DENVER----Qwest Communications International Inc. NYSE: Q:
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Unaudited in millions, except per share amounts
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Q1 2007
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Q4 2006
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Seq.
Change
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Q1 2006
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Y-over-Y
Change
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Operating Revenue
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$3,446
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$3,488
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1.2%
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$3,476
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0.9%
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Net Income
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$240
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$194
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24%
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$88
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173%
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Net Income per Basic Share
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$0.13
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$0.10
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30%
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$0.05
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160%
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Net Income per Diluted Share
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$0.12
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$0.10
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20%
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$0.05
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140%
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EBITDA Margins Expand Year Over Year and Sequentially a
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Data Revenue of $1.2 Billion up 11% From First Quarter 2006
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37% Year-Over-Year Increase in High-Speed Internet Subscribers
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Year-Over-Year Improvement of $300 Million in Free Cash Flow a,
Before Anticipated One-Time Items
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Named a Participant in the Largest Communications Service Contract
Ever
Qwest Communications International Inc. NYSE: Q today reported solid
first quarter 2007 results highlighted by sequential and year-over-year
margin expansion as well as significant net income and earnings per
share growth. For the quarter, Qwest reported earnings of $240 million,
or $0.12 per diluted share compared with earnings of $88 million, or
$0.05 per diluted share in the first quarter 2006.
“The results for the quarter reflect our
disciplined approach and ability to sustain positive operational and
financial trends across our business,” said
Richard C. Notebaert, Qwest chairman and CEO. “The
growth initiatives we have in place, the easing of federal regulations
for our operations, and the General Services Administration awarding
Qwest a stake in Networx – the largest
communications services contract in the world –
provide significant opportunities for Qwest throughout the year and
beyond.”
Financial Results
Operating revenue for the first quarter 2007 was $3.4 billion, including
data and Internet services revenue of $1.2 billion, now more than 35
percent of operating revenue. Combined data, Internet and video revenue
increased by 11 percent year over year, maintained by continued strength
in mass markets and business growth products such as high-speed Internet
and managed services. Total revenue absorbed the de-emphasis of lower
return products including dial access as well as the impact of
regulatory fees and settlements, and revenue reduction from a large data
equipment contract last year. Excluding the impact of these items,
revenue grew modestly.
Mass markets growth continued as customer retention initiatives, ARPU
and bundle growth, as well as customer service excellence overcame
access-line loss pressures. Revenue grew 1.3 percent year over year
while absorbing $6 million in non-recurring revenue credits associated
with the settlement of a regulatory action and $17 million related to
flow-through universal service charges.
Enterprise growth products currently represent more than 20 percent of
business revenues and are growing at nearly 30 percent on an annualized
basis. Overall business revenue declined 4.0 percent year over year;
however, after taking into account revenue from a large data equipment
contract last year and our de-emphasis of the dial access business
totaling $52 million, revenue in this channel improved 1.0 percent.
Wholesale revenue was flat with the prior year as more than 10 percent
growth in data revenue largely offset access-line and volume-driven
declines in local and access revenues. In long-distance revenue,
strategic price increases to certain countries and for certain domestic
voice products helped support margin improvements even as voice traffic
declined.
Qwest’s operating expenses totaled $2.9
billion for the quarter, including a $40 million charge in Selling,
General and Administrative expense related to securities litigation.
First quarter operating expenses declined $195 million, or 6.2 percent
year over year, and $176 million from the previous quarter when expenses
were negatively impacted by heavy storms in the West and Pacific
Northwest, among other factors. Improvements in productivity and
operating efficiencies and lower facility costs drove the decline along
with the expected decrease in annual benefit expenses. These
improvements, along with new relief from regulatory restrictions and
peer merger concessions announced during the quarter, provide
opportunity for further expense reductions.
Qwest’s EBITDA increased to $1.131 billion in
the quarter from $1.08 billion in the fourth quarter and $1.045 billion
in the year-ago quarter. First quarter EBITDA includes the $40 million
charge related to securities litigation.
“We made solid progress in the first quarter
toward our margin and cash flow goals for the year,”
said John W. Richardson, Qwest executive vice president and CFO. “Execution
against our initiatives allows us to continue to achieve our objectives
of expanded margins, continued growth in profitability and shareholder
rewards through steady advance on our share repurchase program.”
Net income for the quarter improved to $240 million, a 173 percent
increase from the year-ago quarter when net income was $88 million and a
24 percent improvement sequentially.
Based on the first quarter results Qwest continues to be comfortable
with our previously stated goals for revenue, EBITDA, capital
expenditures and free cash flow.
Cash Flow, Capital Spending and Interest
Qwest generated adjusted free cash flow of $150 million in the quarter,
after accounting for payments settling shareholder litigation, an
improvement of $300 million year over year. The comparative increase in
cash flow was driven by the improvement in operating results as well as
the timing of capital expenditures and benefits from the balance sheet.
Included in the quarter’s cash flow was
approximately $360 million related to timing of employee compensation
payments and semi-annual interest payments that typically interrupt the
underlying consistency of quarterly free cash flow trends in our first
quarter.
First quarter capital expenditures totaled $318 million, compared to
$390 million in the year-ago quarter when the capital spend was balanced
throughout the year and commercial and housing development was expanding
more quickly. Nearly half of the wireline spend in the quarter was
directed toward increasing the speeds and capabilities of the network.
Capital spending in 2007 is expected to approximate the 2006 level as
the company continues to focus on supporting the highest service levels
and disciplined investment in key growth areas.
Interest expense totaled $282 million for the quarter, compared to $296
million for the first quarter a year ago, reflecting lower debt levels
and debt refinancing in 2006.
Balance Sheet Update
March 31, 2007 total net debt gross debt less cash and short-term
investments declined to $13.8 billion, down $940 million compared to
March 31, 2006. The company maintained strong liquidity with cash and
short-term investments of $1.1 billion at the end of the quarter as it
continued to execute against the $2 billion share repurchase plan.
Bundles
Continued success with sales of Qwest’s
full-featured bundled offerings, which include digital voice, high-speed
Internet access, a national wireless offering and integrated TV services
through Qwest’s own ChoiceTV or its marketing
alliance with DIRECTV, Inc. drove strong sales and improved customer
loyalty.
The company’s bundle penetration increased to
59 percent in the quarter, compared to 53 percent a year ago. Sales of
voice packages with three or more products continue to reduce churn and
drive significant growth. Customer demand for value-added services drove
higher consumer ARPU, which increased 6.1 percent to $52 from $49 a year
ago.
Customer Connections
New high-speed Internet, wireless and video subscribers continue to
outpace declines in mass market access lines. During the quarter Qwest
added 260,000 high-speed Internet, video and wireless subscribers,
resulting in an increase of more than 100,000 in net connections during
the quarter.
At the end of first quarter, Qwest had a total of 13.6 million domestic
access lines, down 6.8 percent from the first quarter 2006.
High-Speed Internet
Strong, sustained high-speed Internet subscriber additions continue to
drive growth in mass markets data and Internet revenue. Compared to the
first quarter 2006, mass markets data and Internet revenue increased 46
percent. High-speed Internet subscribers grew by 167,000 in the first
quarter as the company continued to increase penetration by acquiring
dial-up users, new Internet users and competitors’
customers to its superior products and services. In the quarter, Qwest
was recognized as a leader in its region for the quality of offerings
and competitiveness of high-speed Internet pricing.
Driven by the strong response to its residential "Price for Life" offer
and demand from small businesses, Qwest expanded the offer to eligible
new and existing small-business customers who sign two- or three-year
agreements. With "Price for Life," small-business customers who purchase
Qwest High-Speed Internet can lock in their monthly rate for as long as
they maintain their service.
Qwest continued to bring customers the products they want when they want
them and increase fiber network reach in the quarter, even announcing
deployment of fiber-to-the-home in new communities in southern Utah and
the Seattle area.
DIRECTV® Alliance
Qwest added 80,000 net DIRECTV subscribers in the quarter compared to
38,000 new subscribers in the year-ago quarter. Qwest surpassed the
500,000 video subscriber mark in the quarter and now has a total of
506,000 video subscribers. The strategic relationship with DIRECTV
allows Qwest to offer digital satellite television services to
residential customers across the entire Qwest 14-state region.
Enterprise
Highlighting the quarter was the GSA’s
announcement on March 29 that it had awarded Qwest the opportunity to
negotiate contracts on the government’s
Networx program. Under the Networx Universal program –
currently valued at approximately $20 billion over 10 years –
Qwest will compete against two other companies to provide leading-edge
voice, data and video services, including managed and secure advanced
data networks, to federal agencies nationwide.
During the quarter, Qwest opened a new world-class CyberCenter in the
Seattle area in response to the demand for hosting services and in
support of continued revenue growth in this product. Qwest now operates
a total of 14 CyberCenters nationwide that provide hosting solutions
such as collocation, operating systems, application and database
monitoring and management, storage management and business protection
services.
Customer Service
Qwest continues to receive recognition for its customer service and the
quality of its offerings. In a February report titled, “U.S.
Enterprise-Class VoIP Services, Q1 2007," by Forrester, an independent
analyst firm, Qwest received the highest score in the Customer Service
Rating category for its business voice over IP VoIP services. The
report also recognized Qwest for having one of the broadest and deepest
nationwide hosted VoIP footprints in the United States.
In addition, Light Reading, a leading integrated media company
covering the communications industry, published its quarterly North
American Carrier Scorecard in which Qwest earned their highest rating.
The scorecard – a quarterly ranking of
top-tier service providers – noted Qwest's
success at selling bundled services and its "phenomenal growth" in
broadband subscribers in 2006.
Qwest’s wholesale markets group received the
second consecutive customer service award from Atlantic-ACM, a research
consultancy serving the telecommunications and information industries.
In Atlantic-ACM's 2007 U.S. Wholesale Long Distance Carrier Report
Card, Qwest was rated number one in four categories, including
customer service, by wholesale customers.
Conference Call Today
As previously announced, Qwest will host a conference call for investors
and the media today at 9 a.m. EDT with Richard C. Notebaert, Qwest
chairman and CEO, and John W. Richardson, Qwest executive vice president
and CFO. A live webcast and replay of the call is available at www.qwest.com/about/investor/events.
About Qwest
Qwest offers a unique and powerful combination of managed voice and data
solutions for businesses, government agencies and consumers –
locally and throughout the country. Customers coast to coast are turning
to Qwest's industry-leading national fiber optic network and its Spirit
of Service for quality products and superior customer experience. Qwest
is a participant in Networx, the largest communications services
contract in the world, to provide leading-edge voice, data and video
services. For more information on Qwest, and its various operating
subsidiaries, please go to www.qwest.com.
For information about the products and services Qwest is offering in the
Networx contract, visit www.gsanetworx.com
Forward-Looking Statement Note
This release may contain projections and other forward-looking
statements that involve risks and uncertainties. These statements may
differ materially from actual future events or results. Readers are
referred to the documents filed by us with the Securities and Exchange
Commission, specifically the most recent reports which identify
important risk factors that could cause actual results to differ from
those contained in the forward-looking statements, including but not
limited to: access line losses due to increased competition, including
from technology substitution of our access lines with wireless and cable
alternatives, among others; our substantial indebtedness, and our
inability to complete any efforts to de-lever our balance sheet through
asset sales or other transactions; any adverse outcome of the current
investigation by the U.S. Attorney’s office
in Denver into certain matters relating to us; adverse results of
increased review and scrutiny by regulatory authorities, media and
others including any internal analyses of financial reporting issues
and practices or otherwise; rapid and significant changes in technology
and markets; any adverse developments in commercial disputes or legal
proceedings, including any adverse outcome of current or future legal
proceedings related to matters that are or were the subject of
governmental investigations; potential fluctuations in quarterly
results; volatility of our stock price; intense competition in the
markets in which we compete including the effects of consolidation in
our industry; changes in demand for our products and services;
acceleration of the deployment of advanced new services, such as
broadband data, wireless and video services, which could require
substantial expenditure of financial and other resources in excess of
contemplated levels; higher than anticipated employee levels, capital
expenditures and operating expenses; adverse changes in the regulatory
or legislative environment affecting our business; changes in the
outcome of future events from the assumed outcome included in our
significant accounting policies; and our ability to utilize net
operating losses in projected amounts.
The information contained in this release is a statement of Qwest’s
present intention, belief or expectation and is based upon, among other
things, the existing regulatory environment, industry conditions, market
conditions and prices, the economy in general and Qwest’s
assumptions. Qwest may change its intention, belief or expectation, at
any time and without notice, based upon any changes in such factors, in
Qwest’s assumptions or otherwise. The
cautionary statements contained or referred to in this release should be
considered in connection with any subsequent written or oral
forward-looking statements that Qwest or persons acting on its behalf
may issue. This release may include analysts’
estimates and other information prepared by third parties for which
Qwest assumes no responsibility.
Qwest undertakes no obligation to review or confirm analysts’
expectations or estimates or to release publicly any revisions to any
forward-looking statements and other statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
By including any information in this release, Qwest does not necessarily
acknowledge that disclosure of such information is required by
applicable law or that the information is material.
The Qwest logo is a registered trademark of Qwest Communications
International Inc. in the U.S. and certain other countries.
a See attachment E for Non GAAP Reconciliation
for EBITDA, EBITDA Margins and Free Cash Flow
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ATTACHMENT A
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QWEST COMMUNICATIONS INTERNATIONAL INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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UNAUDITED
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Three Months Ended
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March 31,
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% Change
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2007
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2006
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Dollars in millions except per share amounts, shares in
thousands
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Operating revenue
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$ 3,446
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$ 3,476
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0.9%
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Operating expenses:
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Cost of sales exclusive of depreciation and amortization
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1,317
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1,418
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7.1%
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Selling, general and administrative
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998
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1,013
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1.5%
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Depreciation and amortization
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612
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691
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11.4%
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Total operating expenses
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2,927
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3,122
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6.2%
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Other expense income—net:
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Interest expense—net
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282
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296
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4.7%
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Other—net
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5
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28
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82.1%
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Total other expense income—net
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277
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268
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3.4%
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Income before income taxes
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242
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86
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181.4%
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Income tax expense benefit
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2
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2
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nm
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Net income
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$ 240
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$ 88
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172.7%
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Income per share:
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Basic
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$ 0.13
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$ 0.05
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160.0%
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Diluted
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$ 0.12
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$ 0.05
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140.0%
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Weighted average shares outstanding:
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Basic
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1,864,951
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1,874,313
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0.5%
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Diluted
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1,958,535
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1,911,376
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2.5%
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nm—Percentages greater than 200% and
comparisons between positive and negative values or to/from zero
values are considered not meaningful.
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ATTACHMENT B
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QWEST COMMUNICATIONS INTERNATIONAL INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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UNAUDITED
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March 31,
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December 31,
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2007
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2006
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Dollars in millions
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ 887
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$ 1,241
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Short-term investments
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242
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248
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Other
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2,065
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2,165
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Total current assets
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3,194
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3,654
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Property, plant and equipment—net and
other
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17,507
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17,585
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Total assets
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$ 20,701
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$ 21,239
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
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Current borrowings
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$ 1,688
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$ 1,686
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Accounts payable and other
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2,946
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3,474
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Total current liabilities
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4,634
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5,160
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Long-term borrowings—net
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13,199
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13,206
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Other
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4,402
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4,318
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Total liabilities
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22,235
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22,684
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Stockholders' deficit
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1,534
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1,445
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Total liabilities and stockholders' deficit
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$ 20,701
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$ 21,239
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ATTACHMENT C
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QWEST COMMUNICATIONS INTERNATIONAL INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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UNAUDITED
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Three Months Ended
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March 31,
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2007
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