus interest, be recovered over a seven-year period. As a result, we have deferred these costs on the balance sheet in anticipation of recovery through the regulatory process. On July 16, 2001, we terminated our existing contract with Arizona Public Service and entered into a new seven-year purchase power agreement. This agreement allows us to purchase all power required for operations at a fixed rate per kilowatt hour. This agreement is retroactive to June 1, 2001 and will mitigate further increases in the deferred power cost account. Network access expenses for the three months ended September 30, 2001 increased $28.5 million, or 83%, as compared with the prior year period, primarily due to the impact of the Acquisitions and increased circuit expense associated with additional data product introductions partially offset by a reduction in long distance access expense related to rate changes in the ILEC sector. Network access expenses for the nine months ended September 30, 2001 increased $23.8 million, or 22%, as compared with the prior year period, primarily due to the impact of the Acquisitions and increased circuit expense associated with additional data product introductions and an Internet remote call forwarding adjustment partially offset by a reduction in long distance access expense related to rate changes in the ILEC sector and reduced variable costs at ELI. 30
DEPRECIATION AND AMORTIZATION EXPENSE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Depreciation expense $ 141,709 $ 92,004 54% $ 335,452 $ 273,198 23% Amortization expense 51,953 3,855 1248% 78,282 5,285 1381% -------------- ------------- ------------- -------------- $ 193,662 $ 95,859 102% $ 413,734 $ 278,483 49% ============== ============= ============= ==============
Depreciation expense for the three and nine months ended September 30, 2001 increased $49.7 million, or 54%, and $62.3 million, or 23%, respectively, as compared with the prior year periods, primarily due to the impact of the Acquisitions of $47.1 million and $78.5 million, respectively, and $8.8 million of accelerated depreciation related to the change in useful life of our accounting and human resource systems and our Plano, Texas office building, land, furniture and fixtures as a result of our restructuring. The accelerated depreciation will continue over the next nine months. The incremental increase to depreciation is estimated to be $13.2 million, $11.9 million and $.9 million for the fourth quarter of 2001, first quarter of 2002 and second quarter of 2002, respectively. Higher property, plant and equipment balances in the telecommunications and ELI sectors also contributed to the increase. The increases were partially offset by decreased depreciation expense related to our classifying our gas and electric sectors as "assets held for sale" which requires us to cease depreciating these assets. Such depreciation expense would have been an additional $11.4 million and $39.5 million for the three and nine months ended September 20, 2001, respectively. The increase for the nine months ended September 30, 2001 is also offset by $17.4 million in the prior year period of accelerated depreciation related to the change in useful life of an operating system in the telecommunications sector. Amortization expense for the three and nine months ended September 30, 2001 increased $48.1 million, or 1,248%, and $73.0 million, or 1,381%, respectively, as compared with the prior year periods, primarily due to amortization of goodwill of $47.6 million and $71.0 million, respectively, related to the Acquisitions.
OTHER OPERATING EXPENSES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Operating expenses $ 203,625 $ 143,888 42% $ 506,861 $ 427,465 19% Taxes other than income taxes 34,789 25,704 35% 85,062 80,793 5% Sales and marketing 29,478 17,781 66% 71,049 55,169 29% -------------- ------------- ------------- -------------- $ 267,892 $ 187,373 43% $ 662,972 $ 563,427 18% ============== ============= ============= ==============
Operating expenses for the three and nine months ended September 30, 2001 increased $59.7 million, or 42%, and $79.4 million, or 19%, as compared with the prior year periods, primarily due to increased operating expenses due to the impact of the Acquisitions. The increases were partially offset by decreased operating expenses at ELI primarily due to a reduction in personnel, increased operating efficiencies in the telecommunications sector, decreased operating expenses in the gas sector primarily due to the sale of the Louisiana gas operations on July 2, 2001, and a decrease in compensation expense related to variable stock plans. A $1.00 change in our stock price can impact compensation expense by $1.0 million annually. Taxes other than income taxes increased $9.1 million, or 35%, and $4.3 million, or 5%, respectively, as compared with the prior year periods, primarily due the impact of the Acquisitions. The increase for the nine months ended September 30, 2001 was partially offset by franchise tax refunds received by the gas sector. Sales and marketing expenses increased $11.7 million, or 66%, and $15.9 million, or 29%, respectively, as compared with the prior year periods, primarily due to the impact of the Acquisitions and increased telemarketing costs in the telecommunications sector. 31
RESTRUCTURING EXPENSES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Restructuring expenses $ 13,002 $ - 100% $ 13,002 $ - 100%
Restructuring expenses of $13.0 million for the three and nine months ended September 30, 2001 is related to our plan to close our operations support center in Plano, Texas by April 2002. The restructuring resulted in the reduction of 749 employees. These expenses primarily consist of severance, benefits, retention, early lease termination costs and other planning and communication costs. We expect to incur additional costs of approximately $3,128,000 through the first quarter of 2002.
ACQUISITION ASSIMILATION EXPENSE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Acquisition assimilation expense $ 5,119 $ 12,539 -59% $ 17,665 $ 24,130 -27%
Acquisition assimilation expense of $5.1 million and $12.5 million for the three months ended September 30, 2001 and 2000, respectively, and $17.7 million and $24.1 million for the nine months ended September 30, 2001 and 2000, respectively, is related to the completed and pending acquisitions. These expenses represent incremental costs incurred by us in advance of the respective acquisitions which are solely related to preparation for businesses to be acquired and have no relationship with then existing operations, and as a result, have no revenue offset. Costs incurred during 2001 were significant due to the unprecedented level of planned and completed acquisitions. We anticipate a lower level of assimilation expense associated with our pending acquisitions in California and Arizona which are expected to close in 2002. Material components of acquisition expenses include incremental pre-staffing and training costs incurred in anticipation of acquisitions, incremental costs associated with the integration of the acquired networks into our existing networks and network operating center, and costs associated with the preparation for the conversion of billing, accounting and plant records.
OPERATING INCOME ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Operating Income $ 58,232 $ 42,442 37% $ 206,664 $ 115,140 79%
Operating income for the three and nine months ended September 30, 2001 increased $15.8 million, or 37%, and $91.5 million, or 79%, respectively, as compared with prior year periods, primarily due to ILEC growth and acquisitions partially offset by the restructuring expenses and increased ELI losses. Included in operating income is approximately $11.8 million of operating income for the nine months ended September 30, 2001 from our Louisiana gas operations. This operating income will not continue since the sale of our Louisiana gas operations closed on July 2, 2001.
INVESTMENT AND OTHER INCOME, NET / MINORITY INTEREST INTEREST EXPENSE/INCOME TAXES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Investment and other income, net $ 3,070 $ 5,096 -40% $ 16,495 $ 14,913 11% Gain on sale of assets $ 139,304 $ - 100% $ 139,304 $ - 100% Minority interest $ - $ - - $ - $ 12,222 -100% Interest expense $ 123,452 $ 49,559 149% $ 258,033 $ 128,899 100% Income taxes $ 39,610 $ (202) - $ 49,183 $ 5,096 -
32 Investment and other income, net for the three months ended September 30, 2001 decreased $2.0 million, or 40%, as compared with the prior year period, primarily due to lower average investment balances. Investment and other income, net for the nine months ended September 30, 2001 increased $1.6 million, or 11%, as compared with the prior year period, primarily due to increased income from higher money market balances resulting from the temporary investment of proceeds from debt issuances, an increase in the equity component of the allowance for funds used during construction (AFUDC) and increases in miscellaneous income items. Gain on sale of assets for the three and nine months ended September 30, 2001 represents the gain recognized from the sale of our Louisiana Gas operations to Atmos Energy Corporation on July 2, 2001. Minority interest, as presented on the income statement, represents the minority's share of ELI's net loss which we were able to recognize in prior periods to the extent of minority interest on our balance sheet. As of June 30, 2000, the minority interest on the balance sheet had been reduced to zero. Therefore, from that point going forward, we discontinued recording minority interest income on our income statement, as there is no obligation for the minority interests to provide additional funding for ELI. Interest expense for the three months ended September 30, 2001 increased $73.9 million, or 149%, as compared with the prior year periods, primarily due to $39.2 million of interest expense on our $1.75 billion of notes issued in May 2001, $17.5 million of interest expense on our $1.75 billion of notes issued in August, 2001, $2.9 million of interest expense on our lines of credit, $8.0 million of interest expense on our equity units issued in June 2001 and $3.1 million for amortization of costs associated with our committed bank credit facilities and $3.2 million of increased amortization of debt discount expense. During the three months ended September 30, 2001, we had average long-term debt outstanding of $6.3 billion compared to $2.7 billion during the three months ended September 30, 2000. Our composite average borrowing rate paid for the three months ended September 30, 2001 as compared with the prior year period was 51 basis points higher, increasing from 6.87% to 7.38% due to the impact of higher interest rates on our new borrowings. Interest expense for the nine months ended September 30, 2001 increased $129.1 million, or 100%, as compared with the prior year periods, primarily due to $56.1 million of interest expense on our $1.75 billion of notes issued in May 2001, $17.5 million of interest expense on our $1.75 billion of notes issued in August 2001, $26.9 million of interest expense on our lines of credit, a $4.2 million increase in ELI's interest expense related to increased borrowings, $9.2 million for amortization of costs associated with our committed bank credit facilities, $3.7 million of increased amortization of debt discount expense and $8.9 million of interest expense on our equity units issued in June. During the nine months ended September 30, 2001, we had average long-term debt outstanding of $4.7 billion compared to $2.5 billion during the nine months ended September 30, 2000. Our composite average borrowing rate paid for the nine months ended September 30, 2001 as compared with the prior year period was 63 basis points higher, increasing from 6.77% to 7.40%, due to the impact of higher interest rates on our new borrowings. Income taxes for the three and nine months ended September 30, 2001 increased $39.8 million and $44.1 million, respectively, as compared with the prior year periods, primarily due to changes in taxable income. The estimated annual effective tax rate for 2001 and 2000 is 37%. Income tax expense for the three and nine months ended September 30, 2000 includes adjustments made in the current period to arrive at this rate.
DISCONTINUED OPERATIONS ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Revenue $ 34,451 $ 29,272 18% $ 87,880 $ 79,913 10% Operating income $ 14,832 $ 9,716 53% $ 26,777 $ 19,746 36% Net income $ 7,199 $ 4,838 49% $ 11,675 $ 8,182 43%
Revenue from discontinued operations for the three and nine months ended September 30, 2001 increased $5.2 million, or 18%, and $8.0 million, or 10%, respectively, as compared with the prior year periods, primarily due to customer growth and new water sales related to the completion of a multi-year $50 million water pipeline project in Illinois in March 2001. Operating income from discontinued operations for the three and nine months ended September 30, 2001 increased $5.1 million, or 53%, and $7.0 million, or 36%, respectively, as compared with the prior year periods, primarily due to customer growth and new water sales related to the completion of a water pipeline project in Illinois in March 2001. 33 Net income from discontinued operations for the three and nine months ended September 30, 2001 increased $2.4 million, or 49%, and $3.5 million, or 43%, respectively, as compared with prior year periods, primarily due to the respective changes in operating income net of income taxes.
EXTRAORDINARY EXPENSE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax $ 43,631 $ - 100% $ 43,631 $ - 100%
Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax, of $43.6 million for the three and nine months ended September 30, 2001, relates to the write off of regulatory assets and liabilities previously recognized under SFAS 71. Deregulation of most of our local exchange telephone properties required us to cease application of SFAS 71 in the third quarter, resulting in a non cash extraordinary charge of $43.6 million, net of tax, in our income statement. See discussion in Note 11 of the financial statements.
NET INCOME/AVAILABLE TO COMMON SHAREHOLDERS/ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS PER COMMON SHARE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, ---------------------------------------- ---------------------------------------- 2001 2000 % Change 2001 2000 % Change -------------- ------------- ----------- ------------- -------------- ----------- Net income $ (441) $ 1,466 -130% $ 18,633 $ 11,804 58% Carrying cost of equity forward contracts 1,003 - n/a 13,650 - n/a -------------- ------------- ----------- ------------- -------------- ----------- Available to common shareholders $(1,444) $ 1,466 -198% $ 4,983 $ 11,804 -58% ============== ============= =========== ============= ============== =========== Net income available to common shareholders per common share $ (0.01) $ 0.01 -100% $ 0.02 $ 0.05 -60%
Net income for the three months ended September 30, 2001 decreased $1.9 million, or 130%, as compared with the prior year period, primarily due to restructuring expenses, extraordinary expense and increased interest expense partially offset by increased operating income and the gain from the sale of our Louisiana gas operations. Net income for the nine months ended September 30, 2001 increased $6.8 million, or 58%, as compared with the prior year period, primarily due to increased operating income and the gain from the sale of our Louisiana gas operations partially offset by restructuring expenses, extraordinary expense and increased interest expense. During 2000, we entered into an equity forward contract for the acquisition of 9,140,000 shares as part of our share repurchase programs. Pursuant to transition accounting rules, commencing December 31, 2000 through June 30, 2001 we were required to report our equity forward contract as a reduction to shareholders' equity and a component of temporary equity for the gross settlement amount of the contract ($150,013,000). On June 28, 2001, we entered into a master confirmation agreement that amended the equity forward contract to no longer permit share settlement of the contract. We were required to report the accrued carrying costs as a reduction of net income available to common shareholders. Accordingly, on June 29, 2001, we accrued $42,995,000 to net cash settle a portion of the contract, plus $12,647,000 in associated carrying costs. At September 30, 2001, we settled the contract by paying the redemption amount of $107,018,000 plus $1,003,000 in associated carrying costs. 34 Item 3. 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. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity and commodity 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. Our primary market risk exposures are interest rate risk and equity and commodity 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 and long term debt and capital lease obligations. The long term debt and capital lease obligations include various instruments with various maturities and weighted average interest rates. 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, a majority of our borrowings have fixed interest rates and variable rate debt is refinanced when advantageous. Consequently, we have no material future earnings or cash flow exposures from changes in interest rates on our long-term debt and capital lease obligations. A hypothetical 10% 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 September 30, 2001, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows. Sensitivity analysis of interest rate exposure At September 30, 2001, the fair value of our long-term debt and capital lease obligations was estimated to be approximately $6,244.6 million, based on our overall weighted average rate of 7.8% and our overall weighted maturity of approximately 12 years. There has been no material change in the weighted average maturity applicable to our obligations since December 31, 2000. However, the overall weighted average interest rate applicable to our obligations has increased by approximately 85 basis points since December 31, 2000. A hypothetical increase of 78 basis points (10% of our overall weighted average borrowing rate) would result in an approximate $305.5 million decrease in the fair value of our fixed rate obligations. Equity Price Exposure Our exposure to market risk for changes in equity prices relate primarily to the equity portion of our investment portfolio. The equity portion of our investment portfolio includes marketable equity securities of media and telecommunications companies. Sensitivity analysis of equity price exposure At September 30, 2001, the fair value of the equity portion of our investment portfolio was estimated to be $117.1 million. A hypothetical 10% decrease in quoted market prices would result in an approximate $11.7 million decrease in the fair value of the equity portion of our investment portfolio. 35 Commodity Price Exposure We purchase monthly gas future contracts to manage well-defined commodity price fluctuations, caused by weather and other unpredictable factors, associated with our commitments to deliver natural gas to customers at fixed prices. Customers pay for gas service based upon prices that are defined by a tariff. A tariff is an agreement with the public utility commission that determines the price that we will charge to the customer. Fluctuations in gas prices are routinely handled through a pricing mechanism called the purchase gas adjustor (PGA). The PGA allows for a process whereby any price change from the agreed upon tariff will be settled as a pass through to the customer. As a result, if gas prices increase, the PGA will increase and pass more costs on to the customer. If gas prices decrease, the PGA will decrease and refunds will be provided to the customer. This commodity activity relates to our gas businesses and is not material to our consolidated financial position or results of operations. In all instances we take physical delivery of the gas supply purchased or contracted for. These gas future contracts and gas supply contracts are considered derivative instruments as defined by SFAS 133. However, such contracts are excluded from the provisions of SFAS 133 since they are purchases made in the normal course of business and not for speculative purposes. Based upon our overall commodity price exposure at September 30, 2001, a material near-term change in the quoted market price of gas would not materially affect our consolidated financial position or results of operations. Disclosure of limitations of sensitivity analysis Certain shortcomings are inherent in the method of analysis presented in the computation of fair value of financial instruments. Actual values may differ from those presented should market conditions vary from assumptions used in the calculation of the fair value. This analysis incorporates only those exposures that exist as of September 30, 2001. It does not consider those exposures or positions which could arise after that date. As a result, our ultimate exposure with respect to our market risks will depend on the exposures that arise during the period and the fluctuation of interest rates and quoted market prices. 36 PART II. OTHER INFORMATION CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Item 1. Legal Proceedings ----------------- On July 20, 2001, we notified Qwest Corporation that we were terminating eight acquisition agreements with Qwest relating to telephone exchanges in Arizona, Colorado, Idaho/ Washington, Iowa, Minnesota, Montana, Nebraska and Wyoming. On July 23, 2001, Qwest informed us that it intends to file a notice of claim for arbitration in Denver, Colorado under the rules of the American Arbitration Association with respect to the terminated acquisition agreements. Qwest asserts that we wrongfully terminated these agreements and is seeking approximately $64 million in damages, which is the aggregate of liquidated damages under letters of credit established in the terminated acquisition agreements. We intend to file a notice of claim in the same arbitration proceeding, contesting Qwest's asserted claims and asserting substantial claims against Qwest for material breaches of representations, warranties and covenants in the terminated acquisition agreements and in the acquisition agreement relating to North Dakota assets that we purchased from Qwest. We are party to proceedings arising in the normal course of our business. The outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage, will not have a material adverse effect on our financial position, results of operations, or our cash flows. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- None. Item 3. Defaults upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- On April 2, 2001, ELI received a notice from the Nasdaq Stock Market, Inc. that its stock would be subject to delisting from the Nasdaq National Market after July 2, 2001 because its Class A Common Stock failed to maintain a minimum bid price. On June 29, 2001, ELI filed an application for its listing to be transferred to the Nasdaq SmallCap Market. As part of the application process, we converted approximately 25.3 million shares of our Class B Common Stock into the same number of shares of ELI's Class A Common Stock on August 27, 2001. On August 31, 2001, ELI received a notice from Nasdaq indicating that it had failed to comply with the shareholders' equity, market capitalization, market value/total assets and revenue and minimum bid price requirements for continued listing, and that ELI's stock was, therefore, subject to delisting from the Nasdaq National Market. ELI was granted a hearing before a Nasdaq Listing Qualifications Panel to review the delisting. On September 27, 2001, Nasdaq implemented a moratorium on the minimum bid price and market value of public float requirements for continued listing on the Nasdaq Stock Market until January 2, 2002. ELI received a notice from Nasdaq on that date stating that as a result of that action the hearing scheduled regarding the delisting of ELI's stock had been canceled and ELI's hearing file closed for now. As of January 2, 2002, compliance with the minimum requirements for listing on the Nasdaq National and SmallCap Markets will start anew. If ELI does not meet these requirements for 30 consecutive days, and is unable to regain compliance within 90 days, ELI's stock could be subject to delisting at that time. It is uncertain whether ELI will be able to meet the applicable listing requirements. If the requirements are not met, ELI's Class A Common Stock may not be eligible for trading on Nasdaq and ELI expects it would trade in the over-the-counter market. If ELI's Class A Common Stock fails to remain included on Nasdaq, the delisting may have a material adverse impact on the market value of ELI's Class A Common Stock. 37 Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits: 10.38 Competitive Advance and Revolving Credit Facility Agreement for $680,000,000 dated October 24, 2001. 10.39 Loan Agreement between Citizens Communications Company and Rural Telephone Finance Cooperative for $200,000,000 dated October 24, 2001. b) Reports on Form 8-K: We filed on Form 8-K on July 2, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Exhibits," a press release announcing the completion of our acquisition of Global Crossing's local exchange telephone business, which operates under the name Frontier Telephone. We filed on Form 8-K on July 2, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Exhibits," a press release announcing that we had completed the sale of our Louisiana gas operations to Atmos Energy Corporation for approximately $365 million in cash. We filed on Form 8-K on July 24, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Exhibits," a press release announcing that we delivered a notice of termination of our pending acquisition agreements with Qwest Communications International, Inc. We filed on Form 8-K on August 10, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Pro Forma Financial Information and Exhibits," financial statements of the Frontier business acquired and pro forma financial information related to the Frontier business acquired and the disposition of our Louisiana gas operations for period ended March 31, 2001. We filed on Form 8-K on August 10, 2001 under Item 7 "Financial Statements, Exhibits," a press release announcing earnings for the quarter and six months ended June 30, 2001 and certain financial and operating data. We filed on Form 8-K on August 15, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Exhibits," a press release announcing that we priced a private offering $1.75 billion of senior notes for resale under Rule 144A of the Securities Act of 1933. We filed on Form 8-K on August 22, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Exhibits," certain agreements related to our private offering of $1.75 billion of senior notes. We filed on Form 8-K on September 17, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Pro Forma Financial Information and Exhibits," financial statements of the Frontier business acquired and pro forma financial information related to the Frontier business acquired, the remaining Verizon acquisitions and the public utilities services dispositions for period ended June 30, 2001. We filed on Form 8-K on September 21, 2001 under Item 5 "Other Events" and Item 7 "Financial Statements, Exhibits," a press release announcing we received California PUC approval to sell our water and wastewater operations. 38 CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CITIZENS COMMUNICATIONS COMPANY ------------------------------- (Registrant) By: /s/ Robert J. Larson --------------------------------------- Robert J. Larson Vice President and Chief Accounting Officer Date: November 13, 2001 39 EX-10 3 finalagree.txt FINAL AGREEMENT $680,000,000 COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Dated as of October 24, 2001 among CITIZENS COMMUNICATIONS COMPANY as Borrower and THE LENDERS NAMED HEREIN as Lenders CITIBANK, N.A. as Syndication Agent and TD SECURITIES (USA) INC. BEAR STEARNS CORPORATE LENDING as Co-Documentation Agents and THE CHASE MANHATTAN BANK as Administrative Agent ___________________________ J.P. MORGAN SECURITIES INC. SALOMON SMITH BARNEY INC. Joint Lead Arrangers and Joint Bookrunners
Table of Contents Page ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms...............................................................................1 SECTION 1.02. Terms Generally............................................................................13 ARTICLE II THE CREDITS SECTION 2.01. Commitments................................................................................13 SECTION 2.02. Loans......................................................................................14 SECTION 2.03. Competitive Bid Procedure..................................................................15 SECTION 2.04. Standby Borrowing Procedure................................................................17 SECTION 2.05. Conversions................................................................................18 SECTION 2.06. Fees.......................................................................................18 SECTION 2.07. Repayment of Loans.........................................................................19 SECTION 2.08. Interest on Loans..........................................................................19 SECTION 2.09. Default Interest...........................................................................20 SECTION 2.10. Alternate Rate of Interest.................................................................20 SECTION 2.11. Changes in Commitments.....................................................................21 SECTION 2.12. Prepayment.................................................................................22 SECTION 2.13. Reserve Requirements; Change in Circumstances..............................................23 SECTION 2.14. Change in Legality.........................................................................25 SECTION 2.15. Indemnity..................................................................................25 SECTION 2.16. Pro Rata Treatment.........................................................................26 SECTION 2.17. Sharing of Setoffs.........................................................................26 SECTION 2.18. Payments...................................................................................27 SECTION 2.19. Taxes......................................................................................27 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. Organization; Powers; Governmental Approvals...............................................30 SECTION 3.02. Financial Statements.......................................................................30 SECTION 3.03. No Material Adverse Change.................................................................31 SECTION 3.04. Title to Properties; Possession Under Leases...............................................31 SECTION 3.05. Ownership of Subsidiaries..................................................................31 SECTION 3.06. Litigation; Compliance with Laws...........................................................31 SECTION 3.07. Agreements.................................................................................32 SECTION 3.08. Federal Reserve Regulations................................................................32 SECTION 3.09. Investment Company Act; Public Utility Holding Company Act.................................33 SECTION 3.10. Use of Proceeds............................................................................33 SECTION 3.11. Tax Returns................................................................................33 SECTION 3.12. No Material Misstatements..................................................................33 SECTION 3.13. Employee Benefit Plans.....................................................................33 SECTION 3.14. Insurance..................................................................................34 ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Each Borrowing.............................................................................34 SECTION 4.02. Effective Date.............................................................................34 ARTICLE V AFFIRMATIVE COVENANTS SECTION 5.01. Existence; Businesses and Properties.......................................................36 SECTION 5.02. Financial Statements, Reports, etc.........................................................37 SECTION 5.03. Litigation and Other Notices...............................................................38 SECTION 5.04. Maintaining Records........................................................................38 SECTION 5.05. Use of Proceeds............................................................................38 ARTICLE VI NEGATIVE COVENANTS SECTION 6.01. Liens; Restrictions on Sales of Receivables................................................39 SECTION 6.02. Ownership of the Principal Subsidiaries....................................................39 SECTION 6.03. Asset Sales................................................................................40 SECTION 6.04. Mergers....................................................................................40 SECTION 6.05. Restrictions on Dividends..................................................................40 SECTION 6.06. Transactions with Affiliates...............................................................41 SECTION 6.07. Minimum Consolidated Net Worth.............................................................41 SECTION 6.08. Minimum Access Lines.......................................................................41 ARTICLE VII EVENTS OF DEFAULT ARTICLE VIII THE ADMINISTRATIVE AGENT ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices....................................................................................46 SECTION 9.02. Survival of Agreement......................................................................46 SECTION 9.03. Binding Effect.............................................................................46 SECTION 9.04. Successors and Assigns.....................................................................47 SECTION 9.05. Expenses; Indemnity........................................................................49 SECTION 9.06. Right of Setoff............................................................................50 SECTION 9.07. Applicable Law.............................................................................51 SECTION 9.08. Waivers; Amendment.........................................................................51 SECTION 9.09. Interest Rate Limitation...................................................................51 SECTION 9.10. Entire Agreement...........................................................................52 SECTION 9.11. Waiver of Jury Trial.......................................................................52 SECTION 9.12. Severability...............................................................................52 SECTION 9.13. Counterparts...............................................................................52 SECTION 9.14. Headings...................................................................................52 SECTION 9.15. Jurisdiction; Consent to Service of Process................................................53 Exhibit A-1 Form of Competitive Bid Request Exhibit A-2 Form of Notice of Competitive Bid Request Exhibit A-3 Form of Competitive Bid Exhibit A-4 Form of Competitive Bid Accept/Reject Letter Exhibit A-5 Form of Standby Borrowing Request Exhibit A-6 Form of Conversion Request Exhibit B Form of Assignment and Acceptance Exhibit C Form of Opinion of Counsel to Borrower Exhibit D-1 Form of Standby Note Exhibit D-2 Form of Competitive Note Schedule 2.01 Lenders' Commitments
COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, dated as of October 24, 2001, among CITIZENS COMMUNICATIONS COMPANY, a Delaware corporation (the "Borrower"), the Lenders listed in Schedule 2.01 (together with any assignees pursuant to Section 9.04(b), the "Lenders") and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). The Borrower has requested the Lenders to extend credit to the Borrower in order to enable it to borrow on a standby revolving credit basis on and after the date hereof and at any time and from time to time prior to the Maturity Date (as hereinafter defined) a principal amount not in excess of $680,000,000 (as such amount may be modified pursuant to Section 2.11 hereof) at any time outstanding. The Borrower has also requested the Lenders to provide a procedure pursuant to which the Borrower may invite the Lenders to bid on an uncommitted basis on short-term borrowings by the Borrower. The proceeds of such borrowings are to be used for general corporate purposes, including working capital and support of commercial paper issuances and Securitization Transactions (as hereinafter defined) permitted hereunder. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions herein set forth. Accordingly, the Borrower, the Lenders and the Administrative Agent agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Access Lines" shall mean, on any date, the total number of telephony access lines provided by the Borrower and its Subsidiaries (other than Non-Recourse Joint Ventures) through their owned telecommunications system network facilities (excluding lines provided through resale agreements) to customers of the Borrower and its Subsidiaries (other than Non-Recourse Joint Ventures) whose service payments are not overdue to a point where service is generally disconnected. "Administrative Fees" shall have the meaning assigned to such term in Section 2.06(b). "Administrative Questionnaire" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability of the Administrative Agent to obtain sufficient quotations, the Alternate Base Rate shall be determined without regard to clause (ii) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Rate" shall mean, with respect to any ABR Loan, Eurodollar Standby Loan or Facility Fee, as the case may be, at all times during which any "Applicable Rating Level" set forth below is in effect, the rate per annum set forth below under the appropriate caption next to such Applicable Rating Level:
Applicable S&P Applicable Rate Applicable Rate Rating Rating/Moody's Applicable Rate for Eurodollar for Utilization Level Rating for ABR Loans Standby Loans Facility Fee Margin - -------------------------------------------------------------------------------------------------------------------- I A-or higher/A3 0.000% 0.425% 0.200% 0.125% or higher - -------------------------------------------------------------------------------------------------------------------- II BBB+/Baa1 0.000% 0.525% 0.225% 0.125% - -------------------------------------------------------------------------------------------------------------------- III BBB/Baa2 0.000% 0.625% 0.250% 0.125% - -------------------------------------------------------------------------------------------------------------------- IV BBB-/Baa3 0.000% 0.825% 0.300% 0.125% - -------------------------------------------------------------------------------------------------------------------- V BB+/Bal 0.000% 0.975% 0.400% 0.125% - -------------------------------------------------------------------------------------------------------------------- VI lower than BB+/lower 0.125% 1.125% 0.500% 0.125% than Ba1
provided, that the Applicable Rate for Eurodollar Standby Loans and ABR Loans shall be increased by the rate per annum set forth above under the caption "Utilization Margin" that corresponds to the Applicable Rating Level used to determine such Applicable Rates at any time during a Utilization Period. For purposes of the foregoing, the Applicable Rating Level shall be determined in accordance with the then applicable S&P Rating and the then applicable Moody's Rating. In the event that the S&P Rating and the Moody's Rating do not correspond to the same Applicable Rating Level, then the higher of the two ratings shall determine the Applicable Rating Level; provided, however, that if there is a difference of two or more levels between the Applicable Rating Level corresponding to the S&P Rating and the Applicable Rating Level corresponding to the Moody's Rating, then the Applicable Rating Level that is one level above the Applicable Rating Level corresponding to the lower of the S&P Rating and the Moody's Rating shall apply. In the event that no S&P Rating or no Moody's Rating shall be in effect (other than by reason of the circumstances referred to in the last sentence of this definition), then the Applicable Rating Level shall be Applicable Rating Level VI. The Applicable Rating Level shall be redetermined on the date of announcement of a change in the S&P Rating or the Moody's Rating. A change in the Applicable Rate resulting from a change in the Applicable Rating Level shall become effective on such date. If the rating system of S&P or Moody's shall change, or if either such Person shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such Person and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. "Asset Exchange" shall mean the exchange or other transfer of telecommunications assets between or among the Borrower and another Person or other Persons in connection with which the Borrower would transfer telecommunications assets and/or other property in consideration of the receipt of telecommunications assets and/or other property having a fair market value substantially equivalent to those transferred by the Borrower (as determined in good faith by the Borrower's Board of Directors); provided that the principal value of the assets being transferred to the Borrower shall be represented by telecommunications assets. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B or any other form approved by the Administrative Agent. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) or Converted on a single date and as to which a single Interest Period is in effect. All Loans of the same Type, having the same Interest Period and made or Converted on the same day shall be deemed a single Borrowing hereunder until repaid or next Converted. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person shall mean the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. A "Change in Control" shall be deemed to have occurred if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing 50% or more of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; or (b) a majority of the seats (other than vacant seats) on the board of directors of the Borrower shall at any time have been occupied by Persons who were neither (i) nominated by the management of the Borrower, nor (ii) appointed by directors so nominated; or (c) any Person or group shall otherwise directly or indirectly Control the Borrower. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender hereunder as set forth in Schedule 2.01 hereto, as such Lender's Commitment may be modified from time to time pursuant to Section 2.11 or Section 2.13(f). Unless earlier terminated pursuant to the terms of this Agreement, the Commitments shall automatically and permanently terminate on the Maturity Date. "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by the Borrower pursuant to Section 2.03(d) in the form of Exhibit A-4. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Lender pursuant to Section 2.03(b), (i) in the case of a Eurodollar Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03 in the form of Exhibit A-1. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted by the Borrower under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a Loan from a Lender to the Borrower pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be a Eurodollar Competitive Loan or a Fixed Rate Loan. "Consolidated Net Worth" shall mean, as at any date of determination, the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries, including redeemable preferred securities where the redemption date occurs after the Maturity Date, mandatorily redeemable convertible preferred securities, mandatorily convertible Indebtedness (or Indebtedness subject to mandatory forward purchase contracts for equity or similar securities) and minority equity interests in other persons, as determined on a consolidated basis in conformity with GAAP consistently applied. For the purpose of calculating "Consolidated Net Worth", the consolidated stockholders' equity of any Non-Recourse Joint Venture and its subsidiaries shall be excluded from the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries. "Consolidated Tangible Assets" of any Person shall mean total assets of such Person and its consolidated Subsidiaries, determined on a consolidated basis, less goodwill, patents, trademarks and other assets classified as intangible assets in accordance with GAAP. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and "Controlling" and "Controlled" shall have meanings correlative thereto. "Conversion", "Convert" or "Converted" shall mean the conversion of any Standby Loan of one Type into a Standby Loan of another Type, or the selection of a new, or the renewal of the same, Interest Period for any such Standby Loan, as the case may be, pursuant to Section 2.05. "Conversion Request" shall mean a request made pursuant to Section 2.05 in the form of Exhibit A-6. "Default" shall mean any event or condition which upon notice, lapse of time, or both would constitute an Event of Default. "Dollars" or "$" shall mean lawful money of the United States of America. "Effective Date" shall mean the date on which the conditions specified in Section 4.02 are satisfied (or waived in accordance with Section 9.08). "Environmental Laws" shall mean all national, federal, state, provincial, municipal or local laws, statutes, ordinances, orders, judgments, decrees, injunctions, writs, policies and guidelines (having the force of law), directives, approvals, notices, rules and regulations and other applicable laws relating to environmental or occupational health and safety matters, including those relating to the Release or threatened Release of Specified Substances and to the generation, use, storage or transportation of Specified Substances, each as in effect as of the date of determination. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA. "ERISA Termination Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA (other than a "Reportable Event" not subject to the provision for 30-day notice to the PBGC under such regulations), or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceeding to terminate a Plan by the PBGC or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Competitive Borrowing" shall mean a Borrowing comprised of Eurodollar Competitive Loans. "Eurodollar Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurodollar Loan" shall mean any Eurodollar Competitive Loan or Eurodollar Standby Loan. "Eurodollar Standby Borrowing" shall mean a Borrowing comprised of Eurodollar Standby Loans. "Eurodollar Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VII. "Existing Facilities" shall mean (i) the Competitive Advance and Revolving Credit Facility Agreement dated as of December 16, 1993, as amended, among the Borrower, the lenders party thereto, PNC Bank, National Association, as co-agent for the lenders, and The Chase Manhattan Bank, as agent for the lenders and (ii) the Competitive Advance and Revolving Credit Facility Agreement, dated as of October 27, 2000, among the Borrower, the lenders parties thereto and The Chase Manhattan Bank, as agent for the lenders. "Facility Fee" shall have the meaning assigned to such term in Section 2.06(a). "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fees" shall mean the Facility Fee and the Administrative Fees. "Financial Officer" of any corporation shall mean the President, Chief Financial Officer, Chief Executive Officer, Vice President - Finance, Executive Vice President, Chief Accounting Officer or Treasurer of such corporation. "First Mortgage Bond Indentures" shall mean (i) the First Mortgage and Collateral Trust Indenture, dated as of March 1, 1947, from the Borrower to The Marine Midland Trust Company of New York, as Trustee, and (ii) the Mortgage and Deed of Trust Indenture, dated as of June 1, 1962, from the Borrower to Manufacturers Hanover Trust Company, as Trustee, as the same have been and may from time to time be amended or supplemented and in effect. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. "Governmental Approval" shall mean any authorization, consent, order, approval, license, franchise, lease, ruling, tariff, rate, permit, certificate, exemption of, or filing or registration with, any Governmental Authority. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Hostile Acquisition" shall mean any Target Acquisition (as defined below) involving a tender offer or proxy contest that has not been recommended or approved by the board of directors (or similar governing body) of the Person that is the subject of such Target Acquisition prior to the first public announcement or disclosure relating to such Target Acquisition. As used in this definition, the term "Target Acquisition" shall mean any transaction, or any series of related transactions, by which the Borrower and/or any of its Subsidiaries directly or indirectly (i) acquires any ongoing business or all or substantially all of the assets of any Person or division thereof, whether through purchase of assets, merger or otherwise, (ii) acquires (in one transaction or as the most recent transaction in a series of transactions) control of at least a majority in ordinary voting power of the securities of a Person which have ordinary voting power for the election of directors or (iii) otherwise acquires control of a more than 50% ownership interest in any such Person. "Indebtedness" of any Person shall mean, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind (other than customer deposits made in the ordinary course of business), (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capital Lease Obligations of such Person, (h) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements (except to the extent such obligations are used as a bona fide hedge of other Indebtedness of such Person), (i) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances (except to the extent any such obligations are incurred in support of other obligations constituting Indebtedness of such Person and other than, to the extent reimbursed if drawn, letters of credit in support of ordinary course performance obligations) and (j) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, directly or indirectly (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term Indebtedness shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable thereto and, in the case of a Eurodollar Loan with an Interest Period of more than three months' duration or a Fixed Rate Loan, each day that would have been an Interest Payment Date for such Loan had successive Interest Periods of three months' duration or 90 days duration, as the case may be, been applicable to such Loan and, in addition, the date of any Conversion of such Loan to a Loan of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or, with respect to any Conversion, on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter (or such longer period as may be agreed to by all of the Lenders), as the Borrower may elect, (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing and ending on the date 90 days thereafter or, if earlier, on the Maturity Date or the date of prepayment of such Borrowing and (c) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offer to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than the day after the date of such Borrowing or later than 364 days (or, subject to the Borrower obtaining all necessary Governmental Approvals, such longer period as may be agreed to by all of the Lenders) after the date of such Borrowing; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Joint Venture" shall mean a general or limited partnership, limited liability company or other entity formed or organized under the laws of the United States of America or any state thereof that would own or operate telecommunications assets and which, in turn, the Borrower would manage. "Joint Venture Transaction" shall mean the formation of a Joint Venture, by the formation of a new entity and the contribution of telecommunications assets (or cash or similar assets) thereto by the Borrower, the investment by the Borrower in a previously existing entity that owns telecommunications assets or other similar transaction. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to the rate at which dollar deposits approximately equal in principal amount to (i) in the case of a Standby Borrowing, The Chase Manhattan Bank's (if then acting as Administrative Agent or, in case another Person is then acting as Administrative Agent, such other Person's) portion of such Eurodollar Borrowing and (ii) in the case of a Competitive Borrowing, a principal amount that would have been The Chase Manhattan Bank's (if then acting as Administrative Agent or, in case another Person is then acting as Administrative Agent, such other Person's) portion of such Competitive Borrowing had such Competitive Borrowing been a Standby Borrowing, and, in the case of each of clause (i) and clause (ii) above, for a maturity comparable to such Interest Period, are offered to the principal London office of The Chase Manhattan Bank (or such other Person then acting as Administrative Agent) in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge, or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease, or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call, or similar right of a third party with respect to such securities. "Loan" shall mean a Competitive Loan or a Standby Loan, whether made as a Eurodollar Loan, an ABR Loan, or a Fixed Rate Loan, as permitted hereby. "Margin" shall mean, as to any Eurodollar Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Regulations" shall mean Regulations T, U and X of the Board. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, operations, financial condition or results of operations of the Borrower and the Subsidiaries taken as a whole. "Maturity Date" shall mean October 24, 2006. "Moody's" shall mean Moody's Investors Service, Inc., or any successor thereto. "Moody's Rating" shall mean, on any date of determination, (i) the debt rating most recently announced by Moody's with respect to the long-term, senior, unsecured, non-credit enhanced Indebtedness of the Borrower or (ii) if (A) the Indebtedness of the Borrower under this Agreement shall be credit enhanced by any Person other than the Borrower and (B) both Moody's and S&P shall have assigned a debt rating to such Indebtedness, then such debt rating assigned by Moody's. "Non-Recourse Joint Venture" shall mean a Joint Venture the Indebtedness of which is Non-Recourse Joint Venture Indebtedness. "Non-Recourse Joint Venture Indebtedness" shall mean secured or unsecured Indebtedness of a Joint Venture that is non-recourse to the Borrower or any Principal Subsidiary or any of their respective assets or property. In furtherance of the foregoing, an obligation of the Borrower that is non-recourse to the Borrower except to the extent of a pledge of the equity of a Joint Venture (the Indebtedness of which is otherwise non-recourse to the Borrower) will be deemed Non-Recourse Joint Venture Indebtedness. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership, or government, or any agency or political subdivision thereof. "Plan" shall mean any pension plan (including a multiemployer plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code which is maintained for or to which contributions are made for employees of the Borrower or any ERISA Affiliate. "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. "Principal Subsidiaries" shall mean any Subsidiary of the Borrower, other than Electric Lightwave, Inc., whose Consolidated Tangible Assets comprise in excess of 20% of the Consolidated Tangible Assets of the Borrower and its consolidated Subsidiaries as of the date hereof or at any time hereafter. The term "Principal Subsidiaries" shall not include any Non-Recourse Joint Venture. "Register" shall have the meaning given such term in Section 9.04(d). "Regulation D" shall mean Regulation D of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation T" shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Release" shall mean any spilling, emitting, discharging, depositing, escaping, leaching, dumping or other releasing, including the movement of any Specified Substance through the air, soil, surface water, groundwater or property, and when used as a verb has a like meaning. "Required Lenders" shall mean, at any time, Lenders having Commitments representing more than 50% of the Total Commitment or, for purposes of acceleration pursuant to clause (ii) of Article VII or if the Total Commitment has terminated, Lenders holding Loans representing more than 50% of the aggregate principal amount of the Loans outstanding. "S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor thereto. "S&P Rating" shall mean, on any date of determination, (i) the debt rating most recently announced by S&P with respect to the long-term, senior, unsecured, non-credit enhanced Indebtedness of the Borrower or (ii) if (A) the Indebtedness of the Borrower under this Agreement shall be credit enhanced by any Person other than the Borrower and (B) both S&P and Moody's shall have assigned a debt rating to such Indebtedness, then such debt rating assigned by S&P. "Securitization Transaction" means (a) any transfer of accounts receivable or interests therein (i) to a trust, partnership, corporation or other entity (other than a Subsidiary), which transfer or pledge is funded by such entity in whole or in part by the issuance to one or more lenders or investors of indebtedness or other securities that are to receive payments principally from the cash flow derived from such accounts receivable or interests in accounts receivable, or (ii) directly to one or more investors or other purchasers (other than any Subsidiary), or (b) any transaction in which the Borrower or a Subsidiary incurs Indebtedness secured by Liens on accounts receivable. The "amount" of any Securitization Transaction shall be deemed at any time to be (A) in the case of a transaction described in clause (a) of the preceding sentence, the aggregate uncollected amount of the accounts receivable transferred pursuant to such Securitization Transaction, net of any such accounts receivable that have been written off as uncollectible, and (B) in the case of a transaction described in clause (b) of the preceding sentence, the aggregate outstanding principal amount of the Indebtedness secured by Liens on accounts receivable Incurred pursuant to such Securitization Transaction. "Specified Substance" shall mean (i) any chemical, material or substance defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste" or "toxic substances" or words of similar import under any applicable Environmental Laws; (ii) any (A) oil, natural gas, petroleum or petroleum derived substance, any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal fluid, any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or (B) other materials or pollutants that, in the case of both (A) and (B), (1) pose a hazard to the property of the Borrower or any of its Subsidiaries or any part thereof or to persons on or about such property or to any other property that may be affected by the Release of such materials or pollutants from such property or any part thereof or to persons on or about such other property or (2) cause such property or such other property to be in violation of any Environmental Law; (iii) asbestos, urea formaldehyde foam insulation, toluene, polychlorinated biphenyls and any electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million; and (iv) any sound, vibration, heat, radiation or other form of energy and any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority. "Standby Borrowing" shall mean a Borrowing consisting of simultaneous Standby Loans from each of the Lenders. "Standby Borrowing Request" shall mean a request made pursuant to Section 2.04 in the form of Exhibit A-5. "Standby Loans" shall mean the revolving loans made by the Lenders to the Borrower pursuant to Section 2.04. Each Standby Loan shall be a Eurodollar Standby Loan or an ABR Loan. All Standby Loans by a Lender of the same Type, having the same Interest Period and made or Converted on the same day shall be deemed to be a single Standby Loan by such Lender until repaid or next Converted. "Subsidiary" shall mean, with respect to any Person (herein referred to as the "parent"), any corporation, partnership, association, or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled, or held by the parent, or (b) which is, at the time any determination is made, otherwise Controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless otherwise indicated, all references in this Agreement to "Subsidiaries" shall be construed as references to Subsidiaries of the Borrower. "Total Commitment" shall mean at any time the aggregate amount of the Lenders' Commitments, as in effect at such time. "Transferee" shall mean any transferee or assignee of all or any portion of a Lender's interests, rights and obligations hereunder, including any participation holder. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO Rate, the Alternate Base Rate and the rate of interest applicable to any Fixed Rate Loan. "Utilities Assets" shall mean any assets of the Borrower or any Subsidiary thereof (including, without limitation, stock in any such Subsidiary) that are employed in the generation or production, transmission or distribution (as applicable) of electricity, natural gas, synthetic gas or water, or that are used to provide wastewater services. "Utilization Period" shall mean any day or days during which the aggregate amount of Loans outstanding hereunder is equal to or greater than 331/3% of the Total Commitment for such day or days. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement, unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that, for purposes of determining compliance with any covenant set forth in Article VI, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing the Borrower's audited financial statements referred to in Section 3.02. ARTICLE II THE CREDITS SECTION 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Standby Loans to the Borrower, at any time and from time to time on and after the Effective Date and until the earlier to occur of the Maturity Date and the termination of the Commitment of such Lender, in an aggregate principal amount at any time outstanding not to exceed such Lender's Commitment minus the amount by which the Competitive Loans outstanding at such time shall be deemed to have used such Commitment pursuant to Section 2.16, subject however, to the conditions that (a) at no time shall (i) the sum of (x) the outstanding aggregate principal amount of all Standby Loans made by all Lenders plus (y) the outstanding aggregate principal amount of all Competitive Loans made by all Lenders exceed (ii) the Total Commitment, and (b) at all times the outstanding aggregate principal amount of all Standby Loans made by each Lender shall equal the product of (i) the percentage which its Commitment represents of the Total Commitment times (ii) the outstanding aggregate principal amount of all Standby Loans made pursuant to Section 2.04. Each Lender's Commitment is set forth opposite its respective name in Schedule 2.01. Such Commitments may be modified or reduced from time to time pursuant to Section 2.11 and Section 2.13(f). Within the foregoing limits, the Borrower may borrow, pay, or prepay and reborrow hereunder, on and after the Effective Date and prior to the Maturity Date, subject to the terms, conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Standby Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their Commitments; provided, however, that the failure of any Lender to make any Standby Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Standby Loans or Competitive Loans comprising any Borrowing shall be in an aggregate principal amount which is an integral multiple of $1,000,000 and not less than $10,000,000 (or, in the case of Standby Loans, an aggregate principal amount equal to the remaining balance of the available Commitments). (b) Each Competitive Borrowing shall be comprised entirely of Eurodollar Competitive Loans or Fixed Rate Loans, and each Standby Borrowing shall be comprised entirely of Eurodollar Standby Loans or ABR Loans, as the Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing which, if made, would result in an aggregate of more than ten separate Standby Loans of any Lender being outstanding hereunder at any one time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. (c) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 1:00 P.M., New York City time, and the Administrative Agent shall by 3:00 P.M., New York City time, credit the amounts so received to the general deposit account of the Borrower with the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Competitive Loans shall be made by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant to Section 2.03 in the amounts so accepted and Standby Loans shall be made by the Lenders pro rata in accordance with Section 2.16. Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing (or, in the case of an ABR Borrowing, prior to the time of such ABR Borrowing) that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent and the Administrative Agent has made available to the Borrower such portion, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Interest Period requested by the Borrower with respect to any Borrowing shall not end after the Maturity Date. SECTION 2.03. Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time during the period from and including the Effective Date to but excluding the earlier to occur of the Maturity Date and the termination of the Commitments of all Lenders, the Borrower may request Competitive Bids and may, but shall not have any obligation to, accept Competitive Bids and borrow Competitive Loans; provided, that at no time shall the sum of (x) the outstanding aggregate principal amount of all Standby Loans made by all Lenders plus (y) the outstanding aggregate principal amount of all Competitive Loans made by all Lenders exceed the Total Commitment. In order to request Competitive Bids, the Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Competitive Bid Request in the form of Exhibit A-1 hereto, to be received by the Administrative Agent (i) in the case of a Eurodollar Competitive Borrowing, not later than 10:00 A.M., New York City time, four Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 A.M., New York City time, one Business Day before a proposed Competitive Borrowing. No ABR Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit A-1 may be rejected in the Administrative Agent's sole discretion, and the Administrative Agent shall promptly notify the Borrower of such rejection by telecopier. Such request shall in each case refer to this Agreement and specify (x) whether the Borrowing then being requested is to be a Eurodollar Borrowing or a Fixed Rate Borrowing, (y) the date of such Borrowing (which shall be a Business Day) and the aggregate principal amount thereof which shall be in a minimum principal amount of $10,000,000 and in an integral multiple of $1,000,000, and (z) the Interest Period(s) with respect thereto (which may not end after the Maturity Date). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Administrative Agent shall invite by telecopier (in the form set forth in Exhibit A-2 hereto) the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Loans pursuant to the Competitive Bid Request. (b) Each Lender may, in its sole discretion, make one or more Competitive Bids to the Borrower responsive to a Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Administrative Agent via telecopier, in the form of Exhibit A-3 hereto, (i) in the case of a Eurodollar Competitive Borrowing, not later than 9:30 A.M., New York City time, three Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 A.M., New York City time, on the day of a proposed Competitive Borrowing. Multiple bids will be accepted by the Administrative Agent. Competitive Bids that do not conform substantially to the format of Exhibit A-3 may be rejected by the Administrative Agent after conferring with, and upon the instruction of, the Borrower, and the Administrative Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the range of principal amounts (each of which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000 and, in the case of the larger such amount, may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Loan or Loans and (z) the Interest Period and the last day thereof. If any Lender shall elect not to make a Competitive Bid, such Lender shall so notify the Administrative Agent via telecopier (A) in the case of Eurodollar Competitive Loans, not later than 9:30 A.M., New York City time, three Business Days before a proposed Competitive Borrowing, and (B) in the case of Fixed Rate Loans, not later than 9:30 A.M., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Loan as part of such Competitive Borrowing. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable. If the Administrative Agent shall not have received from any Lender notification of its election to make a Competitive Bid on or before the times set forth in the second sentence of this paragraph, such Lender shall be deemed to have elected not to make a Competitive Bid. (c) The Administrative Agent shall promptly notify (but in any event no later than 10:00 A.M., New York City time, on the day any Competitive Bid is received by the Administrative Agent) the Borrower by telecopier of all the Competitive Bids made, the Competitive Bid Rate and the principal amount (or range thereof) of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Administrative Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.03. (d) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject all or any portion (within the range of principal amounts specified therein) of any Competitive Bid referred to in paragraph (c) above. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopier in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above, (x) in the case of a Eurodollar Competitive Borrowing, not later than 11:00 A.M., New York City time, three Business Days before a proposed Competitive Borrowing and (y) in the case of a Fixed Rate Borrowing, not later than 11:00 A.M., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that (i) the failure by the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (c) above, (ii) the Borrower shall not accept a bid made at a particular Competitive Bid Rate if the Borrower has decided to reject a bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (iv) if the Borrower shall accept a bid or bids made at the same Competitive Bid Rate but the amount of such bid or bids shall cause the total amount of bids to be accepted by the Borrower to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount no greater than the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids at a lower Competitive Bid Rate accepted with respect to such Competitive Bid Request, which acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the lowest amount of each such bid at such Competitive Bid Rate, and (v) except pursuant to clause (iv) above, no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given by the Borrower pursuant to this paragraph (d) shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopier sent by the Administrative Agent, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Borrower not later than 9:15 A.M., New York City time, on the day on which the other Lenders are required to submit their bids to the Administrative Agent pursuant to paragraph (b) above. (g) All notices required by this Section 2.03 shall be given in accordance with Section 9.01. SECTION 2.04. Standby Borrowing Procedure. In order to request a Standby Borrowing (other than a Conversion), the Borrower shall hand deliver or telecopy to the Administrative Agent a notice in the form of Exhibit A-5 (a) in the case of a Eurodollar Standby Borrowing, not later than 11:00 A.M., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 11:00 A.M., New York City time, on the day of a proposed Borrowing. No Fixed Rate Loan shall be requested or made pursuant to a Standby Borrowing Request. Such notice shall be irrevocable (unless otherwise expressly provided herein) and shall in each case specify (i) whether the Borrowing then being requested is to be a Eurodollar Standby Borrowing or an ABR Borrowing; (ii) the date of such Standby Borrowing (which shall be a Business Day) and the amount thereof; and (iii) if such Borrowing is to be a Eurodollar Standby Borrowing, the Interest Period with respect thereto. If no election as to the Type of Standby Borrowing is specified in any such notice, then the requested Standby Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Standby Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall promptly advise (but in any event no later than 12:00 noon on such date) the Lenders of any notice given pursuant to this Section 2.04 and of each Lender's portion of the requested Borrowing. SECTION 2.05. Conversions. The Borrower may from time to time Convert any Standby Loan (or portion thereof) of any Type and with any Interest Period (if applicable) to one or more Standby Loans of the same or any other Type and with any Interest Period (if applicable) by delivering (by hand delivery or telecopier) a request for such Conversion in the form of Exhibit A-6 to the Administrative Agent no later than (i) 11:00 A.M., New York City time, on the third Business Day prior to the date of any proposed Conversion into a Eurodollar Standby Loan and (ii) 11:00 A.M., New York City time, on the day of any proposed Conversion into an ABR Loan. The Administrative Agent shall give each Lender prompt notice of each Conversion Request. Each Conversion Request shall be irrevocable (unless otherwise expressly provided herein) and binding on the Borrower and shall specify the requested (A) date of such Conversion, (B) Type of, and Interest Period, if any, applicable to, the Standby Loans (or portions thereof) proposed to be Converted, (C) Type of Standby Loans to which such Standby Loans (or portions thereof) are proposed to be Converted, (D) initial Interest Period, if any, to be applicable to the Standby Loans resulting from such Conversion and (E) aggregate amount of Standby Loans (or portions thereof) proposed to be Converted. No Eurodollar Standby Loans may be Converted on a date other than the last day of the Interest Period applicable thereto, unless the Borrower reimburses each Lender pursuant to Section 2.15 for all losses or expenses incurred by such Lender in connection with such Conversion. If the Borrower shall fail to give a timely Conversion Request pursuant to this subsection in respect of any Standby Loans, such Standby Loans shall, on the last day of the then existing Interest Period therefor, automatically Convert into, or remain as, as the case may be, ABR Loans, unless such Standby Loans are repaid at the end of such Interest Period. If the Borrower shall fail, in any Conversion Request that has been timely given, to select the duration of any Interest Period for Standby Loans to be Converted into Eurodollar Standby Loans, such Standby Loans shall, on the last day of the then existing Interest Period therefor, automatically Convert into Eurodollar Standby Loans with an Interest Period of one month's duration. If, on the date of any proposed Conversion, the Borrower shall have failed to fulfill any condition set forth in Section 4.01, all Standby Loans then outstanding shall, on such date, automatically Convert into, or remain as, as the case may be, ABR Loans. SECTION 2.06. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, on each March 31, June 30, September 30 and December 31, on the date on which the Commitment of such Lender shall be terminated as provided herein and on the Maturity Date, a facility fee (a "Facility Fee") at a rate per annum equal to the Applicable Rate from time to time in effect on (i) the amount of the Commitment of such Lender, whether used or unused, during the preceding quarter (or shorter period commencing on the date hereof and ending on the Maturity Date or any other date on which the Commitment of such Lender shall be terminated) and (ii) in the event that the Commitments have terminated, the aggregate amount of the Standby Loans owed by the Borrower to such Lender during the preceding quarter (or shorter period ending on the date on which such Standby Loans are paid in full). All Facility Fees shall be computed on the basis of the actual number of days elapsed in a year of 365 or 366 days, as the case may be. The Facility Fee due to each Lender shall commence to accrue on the date hereof and shall cease to accrue on the later of the Maturity Date and the date of payment in full of the Loans, accrued interest thereon and all other amounts payable hereunder. (b) The Borrower agrees to pay the Administrative Agent, for its own account, the fees (the "Administrative Fees") at the times and in the amounts agreed upon between them. (c) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.07. Repayment of Loans. (a) The outstanding principal balance of each Loan shall be payable, in the case of each Competitive Loan, on the earlier to occur of the last day of the Interest Period applicable to such Loan and the Maturity Date, and, in the case of each Standby Loan, on the Maturity Date. Each Competitive Loan and each Standby Loan shall bear interest from the date thereof on the outstanding principal balance thereof as set forth in Section 2.08. Each Lender shall, and is hereby authorized by the Borrower to record in such Lender's internal records an appropriate notation evidencing the date and amount of each Competitive Loan or Standby Loan, as applicable, of such Lender, each payment or prepayment of principal of any Competitive Loan or Standby Loan, as applicable, and such other relevant information as such Lender records in its internal records with respect to loans of a type similar to such Loans; provided, however, that the failure of any Lender to make such a notation or any error therein shall not in any manner affect the obligation of the Borrower to repay the Competitive Loans or Standby Loans, as applicable, made by such Lender in accordance with the terms hereof. (b) Any Lender may request that any Loans made by it be evidenced by one or more promissory notes. Promptly upon receipt of such request, the Borrower shall prepare, execute and deliver to such Lender one or more promissory notes payable to the order of such Lender (or, if requested by such Lender, to such Lender and its assignees) substantially in the form of Exhibit D-1 or D-2, as appropriate. Thereafter, the Loans evidenced by such promissory notes and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein. SECTION 2.08. Interest on Loans. (a) Subject to the provisions of Section 2.09, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to (i) in the case of each Eurodollar Standby Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, and (ii) in the case of each Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Margin offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each Eurodollar Borrowing shall be payable on each applicable Interest Payment Date. The LIBO Rate for each Interest Period shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. The Administrative Agent shall promptly (but in any event no later than 10:30 A.M., New York City time, two Business Days prior to the commencement of such Interest Period) (A) advise the Borrower and each Lender, as appropriate, of such determination and (B) upon the request of the Borrower, provide the Borrower with the calculations and relevant factors supporting such determination. (b) Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined with reference to the Prime Rate and over a year of 360 days in all other cases) at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate. Interest on each ABR Borrowing shall be payable on each applicable Interest Payment Date. The Alternate Base Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. The Administrative Agent shall promptly (but in any event no later than 11:30 A.M., New York City time, on the day of each ABR Borrowing) (A) advise the Borrower and each Lender of such determination and (B) upon the request of the Borrower, provide the Borrower with the calculations and relevant factors supporting such determination. (c) Subject to the provisions of Section 2.09, each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each Fixed Rate Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. SECTION 2.09. Default Interest. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration, or otherwise, the Borrower shall on demand from time to time from the Administrative Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 2%. SECTION 2.10. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Eurodollar Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any such request by the Borrower for a Eurodollar Competitive Borrowing pursuant to Section 2.03 shall be of no force and effect and shall be denied by the Administrative Agent, (ii) any such request by the Borrower for a Eurodollar Standby Borrowing pursuant to Section 2.04 shall be deemed to be a request for an ABR Borrowing (unless the Borrower shall have withdrawn its request for such Eurodollar Standby Borrowing not later than 10:00 A.M., New York City time, on the day of the proposed Borrowing) and (iii) any request by the Borrower for a Conversion to Eurodollar Standby Loans pursuant to Section 2.05 shall be deemed to be a request for a Conversion to ABR Loans (unless the Borrower shall have withdrawn its request for such Conversion not later than 10:00 A.M., New York City time, on the day of the proposed Conversion). Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.11. Changes in Commitments. (a) Upon at least three Business Days' prior irrevocable written notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; provided, however, that (i) each partial reduction of the Total Commitment shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $10,000,000 and (ii) no such termination or reduction shall be made which would, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.12, reduce the Total Commitment to an amount less than the sum of the aggregate principal amount of all Standby Loans outstanding plus the aggregate principal amount of all Competitive Loans outstanding. (b) Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrower shall pay to the Administrative Agent for the account of the Lenders, on the date of each termination or reduction, the Facility Fees on the amount of the Commitments so terminated or reduced accrued through the date of such termination or reduction. Subject to Section 2.06(a)(ii), no additional Facility Fees on the amount of the Commitments so terminated or reduced will accrue. (c) Unless earlier terminated pursuant to the terms of this Agreement, the Commitment of each Lender shall automatically and permanently terminate on the Maturity Date. (d) Provided that no Default or Event of Default shall have occurred and be continuing, the Borrower shall have the right, without the consent of the Lenders but subject to the terms of an amendment hereto entered into by the Borrower and the Administrative Agent, to effectuate from time to time an increase in the Total Commitment by (x) the accession to this Agreement of one or more financial institutions as a Lender or as Lenders or (y) allowing one or more Lenders to increase its Commitment hereunder (any such event described in clause (x) or (y) being a "Commitment Increase"; provided that (i) the aggregate amount of Commitment Increases effectuated pursuant to this paragraph shall not exceed $75,000,000, (ii) no Lender's Commitment shall be increased without the consent of such Lender, (iii) on the effective date of any such Commitment Increase, there are no outstanding Eurodollar Standby Loans, and (iv) no Commitment Increase may occur pursuant to this paragraph on any date after January 31, 2002. Each party hereto hereby consents to the amendment of this Agreement to reflect any such Commitment Increase. The Borrower shall give the Administrative Agent three Business Days' (or such shorter period of time as shall be acceptable to the Administrative Agent) notice of the Borrower's intention to increase the Total Commitment pursuant to this paragraph. Such notice shall specify each new financial institution to accede to this Agreement as a Lender or the name of the Lender that has agreed to increase its Commitment hereunder, as the case may be, and the amount of the proposed additional Commitment or the amount of the proposed increase in an existing Commitment, as the case may be. The Borrower shall also provide to the Administrative Agent satisfactory evidence that all necessary Governmental Approvals and corporate authorizations have been obtained by the Borrower in connection with proposed Commitment Increase, together with such other information as is reasonably requested by the Administrative Agent. Each financial institution agreeing to accede to this Agreement as a Lender, and each Lender agreeing to increase its Commitment (each such financial institution or Lender being an "Acceding Lender"), shall execute and deliver to the Administrative Agent and the Borrower documentation in form and substance satisfactory to the Administrative Agent and the Borrower pursuant to which it becomes a party hereto or increases its Commitment, as the case may be, shall deliver to the Administrative Agent an Administrative Questionnaire, and shall purchase from the existing Lenders its proportionate share (based on the amount of its Commitment and the amount of the Total Commitment after giving effect to the Commitment Increase) of any Standby Loans outstanding on the date such Commitment Increase becomes effective. Upon (x) the execution and delivery of such documentation and an amendment to this Agreement that reflects any such increase in the Total Commitment and such additional or changed Commitments and (y) the provision to the Administrative Agent by the Acceding Lender of funds in an amount necessary to purchase from the existing Lenders its proportionate share (based on the amount of its Commitment and the amount of the Total Commitment after giving effect to the Commitment Increase) of any Standby Loans outstanding on the date such Commitment Increase becomes effective, (i) the Commitment Increase shall become effective, (ii) the financial institution agreeing to accede to this Agreement as a Lender shall constitute a Lender under this Agreement with a Commitment as specified therein, or, in the case of an existing Lender agreeing to increase its Commitment, such Lender's Commitment shall increase as specified therein, and (iii) the Acceding Lender shall acquire its proportionate share (determined as aforesaid) of any outstanding Standby Loans and the rights relating thereto as provided by the Agreement. (e) Any changes in the Commitments pursuant to this Section 2.11 shall be appropriately recorded by the Administrative Agent in the Register in accordance with Section 9.04(d). In addition, all notices with respect to any such change shall be maintained by the Administrative Agent with the Register. SECTION 2.12. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Standby Borrowing or Eurodollar Competitive Borrowing, in whole or in part, upon giving written notice (or telephone notice promptly confirmed by written notice) to the Administrative Agent: (i) before 11:00 A.M., New York City time, three Business Days prior to prepayment, in the case of Eurodollar Loans, and (ii) before 11:00 A.M., New York City time, on the day of prepayment, in the case of ABR Loans; provided, however, that each partial prepayment shall be in an amount which is an integral multiple of $1,000,000 and not less than $5,000,000. The Borrower shall not have the right to prepay any Fixed Rate Competitive Borrowing without the consent of the applicable Lender. (b) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing (or portion thereof) by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.13. Reserve Requirements; Change in Circumstances. (a) It is understood that the cost to each Lender of making or maintaining any of the Eurodollar Loans may fluctuate as a result of the applicability of reserve requirements imposed by the Board at the ratios provided for in Regulation D on the date hereof. The Borrower agrees to pay to each of the Lenders from time to time such amounts as shall be necessary to compensate such Lender for the portion of the cost of making or maintaining Eurodollar Loans (other than Eurodollar Competitive Loans) resulting from any such reserve requirements provided for in Regulation D as in effect on the date hereof, it being understood that the rates of interest applicable to Eurodollar Loans have been determined on the assumption that no such reserve requirements exist or will exist and that such rates do not reflect costs imposed on the Lenders in connection with such reserve requirements. (b) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation (including, without limitation, Regulation D) or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan or Fixed Rate Loan made by such Lender or any Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender and franchise taxes imposed on it by the jurisdiction in which such Lender has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify, or deem applicable any reserve, special deposit, or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender, or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or any Eurodollar Loan or Fixed Rate Loan made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest, or otherwise) by an amount deemed by such Lender to be material, then, to the extent not otherwise being reimbursed under Section 2.19 hereof, the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. Notwithstanding the foregoing, no Lender shall be entitled to request compensation under this paragraph with respect to any Competitive Loan if it shall have had actual knowledge of the change giving rise to such request at the time of submission of the Competitive Bid pursuant to which such Competitive Loan shall have been made. (c) If any Lender shall have determined that the adoption after the date hereof of any law, rule, regulation, or guideline regarding capital adequacy, or any change in any existing law, rule, regulation, or guideline regarding capital adequacy or in the interpretation or administration of any of the foregoing by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (d) A certificate of a Lender setting forth such amount or amounts as shall be necessary to compensate such Lender as specified in paragraph (a), (b), or (c) above, as the case may be, and all of the relevant factors and the calculations supporting such amount or amounts, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered by it within 10 days after the receipt of the same. (e) Notwithstanding the provisions of subsections (a), (b) or (c) above, to the contrary, no Lender shall be entitled to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital to the extent that such compensation relates to any period of time prior to the date upon which such Lender first notified the Borrower of the occurrence of the event entitling such Lender to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Borrower required by any governmental authority, central bank or comparable agency). (f) If any Lender shall have delivered a notice or certificate pursuant to paragraph (d) above, the Borrower shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, to require such Lender to (i) terminate its Commitment or (ii) transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.04) all or a portion of its interest, rights and obligations under this Agreement to another financial institution which shall assume such obligations; provided that (A) no such termination or assignment shall conflict with any law, rule, or regulation or order of any Governmental Authority and (B) the Borrower or the assignee, as the case may be, shall pay to the affected Lender in immediately available funds on the date of such termination or assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder (other than any amounts owed to such Lender pursuant to Section 2.15(c) in connection with such principal payment). SECTION 2.14. Change in Legality. (a) Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent, such Lender may: (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon such Lender shall not submit a Competitive Bid in response to a request for Eurodollar Competitive Loans and any request by the Borrower for a Eurodollar Standby Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan (or for a Conversion thereto pursuant to Section 2.05) unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be Converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically Converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the Converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the Conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.14, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. SECTION 2.15. Indemnity. The Borrower shall indemnify each Lender against any loss or expense which such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any Borrowing hereunder the applicable conditions set forth in Article IV, (b) any failure by the Borrower to borrow or to Convert any Loan hereunder after irrevocable notice of such Borrowing or Conversion has been given pursuant to Section 2.03, 2.04 or 2.05, (c) any payment, prepayment or Conversion of a Eurodollar Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period applicable thereto, (d) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise), or (e) the occurrence of any Event of Default, including, in each such case, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss or reasonable expense shall include an amount equal to the excess, if any, as reasonably demonstrated by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid, Converted, or not borrowed (assumed to be the LIBO Rate or, in the case of a Fixed Rate Loan, the fixed rate of interest applicable thereto) for the period from the date of such payment, prepayment, or failure to borrow to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably demonstrated by such Lender) that would be realized by such Lender in redeploying the funds so paid, prepaid, or not borrowed for such period or Interest Period, as the case may be. A certificate of any Lender setting forth the factors and calculations supporting any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower no later than 30 days following the incurrence of any loss or expense for which such Lender is seeking indemnification under this Section 2.15 and shall be conclusive absent manifest error. SECTION 2.16. Pro Rata Treatment. Except as required or otherwise permitted under Sections 2.13(f) and 2.14, each Standby Borrowing, each payment or prepayment of principal of any Standby Borrowing, each payment of interest on the Standby Loans, each payment of the Facility Fees, each reduction of the Commitments and each Conversion of any Borrowing with a Standby Borrowing of any Type, shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Standby Loans). Each payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. For purposes of determining the available Commitments of the Lenders at any time, each outstanding Competitive Borrowing shall be deemed to have utilized the Commitments of the Lenders (including those Lenders which shall not have made Loans as part of such Competitive Borrowing) pro rata in accordance with such respective Commitments. Each Lender agrees that, in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.17. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff, or counterclaim against the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency, or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Standby Loan or Standby Loans as a result of which the unpaid principal portion of the Standby Loans of such Lender shall be proportionately less than the unpaid principal portion of the Standby Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Standby Loans of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans and participations in the Standby Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans then outstanding as the principal amount of its Standby Loans prior to such exercise of banker's lien, setoff, or counterclaim or other event was to the principal amount of all Standby Loans outstanding prior to such exercise of banker's lien, setoff, or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that, to the maximum extent permitted by law, any Lender holding a participation in a Standby Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff, or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Standby Loan directly to the Borrower in the amount of such participation. SECTION 2.18. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder not later than 12:00 noon, New York City time, on the date when due in Dollars to the Administrative Agent at its offices at 270 Park Avenue, New York, New York 10017, in immediately available funds. All payments by the Borrower shall be made without deduction for any counterclaim, defense, recoupment or setoff. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the Administrative Agent's or any Lender's (or any Transferee's) net income and franchise taxes imposed on the Administrative Agent or any Lender (or Transferee) by the United States or any jurisdiction under the laws of which it is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. Each Lender party hereto on the date hereof represents and warrants that no Taxes will be incurred on the date hereof in connection with the execution and delivery of this Agreement. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made hereunder or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement (hereinafter referred to as "Other Taxes"). Each Lender party hereto on the date hereof represents and warrants that no Other Taxes will be incurred on the date hereof in connection with the execution and delivery of this Agreement. (c) The Borrower will indemnify each Lender (or Transferee) and the Administrative Agent for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.19) paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Payment of such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor. If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to receive a refund in respect of Taxes or Other Taxes, it shall promptly notify the Borrower of the availability of such refund and shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Lender (or Transferee) or the Administrative Agent receives a refund in respect of any Taxes or Other Taxes for which such Lender (or Transferee) or the Administrative Agent has received payment from the Borrower hereunder, it shall promptly notify the Borrower of such refund and shall, within 15 days after receipt of such refund, repay such refund to the Borrower, net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and only with interest received, if any, from the relevant taxing authority or Governmental Authority; provided that the Borrower, upon the request of such Lender (or Transferee) or the Administrative Agent, agrees to return such refund (plus penalties, interest, or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund. (d) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender (or Transferee) or the Administrative Agent, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.19 shall survive the payment in full of the principal of and interest on all Loans made hereunder. (f) Each Lender represents and warrants that either (i) it is organized under the laws of a jurisdiction within the United States or (ii) it has delivered to the Borrower and the Administrative Agent duly completed copies of such form or forms prescribed by the Internal Revenue Service indicating that such Lender is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Code. Each Transferee agrees that, on or prior to the date upon which it shall become a party hereto or obtain a participation herein, and upon the reasonable request from time to time of the Borrower or the Administrative Agent, it will deliver to the Borrower and the Administrative Agent either (A) a statement that it is organized under the laws of a jurisdiction within the United States or (B) duly completed copies of such form or forms as may from time to time be prescribed by the United States Internal Revenue Service, indicating that such Transferee is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Code. Each Lender that has delivered, and each Transferee that hereafter delivers, to the Borrower and the Administrative Agent the form or forms referred to in the two preceding sentences further undertakes to deliver to the Borrower and the Administrative Agent, so far as it may legally do so, further copies of such form or forms, or successor applicable form or forms, as the case may be, as and when any previous form filed by it hereunder shall expire or shall become incomplete or inaccurate in any respect. Each Lender and Transferee represents and warrants that each such form supplied by it to the Administrative Agent and the Borrower pursuant to this subsection (f), and not superseded by another form supplied by it, is or will be, as the case may be, complete and accurate. (g) The Borrower shall not be required to pay any additional amounts to any Lender (or Transferee) in respect of United States withholding tax pursuant to paragraph (a) above if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender (or Transferee) to comply with the provisions of paragraph (f) above, unless such failure results from (i) a change in applicable law, regulation, or official interpretation thereof, or (ii) an amendment, modification, or revocation of any applicable tax treaty or a change in official position regarding the application or interpretation thereof, in each case after the date hereof (and, in the case of a Transferee, after the date of assignment or transfer); provided, however, that the Borrower shall be required to pay those amounts to any Lender (or Transferee) which it was required to pay hereunder prior to the failure of such Lender (or Transferee) to comply with the provisions of paragraph (f). (h) Any Lender (or Transferee) claiming any additional amounts payable pursuant to this Section 2.19 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender (or Transferee). (i) If any Lender shall request compensation under this Section 2.19, the Borrower shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, to require such Lender to (i) terminate its Commitment or (ii) transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.04) all or a portion of its interest, rights and obligations under this Agreement to another financial institution which shall assume such obligations; provided that (A) no such termination or assignment shall conflict with any law, rule, or regulation or order of any Governmental Authority and (B) the Borrower or the assignee, as the case may be, shall pay to the affected Lender in immediately available funds on the date of such termination or assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each of the Lenders that: SECTION 3.01. Organization; Powers; Governmental Approvals. (a) The Borrower and each Principal Subsidiary (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not have a Material Adverse Effect. The Borrower's execution, delivery and performance of this Agreement are within its corporate powers, have been duly authorized by all necessary action and do not violate or create a default under (A) law, (B) its constituent documents, or (C) any contractual provision binding upon it, except to the extent (in the case of violations or defaults described under clauses (A) or (C)) where such violation or default would not reasonably be expected to result in a Material Adverse Effect. This Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against it in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting the rights of creditors generally and general principles of equity, including an implied covenant of good faith and fair dealing). (b) Except for (i) any Governmental Approvals required in connection with any Borrowings (such approvals being "Borrowing Approvals") and (ii) any Governmental Approvals the failure to obtain which could not reasonably be expected to result in a Material Adverse Effect or affect the validity or enforceability of this Agreement, all Governmental Approvals required in connection with the execution and delivery by the Borrower of this Agreement and the performance by the Borrower of its obligations hereunder have been, and, prior to the time of any Borrowing, all Borrowing Approvals will be, duly obtained, are (or, in the case of Borrowing Approvals, will be) in full force and effect without having been amended or modified in any manner that may impair the ability of the Borrower to perform its obligations under this Agreement, and are not (or, in the case of Borrowing Approvals, will not be) the subject of any pending appeal, stay or other challenge. SECTION 3.02. Financial Statements. The Borrower has furnished to the Lenders, for itself and its Subsidiaries, its most recent filings with the Securities and Exchange Commission on Forms 10-K and 10-Q. Such Forms 10-K and 10-Q do not contain any untrue statement of a material fact or omit to state a material fact necessary to make any statement therein, in light of the circumstances under which it was made, not misleading. Each of the financial statements in such Forms 10-K and 10-Q has been, and each of the financial statements to be furnished pursuant to Section 5.02 will be, prepared in accordance with GAAP applied consistently with prior periods, except as therein noted, and fairly presents or will fairly present in all material respects the consolidated financial position of the Borrower and its Subsidiaries as of the date thereof and the results of the operations of the Borrower and its Subsidiaries for the period then ended. SECTION 3.03. No Material Adverse Change. Since the date of the Borrower's most recent financial statements contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2000, furnished to the Lenders pursuant to Section 3.02, there has been no material adverse change in, and there has occurred no event or condition which is likely to result in a material adverse change in, the financial condition, results of operations, business, assets or operations of the Borrower and the Subsidiaries taken as a whole (it being understood that none of the divestiture of Utilities Assets, the consummation or dissolution of a Joint Venture Transaction, the incurrence of Non-Recourse Joint Venture Indebtedness or the consummation of an Asset Exchange shall constitute such a material adverse change). SECTION 3.04. Title to Properties; Possession Under Leases. (a) To the best of the Borrower's knowledge, each of the Borrower and the Principal Subsidiaries has good and marketable title to, or valid leasehold interests in, or other rights to use or occupy, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.01. (b) Each of the Borrower and the Principal Subsidiaries has complied with all obligations under all material leases to which it is a party and all such leases are in full force and effect, except where such failure to comply or maintain such leases in full force and effect would not have a Material Adverse Effect. Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases except where such failure would not have a Material Adverse Effect. SECTION 3.05. Ownership of Subsidiaries. The Borrower owns, free and clear of any Lien (other than Liens expressly permitted by Section 6.01), all of the issued and outstanding shares of common stock of each of the Principal Subsidiaries. SECTION 3.06. Litigation; Compliance with Laws. (a) There is no action, suit, or proceeding, or any governmental investigation or any arbitration, in each case pending or, to the knowledge of the Borrower, threatened against the Borrower or any of the Subsidiaries or any material property of any thereof before any court or arbitrator or any governmental or administrative body, agency, or official which (i) challenges the validity of this Agreement, (ii) may reasonably be expected to have a material adverse effect on the ability of the Borrower to perform any of its obligations under this Agreement or on the rights of or benefits available to the Lenders under this Agreement or (iii) except as disclosed in the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 or the Borrower's Quarterly Reports on Form 10-Q for the periods ending March 31, 2001 and June 30, 2001, may reasonably be expected to have a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries is in violation of any law, rule, or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default could reasonably be anticipated to result in a Material Adverse Effect. (c) Except as set forth in or contemplated by the financial statements or other reports referred to in Section 3.02 hereof and which have been delivered to the Lenders on or prior to the date hereof, (i) the Borrower and each of its Subsidiaries have complied with all Environmental Laws, except to the extent that failure to so comply is not reasonably likely to have a Material Adverse Effect, (ii) neither the Borrower nor any of its Subsidiaries has failed to obtain, maintain or comply with any permit, license or other approval under any Environmental Law, except where such failure is not reasonably likely to have a Material Adverse Effect, (iii) neither the Borrower nor any of its Subsidiaries has received notice of any failure to comply with any Environmental Law or become subject to any liability under any Environmental Law, except where such failure or liability is not reasonably likely to have a Material Adverse Effect, (iv) no facilities of the Borrower or any of its Subsidiaries are used to manage any Specified Substance in violation of any law, except to the extent that such violations, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, and (v) the Borrower is aware of no events, conditions or circumstances involving any Release of a Specified Substance that is reasonably likely to have a Material Adverse Effect. SECTION 3.07. Agreements. (a) Neither the Borrower nor any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted, or could reasonably be anticipated to result, in a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be anticipated to result in a Material Adverse Effect. SECTION 3.08. Federal Reserve Regulations. No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally, or ultimately, for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Margin Regulations. SECTION 3.09. Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.10. Use of Proceeds. The Borrower will use the proceeds of the Loan only for general corporate purposes, including working capital and support of commercial paper issuances and Securitization Transactions permitted hereunder as well as one or more Joint Venture Transactions, acquisitions or Asset Exchanges; provided, however, that no such proceeds shall be used directly or indirectly in connection with any Hostile Acquisition. SECTION 3.11. Tax Returns. Each of the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state and local tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except (i) taxes that are being contested in good faith by appropriate proceedings and for which the Borrower shall have set aside on its books adequate reserves and (ii) where such failure to file or pay would not reasonably be expected to result in a Material Adverse Effect. SECTION 3.12. No Material Misstatements. No statement, information, report, financial statement, exhibit or schedule furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the syndication or negotiation of this Agreement or included herein or delivered pursuant hereto contained, contains, or will contain any material misstatement of fact or intentionally omitted, omits, or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are, or will be made, not misleading. SECTION 3.13. Employee Benefit Plans. (a) Each Plan is in compliance with ERISA, except for such noncompliance that has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (b) No Plan has an accumulated or waived funding deficiency within the meaning of Section 412 or Section 418B of the Code, except for any such deficiency that has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (c) No proceedings have been instituted to terminate any Plan, except for such proceedings where the termination of a Plan has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (d) Neither the Borrower nor any Subsidiary or ERISA Affiliate has incurred any liability to or on account of a Plan under ERISA (other than obligations to make contributions in accordance with such Plan), and no condition exists which presents a material risk to the Borrower or any Subsidiary of incurring such a liability, except for such liabilities that have not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. SECTION 3.14. Insurance. Each of the Borrower and the Principal Subsidiaries maintains insurance with financially sound and reputable insurers, or self-insurance, with respect to its properties and business against loss or damage of the kind customarily insured against by reputable companies in the same or similar business and of such types and in such amounts (with such deductible amounts) as is customary for such companies under similar circumstances. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Each Borrowing. The obligation of each Lender to make a Loan on the occasion of any Borrowing, including any Conversion pursuant to Section 2.05, is subject to the satisfaction of the following conditions: (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03, 2.04 or 2.05, as applicable; (b) The representations and warranties set forth in Article III hereof (except, in the case of a Conversion, the representations set forth in Sections 3.03 and 3.06(a)) shall be true and correct in all material respects on and as of the date of such Borrowing with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date; (c) The Borrower shall be in compliance with all of the terms and provisions set forth herein on its part to be observed or performed, and at the time of, and immediately after such Borrowing, no Event of Default or Default shall have occurred and be continuing; and each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.08): (a) The Administrative Agent shall have received a favorable written opinion of the general counsel of the Borrower, dated the Effective Date and addressed to the Lenders, to the effect set forth in Exhibit C hereto, and the Borrower hereby instructs such counsel to deliver such opinion to the Administrative Agent; (b) All legal matters incident to this Agreement and the borrowings hereunder shall be satisfactory to the Administrative Agent and the Lenders; (c) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of the Borrower, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of the Borrower as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower dated the Effective Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on the Effective Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Agreement and the borrowings hereunder, and that such resolutions have not been modified, rescinded, or amended and are in full force and effect, (C) that the certificate or articles of incorporation of the Borrower have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Borrower; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (ii) above; (iv) irrevocable notices from the Borrower requesting termination of the "Total Commitment" under each of the Existing Facilities effective automatically on the Effective Date and (v) such other documents as the Administrative Agent or the Lenders may reasonably request; (d) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01; (e) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Effective Date; and (f) All "Commitments" (as defined in each of the Existing Facilities) under the Existing Facilities shall have been terminated in accordance with the terms thereof and all "Loans" (as defined in each of the Existing Facilities) outstanding thereunder shall have been repaid or prepaid together with accrued interest thereon and all other amounts payable to the "Lenders" (as defined in each of the Existing Facilities) under the Existing Facilities. ARTICLE V AFFIRMATIVE COVENANTS The Borrower covenants and agrees with the Administrative Agent and each Lender that, so long as this Agreement shall remain in effect or the principal of or interest on any Loan (or any portion thereof), or any other expenses or amounts payable hereunder, shall be unpaid, the Borrower will: SECTION 5.01. Existence; Businesses and Properties. (a) Preserve and maintain, cause each of the Principal Subsidiaries to preserve and maintain, and cause each other Subsidiary to preserve and maintain (where the failure by any such other Subsidiary to so preserve and maintain would likely result in a Material Adverse Effect), its corporate existence, rights and franchises, except in connection with a Joint Venture Transaction or an Asset Exchange, provided, however, that the corporate existence of any Principal Subsidiary may be terminated if such termination is not disadvantageous to the Administrative Agent or any Lender; (b) continue to own all of the outstanding shares of common stock of each Principal Subsidiary, except in connection with a Joint Venture Transaction or an Asset Exchange; (c) comply, and cause each of the Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, including, without limitation, all Environmental Laws; (d) pay, and cause each of the Subsidiaries to pay, before any such amounts become delinquent, (i) all taxes, assessments and governmental charges imposed upon it or upon its property, and (ii) all claims (including without limitation, claims for labor, materials, supplies, or services) which might, if unpaid, become a Lien upon its property, unless, in each case, the validity or amount thereof is being disputed in good faith, and the Borrower has maintained adequate reserves with respect thereto, in each case where the failure to so pay would be reasonably expected to cause a Material Adverse Effect; (e) keep, and cause each of the Subsidiaries to keep, proper books of record and account, containing complete and accurate entries of all financial and business transactions of the Borrower and such Subsidiary in all material respects; (f) continue to carry on, and cause each Principal Subsidiary to continue to carry on, substantially the same type of business as the Borrower or such Principal Subsidiary conducted as of the date hereof and business reasonably related thereto, except for changes in such business that result from the sale of Utilities Assets, a Joint Venture Transaction or an Asset Exchange; and (g) maintain or cause to be maintained insurance with financially sound and reputable insurers, or self-insurance, with respect to its properties and business and the properties and business of the Subsidiaries against loss or damage of the kinds customarily insured against by reputable companies in the same or similar businesses, such insurance to be of such types and in such amounts (with such deductible amounts) as is customary for such companies under similar circumstances; provided, however, that the foregoing shall not limit the right of the Borrower or any of its Subsidiaries to engage in any transaction not otherwise prohibited by Section 6.02, 6.03 or 6.04. SECTION 5.02. Financial Statements, Reports, etc. In the case of the Borrower, furnish to the Administrative Agent and each Lender: (a) as soon as available and in any event within 110 days after the end of each fiscal year, consolidated balance sheets and the related statements of income and cash flows of the Borrower and its Subsidiaries (the Borrower and its Subsidiaries being collectively referred to as the "Companies") as of the close of such fiscal year (which requirement shall be deemed satisfied by the delivery of the Borrower's Annual Report on Form 10-K (or any successor form) for such year), all audited by KPMG Peat Marwick or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants to the effect that such consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Companies on a consolidated basis in accordance with GAAP consistently applied; (b) within 65 days after the end of each of the first three fiscal quarters of each fiscal year, consolidated balance sheets and related statements of income and cash flows of the Companies as of the close of such fiscal quarter and the then elapsed portion of the fiscal year (which requirement shall be deemed satisfied by the delivery of the Borrower's Quarterly Report on Form 10-Q (or any successor form) for such quarter), each certified by a Financial Officer as fairly presenting the financial condition and results of operations of the Companies on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Borrower's public shareholders, and copies of all registration statements (other than those on Form S-8) and Form 8-K's (to the extent that such Form 8-K's disclose actual or potential adverse developments with respect to the Borrower or any of its Subsidiaries that constitute, or could reasonably be anticipated to constitute, a Material Adverse Effect) filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange; (d) prompt notice of any reduction in the credit rating given to the Borrower by S&P or Moody's; (e) promptly after (i) the occurrence thereof, notice of any ERISA Termination Event or "prohibited transaction", as such term is defined in Section 4975 of the Code, with respect to any Plan that results, or could reasonably be anticipated to result, in a Material Adverse Effect, which notice shall specify the nature thereof and the Borrower's proposed response thereto, and (ii) actual knowledge thereof, copies of any notice of PBGC's intention to terminate or to have a trustee appointed to administer any Plan; and (f) promptly, from time to time, such other information, regarding its operations, business affairs and financial condition, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. SECTION 5.03. Litigation and Other Notices. Furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of, or any written notice of intention of any Person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any of the Subsidiaries which is reasonably likely to be adversely determined and which, if adversely determined, could reasonably be anticipated to result in a Material Adverse Effect; and (c) any development with respect to the Borrower or any Subsidiary that has resulted in, or could reasonably be anticipated to result in, a Material Adverse Effect. SECTION 5.04. Maintaining Records. Maintain all financial records in accordance with GAAP and, upon reasonable notice, permit any Lender to visit and inspect the financial records of the Borrower at reasonable times and as often as requested and to make extracts from and copies of such financial records, and permit any representatives designated by any Lender to discuss the affairs, finances and condition of the Borrower with the appropriate officers thereof and, with the Borrower's consent (which shall not be unreasonably withheld), the independent accountants therefor; provided, however, that if the Borrower shall so require, a single representative shall be appointed by Lenders holding at least 50% of the aggregate outstanding principal balance of the Loans to exercise the rights granted under this Section 5.04. SECTION 5.05. Use of Proceeds. Use the proceeds of the Loans only for general corporate purposes, including working capital and support of commercial paper issuances and Securitization Transactions permitted hereunder as well as one or more Joint Venture Transactions, acquisitions or Asset Exchanges; provided, however, that no such proceeds shall be used directly or indirectly in connection with any Hostile Acquisition. ARTICLE VI NEGATIVE COVENANTS The Borrower covenants and agrees with each Lender and the Administrative Agent that, so long as this Agreement shall remain in effect or the principal of or interest on any Loan (or any portion thereof), or any other expenses or amounts payable hereunder, shall be unpaid, it will not: SECTION 6.01. Liens; Restrictions on Sales of Receivables. Create, incur, assume, or suffer to exist, or permit any of the Principal Subsidiaries to create, incur, assume, or suffer to exist, any Lien on any of its property now owned or hereafter acquired to secure any Indebtedness of the Borrower or any such Principal Subsidiary, or sell or assign any accounts receivable (other than in the ordinary course of business substantially in accordance with the Borrower's past practice), other than: (a) Liens incurred or deposits made in the ordinary course of business to secure surety and appeal bonds, leases, return-of-money bonds and other similar obligations (exclusive of obligations of the payment of borrowed money); (b) Liens created under or in connection with the First Mortgage Bond Indentures or any other indentures governing the issuance of mortgage bonds by the Borrower; (c) pledges or deposits to secure the utility obligations of the Borrower incurred in the ordinary course of business; (d) Liens upon or in property now owned or hereafter acquired to secure Indebtedness incurred solely for the purpose of financing the acquisition, construction or improvement of any property, provided that such Indebtedness shall not exceed the fair market value of the property being acquired, constructed or improved; (e) Liens on the assets of any Principal Subsidiary to secure the repayment of project financing for such Principal Subsidiary; (f) Liens on the assets of any Person merged or consolidated with or into (in accordance with Section 6.04) the Borrower or any Principal Subsidiary that were in effect at the time of such merger or consolidation; (g) Liens securing Indebtedness of the Borrower or of any Principal Subsidiary to the Rural Electrification Administration, the Rural Utilities Service, the Rural Telephone Bank or the Rural Telephone Finance Cooperative (or any successor to any such agency); (h) Liens for taxes, assessments and governmental charges or levies, which are not yet due or are which are being contested in good faith by appropriate proceedings; (i) carriers', warehousemen's, mechanics', materialmen's, repairmen's, suppliers or other like Liens arising in the ordinary course of business relating to obligations not overdue for a period of more than 60 days or which are bonded or being contested in good faith by appropriate proceedings; (j) pledges or deposits in connection with workers' compensation laws or similar legislation or to secure public or statutory obligations; (k) Liens incurred on deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (l) easements, rights of way, restrictions and other encumbrances incurred which, in the aggregate, do not materially interfere with the ordinary conduct of business; (m) restrictions by Governmental Authorities on the operations, business or assets of the Borrower or its Subsidiaries that are customary in the Borrower's and its Subsidiaries' businesses; and (n) sales of accounts receivable pursuant to, and Liens existing or deemed to exist in connection with, any Securitization Transactions, provided the aggregate amount of all such Securitization Transactions shall not at any time exceed $150,000,000; provided, however, that the Borrower or any Principal Subsidiary may create, incur, assume or suffer to exist other Liens (in addition to Liens excepted by the foregoing clauses (a) through (m)) on its assets so long as the sum of the assets subject to such Liens plus the amount of any outstanding Securitization Transactions permitted by the foregoing clause (n) does not represent in the aggregate more than 20% of the Borrower's Consolidated Tangible Assets. SECTION 6.02. Ownership of the Principal Subsidiaries. Sell, assign, pledge, or otherwise transfer or dispose of any shares of common stock, voting stock, or stock convertible into voting or common stock of any Principal Subsidiary, except (a) to another Subsidiary, (b) to the extent the assets of such Principal Subsidiary consist entirely of Utilities Assets at the time such transaction is consummated, (c) in connection with a Joint Venture Transaction or (d) in connection with an Asset Exchange. SECTION 6.03. Asset Sales. Except in connection with a Joint Venture Transaction or an Asset Exchange, permit any Principal Subsidiary to sell, assign, or otherwise dispose of telecommunications assets (whether in one transaction or a series of transactions, if the net, after-tax proceeds thereof are used by the Borrower or any Subsidiary to prepay (other than a mandatory prepayment in accordance with the terms of the applicable governing documents, including pursuant to any put provision) Indebtedness incurred after the date hereof which Indebtedness has a maturity later than the Maturity Date (other than bridge or other financings incurred in connection with an asset purchase or sale, including acquisition indebtedness or indebtedness of an acquired entity). SECTION 6.04. Mergers. Merge or consolidate with, or sell, assign, lease, or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), except for Utilities Assets or in connection with an Asset Exchange, to any Person, or permit any Principal Subsidiary to do so, except that any Subsidiary may merge into or, subject to Section 6.03, transfer assets to the Borrower or any other Subsidiary and the Borrower may merge with any Person; provided that, immediately thereafter and after giving effect thereto, no event shall occur or be continuing which constitutes an Event of Default or a Default and, in the case of any such merger to which the Borrower is a party, either the Borrower is the surviving corporation or the surviving entity (if not the Borrower) has a consolidated net worth (as determined in accordance with GAAP) immediately subsequent to such merger at least equal to the Consolidated Net Worth of the Borrower immediately prior to such merger and expressly assumes the obligations of the Borrower hereunder; provided, however, that, notwithstanding the foregoing, the Borrower and any of the Principal Subsidiaries may sell assets in the ordinary course of its business and may sell or otherwise dispose of worn out or obsolete equipment on a basis consistent with good business practices. SECTION 6.05. Restrictions on Dividends. Enter into or permit any Principal Subsidiary to enter into, any contract or agreement (other than with a governmental regulatory authority having jurisdiction over the Borrower or such Principal Subsidiary) restricting the ability of such Principal Subsidiary to pay dividends or make distributions to the Borrower in any manner that would impair the ability of the Borrower to meet its present and future obligations hereunder. The Secretary of the Borrower or another officer of the Borrower satisfactory to the Administrative Agent shall, prior to entry into any contract or agreement that could restrict the ability of any Principal Subsidiary to pay dividends or make distributions to the Borrower, deliver to the Lenders a certificate certifying (a) to the absence of any Event of Default or Default after giving effect to the entry by such Principal Subsidiary into such contract or agreement, and (b) that such contract or agreement will not impair the ability of the Borrower to meet its present and future obligations hereunder. SECTION 6.06. Transactions with Affiliates. Except in connection with a Joint Venture Transaction or an Asset Exchange, sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that as long as no Default or Event of Default shall have occurred and be continuing, the Borrower or any Subsidiary may engage in any of the foregoing transactions (i) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (ii) as otherwise may be required by any Federal or state Governmental Authority, or (iii) so long as such transactions are not materially disadvantageous to the Borrower. SECTION 6.07. Minimum Consolidated Net Worth. Permit its Consolidated Net Worth at any time to be less than $1,500,000,000. SECTION 6.08. Minimum Access Lines. Permit, as a direct result of any sale, exchange, transfer or other disposition of Access Lines, the total Access Lines owned by the Borrower and its Subsidiaries (other than any Joint Venture) as of the end of the applicable fiscal quarter of the Borrower to be less than 2,500,000. ARTICLE VII EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with this Agreement or the Borrowings hereunder, or any representation, warranty, statement, or information contained in any written report, certificate, financial statement, or other instrument furnished in connection with or pursuant to this Agreement, shall prove to have been false or misleading in any material respect when so made, deemed made, or furnished; (b) default shall be made in the payment of any principal of any Loan (or any portion thereof) when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan (or any portion thereof) or any Fee or any other amount (other than an amount referred to in (b) above) due hereunder, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five Business Days; (d) default shall be made in the due observance or performance of any covenant, condition, or agreement contained in Section 5.01(f) or Section 5.05 or in Article VI; (e) default shall be made in the due observance or performance of any covenant, condition, or agreement contained herein (other than those specified in (b), (c), or (d) above) and such default shall continue unremedied for a period of 30 days after the earlier to occur of (i) the Borrower obtaining knowledge thereof and (ii) the date that written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any Principal Subsidiary, or of a substantial part of the property or assets of the Borrower or a Principal Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership, or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator, or similar official for the Borrower or any Principal Subsidiary or for a substantial part of the property or assets of the Borrower or a Principal Subsidiary, or (iii) the winding-up or liquidation of the Borrower or any Principal Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (g) the Borrower or any Principal Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership, or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (f) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator, or similar official for the Borrower or any Principal Subsidiary or for a substantial part of the property or assets of the Borrower or any Principal Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability, or fail generally to pay its debts as they become due, or (vii) take any action for the purpose of effecting any of the foregoing; (h) the Borrower or any Principal Subsidiary, as the case may be, fails to pay when due, or within any grace period applicable thereto by the terms thereof, any other Indebtedness of the Borrower or any Principal Subsidiary aggregating $50,000,000 or more; (i) the Borrower or any Principal Subsidiary shall fail to observe or perform any covenant or agreement contained in any single agreement or instrument relating to any Indebtedness in excess of (i) $75,000,000 in the aggregate, with respect to any Indebtedness issued on a tax-exempt basis, and (ii) $50,000,000 in the aggregate, with respect to all other Indebtedness, in each case within any applicable grace period, or any other event shall occur if the effect of such failure or other event is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness; or any such Indebtedness shall be required to be prepaid (other than by a regularly scheduled required prepayment, pursuant to any put right (or similar right) of the holder thereof, or by the exercise by the Borrower or such Principal Subsidiary of its right to make a voluntary prepayment) in whole or in part prior to its stated maturity; (j) a judgment or order for the payment of money in excess of $50,000,000 and having a Material Adverse Effect shall be rendered against the Borrower or any of the Subsidiaries and such judgment or order shall continue unsatisfied (in the case of a money judgment) and in effect for a period of 30 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement, or otherwise); (k) a Plan shall fail to maintain the minimum funding standard required by Section 412(a) of the Code for any plan year or a waiver of such standard is sought or granted under Section 412(d), or a Plan is or shall have been terminated or the subject of termination proceedings under ERISA, or the Borrower or an ERISA Affiliate has incurred a liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result from any such event or events a Material Adverse Effect; and (l) there shall have occurred a Change in Control; then, and in every such event (other than an event with respect to the Borrower described in paragraph (f) or (g) above), and at any time thereafter during the continuance of such event, the Administrative Agent, at the request of the Required Lenders, shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall become forthwith due and payable, without presentment, demand, protest, or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding; and in any event with respect to the Borrower described in paragraph (f) or (g) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest, or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding. ARTICLE VIII THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Administrative Agent on behalf of the Lenders. Each of the Lenders, and each Transferee by its agreement to be bound hereby, irrevocably authorizes the Administrative Agent to take such actions on behalf of such Lender or Transferee and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to promptly give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrower pursuant to this Agreement as received by the Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall be liable as such for any action taken or omitted by any of them, except for its or his own gross negligence or willful misconduct, or be responsible for any statement, warranty, or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower of any of the terms, conditions, covenants, or agreements contained herein. The Administrative Agent shall not be responsible to the Lenders or any Transferee for the due execution, genuineness, validity, enforceability, or effectiveness of this Agreement or any other instruments or agreements. The Administrative Agent may deem and treat each Lender party hereto as a "Lender" hereunder and for all purposes hereof until it shall have received notice, given as provided herein, of the assignment of all of such Lender's rights and obligations hereunder. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders (or such other number of Lenders as is expressly required hereby with respect to such action or inaction) and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders and each Transferee. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper Person or Persons. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall have any responsibility to the Borrower on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or the Borrower of any of their respective obligations hereunder or in connection herewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor administrative agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Borrower shall have the right to appoint a successor, provided that any successor selected by the Borrower must be approved by the Required Lenders. If no successor shall have been so appointed by the Borrower and shall have accepted such appointment within 20 Business Days after the retiring Administrative Agent gives notice of its resignation, then the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 Business Days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor administrative agent which shall be a bank with an office in New York, New York and having a combined capital and surplus of at least $1,000,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and the Administrative Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent. Each Lender agrees (i) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder or, if the Commitments shall have terminated, based on its outstanding Loans hereunder) of any expenses incurred for the benefit of the Lenders by the Administrative Agent, including reasonable counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, which shall not have been reimbursed by the Borrower, and (ii) to indemnify and hold harmless the Administrative Agent and any of its directors, officers, employees, or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, cost, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it in its capacity as the Administrative Agent or any of them in any way relating to or arising out of this Agreement or any action taken or omitted by it or any of them under this Agreement, to the extent the same shall not have been indemnified by the Borrower; provided that no Lender shall be liable to the Administrative Agent or any of them for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent or any of its directors, officers, employees, or agents. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. None of the Lenders identified on the facing page or signature pages of this Agreement as a "syndication agent" or "co-documentation agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified as a "syndication agent" or "co-documentation agent" shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by the method, if any, specified in the relevant provisions of this Agreement and otherwise by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to the Borrower, to it at 3 High Ridge Park, Stamford, Connecticut 06905, Attention of Treasurer (Telecopy No. 203-614-5711); (b) if to the Administrative Agent, to it at One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Janet Belden (Telecopy No. 212-552-5658), with a copy to Joan M. Fitzgibbon, The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017 (Telecopy No. 212-270-4164); and (c) if to a Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy, or on the date five Business Days after dispatch by certified or registered mail, if mailed, in each case delivered, sent, or mailed (properly addressed) to such party as provided in this Section 9.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.01; provided, that notices from the Borrower to the Administrative Agent relating to Borrowings or Conversions shall be effective only on actual receipt. SECTION 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement is outstanding and unpaid or so long as the Commitments have not been terminated. SECTION 9.03. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have received copies hereof which, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior consent of all the Lenders. SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Administrative Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement, including all or a portion of its Commitment and the Loans at the time owing to it; provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, or an assignment pursuant to Section 9.04(h) (in such circumstances described in Section 9.04(h) where consent is not required), the Borrower and the Administrative Agent must give their prior written consent to such assignment, which consent shall not be unreasonably withheld, provided, further, however, that the consent of the Borrower to any such assignment shall not be required at any time an Event of Default shall have occurred and be continuing, (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights or obligations under this Agreement, (iii) the amount of the Commitment or Loans of the assigning Lender subject to any such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 and the amount of the Commitment or Loans of such Lender remaining after such assignment shall not be less than $5,000,000 or shall be zero, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Subject to payment in full by the assignee to the assignor and upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have (in addition to any such rights and obligations theretofore held by it) the rights and obligations of a Lender under this Agreement, and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any Fees accrued for its account hereunder and not yet paid)). Notwithstanding the foregoing, any Lender assigning its rights and obligations under this Agreement may retain any Competitive Loans made by it outstanding at such time, and in such case shall retain its rights hereunder in respect of any Loans so retained until such Loans have been repaid in full in accordance with this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, and the outstanding balances of its Standby Loans and Competitive Loans (to the extent assigned), in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties, or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement or any other instrument or document furnished pursuant hereto or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.02 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender, or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The Administrative Agent shall also record in the Register the then scheduled Maturity Date and shall update the Register from time to time upon any change in a Lender's Commitment and Loans pursuant to the terms of this Agreement. The entries in the Register shall be conclusive in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, together with an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of the Borrower and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Lenders and (iv) send a copy of such Assignment and Acceptance to the Borrower. (f) Each Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders and (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications, or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans or Fees, or changing or extending the Commitments). (g) Any Lender may, in connection with any assignment or proposed assignment pursuant to this Section 9.04, disclose to the assignee or proposed assignee any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or proposed assignee shall execute an agreement whereby such assignee shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information. It is understood that confidential information relating to the Borrower would not ordinarily be provided in connection with assignments of Competitive Loans. No Lender may, in connection with any participation or proposed participation pursuant to this Section 9.04, disclose to any participant or proposed participant any confidential information relating to the Borrower without the prior written consent of the Borrower. (h) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement and its promissory notes (if any) to secure obligations of such Lender to a Federal Reserve Bank or, with the prior written consent of the Borrower (which consent shall not be unreasonably withheld, provided, that the consent of the Borrower to any such pledge or assignment shall not be required at any time an Event of Default shall have occurred and be continuing), to secure other obligations of such Lender; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (i) The Borrower shall not assign or delegate any of its rights or duties hereunder. SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay (i) all reasonable legal fees and disbursements incurred by the Administrative Agent in connection with the preparation of this Agreement and (ii) all out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by the Administrative Agent and any Lender in connection with any amendments, modifications or waivers of the provisions hereof or thereof or incurred by the Administrative Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement. (b) The Borrower agrees to indemnify the Administrative Agent, each Lender and each of their respective directors, officers, employees, Affiliates and agents (each such Person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against any Indemnitee arising out of, (i) the use of the proceeds of the Loans or (ii) any claim, litigation, investigation, or proceeding relating to this Agreement, the use of such proceeds or the transactions contemplated hereby, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities, or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. Each Lender shall notify the Borrower promptly after it determines that it will make a claim for indemnification under this Section 9.05(b). The Borrower shall be entitled to participate in the defense of the litigation, investigation, or proceeding giving rise to such claim with counsel satisfactory to the Lender, in the exercise of its reasonable judgment; provided, however, that any such participation in such defense shall be conducted by the Borrower and at the Borrower's expense and in a manner considered by such Lender to be satisfactory and effective to protect against such claim without causing damage to the conduct of, or affecting such Lender's control of, such Lender's defense. The Borrower shall inform such Lender of its intention to participate in the defense of such claim within 15 days after receipt of notice thereof from such Lender. (c) The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement, or any investigation made by or on behalf of the Administrative Agent or any Lender. All amounts due under this Section 9.05 shall be payable on written demand therefor. SECTION 9.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.07. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. (b) Except as provided in Section 2.11(d), neither this Agreement nor any provision hereof may be waived, amended, or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on, any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender, (ii) except as provided in Section 2.11(d), change or extend the Commitment of any Lender or decrease or extend any scheduled payment date for the Facility Fees of any Lender without the prior written consent of such Lender, or (iii) amend or modify the provisions of Section 2.16, the provisions of this Section or the definition of "Required Lenders", without the prior written consent of each Lender; provided further that no such agreement shall amend, modify, or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Each Lender shall be bound by any waiver, amendment, or modification authorized by this Section or by Section 2.11(d), and any consent by any Lender pursuant to this Section or by Section 2.11(d) shall bind any Transferee of its rights and obligations hereunder. SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively, the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken, or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received, or reserved by such Lender in accordance with applicable law, the rate of interest payable to such Lender, together with all Charges payable to such Lender, shall be limited to the Maximum Rate. SECTION 9.10. Entire Agreement. This Agreement constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations, or liabilities under or by reason of this Agreement. SECTION 9.11. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH. EACH PARTY HERETO (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT, OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (b) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND, IF APPLICABLE, ANY OTHER AGREEMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11. SECTION 9.12. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal, or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal, or unenforceable provisions. SECTION 9.13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 9.03. SECTION 9.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) The Borrower hereby irrevocably and unconditionally submits to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any other agreement or instrument executed and delivered in connection herewith, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (b) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action, or proceeding arising out of or relating to this Agreement or any other agreement or instrument executed and delivered in connection herewith in any New York State court or Federal court of the United States of America sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. [Signature pages follow] IN WITNESS WHEREOF, the Borrower, the Administrative Agent and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CITIZENS COMMUNICATIONS COMPANY By: /s/ Donald B. Armour ------------------------------------------- Name: Donald B. Armour Title: Vice-President Finance and Treasurer THE CHASE MANHATTAN BANK, as Administrative Agent By: /s/ Joan M. Fitzgibbon --------------------------------------------- Name: Joan M. Fitzgibbon Title: Managing Director Lenders: ------- THE CHASE MANHATTAN BANK By: Joan M. Fitzgibbon --------------------------------------------- Name: Joan M. Fitzgibbon Title: Managing Director SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Name of Institution: Citibank N.A. ------------- By: /s/ Thomas Labergere ------------------------------ Name: Thomas Labergere Title: Vice-President SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Name of Institution: Toronto Dominion (Texas), Inc. -------------------------------- By: /s/ Caroline Faeth ----------------------- Name: Caroline Faeth Title:Vice-President SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Name of Institution: Bear Stearns Corporate Lending ------------------------------ By: /s/ Lawrence B. Alletto -------------------------------- Name: Lawrence B. Alletto Title: Senior Managing Director Bear Stearns Corporate Lending SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Name of Institution: Bank of America , N. A. ----------------------- By: /s/ Michael Pavell ----------------------- Name: Michael Pavell Title: Vice-President SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Name of Institution: Bank One, NA ------------ By: /s/ Jennifer L. Jones ------------------------ Name: Jennifer L. Jones Title: Assistant Vice-President SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Name of Institution: Mellon Bank, N.A. ----------------- By: /s/ Thomas J. Tarasovich, Jr. ----------------------------- Name: Thomas J. Tarasovich, Jr. Title: Lending Officer EX-10 4 rtfcagree.txt RTFC AGREEMENT -------------------------------------------------- $200,000,000 LOAN AGREEMENT dated as of October 24, 2001 by and between CITIZENS COMMUNICATIONS COMPANY as Borrower and RURAL TELEPHONE FINANCE COOPERATIVE as Lender --------------------------------------------------
EXECUTION COPY TABLE OF CONTENTS Page ARTICLE 1 CONSTRUCTION AND DEFINITION OF TERMS SECTION 1.01 Defined Terms...................................................................1 SECTION 1.02 Terms Generally.................................................................9 ARTICLE 2 LOAN SECTION 2.01 Loan............................................................................10 SECTION 2.02 Advances........................................................................10 SECTION 2.03 Payments and Interest Rate......................................................10 SECTION 2.04 Prepayment .....................................................................11 SECTION 2.05 10% Subordinated Capital Certificates ..........................................11 ARTICLE 3 RESERVED ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01 Organization; Powers; Governmental Approvals ...................................11 SECTION 4.02 Financial Statements ...........................................................12 SECTION 4.03 No Material Adverse Change .....................................................12 SECTION 4.04 Title to Properties; Possession Under Lease ....................................12 SECTION 4.05 Ownership of Subsidiaries ......................................................13 SECTION 4.06 Litigation; Compliance with Laws ...............................................13 SECTION 4.07 Agreement.......................................................................13 SECTION 4.08 Federal Reserve Regulations.....................................................13 SECTION 4.09 Investment Company Act; Public Utility Holding Company Act......................14 SECTION 4.10 Use of Proceeds.................................................................14 SECTION 4.11 Tax Returns.....................................................................14 SECTION 4.12 No Material Misstatements.......................................................14 SECTION 4.13 Employee Benefit Plans..........................................................14 .. SECTION 4.14 Insurance.......................................................................14 ARTICLE 5 CONDITIONS OF LENDING SECTION 5.01 Initial Advance.................................................................15 SECTION 5.02 Each Advance....................................................................16 ARTICLE 6 AFFIRMATIVE COVENANTS SECTION 6.01 Membership .....................................................................16 SECTION 6.02 Financial Statements and Other Information .....................................16 SECTION 6.03 Financial Ratios................................................................17 SECTION 6.04 Annual Certificate..............................................................17 SECTION 6.05 Insurance.......................................................................17 SECTION 6.06 Existence; Businesses and Properties............................................18 ARTICLE 7 NEGATIVE COVENANTS SECTION 7.01 Notice.........................................................................18 SECTION 7.02 Dividends and Other Cash Distributions.........................................18 SECTION 7.03 Sale of Assets.................................................................18 SECTION 7.04 Liens; Restrictions on Sales Receivables.......................................19 SECTION 7.05 Ownership of the Principal Subsidiaries........................................20 SECTION 7.06 Mergers........................................................................20 SECTION 7.07 Transactions with Affiliates...................................................20 SECTION 7.08 Net Worth......................................................................20 SECTION 7.09 Minimum Access Lines...........................................................20 ARTICLE 8 EVENTS OF DEFAULT ARTICLE 9 RIGHTS AND REMEDIES SECTION 9.01 Rights and Remedies of the Lender ............................................22 SECTION 9.02 Cumulative Nature of Remedies.................................................22 SECTION 9.03 Costs and Expenses............................................................22 SECTION 9.04 Lender's Setoff...............................................................23 ARTICLE 10 MISCELLANEOUS SECTION 10.01 Performance for Borrower ....................................................23 SECTION 10.02 Reserved. Expenses; Indemnity................................................23 SECTION 10.03 Waivers by Borrower .........................................................24 SECTION 10.04 Waivers by the Lender........................................................24 SECTION 10.05 Lender's Records.............................................................25 SECTION 10.06 Modifications................................................................25 SECTION 10.07 Notices......................................................................25 SECTION 10.08 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial..............25 SECTION 10.09 Holiday Payments ............................................................26 SECTION 10.10 Consent to Patronage Capital Distributions...................................26 SECTION 10.11 Right to Inspect.............................................................26 SECTION 10.12 Survival; Successors and Assigns.............................................26 SECTION 10.13 Assignment...................................................................26 SECTION 10.14 Severability.................................................................27 SECTION 10.15 Counterparts.................................................................27 SECTION 10.16 Headings/Use of Terms........................................................27 SECTION 10.17 Further Assurances...........................................................27 SECTION 10.18 Lender's Approval............................................................27 SECTION 10.19 Merger and Integration.......................................................27 SECTION 10.20 Right to Setoff..............................................................27 SECTION 10.21 Interest Rate Limitation.....................................................27
LOAN AGREEMENT LOAN AGREEMENT ("Agreement") made as of October 24, 2001, by and between CITIZENS COMMUNICATIONS COMPANY, a Delaware corporation ("Borrower"), and RURAL TELEPHONE FINANCE COOPERATIVE, a South Dakota cooperative association ("Lender"). RECITALS: WHEREAS, Borrower has requested Lender to make a loan to Borrower in an amount up to $200,000,000.00 for a term of ten (10) years on the terms and conditions set forth herein; and WHEREAS, Lender is willing to make the loan upon the terms and conditions set forth in this Agreement, the Note and the other loan documents; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein, Borrower and Lender do hereby agree as follows: l. CONSTRUCTION AND DEFINITION OF TERMS 1.01 Defined Terms. In addition to the terms defined elsewhere in this Agreement, unless the context otherwise requires, when used herein, the following terms shall have the following meanings: "Access Lines" shall mean, on any date, the total number of telephony access lines provided by the Borrower and its Subsidiaries (other than Non-Recourse Joint Ventures) through their owned telecommunications system network facilities (excluding lines provided through resale agreements) to customers of the Borrower and its Subsidiaries (other than Non-Recourse Joint Ventures) whose service payments are not overdue to a point where service is generally disconnected. "Advance" shall mean an advance of funds under the Loan as defined in Section 2.02. "Advance Date" shall mean the date of any Advance. "Applicable Rate" for each Advance shall mean the ten (10) year Treasury bond rate as published in the U.S. edition of The Wall Street Journal on the applicable Advance Date (hereinafter "Index Rate"), plus the current Secondary Market Bullet Bid Side Spread for Utilities for a ten (10) year issue term for Borrower's then Lehman Rating, as published on the applicable Advance Date (or if not published on the Advance Date, the most recent prior publication date) in the Lehman Brothers Global Fixed Income Market Data publication, minus one-quarter of one percent (.25%) (hereinafter "Spread"). If The Wall Street Journal changes or ceases to publish the Index Rate, or the Index Rate becomes unavailable for any reason, or if Lehman Brothers Global Fixed Income Market Data publication changes or ceases publication of the necessary information to determine the Spread or the Lehman Rating, or the information becomes unavailable for any reason, then the parties shall negotiate, in good faith, to select another source for a comparable Lehman Rating, Index Rate and Spread. "Applicable Rating Level" at any time, as to the Borrower shall mean the lower of Borrower's Moody's Rating or S&P Rating. In the event that no S&P Rating or no Moody's Rating shall be in effect (other than by reason of the circumstances referred to in the last sentence of this definition), then the Applicable Rating Level shall be the rating most recently in effect prior to such change or cessation. For purposes of this Agreement the Applicable Rating Level shall be redetermined on each date of an announcement of a change in the S&P Rating or the Moody's Rating without further notice to Borrower. If the rating system of S&P or Moody's shall change, or if either such Person shall cease to issue a rating for Borrower, or cease to be in the business of rating corporate Indebtedness obligations, the Borrower and the Lender shall negotiate, in good faith, to amend this definition to reflect such changed rating system or the unavailability of ratings from such Person and, pending the effectiveness of any such amendment, the Applicable Rate and financial covenant compliance shall be determined by reference to the Applicable Rating Level most recently in effect prior to such change or cessation. "Asset Exchange" shall mean the exchange or other transfer of telecommunications assets between or among the Borrower and another Person or other Persons in connection with which the Borrower would transfer telecommunications assets and/or other property in consideration of the receipt of telecommunications assets and/or other property having a fair market value substantially equivalent to those transferred by the Borrower (as determined in good faith by the Borrower's Board of Directors); provided that the principal value of the assets being transferred to the Borrower shall be represented by telecommunications assets. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) that Lender is open for business. "Capital Lease" shall mean any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, by the Borrower or any of its Subsidiaries, as lessee, which obligations are required in accordance with GAAP to be classified and accounted for as a capital lease on a Consolidated balance sheet of the Borrower and its Subsidiaries. "Certified" shall mean that the information, statement, schedule, report or other document required to be "Certified" shall contain a representation of a duly authorized officer of Borrower that such information, statement, schedule, report or other document is true and correct and complete as of the date thereof (except as otherwise set forth therein). A "Change in Control" shall be deemed to have occurred if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date thereof) shall own directly or indirectly, beneficially or of record, shares representing 50% or more of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; or (b) a majority of the seats (other than vacant seats) on the Board of Directors of the Borrower shall at any time have been occupied by Persons who were neither (i) nominated by the management of the Borrower, nor (ii) appointed by directors so nominated; or (c) any Person or group shall otherwise directly or indirectly Control the Borrower. "Closing" shall mean the first date on which funds are available to be advanced to Borrower hereunder. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment Amount" shall be $200,000,000.00. "Consolidated" shall mean, when used with reference to financial statements or financial statement items of the Borrower and its Subsidiaries, such statements or items on a consolidated basis in accordance with applicable principles of consolidation under GAAP. "Consolidated Net Worth" shall mean, as at any date of determination, the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries, including redeemable preferred securities where the redemption date occurs after the Maturity Date, mandatorily redeemable convertible preferred securities, mandatorily convertible Indebtedness (or Indebtedness subject to mandatory forward purchase contracts for equity or similar securities) and minority equity interests in other persons, as determined on a consolidated basis in conformity with GAAP consistently applied. For the purpose of calculating "Consolidated Net Worth", the consolidated stockholder's equity of any Non-Recourse Joint Venture and its Subsidiaries and all Non-Recourse Indebtedness shall be excluded from the consolidated stockholder's equity of the Borrower and its consolidated Subsidiaries, except to the extent included in minority equity interests. "Consolidated Tangible Assets" of any Person shall mean total assets of such Person and its consolidated Subsidiaries, determined on a consolidated basis, less goodwill, patents, trademarks and other assets classified as intangible assets in accordance with GAAP. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and "Controlling" and "Controlled" shall have meanings correlative thereto. "Default" shall mean any event or condition which upon notice, lapse of time, or both, would constitute an Event of Default. "EBITDA" shall mean, with respect to the Borrower and its Subsidiaries for any period: operating income for such period plus depreciation and amortization, calculated on a Consolidated basis without duplication, in accordance with GAAP. For any acquisition or sale of assets by the Borrower or any Subsidiary during any period of calculation, the EBITDA shall be adjusted to reflect pro forma income and expenses of the acquired or sold asset as determined in good faith by a Financial Officer to give effect to such acquisition or sale, as if such acquisition or sale occurred on the first day of the period. "Effective Date" shall mean the date on which the conditions specified in Section 5.01 are satisfied, or waived in accordance with Section 10.06. "Environmental Laws" shall mean all national, federal, state, provincial, municipal or local laws, statutes, ordinances, orders, judgments, decrees, injunctions, writs, policies and guidelines (having the force of law), directives, approvals, notices, rules and regulations and other applicable laws relating to environmental or occupational health and safety matters, including those relating to the Release or threatened Release of Specified Substances and to the generation, use, storage or transportation of Specified Substances, each as in effect as of the date of determination. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA. "ERISA Termination Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA (other than a "Reportable Event" not subject to the provision for 30-day notice to the PBGC under such regulations), or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceeding to terminate a Plan by the PBGC or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Event of Default" shall mean any of the events described in Article 8 hereof. "Financial Ratios" shall mean the Interest Coverage Ratio and the Leverage Ratio. "Financial Officer" of any corporation shall mean the President, Chief Financial Officer, Chief Executive Officer, Vice President - Finance, Executive Vice President, Chief Accounting Officer or Treasurer of such corporation. "First Mortgage Bond Indentures" shall mean (i) the First Mortgage and Collateral Trust Indenture, dated as of March 1, 1947, from the Borrower to The Marine Midland Trust Company of New York, as Trustee, and (ii) the Mortgage and Deed of Trust Indenture, dated as of June 1, 1962, from the Borrower to Manufacturers Hanover Trust Company, as Trustee, as the same have been and may from time to time be amended or supplemented and in effect. "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. "Governmental Approval" shall mean any authorization, consent, order, approval, license, franchise, lease, ruling, tariff, rate, permit, certificate, exemption of, or filing or registration with, any Governmental Authority. "Governmental Authority" shall mean any federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Hedging Agreement" shall mean any interest rate protection agreement (including, but not limited to, any interest rate swap, collar, cap, floor or a forward rate agreement), foreign currency exchange agreement or other agreement executed in connection with hedging the interest rate and/or exchange rate exposure of the Borrower and any confirming letter executed pursuant to such Hedging Agreement, all as amended, restated, supplemented or otherwise modified from time to time. "Indebtedness" of any Person shall mean, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind (other than customer deposits made in the ordinary course of business), (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Capital Lease obligations of such Person, (h) all obligations of such Person in respect of any Hedging Agreement (except to the extent such obligations are used as a bonafide hedge of other Indebtedness of such Person), (i) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances (except to the extent any such obligations are incurred in support of other obligations constituting Indebtedness of such Person and other than, to the extent reimbursed if drawn, letters of credit in support of ordinary course performance obligations), and (j) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, directly or indirectly, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term Indebtedness shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Interest Coverage Ratio" shall mean, as of any fiscal quarter end, the ratio of (a) EBITDA for the four consecutive fiscal quarter periods immediately prior to such fiscal quarter end (including such fiscal quarter), to (b) Interest Expense for the same four-quarter period as of such fiscal quarter end. "Interest Expense" shall mean, with respect to the Borrower and its Subsidiaries for any period, aggregate interest expense thereof with respect to Total Indebtedness (and, to the extent not included therein, interest expense attributable to Capital Leases, and any fees and charges with respect to any other Indebtedness, and any fees, charges and other net obligations payable with respect to any Hedging Agreements), calculated on a Consolidated basis, without duplication, in accordance with GAAP. "Investment Grade" shall mean, as to the Borrower, at any time, an S&P rating of BBB- or higher and a Moody's rating of Baa3 or higher. "Joint Venture" shall mean a general or limited partnership, limited liability company or other entity formed or organized under the laws of the United States of America or any state thereof that would own or operate telecommunications assets and which, in turn, the Borrower would manage. "Joint Venture Transaction" shall mean the formation of a Joint Venture, by the formation of a new entity and the contribution of telecommunications assets (or cash or similar assets) thereto by the Borrower, the investment by the Borrower in a previously existing entity that owns telecommunications assets or other similar transaction. "Leases" shall mean any lease of property by which Borrower shall be obligated for rental or other payments which in the aggregate are in excess of $1,000,000.00, except, however, leases shall not mean any equipment leases which in form and substance substantially conform with lease agreements in general use in Borrower's industry by companies of size and character similar to Borrower. "Lehman Rating" as determined for Borrower, shall mean the rating published on, or if not published on then published most recently prior to, an Advance Date in the Lehman Brothers Global Fixed Income Market Data publication for Secondary Market Bullet Bid Side Spreads that is equivalent to the lower of Borrower's Moody's Rating or S&P Rating in effect on the applicable Advance Date. The equivalent Lehman Ratings, Moody's Ratings and S&P Ratings are set forth in Exhibit A, attached hereto and shall be used in determining the Lehman Rating. In the event that no S&P Rating or no Moody's Rating shall be in effect (other than by reason of the circumstances referred to in the last sentence of this definition), then the Moody's Ratings and S&P Ratings shall be the ratings most recently in effect prior to such change or cessation. If the rating system of S&P or Moody's shall change, or if either such Person shall cease to issue a rating for Borrower, or cease to be in the business of rating corporate Indebtedness obligations, or if Lehman Brothers ceases to publish the information necessary to determine the Lehman Rating, the Borrower and the Lender shall negotiate, in good faith, to amend this definition to reflect such changed rating system or the unavailability of ratings from such Person and, pending the effectiveness of any such amendment, the Lehman Rating shall be determined by reference to the Lehman Rating most recently in effect prior to such change or cessation. "Leverage Ratio" shall mean, with respect to any fiscal quarter, as of the date ending such fiscal quarter, the ratio of (a) Total Indebtedness as of such fiscal quarter end to (b) EBITDA, plus cash equity contributions included in the determination of Consolidated Net Worth, for the four consecutive fiscal quarters immediately prior to such fiscal quarter end (including such fiscal quarter). "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge, or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease, or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call, or similar right of a third party with respect to such securities. "Loan" shall mean the loan or loans by the Lender to Borrower, pursuant to this Agreement and the Note, in an aggregate principal amount not to exceed the Commitment Amount. "Make-Whole Premium" shall mean fifty percent (50%) of the excess, if any, of (i) the present value of the amount of interest that would have accrued during the remaining term of each Advance or portion thereof to be prepaid, over (ii) the present value of the amount of interest Lender would earn if the prepaid principal amount was reinvested for the remainder of the applicable remaining term of the Loan in U.S. Treasury obligations with a maturity comparable to the then remaining term of each prepaid Advance. For purposes of calculating the present value in (i) and (ii) above, the discount rate will be the rate of interest accruing on the U.S. Treasury obligations in (ii) above. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, operations, financial condition or results of operations of the Borrower and the Subsidiaries taken as a whole. "Maturity Date" shall mean October 24, 2011. "Moody's" shall mean Moody's Investors Service, Inc., or any successor thereto. "Moody's Rating" shall mean, on any date of determination, (i) the debt rating most recently announced by Moody's with respect to the long-term, senior, unsecured, non-credit enhanced Indebtedness of the Borrower or (ii) if (A) the Indebtedness of the Borrower under this Agreement shall be credit enhanced by any Person other than the Borrower and (B) both Moody's and S&P shall have assigned a debt rating to such Indebtedness, then such debt rating assigned by Moody's. "Non-Recourse Joint Venture" shall mean a Joint Venture the funded Indebtedness of which is Non-Recourse Joint Venture Indebtedness. "Non-Recourse Joint Venture Indebtedness" shall mean secured or unsecured Indebtedness of a Joint Venture that is non-recourse to the Borrower or any Principal Subsidiary. In furtherance of the foregoing, an obligation of the Borrower that is non-recourse to the Borrower except to the extent of a pledge of the equity of a Joint Venture (the Indebtedness of which is otherwise non-recourse to the Borrower) will be deemed Non-Recourse Joint Venture Indebtedness. "Note" shall mean the note or notes executed and delivered by Borrower at or prior to Closing pursuant to Section 5.01 hereof, and all renewals, replacements and extensions thereof. "Obligations" shall include the full and punctual performance of all present and future duties, covenants and responsibilities due to the Lender by Borrower under this Agreement, the Note, the Other Agreements, all present and future obligations of Borrower to the Lender for the payment of money under this Agreement, the Note, the Other Agreements, extending to all principal amounts, interest, late charges and all other charges and sums, as well as all costs and expenses payable by Borrower under this Agreement, the Note, the Other Agreements, and any and all other present and future monetary liabilities of Borrower to the Lender, whether direct or indirect, contingent or noncontingent, matured or unmatured, accrued or not accrued, related or unrelated to this Agreement, whether or not of the same character or class as Borrower's obligations under this Agreement and the Note, whether or not secured under any other document, instrument or statutory or common law provision, as well as all renewals, refinancings, consolidations, recastings and extensions of any of the foregoing. "Other Agreements" shall mean any and all promissory notes, security agreements, assignments, subordination agreements, pledge or hypothecation agreements, mortgages, deeds of trust, leases, contracts, guaranties, instruments and documents now and hereafter existing between the Lender and Borrower that have been executed and/or delivered pursuant to this Agreement or guarantee, secure or in any other manner relate to any of the Obligations, including, the instruments and documents referred to in Section 5.01 hereof. "Payment Date" shall mean the last day of each December, March, June and September when there is any amount outstanding under the Loan. "Payment Notice" shall mean the notice furnished to the Borrower at least at least ten (10) days before each Payment Date, indicating the amount of principal and/or interest due on the next ensuing Payment Date. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership, or government, or any agency or political subdivision thereof. "Plan" shall mean any pension plan (including a multiemployer plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code which is maintained for or to which contributions are made for employees of the Borrower or any ERISA Affiliate. "Principal Subsidiary" shall mean any Subsidiary of the Borrower, other than Electric Lightwave, Inc., whose Consolidated Tangible Assets comprise in excess of 20% of the Consolidated Tangible Assets of the Borrower and its Consolidated Subsidiaries as of the date hereof or at any time hereafter. The term "Principal Subsidiary" shall not include any Non-Recourse Joint Venture. "Reimbursement Obligation" means the obligation of the Borrower to reimburse the issuer for amounts drawn under letters of credit. "Release" shall mean any spilling, emitting, discharging, depositing, escaping, leaching, dumping or other releasing, including the movement of any Specified Substance through the air, soil, surface water, groundwater or property, and when used as a verb has a like meaning. "S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor thereto. "S&P Rating" shall mean, on any date of determination, (i) the debt rating most recently announced by S&P with respect to the long-term, senior, unsecured, non-credit enhanced Indebtedness of the Borrower or (ii) if (A) the Indebtedness of the Borrower under this Agreement shall be credit enhanced by any Person other than the Borrower and (B) both S&P and Moody's shall have assigned a debt rating to such Indebtedness, then such debt rating assigned by S&P. "Securitization Transaction" means (a) any transfer or pledge of accounts receivable or interests therein (i) to a trust, partnership, corporation or other entity (other than a Subsidiary), which transfer or pledge is funded by such entity in whole or in part by the issuance to one or more lenders or investors of indebtedness or other securities that are to receive payments principally from the cash flow derived from such accounts receivable or interests in accounts receivable, or (ii) directly to one or more investors or other purchasers (other than any Subsidiary), or (b) any transaction in which the Borrower or a Subsidiary incurs Indebtedness secured by Liens on accounts receivable. The "amount" of any Securitization Transaction shall be deemed at any time to be (A) in the case of a transaction described in clause (a) of the preceding sentence, the aggregate uncollected amount of the accounts receivable transferred pursuant to such Securitization Transaction, net of any such accounts receivable that have been written off as uncollectible, and (B) in the case of a transaction described in clause (b) of the preceding sentence, the aggregate outstanding principal amount of the Indebtedness secured by Liens on accounts receivable incurred pursuant to such Securitization Transaction. "Specified Substance" shall mean (i) any chemical, material or substance defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste" or "toxic substances" or words of similar import under any applicable Environmental Laws; (ii) any (A) oil, natural gas, petroleum or petroleum derived substance, any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal fluid, any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or (B) other materials or pollutants that, in the case of both (A) and (B), (1) pose a hazard to the property of the Borrower or any of its Subsidiaries or any part thereof or to persons on or about such property or to any other property that may be affected by the Release of such materials or pollutants from such property or any part thereof or to persons on or about such other property or (2) cause such property or such other property to be in violation of any Environmental Law; (iii) asbestos, urea formaldehyde foam insulation, toluene, polychlorinated biphenyls and any electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million; and (iv) any sound, vibration, heat, radiation or other form of energy and any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority. "Subordinated Capital Certificate" or "SCC" shall mean a non-interest bearing, amortizing subordinated certificate representing an investment in the Lender purchased, at par, by the Borrower in connection with the Loan equal to ten percent (10%) of each Advance, in the form as set forth in Exhibit B, attached hereto. "Subsidiary" shall mean, with respect to any Person (herein referred to as the "parent"), any corporation, partnership, association, or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled, or held by the parent, or (b) which is, at the time any determination is made, otherwise Controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless otherwise indicated, all references in this Agreement to "Subsidiaries" shall be construed as references to Subsidiaries of the Borrower. "Termination Date" shall mean October 24, 2002. "Total Indebtedness" shall mean, with respect to the Borrower and its Subsidiaries, at any date of determination and without duplication, all outstanding Indebtedness thereof on a Consolidated basis (other than Non-Recourse Joint Venture Indebtedness). "Utilities Assets" shall mean any assets of the Borrower or any Subsidiary thereof (including, without limitation, stock in any such Subsidiary) that are employed in the generation or production, transmission or distribution (as applicable) of electricity, natural gas, synthetic gas or water, or that are used to provide wastewater services. "Wholly-Owned" shall mean, with respect to a Subsidiary, that all of the shares of capital stock or other ownership interests of such Subsidiary are, directly or indirectly, owned or controlled by the Borrower and/or one or more of its Wholly-Owned Subsidiaries (except for directors' qualifying shares or other shares required by applicable law to be owned by a Person other than the Borrower). 1.02 Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement, unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that, for purposes of determining compliance with any covenant set forth in Article 7, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing the Borrower's audited financial statements referred to in Section 4.02. 2. LOAN 2.01 Loan. The Lender agrees to make the Loan to Borrower subject to all of the terms and conditions of this Agreement and the Other Agreements. 2.02 Advances. (a) The Lender agrees to make, on the terms and conditions of this Agreement, Advances from time to time not to exceed the Commitment Amount. The minimum Advance Borrower may request and Lender shall be required to make hereunder shall be $25,000,000.00 except for the final Advance when a lesser amount may be requested if necessary to fund the total available amounts remaining under this Agreement. The obligation of the Borrower to repay the Advances shall be evidenced by the Note. The Lender's obligation to make Advances shall terminate on the earlier to occur of (i) the Termination Date or, (ii) the date on which the total of all Advances made hereunder equals the Commitment Amount, regardless of any reductions, repayments or prepayments of principal. As of the Termination Date any remaining unborrowed funds may, at Lender's option and without notice to Borrower, be applied to reduce the outstanding Commitment Amount. (b) The parties hereto acknowledge and agree that Borrower has requested and, subject to the terms and conditions hereof, Lender will advance to Borrower at Closing, an initial Advance equal to the Commitment Amount. 2.03 Payments and Interest Rate. (a) The Borrower shall pay on each Payment Date, without deduction or set off for any reason, by wire transfer in immediately available funds to Lender's account according to instructions provided by Lender, quarterly interest installments, in an amount reasonably determined by Lender as shown in the Payment Notice as the amount then due and owing hereunder. The total outstanding balance of principal, interest and all other amounts due and payable under the Note and this Agreement shall be due and payable on the Maturity Date. Required payments hereunder shall commence on December 31, 2001 and shall be made on each subsequent Payment Date until the Maturity Date or such earlier date as all amounts due hereunder and on account of the Note shall have been paid in full. At the Lender's option, all payments shall be applied first to late payment charges and any other fees, costs or charges then due and payable, then to interest accrued to the date of such payment, and then to the reduction of the principal balance outstanding. No provision of this Agreement or the Note shall require the payment, or permit the collection, of interest in excess of the highest rate permitted by applicable law. (b) Each Advance shall bear interest per annum at the Applicable Rate in effect on the particular Advance Date, from the date of the Advance until paid in full. Interest shall be computed on the basis of a 30-day month and 360-day year. (c) If the Borrower shall default in the payment of the principal of, or interest on, any Advance, or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration, or otherwise, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be) equal to the Applicable Rate plus two percent (2%). 2.04 Prepayment. The Borrower shall have the right at any time and from time to time to prepay the Loan, in whole or in part, upon giving written notice (or telephone notice promptly confirmed by written notice) to the Lender before 11:00 A.M., Washington, D.C. time, one Business Day prior to prepayment. In the event the Borrower makes a prepayment, the Borrower shall pay the Make Whole Premium as computed by Lender. All prepayments shall be accompanied by payment of accrued and unpaid interest on the amount prepaid and late charges, if applicable, to the date of the prepayment. All prepayments shall be applied first to the Make Whole Premium and any fees and charges due hereunder, second to the payment of accrued and unpaid interest, and then to the unpaid balance of the principal amount of the Loan. Lender, in Lender's sole discretion, may apply any prepayment to any particular Advance or Advances in any order and amount. 2.05 10% Subordinated Capital Certificates. At the time of each Advance, the Borrower shall purchase SCCs in the amount of ten percent (10%) of each Advance, which in the aggregate shall not exceed $20,000,000.00. The purchase price shall be deducted by Lender from the proceeds of each Advance without further notice to the Borrower. The Lender agrees to deliver the SCC certificates on or about the date on which the SCCs have been paid for in full. The SCCs shall bear no interest and shall amortize and mature in accordance with the terms in Exhibit B, attached hereto. 3. RESERVED 4. REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender as of the date of this Agreement that: 4.01 Organization; Powers; Governmental Approvals. (a) The Borrower and each Principal Subsidiary (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not have a Material Adverse Effect. The Borrower's execution, delivery and performance of this Agreement are within its corporate powers, have been duly authorized by all necessary action and do not violate or create a default under (A) law, (B) its constituent documents, or (C) any contractual provision binding upon it, except to the extent (in the case of violations or defaults described under clauses (A) or (C)) where such violation or default would not reasonably be expected to result in a Material Adverse Effect. This Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against it in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting the rights of creditors generally and general principles of equity, including an implied covenant of good faith and fair dealing). (b) Except for (i) any Governmental Approvals required in connection with any Advances (such approvals being "Borrowing Approvals") and (ii) any Governmental Approvals the failure to obtain which could not reasonably be expected to result in a Material Adverse Effect or affect the validity or enforceability of this Agreement, all Governmental Approvals required in connection with the execution and delivery by the Borrower of this Agreement and the performance by the Borrower of its obligations hereunder have been, and, prior to the time of any Advance, all Borrowing Approvals will be, duly obtained, are (or, in the case of Borrowing Approvals, will be) in full force and effect without having been amended or modified in any manner that may impair the ability of the Borrower to perform its obligations under this Agreement, and are not (or, in the case of Borrowing Approvals, will not be) the subject of any pending appeal, stay or other challenge. 4.02 Financial Statements. The Borrower has furnished to the Lender, for itself and its Subsidiaries, its most recent filings with the Securities and Exchange Commission on Forms 10-K and 10-Q. Such Forms 10-K and 10-Q do not contain any untrue statement of a material fact or omit to state a material fact necessary to make any statement therein, in light of the circumstances under which it was made, not misleading. Each of the financial statements in such Forms 10-K and 10-Q has been, and each of the financial statements to be furnished pursuant to Section 6.02 will be, prepared in accordance with GAAP applied consistently with prior periods, except as therein noted, and fairly presents or, will fairly present, in all material respects the Consolidated financial position of the Borrower and its Subsidiaries as of the date thereof and the results of the operations of the Borrower and its Subsidiaries for the period then ended. 4.03 No Material Adverse Change. Since the date of the Borrower's most recent financial statements contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2000, furnished to the Lender pursuant to Section 4.02, there has been no material adverse change in, and there has occurred no event or condition which is likely to result in a material adverse change in, the financial condition, results of operations, business, assets or operations of the Borrower and the Subsidiaries taken as a whole (it being understood that none of the divestiture of Utilities Assets, the consummation or dissolution of a Joint Venture Transaction, the incurrence of Non-Recourse Joint Venture Indebtedness or the consummation of an Asset Exchange shall constitute such a material adverse change). 4.04 Title to Properties; Possession Under Leases. (a) To the best of the Borrower's knowledge, each of the Borrower and the Principal Subsidiaries has good and marketable title to, or valid leasehold interests in, or other rights to use or occupy, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 7.04. (b) Each of the Borrower and the Principal Subsidiaries has complied with all obligations under all material Leases to which it is a party and all such Leases are in full force and effect, except where such failure to comply or maintain such Leases in full force and effect would not have a Material Adverse Effect. Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material Leases except where such failure would not have a Material Adverse Effect. 4.05 Ownership of Subsidiaries. The Borrower owns, free and clear of any Lien (other than Liens expressly permitted by Section 7.04), all of the issued and outstanding shares of common stock of each of the Principal Subsidiaries. 4.06 Litigation; Compliance with Laws. (a) There is no action, suit, or proceeding, or any governmental investigation or any arbitration, in each case pending or, to the knowledge of the Borrower, threatened against the Borrower or any of the Subsidiaries or any material property of any thereof before any court or arbitrator or any governmental or administrative body, agency, or official which (i) challenges the validity of this Agreement or (ii) except as disclosed in the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 or the Borrower's Quarterly Reports on Form 10-Q for the periods ending March 31, 2001 and June 30, 2001, may reasonably be expected to have a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries is in violation of any law, rule, or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default could reasonably be anticipated to result in a Material Adverse Effect. (c) Except as set forth in or contemplated by the financial statements or other reports referred to in Section 4.02 hereof and which have been delivered to the Lender on or prior to the date hereof, (i) the Borrower and each of its Subsidiaries have complied with all Environmental Laws, except to the extent that failure to so comply is not reasonably likely to have a Material Adverse Effect, (ii) neither the Borrower nor any of its Subsidiaries has failed to obtain, maintain or comply with any permit, license or other approval under any Environmental Law, except where such failure is not reasonably likely to have a Material Adverse Effect, (iii) neither the Borrower nor any of its Subsidiaries has received notice of any failure to comply with any Environmental Law or become subject to any liability under any Environmental Law, except where such failure or liability is not reasonably likely to have a Material Adverse Effect, (iv) no facilities of the Borrower or any of its Subsidiaries are used to manage any Specified Substance in violation of any law, except to the extent that such violations, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, and (v) the Borrower is aware of no events, conditions or circumstances involving any Release of a Specified Substance that is reasonably likely to have a Material Adverse Effect. 4.07 Agreements. (a) Neither the Borrower nor any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted, or could reasonably be anticipated to result, in a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be anticipated to result in a Material Adverse Effect. 4.08 Federal Reserve Regulations. No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally, or ultimately, for any purpose which entails a violation of, or which is inconsistent with, the provisions of the margin regulations of the Board of Governors of the Federal Reserve System. 4.09 Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 4.10 Use of Proceeds. The Borrower will use the proceeds of the Loan only for general corporate purposes, including working capital, liquidity, the purchase of SCCs and other corporate purposes, as well as one or more Joint Venture Transactions, acquisitions or Asset Exchanges. 4.11 Tax Returns. Each of the Borrower and the Subsidiaries has filed or caused to be filed all federal, state and local tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except (i) taxes that are being contested in good faith by appropriate proceedings and for which the Borrower shall have set aside on its books adequate reserves and (ii) where such failure to file or pay would not reasonably be expected to result in a Material Adverse Affect. 4.12 No Material Misstatements. No statement, information, report, financial statement, exhibit or schedule furnished by or on behalf of the Borrower to the Lender in connection with the negotiation of this Agreement or included herein or delivered pursuant hereto contained, contains, or will contain any material misstatement of fact or intentionally omitted, omits, or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are, or will be made, not misleading. 4.13 Employee Benefit Plans. (a) Each Plan is in compliance with ERISA, except for such noncompliance that has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (b) No Plan has an accumulated or waived funding deficiency within the meaning of Section 412 or Section 418B of the Code, except for any such deficiency that has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (c) No proceedings have been instituted to terminate any Plan, except for such proceedings where the termination of a Plan has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (d) Neither the Borrower nor any Subsidiary or ERISA Affiliate has incurred any liability to or on account of a Plan under ERISA (other than obligations to make contributions in accordance with such Plan), and no condition exists which presents a material risk to the Borrower or any Subsidiary of incurring such a liability, except for such liabilities that have not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. 4.14 Insurance. Each of the Borrower and the Principal Subsidiaries maintains insurance with financially sound and reputable insurers, or self-insurance, with respect to its properties and business against loss or damage of the kind customarily insured against by reputable companies in the same or similar business and of such types and in such amounts (with such deductible amounts) as is customary for such companies under similar circumstances. 5. CONDITIONS OF LENDING 5.01 Initial Advance. The Lender shall have no obligation to make the initial Advance to the Borrower hereunder unless, as of the date of the initial Advance, each of the following conditions precedent shall be met to the reasonable satisfaction of Lender as provided below: (a) All legal matters incident to the consummation of the transactions hereby contemplated shall be reasonably satisfactory to counsel for the Lender and to such local counsel as counsel for the Lender may retain. (b) There shall have been delivered to the Lender, fully completed and duly executed (when applicable), the following, satisfactory to the Lender and its counsel: (i) This Agreement and the Note; (ii) (A) a copy of the certificate or articles of incorporation, including all amendments thereto, of the Borrower, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of the Borrower as of a recent date, from such Secretary of State; (B) a certificate of the Secretary or Assistant Secretary of the Borrower dated the Effective Date and certifying (i) that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on the date hereof, and at all times since a date prior to the date of the resolutions described in clause (ii) below, (ii) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Agreement and the borrowings hereunder, and that such resolutions have not been modified, rescinded, or amended and are in full force and effect, (iii) that the certificate or articles of incorporation of the Borrower have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (A) above, and (iv) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Borrower; (C) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (B) above; and (D) such other documents as the Lender may reasonably request; (iii) a favorable written opinion from Borrower's general counsel, addressed to Lender, dated as of even date herewith, addressing such legal matters as the Lender or its counsel shall reasonably require. (iv) satisfactory evidence that the Applicable Rating Level is Investment Grade or higher. (v) true and correct copies of all certificates, authorizations and consents, evidencing all Government Approvals, necessary for the execution, delivery or performance by the Borrower of this Agreement and the Note. (vi) payment in full of the Borrower's payment obligations to Lender under that certain Competitive Advance and Revolving Credit Facility Agreement dated October 27, 2000 between Borrower and The Chase Manhattan Bank as Administrative Agent for certain Lenders (the "Chase Credit Facility") and the complete release of Lender from its obligations under the Chase Credit Facility. 5.02 Each Advance. (a) At Closing and at the date of each Advance hereunder, all covenants, representations and warranties set forth in this Agreement shall be true and correct on and as of each Advance date with the same effect as though such covenants, representations and warranties had been made on and as of such date. (b) The Borrower shall be in compliance with all of the terms and provisions set forth herein on its part to be observed or performed, and at the time of, and immediately after such Advance no Event of Default shall have occurred and be continuing. (c) There shall have occurred no Material Adverse Effect and nothing shall have occurred which in the opinion of the Lender materially and adversely affects the Borrower's ability to meet its obligations hereunder. (d) The Applicable Rating Level shall be Investment Grade or higher. (e) Lender shall have received a written request for an Advance from Borrower in a form agreed upon by Lender and Borrower. (f) Each Advance shall be deemed to constitute a representation and warranty by the Borrower on the date of such Advance as to the matters specified in paragraphs (a), (b), (c) and (d) of this Section 5.02. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees with the Lender that, until all of the Obligations have been paid in full: 6.01 Membership. Borrower will remain, or an affiliate thereof will remain, a member in good standing, or otherwise an eligible borrower, of the Lender. 6.02 Financial Statements and Other Information. In the case of the Borrower, furnish to the Lender: (a) as soon as available and in any event within 110 days after the end of each fiscal year, Consolidated balance sheets and the related statements of income and cash flows of the Borrower and its Subsidiaries (the Borrower and its Subsidiaries being collectively referred to as the "Companies") as of the close of such fiscal year (which requirement shall be deemed satisfied by the delivery of the Borrower's Annual Report on Form 10-K (or any successor form) for such year), all audited by KPMG Peat Marwick or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants to the effect that such Consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Companies on a Consolidated basis in accordance with GAAP consistently applied; (b) within 65 days after the end of each of the first three fiscal quarters of each fiscal year, Consolidated balance sheets and related statements of income and cash flows of the Companies as of the close of such fiscal quarter and the then elapsed portion of the fiscal year (which requirement shall be deemed satisfied by the delivery of the Borrower's Quarterly Report on Form 10-Q (or any successor form) for such quarter), each certified by a Financial Officer as fairly presenting the financial condition and results of operations of the Companies on a Consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Borrower's public shareholders, and copies of all registration statements (other than those on Form S-8) and Form 8-K's (to the extent that such Form 8-K's disclose actual or potential adverse developments with respect to the Borrower or any of its Subsidiaries that constitute, or could reasonably be anticipated to constitute, a Material Adverse Effect) filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange; (d) prompt notice of any reduction in the credit rating given to the Borrower by S&P or Moody's; (e) promptly after (i) the occurrence thereof, notice of any ERISA Termination Event or "prohibited transaction", as such term is defined in Section 4975 of the Code, with respect to any Plan that results, or could reasonably be anticipated to result, in a Material Adverse Effect, which notice shall specify the nature thereof and the Borrower's proposed response thereto, and (ii) actual knowledge thereof, copies of any notice of PBGC's intention to terminate or to have a trustee appointed to administer any Plan; and (f) promptly, from time to time, such other information, regarding its operations, business affairs and financial condition, or compliance with the terms of this Agreement, as the Lender may reasonably request. 6.03 Financial Ratios. For any quarter during which the Applicable Rating Level is below Investment Grade the Borrower shall maintain the following minimum Financial Ratios: (a) an Interest Coverage Ratio of 2.00:1 or greater; and (b) a Leverage Ratio of 6.00:1 or lower. 6.04 Annual Certificate. Within 120 days after the close of each calendar year, commencing with the year in which the initial Advance hereunder shall have been made, Borrower will deliver to the Lender a written statement signed by the Financial Officer or similar presiding officer stating that to the best of said person's knowledge, the Borrower has fulfilled all of its Obligations under this Agreement, and the Note, throughout such year or, if there has been a default in the fulfillment of any such Obligations, specifying each such default known to said person and the nature and status thereof. 6.05 Insurance. The Borrower will at all times at its own expense maintain, with a financially sound and reputable insurer, property and casualty insurance with respect to its properties and business against such casualties and contingencies of such types and in such amounts as the Borrower reasonably determines is customary in the case of any entity of established reputation engaged in the same or a similar business and owning similar properties. 6.06 Existence; Businesses and Properties. (a) Preserve and maintain, cause each of the Principal Subsidiaries to preserve and maintain, and cause each other Subsidiary to preserve and maintain (where the failure by any such other Subsidiary to so preserve and maintain would likely result in a Material Adverse Effect), its corporate existence, rights and franchises, except in connection with a Joint Venture Transaction or an Asset Exchange, provided, however, that the corporate existence of any Principal Subsidiary may be terminated if such termination is not disadvantageous to the Lender; (b) continue to own all of the outstanding shares of common stock and membership interests of each Principal Subsidiary, except in connection with a Joint Venture Transaction or an Asset Exchange; (c) comply, and cause each of the Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, including, without limitation, all Environmental Laws; (d) pay, and cause each of the Subsidiaries to pay, before any such amounts become delinquent, (i) all taxes, assessments and governmental charges imposed upon it or upon its property, and (ii) all claims (including without limitation, claims for labor, materials, supplies, or services) which might, if unpaid, become a Lien upon its property, unless, in each case, the validity or amount thereof is being disputed in good faith, and the Borrower has maintained adequate reserves with respect thereto, in each case where the failure to so pay would be reasonably expected to cause a Material Adverse Effect; (e) keep, and cause each of the Subsidiaries to keep, proper books of record and account, containing complete and accurate entries of all financial and business transactions of the Borrower and such Subsidiary in all material respects; and (f) continue to carry on, and cause each Principal Subsidiary to continue to carry on, substantially the same type of business as the Borrower or such Principal Subsidiary conducted as of the date hereof and business reasonably related thereto, except for changes in such business that result from the sale of Utilities Assets, a Joint Venture Transaction or an Asset Exchange; provided, however, that the foregoing shall not limit the right of the Borrower or any of its Subsidiaries to engage in any transaction not otherwise prohibited by Section 7.03, 7.05 or 7.06. 7. NEGATIVE COVENANTS. 7.01 Notice. Borrower will not, without giving 30 days prior written notice to the Lender change its state of incorporation, chief place of business or name. 7.02 Dividends and Other Cash Distributions. The Borrower shall not, at any time enter into or permit any Principal Subsidiary to enter into, any contract or agreement (other than with a governmental regulatory authority having jurisdiction over the Borrower or such Principal Subsidiary) restricting the ability of such Principal Subsidiary to pay dividends or make distributions to the Borrower in any manner that would materially impair the ability of the Borrower to meet its present and future obligations hereunder. 7.03 Sale of Assets. Except in connection with a Joint Venture Transaction or an Asset Exchange, the Borrower shall not permit any Principal Subsidiary to sell, assign, or otherwise dispose of telecommunications assets (whether in one transaction or a series of transactions), if the net, after-tax proceeds thereof are used by the Borrower or any Subsidiary to prepay (other than a mandatory prepayment in accordance with the terms of the applicable governing documents, including pursuant to any put provision) Indebtedness incurred after the date hereof which Indebtedness has a maturity later than the October 24, 2006 (other than bridge or other financings incurred in connection with an asset purchase or sale, including acquisition indebtedness or indebtedness of an acquired entity). 7.04 Liens; Restrictions on Sales Receivables. The Borrower shall not create, incur, assume, or suffer to exist, or permit any of the Principal Subsidiaries to create, incur, assume, or suffer to exist, any Lien on any of its property now owned or hereafter acquired to secure any Indebtedness of the Borrower or any such Principal Subsidiary, or sell or assign any accounts receivable (other than in the ordinary course of business substantially in accordance with the Borrower's past practice), other than: (a) Liens incurred or deposits made in the ordinary course of business to secure surety and appeal bonds, leases, return-of-money bonds and other similar obligations (exclusive of obligations of the payment of borrowed money); (b) Liens created under or in connection with the First Mortgage Bond Indentures or any other indentures governing the issuance of mortgage bonds by the Borrower; (c) pledges or deposits to secure the utility obligations of the Borrower incurred in the ordinary course of business; (d) Liens upon or in property now owned or hereafter acquired to secure Indebtedness incurred solely for the purpose of financing the acquisition, construction or improvement of any property, provided that such Indebtedness shall not exceed the fair market value of the property being acquired, constructed or improved; (e) Liens on the assets of any Principal Subsidiary to secure the repayment of project financing for such Principal Subsidiary; (f) Liens on the assets of any Person merged or consolidated with or into (in accordance with Section 7.06) the Borrower or any Principal Subsidiary that were in effect at the time of such merger or consolidation; (g) Liens securing Indebtedness of the Borrower or of any Principal Subsidiary to the Rural Electrification Administration, the Rural Utilities Service, the Rural Telephone Bank or the Rural Telephone Finance Cooperative (or any successor to any such agency); (h) Liens for taxes, assessments and governmental charges or levies, which are not yet due or which are being contested in good faith by appropriate proceedings; (i) carriers', warehousemen's, mechanics', materialmen's, repairmen's, suppliers or other like Liens arising in the ordinary course of business relating to obligations not overdue for a period of more than 60 days or which are bonded or being contested in good faith by appropriate proceedings; (j) pledges or deposits in connection with workers' compensation laws or similar legislation or to secure public or statutory obligations; (k) Liens incurred on deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (l) easements, rights of way, restrictions and other encumbrances incurred which, in the aggregate, do not materially interfere with the ordinary conduct of business; (m) restrictions by governmental authorities on the operations, business or assets of the Borrower or its subsidiaries that are customary in the Borrower's and its Subsidiaries' businesses; and (n) sales of accounts receivable pursuant to, and Liens existing or deemed to exist in connection with, any Securitization Transactions, provided the aggregate amount of all such Securitization Transactions shall not at any time exceed the greater of (i) 10% of Consolidated Net Worth of the Borrower and (ii) $150,000,000; provided, however, that the Borrower or any Principal Subsidiary may create, incur, assume or suffer to exist other Liens (in addition to Liens excepted by the foregoing clauses (a) through (m)) on its assets so long as the assets subject to such Liens plus the amount of any outstanding Securitization Transactions permitted by the foregoing clause (n) do not represent in the aggregate more than 20% of the Borrower's Consolidated Tangible Assets. 7.05 Ownership of the Principal Subsidiaries. The Borrower shall not sell, assign, pledge, or otherwise transfer or dispose of any shares of common stock, voting stock, or stock convertible into voting or common stock of any Principal Subsidiary, except (a) to another Subsidiary, (b) to the extent the assets of such Principal Subsidiary consist entirely of Utilities Assets at the time such transaction is consummated, (c) in connection with a Joint Venture Transaction, and (d) in connection with an Asset Exchange. 7.06 Mergers. The Borrower shall not merge or consolidate with, or sell, assign, lease, or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), except for Utilities Assets or in connection with an Asset Exchange, to any Person, or permit any Principal Subsidiary to do so, except that any Subsidiary may merge into or, subject to Section 7.03, transfer assets to the Borrower or any other Subsidiary and the Borrower may merge with any Person; provided that, immediately thereafter and giving effect thereto, no event shall occur or be continuing which constitutes an Event of Default or a Default and, in the case of any such merger to which the Borrower is a party, either the Borrower is the surviving corporation or the surviving entity (if not the Borrower) has a consolidated net worth (as determined in accordance with GAAP) immediately subsequent to such merger at least equal to the Consolidated Net Worth of the Borrower immediately prior to such merger and expressly assumes the obligations of the Borrower hereunder; provided, however, that, notwithstanding the foregoing, the Borrower and any of the Principal Subsidiaries may sell assets in the ordinary course of its business and may sell or otherwise dispose of worn out or obsolete equipment on a basis consistent with good business practices. 7.07 Transactions with Affiliates. Except in connection with a Joint Venture Transaction or an Asset Exchange, the Borrower shall not sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that as long as no Default or Event of Default shall have occurred and be continuing, the Borrower or any Subsidiary may engage in any of the foregoing transactions (i) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (ii) as otherwise may be required by any Governmental Authority, or (iii) so long as such transactions are not materially disadvantageous to the Borrower. 7.08 Net Worth. The Borrower shall not allow its Consolidated Net Worth to fall below $1,500,000,000.00. 7.09 Minimum Access Lines. Permit, as a direct result of any sale, exchange, transfer or other disposition of Access Lines, the total Access Lines owned by the Borrower and its Subsidiaries (other than any Joint Venture) as of the end of any fiscal quarter of the Borrower to be less than 2,500,000. 8. EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an "Event of Default": (a) Any representation or warranty made herein, in any of the Other Agreements or in any statement, report, certificate, opinion, financial statement or other document furnished or to be furnished in connection with this Agreement or the Other Agreements shall prove to have been false or misleading in any material respect when so made or furnished. (b) Failure of Borrower to make any of the payment Obligations, or any portion thereof, including, without limitation, payment of any sum of principal or interest due the Lender under this Agreement or any of the Other Agreements, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five Business Days. (c) Failure of Borrower to observe or perform any warranty, covenant or, condition to be observed or performed by Borrower under this Agreement or any of the Other Agreements and such default shall continue unremedied for a period of 30 days after the earlier to occur of (i) the Borrower obtaining knowledge thereof and (ii) the date that written notice thereof shall have been given to the Borrower by the Lender. (d) The Borrower or any Principal Subsidiary shall default in the due observance or performance of any covenant, condition or agreement contained in Section 4.10, Section 6.06 (f) or Article 7. (e) An involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any Principal Subsidiary, or of a substantial part of the property or assets of the Borrower or a Principal Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other federal or state bankruptcy, insolvency, receivership, or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator, or similar official for the Borrower or any Principal Subsidiary or for a substantial part of the property or assets of the Borrower or a Principal Subsidiary, or (iii) the winding-up or liquidation of the Borrower or any Principal Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (g) The Borrower or any Principal Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other federal or state bankruptcy, insolvency, receivership, or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (f) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator, or similar official for the Borrower or any Principal Subsidiary or for a substantial part of the property or assets of the Borrower or any Principal Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability, or fail generally to pay its debts as they become due, or (vii) take any action for the purpose of effecting any of the foregoing; (h) The Borrower or any Principal Subsidiary, as the case may be, fails to pay when due, or within any grace period applicable thereto by the terms thereof, any other Indebtedness of the Borrower or any Principal Subsidiary aggregating $50,000,000 or more; (i) The Borrower or any Principal Subsidiary shall fail to observe or perform any covenant or agreement contained in any single agreement or instrument relating to any Indebtedness in excess of (i) $75,000,000 in the aggregate, with respect to any Indebtedness issued on a tax-exempt basis, and (ii) $50,000,000 in the aggregate, with respect to all other Indebtedness, in each case within any applicable grace period, or any other event shall occur if the effect of such failure or other event is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness; or any such Indebtedness shall be required to be prepaid (other than by a regularly scheduled required prepayment, pursuant to any put right (or similar right) of the holder thereof, or by the exercise by the Borrower or such Principal Subsidiary of its right to make a voluntary prepayment) in whole or in part prior to its stated maturity; (j) A judgment or order for the payment of money in excess of $50,000,000 and having a Material Adverse Effect shall be rendered against the Borrower or any of the Subsidiaries and such judgment or order shall continue unsatisfied (in the case of a money judgment) and in effect for a period of 30 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement, or otherwise); (k) A Plan shall fail to maintain the minimum funding standard required by Section 412(a) of the Code for any plan year or a waiver of such standard is sought or granted under Section 412(d), or a Plan is or shall have been terminated or the subject of termination proceedings under ERISA, or the Borrower or an ERISA Affiliate has incurred a liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result from any such event or events a Material Adverse Effect; and (l) There shall have occurred a Change in Control without the written consent of Lender. 9. RIGHTS AND REMEDIES 9.01 Rights and Remedies of the Lender. Upon the occurrence of an Event of Default, the Lender may, subject to compliance, if required, with the rules and regulations of any Government Authority having jurisdiction, exercise in any jurisdiction in which enforcement hereof is sought, the following rights and remedies, in addition to all rights and remedies available to the Lender under applicable law, all such rights and remedies being cumulative and enforceable alternatively, successively or concurrently: (a) Declare all unpaid principal outstanding on the Note, all accrued and unpaid interest thereon, and all other Obligations to be immediately due and payable and the same shall thereupon become immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower. (b) Institute any proceeding or proceedings to enforce the Obligations owed to, or any Liens in favor of the Lender. (c) Pursue any other rights and remedies available to the Lender at law or in equity. 9.02 Cumulative Nature of Remedies. Nothing herein shall limit the right of the Lender to pursue all rights and remedies available to a creditor following the occurrence of an Event of Default. Each right, power and remedy of the Lender in this Agreement and/or the Other Agreements shall be cumulative and concurrent, and recourse to one or more rights or remedies shall not constitute a waiver of any other right, power or remedy. 9.03 Costs and Expenses. Borrower agrees to pay and to be liable for any and all reasonable expenses, including attorney's fees, settlements and court costs, incurred by the Lender in exercising or enforcing any of its rights hereunder or under the Other Agreements together with interest thereon. 9.04 Lender's Setoff. The Lender shall have the right, in addition to all other rights and remedies available to it, to setoff and to recover against any or all of the Obligations due to Lender, any monies now and hereafter owing to Borrower by the Lender. Borrower waives all rights of setoff, deduction, recoupment or counterclaim. 10. MISCELLANEOUS 10.01 Performance for Borrower. Upon the occurrence and continuance of an Event of Default, Borrower agrees and hereby authorizes that the Lender may, in its sole discretion, but the Lender shall not be obligated to, advance funds on behalf of Borrower without prior notice to Borrower, in order to insure Borrower's compliance with any material covenant, warranty, representation or agreement of Borrower made in or pursuant to this Agreement or any of the Other Agreements, to preserve or protect any right or interest of the Lender under or pursuant to this Agreement or any of the Other Agreements; provided, however, that the making of any such advance by the Lender shall not constitute a waiver by the Lender of any Event of Default with respect to which such advance is made nor relieve Borrower of any such Event or Default. Borrower shall pay to the Lender upon demand all such advances made by the Lender with interest thereon at the rate and determined in the manner provided in the Note. 10.02 Reserved. Expenses; Indemnity. (a) The Borrower agrees to pay all out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by the Lender in connection with any amendments, modifications or waivers of the provisions hereof or thereof or incurred by the Lender in connection with the enforcement or protection of its rights in connection with this Agreement. (b) The Borrower agrees to indemnify the Lender and each of their respective directors, officers, employees, Affiliates and agents (each such Person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against any Indemnitee arising out of, (i) the use of the proceeds of the Loan or (ii) any claim, litigation, investigation, or proceeding relating to this Agreement, the use of such proceeds or the transactions contemplated hereby, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities, or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. The Lender shall notify the Borrower promptly after it determines that it will make a claim for indemnification under this Section 10.02(b). The Borrower shall have the right to elect to control the defense of the litigation, investigation, or proceeding giving rise to such claim (collectively, for purposes of this Section 10.02(b), the "Litigation") and shall inform the Lender of its intention to do so within 15 days after receipt of the Lender's claim for indemnification. In the event the Borrower elects to control the defense of the Litigation, (i) the Lender shall be entitled to participate in the defense of the Litigation with counsel satisfactory to the Borrower, in the exercise of its reasonable judgment; provided, however, that any such participation in such defense shall be conducted by the Lender and at the Lender's expense (subject to Borrower's indemnity obligations under this paragraph) and in a manner considered by the Borrower to be satisfactory and effective to protect against such claim without causing damage to the conduct of, or affecting the Borrower's control of, the defense of the Litigation; and (ii) the Lender shall inform the Borrower of its intention to participate in the defense of the Litigation within 15 days after receipt of notice thereof from the Borrower. In the event the Borrower does not elect to control the defense of the Litigation pursuant to this Section 10.02(b), the Lender shall control the defense of the Litigation, and (i) the Borrower shall be entitled to participate in the defense of the Litigation with counsel satisfactory to the Lender, in the exercise of its reasonable judgment; provided, however, that any such participation in such defense shall be conducted by the Borrower and at the Borrower's expense and in a manner considered by the Lender to be satisfactory and effective to protect against such claim without causing damage to the conduct of, or affecting the Lender's control of, the defense of the Litigation; and (ii) the Borrower shall inform the Lender of its intention to participate in the defense of the Litigation within 20 days after receipt of notice thereof from the Borrower. Notwithstanding the foregoing, if the Borrower shall elect to defend the Litigation and, during the course of such defense by the Borrower, the Lender determines in good faith that (x) there exists a material conflict of interest between the Lender and the Borrower as a result of Borrower's control of the Litigation, or (z) the Borrower's control of the Litigation would otherwise materially prejudice Lender's rights in any such Litigation, then the Lender may, upon 10 days' written notice to the Borrower of such determination, elect to control the defense of the Litigation at the Lender's expense (subject to Borrower's indemnity obligations under this paragraph) with counsel satisfactory to the Borrower, provided that the Borrower shall be able to participate in the defense of the Litigation in accordance with sub-part (i) of the immediately preceding sentence. In the event of such election by the Lender, the Borrower shall reasonably cooperate in the transition of defense of the Litigation to the Lender. (c) The provisions of this Section 10.02 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement, or any investigation made by or on behalf of Lender. All amounts due under this Section 10.02 shall be payable on written demand therefor. 10.03 Waivers by Borrower. Borrower hereby waives, to the extent the same may be waived under applicable law: presentment, demand for payment, protest and notice of non-payment and all exemptions. Borrower agrees that the Lender may exercise any or all of its rights and/or remedies hereunder and under the Other Agreements. 10.04 Waivers by the Lender. Neither any failure nor any delay on the part of the Lender in exercising any right, power or remedy hereunder or under any of the Other Agreements shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 10.05 Lender's Records. Every statement of account or reconciliation rendered by the Lender to Borrower with respect to any of the Obligations shall be presumed conclusively to be correct and shall constitute an account stated between the Lender and Borrower unless, within ten (10) Business Days after such statement or reconciliation shall have been mailed, postage prepaid, to Borrower, the Lender shall receive written notice of specific objection thereto. 10.06 Modifications. No modification or waiver of any provision of this Agreement, the Note or any of the Other Agreements, and no consent to any departure by Borrower therefrom shall in any event be effective unless the same shall be in writing, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand upon Borrower in any case shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. 10.07 Notices. All notices, requests and other communications provided for herein including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement shall be given or made in writing (including, without limitation, by telecopy) and delivered to the intended recipient at the "Address for Notices" specified below; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given (a) upon receipt when delivered personally, or by overnight courier, or (ii) in the case of a telecopied or mailed notice, upon receipt, in each case given or addressed as provided for herein. The Address for Notices of the respective parties are as follows: Lender's Address: Rural Telephone Finance Cooperative Woodland Park 2201 Cooperative Way Attn: General Counsel Herndon, Virginia 22071-3025 Telecopy: 703-709-6776 Borrower's Address: Citizens Communications Company 3 High Ridge Park Stamford, Connecticut 06905 Attn: Treasurer Telecopy: 203-614-5711 10.08 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. (a) THE PERFORMANCE AND CONSTRUCTION OF THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF VIRGINIA. (b) BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES COURTS LOCATED IN VIRGINIA AND OF ANY STATE COURT SO LOCATED FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE ESTABLISHING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (c) EACH OF THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 10.09 Holiday Payments. If any payment to be made by the Borrower hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment. 10.10 Consent to Patronage Capital Distributions. Borrower will receive a share of Lender's net margins in the form of patronage capital refunds, as determined from time to time by Lender's Board of Directors. Patronage Capital will be allocated annually to Borrower based on the percentage that the Borrower's interest payments hereunder contributed to Lender's gross margins. Borrower hereby agrees that the amount of any distributions with respect to Borrower's patronage which are made in written notices of allocation (as defined in Section 1388 of the Internal Revenue Code of 1986, as amended ("Code") including any other comparable successor provision) and which are received from Lender will be taken into account by Borrower at their stated dollar amounts in the manner provided in Section 1385(a) of the Code in the taxable year in which such written notices of allocation are received. 10.11 Right to Inspect. Except for information designated by the Borrower as confidential, the Lender, through its representatives, shall during reasonable business hours have access to, and the right to inspect and make copies of books, records, accounts documents and papers belonging to or in possession of the Borrower and its Subsidiaries and pertaining to the Borrower's and its Subsidiaries' property or business. 10.12 Survival; Successors and Assigns. All covenants, agreements, representations and warranties made herein and in the Other Agreements shall survive Closing and the execution and delivery to the Lender of the Note, and shall continue in full force and effect until all of the Obligations have been paid in full. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party. All covenants, agreements, representations and warranties by or on behalf of Borrower which are contained in this Agreement and the Other Agreements shall inure to the benefit of the successors and assigns of the Lender. 10.13 Assignment. The Lender may assign its rights and obligations under this Agreement and the Other Agreements to the National Cooperative Services Corporation without the consent of the Borrower; provided, however, that no such assignment shall result in terms or conditions less favorable to Borrower. Except as otherwise set forth in the immediately preceding sentence, each of the parties hereto may not assign any of its rights and obligations under this Agreement or the Other Agreements without the prior written consent of the other party. 10.14 Severability. If any term, provision or condition, or any part thereof, of this Agreement or any of the Other Agreements shall for any reason be found or held invalid or unenforceable by any court or governmental agency of competent jurisdiction, such invalidity or unenforceability shall not affect the remainder of such term, provision or condition nor any other term, provision or condition, and this Agreement, the Note, and the Other Agreements shall survive and be construed as if such invalid or unenforceable term, provision or condition had not been contained therein. 10.15 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counter-parts shall together constitute one and the same instrument. 10.16 Headings/Use of Terms. The headings and sub-headings contained in this Agreement are intended to be used for convenience only and do not constitute part of this Agreement. The use of any gender or the neuter herein shall also refer to the other gender or the neuter and the use of the plural shall also refer to the singular, and vice versa. 10.17 Further Assurances. The Borrower will, upon demand of the Lender, make, execute, acknowledge and deliver all such further and supplemental indentures of mortgage, deeds of trust, mortgages, financing statements, continuation statements, security agreements and/or any other instruments and conveyances as may be reasonably requested by the Lender to effectuate the intention of this Agreement and to provide for the securing and payment of the principal of and interest on the Note according to the terms thereof. 10.18 Lender's Approval. Wherever prior written approval of Lender is required under the terms and conditions of this Agreement, Lender hereby agrees to not unreasonably withhold said approval. 10.19 Merger and Integration. This Agreement and the attached exhibits and matters incorporated by reference contain the entire agreement of the parties hereto with respect to the matters covered and the transactions contemplated hereby, and no other agreement, statement or promise made by any party hereto, or by any employee, officer, agent or attorney of any party hereto, which is not contained herein, shall be valid or binding. 10.20 Right of Setoff. If an Event of Default shall have occurred and be continuing, Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by Lender, irrespective of whether or not Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which Lender may have. 10.21 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively, the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken, or reserved by Lender, shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received, or reserved by Lender in accordance with applicable law, the rate of interest payable to Lender, together with all Charges payable to Lender, shall be limited to the Maximum Rate. IN WITNESS WHEREOF, the parties hereto have executed or caused to be executed this Agreement under seal as of the date first above written. BORROWER: CITIZENS COMMUNICATIONS COMPANY By: ________________________________________ Name: ______________________________________ Title: _____________________________________ LENDER: RURAL TELEPHONE FINANCE COOPERATIVE By: ________________________________________ Name: ______________________________________ Title: Assistant Secretary-Treasurer EXHIBIT A EQUIVALENT RATINGS Indebtedness Moody's Rating S&P Rating Lehman Rating* --------------------------------------------------- Aaa AAA AA Aa1 AA+ AA Aa2 AA AA Aa3 AA- AA Baa1 BBB+ BBB Baa2 BBB BBB Baa3** BBB-** BBB Ba1 BB+ BB*** Ba2 BB BB Ba3 BB- BB B1 B+ B B2 B B B3 and lower B- and lower B * This is periodically published in Secondary Market Bullet Bid Side Spreads in the Lehman Brothers Global Fixed-Income Market Data publication. The ten (10) year current spread for "Utilities" at the appropriate rating shall be used. ** This is the lowest "Investment Grade" rating level. *** At and below this level the "Utilities" sector does not have a specific current spread. The "High Yield 10" current spread shall be used. EXHIBIT B RURAL TELEPHONE FINANCE COOPERATIVE SUBORDINATED CAPITAL CERTIFICATE Date of Issuance: No.: Amount: Rural Telephone Finance Cooperative, a corporation organized under and by virtue of the South Dakota Cooperative Association Act (herein called the "Corporation"), for value received, hereby promises to pay pursuant to the Corporation's policies of general application in effect from time to time to: CITIZENS COMMUNICATIONS COMPANY (the "Payee") the sum of __________________ . Repayments of the principal amount hereof shall be made without interest on the first day of March as described herein (a "Payment Date") and shall be in an amount equal to the difference between the outstanding balance of this Subordinated Capital Certificate (the "Certificate") on the 31st day of December (the "Computation Date") preceding a Payment Date and ten percent (10%) of the outstanding principal balance of the Payee's corresponding loan on said Computation Date. The initial computation of the repayment of the principal amount hereunder shall be made on the first Computation Date occurring one year after both of the following conditions have been met: (a) this Certificate has been paid for in full, and (b) the Payee's corresponding loan has been fully advanced; provided, however, if the Payee's corresponding loan has been partially advanced, and the balance of such loan is rescinded, then the initial computation of the repayment amount hereunder shall be made on the first Computation Date following the date on which such balance of the Payee's loan has been rescinded. The initial payment hereunder shall be made on the first Payment Date next following the initial Computation Date. Subsequent computations of the repayment amount and payments hereunder shall be made at one-year intervals on a respective Computation or Payment Date. Notwithstanding the above, this Certificate shall be fully repaid within 60 days following the date on which the Payee's corresponding loan has matured and has been paid in full. In the event the Payee's corresponding loan is fully prepaid prior to its maturity date (the calendar year in which such prepayment is made being called the "Prepayment Year"), this Certificate shall be fully repaid on the following March 1st. Payment of the principal of this Certificate will be made at the office of the Corporation maintained for that purpose in Herndon, Virginia or such other location as the Corporation may designate. All payments made hereunder shall be paid to the Payee. Prepayment. By its acceptance hereof, the holder hereof agrees that the Corporation may at any time or from time to time, on not less than 60 days' written notice to the holder hereof, prepay all or any part hereof; prepayment may be made without penalty or premium. Subordination to Senior Indebtedness. This Certificate, and the payment of principal hereof, shall, to the extent and in the manner hereinafter set forth, be subordinate and subject in right of payment to the prior payment in full of Senior Indebtedness as defined herein; and, by acceptance hereof, the holder hereof agrees, expressly for the benefit of present and future holders of Senior Indebtedness, to be bound by the provisions of this paragraph. The term "Senior Indebtedness" shall mean (a) all indebtedness heretofore or hereafter incurred by the Corporation for money borrowed unless by its terms it is provided that such indebtedness is not Senior Indebtedness, (b) all other indebtedness hereafter incurred by the Corporation which by its terms provides that such indebtedness is Senior Indebtedness, (c) all guaranties, endorsements and other contingent obligations in respect of, or obligations to purchase or otherwise acquire or service, indebtedness, or obligations of others, and (d) any amendments, modifications, deferrals, renewals or extensions of any such Senior Indebtedness, or debentures, notes or evidences of indebtedness heretofore or hereafter issued in evidence of or exchange for such Senior Indebtedness. No payment on account of this Certificate shall be made unless full payment of amounts then due for principal of or premium, if any, sinking funds and interest on Senior Indebtedness has been made or fully provided for in money or money's worth. No payment on account of this Certificate shall be made if, at the time of such payment or immediately after giving effect thereto, (i) there shall exist a default in the payment of principal or mandatory prepayments of or premium, if any, sinking funds or interest on any Senior Indebtedness, or (ii) there shall have occurred an event of default (other than a default in the payment of principal, premium, if any, mandatory prepayments, sinking funds or interest) with respect to any Senior Indebtedness as defined herein or in the instrument under which the same is outstanding permitting the holders thereof (or of the indebtedness secured thereby) to accelerate the maturity thereof (or of the indebtedness secured thereby), and such event of default shall not have been cured or waived or shall not have ceased to exist. Upon (i) any acceleration of the principal amount due on this Certificate or (ii) any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or total or partial liquidation or reorganization of the Corporation, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all principal of and premium, if any, and interest due or to become due upon all Senior Indebtedness shall first be paid in full, or payment thereof provided for in money or money's worth, before any payment is made on account of the principal of the indebtedness evidenced by this Certificate, and upon any such dissolution or winding-up or liquidation or reorganization any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities (other than securities of the Corporation or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the extent provided in this paragraph with respect to this Certificate, to the payment in full of all Senior Indebtedness, provided the rights of the holders of Senior Indebtedness are not altered by such reorganization or readjustment) to which the holder hereof would be entitled, except for the provisions hereof, shall be paid by the Corporation or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the holder hereof if received by it, directly to the holders of Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of Senior Indebtedness held by such holder) or their representatives, to the extent necessary to pay all Senior Indebtedness. In the event that any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, not permitted by the foregoing shall be received by the holder hereof before all Senior Indebtedness is paid in full, or provision made for such payment, in accordance with its terms, such payment or distribution shall be held for the benefit of, and shall be paid over or delivered to, the holders of such Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness may have been issued or under which such instruments are issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all such Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness. The provisions of this paragraph are solely for the purpose of defining the relative rights of the holders of Senior Indebtedness on the one hand and the holder hereof on the other hand, and nothing herein shall impair, as between the Corporation and the holder hereof, the obligation of the Corporation, which is unconditional and absolute, to pay to the holder hereof the principal hereof in accordance with the terms hereof, nor shall anything herein prevent the holder hereof from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder, all subject to the rights, if any, under this paragraph of holders of Senior Indebtedness to receive cash, property or securities otherwise payable or deliverable to the holder hereof. Each holder hereof by his acceptance hereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of this Certificate, to acquire and/or continue to hold such Senior Indebtedness and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and/or continuing to hold such Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the holder hereof shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Corporation applicable to the Senior Indebtedness until this Certificate shall be paid in full, and no such payments or distributions to the holders of Senior Indebtedness shall, as between the Corporation, its creditors other than the holders of Senior Indebtedness and the holder hereof, be deemed to be a payment by the Corporation to or on account of this Certificate. Upon any payment or distribution of assets of the Corporation referred to in this paragraph, the holder hereof shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any distribution to the holder hereof for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Corporation, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this paragraph. The holder hereof, by its acceptance hereof, authorizes and directs the Corporation in its behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this paragraph and appoints the Corporation its attorney in fact for any and all such purposes. Events of Default. If any of the following events of default shall occur and shall not have been remedied: A. default in the payment of two successive installments of principal hereof on the dates on which said principal shall be due and payable; B. the Corporation shall (1) apply for or consent to the appointment of a receiver, trustee or liquidator of the Corporation or of all or a substantial part of the assets of the Corporation, (2) be unable, or admit in writing its inability, to pay its debts as they mature, (3) make a general assignment for the benefit of creditors, (4) be adjudicated as bankrupt or insolvent or (5) file a voluntary petition in bankruptcy or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any insolvency law or an answer admitting the material allegations of a petition filed against the Corporation in any bankruptcy, reorganization or insolvency proceeding, or corporate action shall be taken by the Corporation for the purpose of effecting any of the foregoing; or C. an order, judgment or decree shall be entered, without the application, approval or consent of the Corporation, by any court of competent jurisdiction, approving a petition seeking reorganization of the Corporation or appointing a receiver, trustee or liquidator of the Corporation or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of 60 consecutive days; the holder hereof may, by written notice to the Corporation transmitted by certified mail, declare the principal of and accrued interest on this Certificate to be forthwith due and payable, whereupon the same shall, subject to the provisions of the third paragraph hereof, become forthwith due and payable. Registration and Transfer of this Certificate. This Certificate is registered, and the Corporation and any agent of the Corporation may treat the person in whose name this Certificate is registered as the owner hereof for the purposes of receiving payment as herein provided and for all other purposes, whether or not this Certificate be overdue, and neither the Corporation nor any such agent shall be affected by notice to the contrary. This Certificate or any interest herein may not be transferred, assigned, pledged, hypothecated or otherwise disposed of except to a person theretofore approved by the Board of Directors of the Corporation, such approval to be evidenced by a written notice to that effect executed by the Chief Executive Officer, the President, any Vice President, any Assistant Secretary-Treasurer, or any other duly authorized officer of the Corporation. By its acceptance hereof, the holder hereof agrees that this Certificate does not constitute a "holding" in the Corporation as contemplated by the South Dakota Cooperative Association Act or any successor, substitute or analogous provision of the laws of South Dakota. No Recourse Against Corporation or Individuals. No recourse for the payment of this Certificate, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any application, covenant or agreement of the Corporation herein contained shall act against any incorporator, member, director or officer, as such, past, present or future, of the Corporation or of any successor corporation, either directly or through the Corporation or any such successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, of such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released; provided, however, that nothing herein contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any member upon or in respect of securities of the Corporation duly subscribed for and not fully paid. Headings. The headings contained herein are intended to be used for convenience only and do not constitute part of this Certificate. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officer and its corporate seal to be hereunto affixed. RURAL TELEPHONE FINANCE COOPERATIVE By: __________________________________ Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----