Advanced Corporate Finance

University of Colorado-Boulder
Leeds School of Business
October 7, 2009

Joseph J. Euteneuer
Executive Vice President & CFO
Qwest Communications
1

Agenda
Background / The Business Environment
The Streets Perspective
Creating Shareholder Value
Balanced Approach to Capital and Investing
September 2009 Bond Offering
Asset Strategic Review

Qwests Business

Qwest14-state Local Service Area

Qwest POPs
VoIP Deployed Cities

September 15, 2008

Crisis on Wall Street as Lehman

Totters, Merrill Is Sold, AIG
Seeks to Raise Cash Fed Will
Expand Its Lending Arsenal in a
Bid to Calm Markets; Moves Cap
a Momentous Weekend for
American Finance
By Carrick Mollenkamp, Susanne Craig, Serena Ng and Aaron
Lucchetti
A1

Euteneuer to Lead Qwests

Finances
By Roger Cheng
B5
Qwest Communications International
Inc. hired former XM Satellite Radio
and Comcast Corp. executive Joseph
Euteneuer to serve as chief financial
officer

The American financial system was shaken to its core on Sunday.

Lehman Brothers Holdings Inc. faced the prospect of liquidation,
and Merrill Lynch & Co. agreed to be sold to Bank of America
Corp.
4

The Business Environment Post 9/15

Total US Consumer Confidence Index: 3Q06 - 2Q10E

U.S. Unemployment Rate: 2008 - 2011E

12.0%
10.0%

100

8.0%

80

6.0%

60
4.0%

40
2.0%

0.0%

Source: the Conference Board and NIPA; Moodys Economy.com

1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11

20

3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10

CC Index (1985 = 100)

120

US

Source: Bureau of Labor Statistics: Current Population Survey; Moody's Economy.com

U.S. Business Bankruptcy Filings: 3Q06

2010E

1.4

80,000
70,000

1.2

60,000

National

0.8

50,000
40,000
30,000

0.6

20,000

0.4

10,000

0.2

0
3Q
0
4Q 6
0
1Q 6
0
2Q 7
0
3Q 7
0
4Q 7
0
1Q 7
0
2Q 8
0
3Q 8
0
4Q 8
0
1Q 8
0
2Q 9
0
3Q 9
0
4Q 9
0
1Q 9
1
2Q 0
10

Building Permits - National (M)

Single Family Homes - Building Permits

2006 - 2010E

1.0

US last qtr view

3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Source: Bureau of Census: Form C-404; Moody's Economy.com

Source: Office of US District Courts; Moodys Economy.com

The Streets Perspective of Q

2009 Total Qwest Guidance

2008

2009 Guidance

2009 Consensus

Revenue

13,475

n/a

12,367

External Adj. EBITDA

4,547

$4,250 - $4,400

4,351

CapEx

1,777

$1,700 or less

1,629

Normalized Free Cash Flow

1,439

$1,500 - $1,600

1,561

Qwest is on track to meet Guidance and Analyst

Consensus in 2009

Bank of America, David Barden Key Points

Buy/$5.00

Positive view of Qwest is based on several factors:

1. Management focus on extracting value is a positive
2. Potential for enhanced returns to shareholders

Increased the probability of Qwest fully pre-funding the potential

put of its convertible senior notes in 2010

3. Expect another wave of consolidation to emerge in 12 to 18

months
4. Valuation is attractive

Qwests EBITDA multiple is the lowest in the sector while its 09E
FCF yield of 21% is among the highest

Morgan Stanley, Simon Flannery Key Points

Hold/No Price Target

Investment Conclusion
Successfully tapped the credit markets, partially addressing its
short-term maturity profile, easing concerns over its dividend
sustainability
The company has the ability to sustain its dividend:

Substantial cash on hand

Strong cash generation
A ~$945M undrawn credit facility (as of July 29)
Capital budget flexibility

Revenue Generating Unit (RGU) growth, and its impact on

revenue growth, is the bigger obstacle for the stock
Without the stabilization in RGU trends, it may be harder to
attract longer-term investors
9

Goldman Sachs, Jason Armstrong Key Points

Sell/$2.75

Revenue pressure making margin gains difficult to hold

The glimmer of hope in AT&T/Verizon results around a
consumer wireline inflection was not present at Qwest
We still expect 2010 revenues to decline another 3.4%
This will lead to 150 bp in 2010 margin pressure, with an
EBITDA decline of 7.4% to $4.0 bn
Tough balancing act ahead
Peers have invested in video, which appears to be stabilizing line
loss, Qwest line loss stepped up another 50 bp QoQ

Comparisons versus AT&T and Verizon in consumer are likely to

become even more unfavorable given the current trajectory
Attempts at structural value creation through monetizing certain
assets seems unlikely as shown through the recent unsuccessful
auction of the companys backbone business

10

10

Creating Shareholder Value

Sustainable Free Cash Flow Growth

11

11

Shareholder Value

Theoretically how share price is determined:

Revenue OpEx = EBITDA
EBITDA Capex Interest Working Capital = FCF
FCF *Perception Value = Total Value
Total Value Net Debt (Debt-Cash) = Equity Value
Equity Value/Shares Outstanding = Share Price
Increasing
Shareholder
Value

Return on
Investment
Capital

Weighted
Average
Cost of Capital

Sustainable
Free Cash Flow
Growth

The value of a company is determined by its

expected discounted Free Cash Flow

12

*Perception Value - Shorthand metric to reflect the expected Discounted cash

flows of a business, discount rate (including risk) and expected
cash flows growth.

12

Analyst Estimates for Q

Feb-09

Adj EBITDA
Bank of America
BMO
Citi
Goldman Sachs
JP Morgan
Morgan Stanley
Oppenheimer
Thomas Weisel
UBS
Wells Fargo

Analyst Consensus
Max Estimate
Min Estimate
Budget
Guidance

4.24 $
4.31
4.28
4.17
4.21
4.11
4.22
4.34
4.14
4.28

Adj FCF

1.49
1.39
1.42
1.33
1.44
1.36
1.40
1.43
1.32
1.65

Sep-09

Implied
Perception
Value*
12.9x
13.8x
15.9x
12.5x
12.1x
15.2x
n/a
13.1x
13.9x
n/a

4.20

1.40

13.9x

4.31
4.11
4.40
4.2 to 4.4

1.65
1.32
1.50
1.4 to 1.5

15.9x
12.1x
13.0x

Price Target

Adj EBITDA

4.00 $
4.00
6.00
2.50
3.00
4.93
n/a
3.75
3.50
n/a

Adj FCF

4.33 $
4.34
4.40
4.34
4.33
4.36
4.32
4.32
4.41
4.42

1.59
1.23
1.59
1.59
1.65
1.55
1.51
1.50
1.55
1.69

Implied
Perception
Value*
13.2x
16.4x
13.8x
10.7x
13.7x
n/a
n/a
12.9x
12.2x
n/a

4.19

4.35

1.56

13.0x

6.00
2.50

4.42
4.30
4.40
4.25 to 4.4

1.72
1.23
1.50
1.5 to 1.6

16.4x
10.7x
13.0x

Price Target

5.00
4.50
5.50
2.75
6.00
n/a
n/a
4.00
3.80
n/a

4.61
6.00
2.75

* Implied Perception Value is defined as Q Enterprise value divided by the analyst's adjusted FCF estimate

13

13

Perception Value Models

Bank of America Valuation Model
Implied
Total
FCF
x
Perception
=
Value
Value
1,591 x
13.2
=
20,942
Total
Value
20,942
Equity
Value
8,615

Net Debt

12,327

Shares

1,723

Equity
Value
8,615

Total
Value
17,065

Price
Target
$
5.00

Equity
Value
4,738

Net Debt

12,327

Shares

1,723

Equity
Value
4,738
Price
Target
$
2.75

David Bardens Perception of Q:

Jason Armstrongs Perception of Q:

Confident that Q will resolve debt

towers through refinancing

Intense revenue pressure

Meaningful results in business

markets
Consumer access line loss should
continue to slow as FTTN matures

14

Goldman Sachs Valuation Model

Implied
Total
FCF
x
Perception
=
Value
Value
1,589 x
10.7
=
17,065

Views IXC auction as a positive

indication that Q is exploring value

- Large wholesale disconnects

- Mass markets pressure
intensified
Unfavorable FTTN trajectory
Unsuccessful IXC auction
14

Perception Value Sensitivity Analysis

$
$
$
$
$
$
$
$
$
$
$

FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300

11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45

11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60

11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75

12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90

Enterprise Perception Value Multiple

12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50

13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65

13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80

13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96

13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11

13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26

= August 2008 (H = $4.01, L = $3.43)

15

15

Perception Value Sensitivity Analysis

$
$
$
$
$
$
$
$
$
$
$

FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300

11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45

11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60

11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75

12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90

Enterprise Perception Value Multiple

12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50

= August 2008 (H = $4.01, L = $3.43)

16

13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65

13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80

13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96

13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11

13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26

= November 2008 (H = $3.38, L = $2.28)

16

Perception Value Sensitivity Analysis

$
$
$
$
$
$
$
$
$
$
$

FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300

11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45

11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60

11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75

12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90

Enterprise Perception Value Multiple

12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50

= August 2008 (H = $4.01, L = $3.43)

13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65

13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80

13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96

13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11

13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26

= November 2008 (H = $3.38, L = $2.28)

= April 2009 (H = $4.06, L = $3.42)

17

17

Perception Value Sensitivity Analysis

$
$
$
$
$
$
$
$
$
$
$

FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300

18

11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45

11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60

11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75

12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90

Enterprise Perception Value Multiple

12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50

13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65

13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80

13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96

13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11

= August 2008 (H = $4.01, L = $3.43)

= November 2008 (H = $3.38, L = $2.28)

= April 2009 (H = $4.06, L = $3.42)

= September 2009 (H = $3.72, L = $3.34)

13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26

18

Perception Value Sensitivity Analysis

$
$
$
$
$
$
$
$
$
$
$

FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300

19

11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45

11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60

11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75

12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90

Enterprise Perception Value Multiple

12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50

13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65

13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80

13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96

13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11

= August 2008 (H = $4.01, L = $3.43)

= November 2008 (H = $3.38, L = $2.28)

= April 2009 (H = $4.06, L = $3.42)

= September 2009 (H = $3.72, L = $3.34)

13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26

19

Perception Value Sensitivity Analysis

$
$
$
$
$
$
$
$
$
$
$

FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300

20

11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45

11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60

11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75

12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90

Enterprise Perception Value Multiple

12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50

13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65

13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80

13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96

13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11

= August 2008 (H = $4.01, L = $3.43)

= November 2008 (H = $3.38, L = $2.28)

= April 2009 (H = $4.06, L = $3.42)

= September 2009 (H = $3.72, L = $3.34)

13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26

20

Shareholder Value

Theoretically how share price is determined:

Revenue OpEx = EBITDA
EBITDA Capex Interest Working Capital = FCF
FCF *Perception Value = Total Value
Total Value Net Debt (Debt-Cash) = Equity Value
Equity Value/Shares Outstanding = Share Price
Increasing
Shareholder
Value

Return on
Investment
Capital

Weighted
Average
Cost of Capital

Sustainable
Free Cash Flow
Growth

The value of a company is determined by its

expected discounted Free Cash Flow

21

*Perception Value - Shorthand metric to reflect the expected Discounted cash

flows of a business, discount rate (including risk) and expected
cash flows growth.

21

Simplify our Focus to Drive Shareholder Value

Shareholder Value

Revenue

Administrative /
Operating
Expense

Capital

New
Customers

Acquisition
Cost

Shared
Support

Capital
Spending

Existing
Customers

Service
Cost

3rd Party
Payments

PP&E
Efficiency

ARPU
Wallet
Share

Facility
Cost

Expectations

Working
Capital
Efficiency

Execution
Perfecting the Customer Experience
22

Balanced Approach to Capital and

Investing

23

23

Comparative Balance Sheet

QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,
2009

December 31,
2008

(Dollars in millions)

ASSETS
Current assets:
Cash and cash equivalents.................................................................
$
1,796 $
Other.................................................................................................
2,252
Total current assets............................................................................... 4,048
Property, plant and equipmentnet and other..................................... 16,178
Total assets...........................................................................................
$
20,226 $

565
2,405
2,970
17,171
20,141

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term borrowings .........................................
$
Accounts payable and other..............................................................
Total current liabilities.........................................................................
Long-term borrowingsnet.................................................................
Other.....................................................................................................
Total liabilities.....................................................................................
Stockholders' equity ............................................................................
Total liabilities and stockholders' equity..............................................
$
24

1,085 $
2,703
3,788
13,038
4,451
21,277
(1,051)
20,226 $

820
3,033
3,853
12,735
4,939
21,527
(1,386)
20,141
24

Balance Investment in Growth with

Returns to the Shareholder
2009 Investment and Return- $2.8B
(estimated)
In millions of dollars
$528

$549
$1,700

Capex

Dividend

Share Repurchase

Debt Repurchase

We started paying dividends in February 2008

The first dividend paid since 2001

We announced a $2B stock buy back program in October 2006

Repurchased $1.8B through December 2008
Still have authorization to buy $.2B

We spent $1.8B in 2008 on CAPEX

Estimated CAPEX is $1.7B or less in 2009
25

25

Qwest Debt Maturity Schedule

$ in Millions

3,389

Unregulated QCII and QCF (pay

down) Regulated QC (re-finance)
2,168 2,151
1,900

950

Notes:

26

Convertible notes shown as a maturity in 2010 given investors put rights

$945 million un-drawn revolver matures in October 2010

Paid down $562M QCF notes due August 3, 2009

Information above excludes any potential pension funding starting in 2011

26

2009 2011 Quarterly Debt Maturity

Schedule
$2.6B in Debt maturities within
90 days
The Elephant
$1,600

$1,200
$801

$800
$1,265
$825

$400
$500

$525

$403

$0
1Q10

27

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

Unregulated QCII and QCF (pay down)

Regulated QC (re-finance)

4Q11

27

So How Do You Eat an Elephant?

In the 90 day period between Nov. 2010 and Feb. 2011,
Qwest has $2.6 Billion Debt Maturing (The Elephant)

$2.6 Billion

$.8 Billion

Combined with cash on hand and expected cash flow generation,

we need to finance approximately $800 Million to finish the meal.

28

One Piece at a Time

28
28

September 2009 Bond Offering

29

29

Capital Markets Seize Up

High Yield Bonds ($ in billions)

Investment Grade Corporate (Non-Financial) Bonds

($ in billions)
Upcoming Annual
Maturities

Annual New Issuance

Upcoming Annual
Maturities

Annual New Issuance

$181
$165

$158

$799

$143
$112

$518

$40

03

$707

$680

04

05

Source: Citi Syndicate

06

07

08

$51

09

$62

10

$502

$505

04

05

$517

$484

$440

$71

11

03

06

07

08

09

10

11

Source: Citi

30

30

Qwest Yields and High Yield Market Issuance

Heightened LBO Activity
Cheap Money
unlikely to return to these
levels

($ in bn)

Current yields are

comparable to 2008
(pre-Lehman) levels

Heavy issuance volume

9/16/08
Lehman files
for
bankruptcy

$14

3/9/09
S&P 500
2009 low

22.0%

21.255%

20.0%

$12

18.0%
$10
16.0%
$8
14.0%
$6
12.0%
$4
10.0%

$2

8.0%
8.59%

$0

6.0%
1/3/06

4/3/06

7/3/06

10/3/06

1/3/07

4/3/07

7/3/07

10/3/07

Weekly HY Issuance

1/3/08

4/3/08

7/3/08

10/3/08

1/3/09

4/3/09

8/18/09
7/3/09

YTW on QCII 7.5% Senior Notes due '14

31

September 14th Why did Qwest launch a bond

offering?
Financing Transaction

On September 14th, Qwest launched and priced a $550m high yield bond offering
Price of 98.244%, coupon of 8.0% and yield of 8.375%
Rates increase
Now
Rates decrease

Pay rate
as of 9-14
(8.375%)1

Opportunity cost could have paid

lower rate

Re-finance
decision

Rates increase
Later

Pay
higher rate
(could be 20%+)

Rates decrease
Pay
lower rate1
1

Best rate issued since 2002 is in the low 7% range

32
32

September 14th Why did Qwest launch a bond

offering?
Funding need
Debt maturities in 2010/2011 that exceed FCF less dividends

Improved market environment

Equity and bond market were greatly improved
S&P 500 up 54% from low of 676 on March 9, 2009 to 1,043 as of Sept. 11, 2009
High yield market has also rallied (bond prices up and yields down)

Qwests 7.5% note due 2014 trading yield improved to 8.2% (Sept.
11) down from a high of approximately 20% in December 2008

Decision
Raise capital now or at a later date in 2009 or 2010
Waiting = taking a position that interest rates will fall or remain flat
Not waiting = protection against rising interest rates
Chance to opportunistically re-finance a portion of funding requirement (dollar cost average)
Cost is negative carry (the interest cost on new debt raised prior to the maturity of the old
debt)

33
33

Asset Strategic Review

34

34

Introduction Opportunity
Qwest Communications International Inc. (QCII)
Unregulated parent company traded on the NYSE Q
with a state-of-the-art nationwide fiber optic network
and advanced product offerings
Regulated Regional Bell Operating Company (RBOC)
telecom provider in 14 western states with a
significant customer base:
Third largest local telephone company
10.9 million access lines
2.9 million high-speed Internet subscribers
853K video subscribers
Potential Opportunity
Qwest received an unsolicited inquiry from a
company that was interested in purchasing assets
(property plant & equipment, customers, revenue
and employees)
The assets in question were not a separate standalone business unit with financial statements
Qwest Corporation 14-state Local Service Area

Qwest POPs
VoIP Deployed Cities
Qwest Central Offices
1) As of Q2 2009

35

Unsolicited Offer for Assets - Summary

Company receives an unsolicited offer from a buyer

Corporate governance issues
Board has a fiduciary duty to the shareholders to evaluate an
acquisition proposal

Internal and external counsel consulted

Meetings with management, the board of directors and
consultants / advisors
Comprehensive review of the assets and operations undertaken
Decision to run competitive bidding process
Outside advisors engaged to manage process
Evolution of offers concluded the asset was more valuable to
Qwest shareholders
No disclosure requirement until an actual agreement is reached
36

Identify the Specific Assets Due Diligence

Process

Physical Assets

Customer Assets

Detailed process to
identify specifically
what physical assets
the buyer was
interested in

Detailed process to identify

what customer contracts
and revenues would be
included in the sale

For example: fiber in

the ground from city A
to city B, etc.

Many lawyers reviewing

contracts

Audited financial statements

needed to be created

Human Capital

Detailed process to
identify the employees
that would be included
in the sale of assets
Separation of related
assets (e.g., real
estate, PCs, e-mail
networks, etc.)

Goal is to determine what assets would be sold and, therefore, the cash flow stream that would be leaving
the company in exchange for a purchase price
37

Valuation Value to a Buyer of Assets

Considerations

Asset Purchase
Revenue

FCF

Buyer will estimate future

cash flows

Not actual numbers /

For illustrative purposes only

3000
2500

2,200

2,100

2,000

2,400

2,300

2000
1500
1000

800

900

1,000

1,100

1,200

Identification of synergies
is typically a significant
value driver
For example,
elimination of
duplicative overhead

500
0
2010

2011

2012

2013

2014

NPV (net present value) of the cash flows discounted at the companys WACC (weighted average cost
of capital) is the value of purchasing the assets inclusive of synergy value
38

Valuation Value of Retaining Assets

Considerations

Asset Sale
Revenue
3000

FCF

Not actual numbers / For illustrative purposes only

Review of assets and

operations

2,800

2,600
2,400

2500
2,200
2,000
2000
1500
1,000

1,100

1,200

1,300

1,400

1000

Sale of assets may

involve dis-synergies
For example,
corporate overhead
allocated over a
smaller revenue base
Separation of assets
involves transaction costs

500
0
2010

2011

2012

2013

2014

NPV (net present value) of the cash flows discounted at the companys WACC (weighted average cost
of cost of capital) is the value of retaining the assets plus the avoided transaction costs and dis-synergies
39

Evaluation of the Purchase Offer

Consideration
Currency utilized could be:
Cash
Stock
Debt
Commercial agreements
Combination of the above
Terms & conditions of contract

Execution
Risk

Financial Markets
Risk

Time to close
Impact to the business
between announcement
and closing
Regulatory risk sale
may be delayed or
blocked by the
government
Time and cost to extract
the assets (e.g., billing
systems)

Evaluation of the buyers

ability to raise financing
Shareholder perception
of the offer
Exposure on debt pricing

A purchase proposal can be very simple or extremely complex

40

Conclusion

Value of retaining the assets was

greater than purchase price proposed
by the buyer

41

Conclusion
Qwest Completes Strategic Review of Long Distance Network Asset
Company Reaffirms Full Year 2009 Guidance
DENVER, June 8, 2009 Qwest Communications International Inc. (NYSE: Q) and its Board of Directors today announced the outcome of its
strategic review of its long distance network asset.

After receiving unsolicited indications of interest from potential purchasers of Qwest's long distance network asset, the company and its Board of
Directors undertook a comprehensive review of this asset and its operations. Following this review, the company commenced a competitive bidding
process. Although there was significant interest in this process from prospective buyers, the company and its Board of Directors have determined that
the long distance network asset holds far more value to Qwest shareholders and is more strategically important to Qwest and its customers than is
the alternative of pursuing a transaction.

Qwest reaffirms its guidance for the full year 2009, expecting adjusted free cash flow to be $1.4 to $1.5 billion, full year adjusted EBITDA of $4.2 to
$4.4 billion, inclusive of an expected increase in non-cash pension and OPEB expense of $200 million, and capital expenditures of $1.8 billion or
lower.
Qwest remains confident in its outlook for 2009 and the ability of its business to continue to perform, said Edward A. Mueller, chairman and chief
executive officer of Qwest. At the same time, we are committed to taking steps that will benefit our shareholders, customers and employees in every
decision we make. We have always taken a disciplined, prudent approach to assessing our business in this ever changing industry. The review we
conducted confirmed that our nationwide network is a tremendous asset and delivers best-in-class telecommunications services to businesses and
government agencies throughout the country. We are committed to serving those valued customers and remain focused on increasing shareholder
value and perfecting the customer experience."

Second Quarter 2009 Earnings Call

The Company will announce its second quarter 2009 financial and operational highlights on Wednesday, July 29, 2009, at 7 a.m. EDT. Qwest
management will host a conference call at 9 a.m. EDT on the same day to discuss the companys perspective on the results and answer questions.

42

43