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Advanced Corporate FinanceUniversity of Colorado-BoulderLeeds School of BusinessOctober 7, 2009
Joseph J. Euteneuer
Executive Vice President & CFO
Qwest Communications
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Agenda
Background / The Business Environment The Streets Perspective
Creating Shareholder Value
Balanced Approach to Capital and Investing
September 2009 Bond Offering
Asset Strategic Review
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Qwests Business
Qwest14-state Local Service Area
Qwest POPs
VoIP Deployed CitiesVoIP Deployed Cities
Qwest14-state Local Service Area
Qwest POPs
VoIP Deployed CitiesVoIP Deployed Cities
Qwest14-state Local Service AreaQwest14-state Local Service Area
Qwest POPs
VoIP Deployed CitiesVoIP Deployed CitiesVoIP Deployed CitiesVoIP Deployed Cities
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Euteneuer to Lead QwestsFinancesBy Roger ChengB5
Qwest Communications International
Inc. hired former XM Satellite Radio
and Comcast Corp. executive Joseph
Euteneuer to serve as chief financial
officer
Crisis on Wall Street as LehmanTotters, Merrill Is Sold, AIGSeeks to Raise Cash Fed WillExpand Its Lending Arsenal in aBid to Calm Markets; Moves Capa Momentous Weekend forAmerican FinanceBy Carrick Mollenkamp, Susanne Craig, Serena Ng and Aaron
Lucchetti
A1
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.
September 15, 2008
http://online.wsj.com/http://online.wsj.com/7/29/2019 CU_10.7.09 Final
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Total US Consumer Confidence Index: 3Q06 - 2Q10E
0
20
40
60
80
100
120
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
CC
Index(1985=100
)
Single Family Homes - Building Permits
2006 - 2010E
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
BuildingPermits-National(M)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
National
The Business Environment Post 9/15
Source: the Conference Board and NIPA; Moodys Economy.com Source: Bureau of Labor Statistics: Current Population Survey; Moody's Economy.com
Source: Office of US District Courts; Moodys Economy.comSource: Bureau of Census: Form C-404; Moody's Economy.com
U.S. Unemployment Rate: 2008 - 2011E
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
US US last qtr view
U.S. Business Bankruptcy Filings: 3Q062010E
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The Streets Perspective of Q
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2009 Total Qwest Guidance
Qwest is on track to meet Guidance and AnalystConsensus in 2009
7
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 - $1,600 1,561$
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Buy/$5.00
8
Bank of America, David Barden Key Points
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 potentialput of its convertible senior notes in 2010
3. Expect another wave of consolidation to emerge in 12 to 18months
4. Valuation is attractive
Qwests EBITDA multiple is the lowest in the sector while its 09E
FCF yield of 21% is among the highest
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Hold/No Price Target
9
Morgan Stanley, Simon Flannery Key Points
Investment Conclusion Successfully tapped the credit markets, partially addressing its
short-term maturity profile, easing concerns over its dividendsustainability
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 onrevenue growth, is the bigger obstacle for the stock
Without the stabilization in RGU trends, it may be harder toattract longer-term investors
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Sell/$2.75
10
Goldman Sachs, Jason Armstrong Key Points
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 $4.0 bn Tough balancing act ahead
Peers have invested in video, which appears to be stabilizing lineloss, Qwest line loss stepped up another 50 bp QoQ
Comparisons versus AT&T and Verizon in consumer are likely tobecome even more unfavorable given the current trajectory
Attempts at structural value creation through monetizing certainassets seems unlikely as shown through the recent unsuccessfulauction of the companys backbone business
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Creating Shareholder Value
Sustainable Free Cash Flow Growth
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Theoretically how share price is determined:Revenue OpEx = EBITDA
EBITDA Capex Interest Working Capital = FCF
FCF *Perception Value = Total Value
Total Value Net Debt (Debt-Cash) = Equity Value
Equity Value/Shares Outstanding = Share Price
The value of a company is determined by itsexpected discounted Free Cash Flow
*Perception Value - Shorthand metric to reflect the expected Discounted cashflows of a business, discount rate (including risk) and expected
cash flows growth.
Shareholder Value
IncreasingShareholder
Value
Return onInvestment
Capital
WeightedAverage
Cost of Capital
SustainableFree Cash Flow
Growth
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Analyst Estimates for Q
Implied Implied
Adj EBITDA Adj FCF
Perception
Value* Price Target Adj EBITDA Adj FCF
Perception
Value* Price Target
Bank of America 4.24$ 1.49$ 12.9x 4.00$ 4.33$ 1.59$ 13.2x 5.00$
BMO 4.31 1.39 13.8x 4.00 4.34 1.23 16.4x 4.50
Citi 4.28 1.42 15.9x 6.00 4.40 1.59 13.8x 5.50
Goldman Sachs 4.17 1.33 12.5x 2.50 4.34 1.59 10.7x 2.75
JP Morgan 4.21 1.44 12.1x 3.00 4.33 1.65 13.7x 6.00
Morgan Stanley 4.11 1.36 15.2x 4.93 4.36 1.55 n/a n/aOppenheimer 4.22 1.40 n/a n/a 4.32 1.51 n/a n/a
Thomas Weisel 4.34 1.43 13.1x 3.75 4.32 1.50 12.9x 4.00
UBS 4.14 1.32 13.9x 3.50 4.41 1.55 12.2x 3.80
Wells Fargo 4.28 1.65 n/a n/a 4.42 1.69 n/a n/a
Analyst Consensus 4.20 1.40 13.9x 4.19$ 4.35 1.56 13.0x 4.61$Max Estimate 4.31 1.65 15.9x 6.00 4.42 1.72 16.4x 6.00Min Estimate 4.11 1.32 12.1x 2.50 4.30 1.23 10.7x 2.75
Budget 4.40 1.50 13.0x 4.40 1.50 13.0x
Guidance 4.2 to 4.4 1.4 to 1.5 4.25 to 4.4 1.5 to 1.6
* Implied Perception Value is defined as Q Enterprise value divided by the analyst's adjusted FCF estimate
Feb-09 Sep-09
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FCF x
Implied
Perception
Value
=Total
ValueFCF x
Implied
Perception
Value
=Total
Value
1,591 x 13.2 = 20,942 1,589 x 10.7 = 17,065
Total
Value- Net Debt =
Equity
Value
Total
Value- Net Debt =
Equity
Value
20,942 - 12,327 = 8,615 17,065 - 12,327 = 4,738
Equity
Value Shares =
Price
Target
Equity
Value Shares =
Price
Target8,615 1,723 = 5.00$ 4,738 1,723 = 2.75$
Bank of America Valuation Model Goldman Sachs Valuation Model
14
David Bardens Perception of Q:
Confident that Q will resolve debttowers through refinancing
Meaningful results in businessmarkets
Consumer access line loss shouldcontinue to slow as FTTN matures
Views IXC auction as a positive
indication that Q is exploring value
Jason Armstrongs Perception of Q:
Intense revenue pressure
- Large wholesale disconnects
- Mass markets pressureintensified
Unfavorable FTTN trajectory
Unsuccessful IXC auction
Perception Value Models
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Perception Value Sensitivity Analysis
FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$
1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$
= August 2008 (H = $4.01, L = $3.43)
Enterprise Perception Value Multiple
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Perception Value Sensitivity Analysis
FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$
1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$
= August 2008 (H = $4.01, L = $3.43) = November 2008 (H = $3.38, L = $2.28)
Enterprise Perception Value Multiple
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Perception Value Sensitivity Analysis
FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$
1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$
= August 2008 (H = $4.01, L = $3.43) = November 2008 (H = $3.38, L = $2.28)
= April 2009 (H = $4.06, L = $3.42)
Enterprise Perception Value Multiple
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Perception Value Sensitivity Analysis
FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$
1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$
= 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 = $3.34)
Enterprise Perception Value Multiple
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FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$
1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$
= 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 = $3.34)
Enterprise Perception Value Multiple
19
Perception Value Sensitivity Analysis
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FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x
1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$
1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$
1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$
1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$
1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$
1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$
1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$
1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$
1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$
= 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 = $3.34)
Enterprise Perception Value Multiple
20
Perception Value Sensitivity Analysis
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2121
Theoretically how share price is determined:Revenue OpEx = EBITDA
EBITDA Capex Interest Working Capital = FCF
FCF *Perception Value = Total Value
Total Value Net Debt (Debt-Cash) = Equity Value
Equity Value/Shares Outstanding = Share Price
The value of a company is determined by itsexpected discounted Free Cash Flow
*Perception Value - Shorthand metric to reflect the expected Discounted cashflows of a business, discount rate (including risk) and expected
cash flows growth.
Shareholder Value
IncreasingShareholder
Value
Return onInvestment
Capital
WeightedAverage
Cost of Capital
SustainableFree Cash Flow
Growth
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Perfecting the Customer Experience
Simplify our Focus to Drive Shareholder Value
Execution
RevenueAdministrative /
OperatingExpense
Capital Expectations
Shareholder Value
NewCustomers
ExistingCustomers
ARPU
WalletShare
AcquisitionCost
ServiceCost
FacilityCost
SharedSupport
3rd PartyPayments
CapitalSpending
PP&EEfficiency
Working
CapitalEfficiency
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23
Balanced Approach to Capital and
Investing
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Comparative Balance Sheet
24
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)
June 30, December 31,
2009 2008
(Dollars in millions)
ASSETS
Current assets:Cash and cash equivalents................................................................. 1,796$ 565$Other................................................................................................. 2,252 2,405
Total current assets............................................................................... 4,048 2,970Property, plant and equipmentnet and other..................................... 16,178 17,171
Total assets........................................................................................... 20,226$ 20,141$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term borrowings ......................................... 1,085$ 820$Accounts payable and other.............................................................. 2,703 3,033
Total current liabilities......................................................................... 3,788 3,853Long-term borrowingsnet................................................................. 13,038 12,735Other..................................................................................................... 4,451 4,939
Total liabilities..................................................................................... 21,277 21,527Stockholders' equity ............................................................................ (1,051) (1,386)
Total liabilities and stockholders' equity.............................................. 20,226$ 20,141$
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Balance Investment in Growth withReturns to the Shareholder
2009 Investment and Return- $2.8B
(estimated)In millions of dollars
$1,700
$549
$528
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 $1.7B or less in 2009
25
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$ in Millions
Notes: 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
2,168 2,151
1,900
3,389
950
Qwest Debt Maturity Schedule
Unregulated QCIIandQCF(pay
down)RegulatedQC(re-finance)
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282828
In the 90 day period between Nov. 2010 and Feb. 2011,
Qwest has $2.6 Billion Debt Maturing (The Elephant)
$2.6 Billion
One Piece at a Time
Combined with cash on hand and expected cash flow generation,
we need to finance approximately $800 Million to finish the meal.
= $.8 Billion
So How Do You Eat an Elephant?
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September 2009 Bond Offering
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$502 $505
$680
$799
$517 $484$440
$707
$518
03 04 05 06 07 08 09 10 11
Capital Markets Seize Up
High Yield Bonds ($ in billions)Upcoming Annual
MaturitiesAnnual New Issuance
Investment Grade Corporate (Non-Financial) Bonds($ in billions)
Upcoming AnnualMaturities
Source: CitiSource: Citi Syndicate
$158
$112
$181
$165
$51$62
$71
$40
$143
03 04 05 06 07 08 09 10 11
Annual New Issuance
30
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Qwest Yields and High Yield Market Issuance
$0
$2
$4
$6
$8
$10
$12
$14
1/3/06 4/3/06 7/3/06 10/3/06 1/3/07 4/3/07 7/3/07 10/3/07 1/3/08 4/3/08 7/3/08 10/3/08 1/3/09 4/3/09 7/3/09
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
Weekly HY Issuance YTW on QCII 7.5% Senior Notes due '14
8.59%
21.255%
9/16/08Lehman files
forbankruptcy
3/9/09S&P 500
2009 low
Heightened LBO Activity
Cheap Money unlikely to return to these
levels Heavy issuance volume
($ in bn)
Current yields are
comparable to 2008(pre-Lehman) levels
8/18/09
S t b 14th Wh did Q t l h b d
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September 14th Why did Qwest launch a bondoffering?
Re-finance
decision
Now
Later
Pay rate
as of 9-14
(8.375%)1
Opportunity cost -
could have paid
lower rate
Payhigher rate
(could be 20%+)
Pay
lower rate1
Rates increase
Rates increase
Rates decrease
Rates decrease
1 Best rate issued since 2002 is in the low 7% range
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%
32
S t b 14th Wh did Q t l h b d
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September 14th Why did Qwest launch a bondoffering?
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)
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34
Asset Strategic Review
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Introduction Opportunity
Qwest Corporation 14-state Local Service Area
Qwest POPs
VoIP Deployed Cities
Qwest Central Offices
Qwest Communications International Inc. (QCII)
Unregulated parent company traded on the NYSE Qwith a state-of-the-art nationwide fiber optic networkand advanced product offerings
Regulated Regional Bell Operating Company (RBOC)telecom provider in 14 western states with asignificant 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, revenueand employees)
The assets in question were not a separate stand-alone business unit with financial statements
1) As of Q2 2009
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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 anacquisition proposal
Internal and external counsel consulted
Meetings with management, the board of directors andconsultants / 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
Identify the Specific Assets Due Diligence
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Identify the Specific Assets Due DiligenceProcess
Physical Assets Customer Assets Human Capital
Detailed process toidentify specificallywhat physical assetsthe buyer wasinterested in
For example: fiber in
the ground from city Ato city B, etc.
Detailed process to identifywhat customer contractsand revenues would beincluded in the sale
Many lawyers reviewingcontracts
Audited financial statementsneeded to be created
Detailed process toidentify the employeesthat would be includedin the sale of assets
Separation of relatedassets (e.g., real
estate, PCs, e-mailnetworks, etc.)
Goal is to determine what assets would be sold and, therefore, the cash flow stream that would be leavingthe company in exchange for a purchase price
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Valuation Value to a Buyer of Assets
NPV (net present value) of the cash flows discounted at the companys WACC (weighted average costof capital) is the value of purchasing the assets inclusive of synergy value
2,0002,100
2,2002,300
2,400
800900
1,0001,100
1,200
0
500
1000
1500
2000
2500
3000
2010 2011 2012 2013 2014
Revenue FCF
Asset Purchase
Buyer will estimate futurecash flows
Identification of synergiesis typically a significantvalue driver
For example,elimination ofduplicative overhead
Considerations
Not actual numbers /For illustrative purposes only
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Valuation Value of Retaining Assets
NPV (net present value) of the cash flows discounted at the companys WACC (weighted average costof cost of capital) is the value of retaining the assets plus the avoided transaction costs and dis-synergies
2,000
2,200
2,400
2,600
2,800
1,0001,100
1,2001,300
1,400
0
500
1000
1500
2000
2500
3000
2010 2011 2012 2013 2014
Revenue FCF
Asset Sale
Review of assets andoperations
Sale of assets mayinvolve dis-synergies
For example,
corporate overheadallocated over asmaller revenue base
Separation of assetsinvolves transaction costs
Considerations
Not actual numbers / For illustrative purposes only
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Evaluation of the Purchase Offer
ConsiderationExecution
RiskFinancial Markets
Risk
Currency utilized could be: Cash
Stock Debt Commercial agreements Combination of the above
Terms & conditions of contract
Time to close Impact to the business
between announcementand closing Regulatory risk sale
may be delayed orblocked by thegovernment
Time and cost to extractthe assets (e.g., billing
systems)
Evaluation of the buyers
ability to raise financing
Shareholder perceptionof the offer Exposure on debt pricing
A purchase proposal can be very simple or extremely complex
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Conclusion
Value of retaining the assets wasgreater than purchase price proposedby the buyer
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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 itsstrategic 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 ofDirectors undertook a comprehensive review of this asset and its operations. Following this review, the company commenced a competitive biddingprocess. Although there was significant interest in this process from prospective buyers, the company and its Board of Directors have determined thatthe long distance network asset holds far more value to Qwest shareholders and is more strategically important to Qwest and its customers than isthe 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 orlower.
Qwest remains confident in its outlook for 2009 and the ability of its business to continue to perform, said Edward A. Mueller, chairman and chiefexecutive officer of Qwest. At the same t ime, we are committed to taking steps that will benefit our shareholders, customers and employees in everydecision we make. We have always taken a disciplined, prudent approach to assessing our business in this ever changing industry. The review weconducted confirmed that our nationwide network is a tremendous asset and delivers best-in-class telecommunications services to businesses andgovernment agencies throughout the country. We are committed to serving those valued customers and remain focused on increasing shareholdervalue 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. Qwestmanagement 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.
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