At this time I would like to welcome everyone to the Qwest fourth quarter earnings conference call. All lines have been placed on mute for preventing any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. To withdraw your question, press star and the number two on your telephone keypad. Thank you, I would now like to turn over the call to Miss Stephanie Comfort, the Senior Vice President of investor relations, please go ahead.Stephanie Comfort: Thank you. Good morning everyone and welcome to our call, we're here to discuss our fourth quarter and full year results. With us on the call this morning are Dick Notebaert our Chairman and CEO and Oren Shaffer our Vice Chairman and CFO. Before I turn over the call to Dick, I'd like to remind everyone that we will be making forward looking statements. These statements contain risks and uncertainties which can cause actual results to differ materially from those expressed or implied here on the call. Theses risks and uncertainties are on file with the SEC. In addition we do not adopt analysts’ estimates nor do we necessarily commit to updating the forward looking statements that we make here. I'd also like to mention that in all of the quarter supplements, our reporting of our consolidating financial information…the company will discuss certain non –GAAP financial measures including EBITDA, free cash and net debt. We have a full reconciliation of non-GAAP measures included in the quarterly earnings section of our website. With that, I'd like to turn the call over to Dick.

Thank you Stephanie, good morning everybody. I'm really pleased to report our results for 06'. ‘06 was a year of milestones and significant achievements for Qwest. We continue to progress toward our long term goal of value creation through a steady focus on the fundamentals. Those fundamentals are to deliver exceptional service to customers, to operate efficiently, remain disciplined with spending, grow free cash flow and reward shareholders. We delivered our financial objectives in 2006. The objectives were modest revenue gains, sustainable earnings per share, margin improvement towards our target in the mid 30% range, growth in free cash flow, and return of capital for shareholders. We also achieved new highs in customer service levels across the board, and I am the most proud of this accomplishment. As I have said many times, we must differentiate Qwest based on superior service to customers to win in this competitive industry. Our progress and performance continue to demonstrate that our strategies are working and our intention is to carry that momentum into 2007. As we look to the future we continue to invest in growth and value for our constituents. We believe our strategy is one that produces competitive returns and is consistent with our disciplined approach. We will continue to reinvest in areas that drive revenue, customer retention, and compelling returns on investment. At the end of the day, we made steady progress over the last four years, and our goal is to continue to do that. Let me hit some highlights from 2006. At $13.9 billion, revenue posted modest gains. There's higher value, higher ARPU growth products, and improved bundle penetration offset retail line losses. I should add that we reported the seventh consecutive quarter of year over year revenue improvement. Customer demands and a clear value proposition for our…

Thanks Dick and good morning everyone. We are very pleased to have recorded a full year of net income and earnings per share as part of a year during which we achieved a number of other important financial milestones. In 2006, in addition to four quarters of profitability, we significantly increased our free cash flow, brought our balance sheet in line with investment grade metrics and started a $2 billion share buyback program to begin returning additional value to our holders. We made steady progress on each of the elements of our financial strategy. A momentum we gained in our key growth products made it possible to grow annual revenue in our mass market channel by 2.4% in the face of increased competition. The continued strong growth and business data products held quarterly business revenue steady as we bridged to the next generation product. As Dick noted, our migration away from certain lower value services, maps the growth we are seeing in this area. Strong data revenue growth in the wholesale channel offset the anticipated local revenue declines. Modest revenue gains, coupled with our cost containment efforts, drove a 250 basis point margin expansion in 2006. We made significant progress toward achieving our EBITDA margin target in the mid 30% range and continued to see ample opportunity to improve further in 2007. Revenues totaled $3.5 billion in the quarter and $13.9 billion for the year. We saw improved costs across key growth products which more than offset the impact of local losses, industry consolidation and increased competition. The targeted investments that we're making in people, process, capital, and marketing are driving the strong trends we are seeing in data, internet, and video services across all channels. We spent nearly 40% of our capital dollars in 2006 on increasing the speed…

Thank you Oren. If I could just take a minute and take a look at 2006, I think it really is a turning point in the journey that we’ve been on. The results compared to prior years were really excellent and such as that when we look to 2007 we can continue to focus on our priorities. They are to drive modest organic revenue growth, to improve EBITDA margins especially through optimization, and productivity initiatives, and to increase free cash flow. In closing, we have done what we said we would do, and we will continue to do that. We will keep our word. Our strategies are working. Our progress is demonstrable. We have momentum that is tangible and we have a positive outlook to the future. Now operator we’ll stop and we’ll take questions.

At this time I want to remind everyone that if you would like to ask a question, press star and then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from David Barden from Bank of America Securities.

Hey guys, thanks a lot and congrats on 2006. I guess my question is kind of looking out to the balance of 2007. Just one quick housekeeping item. Oren, I think you were trying to answer to some of the concerns about the costs in the fourth quarter and the margins, a lot of one-timers. If you could get a little more specific on the magnitude of the costs in the fourth quarter so we could get kind of a run rate as we look into 2007. And then I guess the $400 million of incremental EBITDA expansion we’re expecting to see would probably put us somewhere in the low $4.7 billion for EBITDA in ‘07. You mentioned changing pension variables and things like that, if you could talk about what, if any contribution to that $400 million is the pension costs, that’d be great. The last thing, there’s just tons of speculation as you guys know about…some of the RP work you might be doing on fiber to the premise and whether you’re sitting back and looking to be a fast follower on AT&T’s IPTV strategy. If you could just kind of set the record straight, what is the path that Qwest is following and how much are you earmarking from a capital standpoint to follow it? Thanks a lot.

Let me do the last one first and give Oren the chance to ponder those first two questions. I mean, we’ve been very consistent in what we’ve said. Our facilities, our cable does not require a complete change-out in the last mile. We have on the average and on the whole good facilities, therefore we will follow a path where we will continue to upgrade the speeds, and you’ve seen the investment that we’ve made, and currently over 25% of our customers can get 7 meg, so we’ll continue to run fiber to the node or to the remote terminal. This has been very consistent with what we’ve done. We’re not investing in Legacy product; we are investing in increasing speeds of bandwidth. On the IPTV situation that constantly comes up, we are watching, we are learning. We are letting other people work with the issue and we’ll benefit from their investment in future technology. We believe that with time shift that you can do on video and the fact that you can content on demand, those of you that watch “24” that you can pull it down the next day, we’re on the right path to do what customers want. So fast follower, OK, that’s good, but we aren’t following anybody as far as deployment of fiber to the node. And so the RP’s that somehow got in the media is our continuing effort to find and determine whether we can get a lower cost on the purchase of that fiber, which we are and have been laying and reinforcing the RT. And just one other comment there’s an article today in the Wall Street Journal that was in error. There’s a paragraph in there that talks about profitability in the first quarter of 2006 because of an asset sale. We did not have an asset sale in the first quarter of 2006, that was the first quarter of 2005. There was also an implication in that article that we are not laying fiber. We have been consistently doing that and reinforcing the RT’s. So Oren, if you’re ready. I took that a long time on that one.

Yeah I appreciate it!

So now if you’re ready, now you can go to “one” and “two”.

David, first of all good morning. On the fourth quarter, you’re correct. I was trying in fact to lay a little bit of work out there so that people could visualize what may have happened to us in the fourth quarter. But I think the key statement we made about the fourth quarter margins is the one that we’re concerned that we’re coming out at the year at a level much similar to the third quarter margins which you’ll recall were closer to the 32.5% level. And what occurred in the fourth quarter…and let me just say one thing…Dick and I had said a few quarters ago that we weren’t going to get into listing out the adjustments of things that went right and wrong. But basically in the fourth quarter we did have storms up and down the West Coast here, so we had a lot of additional compensation related expenses in the repair area, and that’s just the way it happens. In addition we had some adjustments to not only the revenue but also to facilities cost. But just lumping all that together we’re coming out of the year at what I would term a run-rate that is actually slightly better than what we had coming out of the third quarter as we go into 2007. And that’s the reason we feel fairly comfortable talking kind of million dollar nominal dollar increase and the accompanying cash flow improvements. Your right, we’re moving into 2007, I’m actually feeling very good about how we’ve come out. And Dick, I don’t know, do you want to add anything?

The other thing I would add is if you look up in the state of Washington and the state of Oregon, and you look at the mass of storms we had in December which covered the national media on snow and stuff, people looked at that and said your expenses went up because you were working around the clock to provide outstanding service. That’s true. But what’s sometimes missed is that we had to back off of the installation of new services. So it didn’t just affect the cost, it also affected the revenue, because we had to push the intervals out for what we were trying to do for the installation for some of our services. We would not expect to have - global warming aside - that kind of impact on an ongoing basis. That’s why Oren in his comments said that we didn’t expect those to recur. And no nice way to say it, but if it affects your top line and your expenses then obviously it affects your EBITDA margins. So Oren, do you want to go to the other question?

I think on the pension thing, we did have a good year on the pension results next year, obviously that’s if you look closely at the balance sheet you see that the shareholders equity improved by slightly more than a billion dollars on the balance sheet, a lot of that coming out of both not only the benefit changes but also the returns. As far as what we get through the profit and loss statement or through EBITDA next year, we’re looking today to be slightly better than what we did in 2006. And if there was something that would go right in 2007 it might be that that number gets a little larger than it was in 2006 but right now we’re expecting it to be just slightly better.

So maybe more of a tailwind than a material contributor to the $400 million?

I think that’s a fine way of saying it, I’ll put that in my script for the next call.

Any time, Dick. Take care guys. Thanks.

The next question comes from Michael McCormack with Bear Stearns.

Thanks guys, maybe just a couple of comments on the enterprise space. Verizon’s been out there talking about trying to save some costs by bringing more access on their own networks. Maybe some discussion on what the impact might be for you guys. And then, maybe another comment on line loss and sustainability of ARPU trends, you’re saying an increase in competitive losses there and is it wireless substitution?

Our line loss, if you look, we’ve always said this, is both wireless and non-wireless. You know cable competition is real. And I would point out if you look at our percent growth on high speed internet of 44.5% year over year, and if you pick another high speed company at random like Comcast, and if you say what was their growth rate in high speed internet and you get single digits. And you say what was their growth in telephone and you find it’s about the same as our growth in high speed internet. What we are working very hard to do is a migration from Legacy voice into the world of data, internet, VOIP. As long we can do that at the speed we are doing it, then it off-sets any revenue loss because you get a higher ARPU and a higher margin and a greater opportunity to be successful. I think our goal is to continue that in the mass-market area. On the enterprise space, we made a decision just like we did in wholesale. It was a hard decision. We moved away from selling our Dial platform for various companies, and we can’t get into specific because of our NDA’s. We looked at our dollar revenue and said, what’s our margin on that? It was the same thing we did on wholesale on what we were charging a minute and we made a hard decision to move away. That cost us some revenue and I would tell you flat out, it was a pretty good chunk of change on the revenue side in the enterprise space. However, that’s the right decision to do. Why would you want a $100 million of that type of revenue - that’s just an example, that’s not a specific - that loses money? Wouldn’t you be better off focusing totally on data, VOIP and those types of services? If we take that Dial platform decision we made and we move it out, we actually had growth in the enterprise space. And we continue, as Oren pointed out, to groom and attack the sole needs costs. As we said in the prior calls and the conferences we both go to, I think the company has done a very good job at reducing on the long hall the number of cents we pay per dollar of revenue for facility costs. We will continue to groom that. On the wholesale side, what that company said about bringing things on net, they’ve already migrated away from us. That happened a long time ago and more importantly our wholesale groups already made that up. And we will continue to look at that rationalization. We also…that’s why we bought on fiber, we want to move some stuff on net. And if we can find some more bolt on acquisitions that makes sense for the shareholders to reduce our costs, we will give that serious consideration. Oren, you want to add anything on either one of them?

Well said.

Oren, you mind if I just ask you one question. You mentioned balance sheet being of potential use in 2007, could you give us a sense of the magnitude there?

Hopefully, I said we anticipate it to be a slight user of cash in 2007, if I didn’t I’ll say it now. And you remember last year I thought we would be more neutral as we went through the year. In fact I said, I thought the balance sheet would be more neutral in the cash flow, as it turns out in the fourth quarter, we had a bit of a dislocation between our receivables, i.e. payments received and our payables made. And the only thing I can figure out is that we were probably less proned to probably use the bad weather as a reason not to pay our bills than some of our customers were. We got our payables out on time but unfortunately I guess some guy didn’t make it to work because of a snowstorm or something on the side that he was supposed to pay us. So you can look at the end of the year, we coughed up a couple of day sales and receivables but our payables went down almost five days. And obviously that’s not a good thing and we would expect to get that straightened out in 2007.

So it doesn’t sound like it’s going to be a meaningful use then of working capital?

Exactly.

The next question comes from Jonathan Chaplin of J.P. Morgan.

Good morning guys. A couple of quick ones if I may. Oren, you mentioned in your comments modest revenue growth in 2007. I am wondering if you can give more details on what modest revenue growth means, and kind of map your aspirations of 3-4% revenue growth over time. And then in terms of the one time pressures for 4Q, it seems like they fall into three categories. There were facilities costs or rather un-recovered access charges, compensation related expense and some storm related expense. It looks like they sort of together amounted to somewhere between $40-50 million in costs. I’m wondering if you can sort of apportion the short falling costs between those three items and sort of give us some more color around the un-recovered access charges. I’m not sure I fully understand what was involved there. And then I’m wondering, given that the balance sheet was a greater use of cash, a $200 million greater use of cash in 2006, how does that factor into your expectation for 2007? Shouldn’t you be recovering the working capital short fall that you had in 2006 and 2007? And isn’t their an opportunity for the balance sheet to be a source of cash in 2007?

Jonathan, your numbers are pretty good, pretty good analytics. I’m going to do the first one instead of Oren. If you looked at our strategy in terms of where the modest growth will come from, if you go back and re-play what we said on the call, mass-market was growing at around 2.4%, we would expect that to continue in that range. We have that opportunity. We also have an opportunity to keep our wholesale business basically flat with increasing margin improvement and that’s what we should do. But the real opportunity for us, the key to success this year is to focus on our enterprise mid-market space. As we have said at the conferences and on the calls, we’ve got a pretty good shot on that with the consolidation of the industry and with people focusing on some other issues, customers are looking for us in that enterprise space. We’ve got about 4-5% market share, approximately to move that up. And you can do the math on what 50 basis points means across of growth, or 100 basis points of growth, could mean across the sector. So, the real key is right in there, and that's the sweet spot for us this year. We spent a couple of years retooling that part of our distribution. And that will make it. Oren, you want to do the other?

And Jonathan, if I happen to miss any of them as I'm going through this, don't hesitate to ask me again. But on the shift of the...on the costs we incurred in the fourth quarter that weren't expected, they were, you know…In the compensation side, we had some performance-related pay, and then of course the additional charges that we were getting from overtime, and a redirection of people away from activities in our installation and maintenance crews that would have been normally capitalized installation or something like that going into repair. Those two things together on a compensation side probably were pretty-much around $40-45 million. On the facilities-cost side, what happened to us there was that, late in the month, we discovered some traffic activity which, of course, we believe was untoward. But, in any case, it did run up our facilities cost, and when we closed it off – and that's why we consider that these things will not reoccur, because we in fact are not going to transmit that traffic. But our systems did not allow us an early enough warning system to get that out. And it was probably something on the order of $10-15 million, probably.

We've fixed the systems now, so that I can tell you that if we get a little spike like we did from some spots that inappropriate traffic that we could immediately block it. And we have talked to all of our wholesale costumers concerning doing that, and they have agreed. And so the systems that the wholesale group, Roland Thornton and team have put in place, on about a day's notice. Whereas Oren said, we just didn't pick it up quick enough, and that's unfortunate. That was too bad.

And so I think that's why my comments were that I felt pretty comfortable indicating that in my mind at least, we're coming out of the year on an EBITDA trend that is even more represented by the third quarter than what we reported in the fourth quarter and therefore feel fairly good about the kind of EBITDA increases going into '07. On the question about the balance sheet, you know, it would be pleasant if you will, if in fact, the increased use of cash on the balance sheet in '06 actually reversed itself in '07. I'm maybe being a little bit conservative, but it's just my nature to be that way. I'm assuming that that will be the balance sheet that we begin the year with. And we'll go from there. The reason that it used the cash in '06 are obviously temporial, and therefore, you know, may in fact reverse themselves in '07. But right now, I would say we'll just assume they don't, and that the balance sheet going into '07 will be a slight user of cash. But in spite of that, I think we still have the opportunity to improve cash flow in the order of $400 million across the year, which, you know, we'll see how the year develops.

We're better served by being conservative.

Probably so.

A quick follow-up if I may: It looks, you know, based on the costs – and thanks for giving us that, Oren – it looks like it's more sort-of $50-60 million in one-time pressures. It seems like, you know, if you back those out, actually EBITDA margins might have been up a little bit sequentially. I just want to make sure I'm doing the math right there. And then, Dick, just getting back to the revenue growth: Is, you know, when you put all that together, does it get you to sort-of 2% revenue growth, you know, halfway towards your aspirations of 3-4%?

No, that opportunity is there, and I don't think we want to get into a habit of, or get into a pattern of giving guidance on that. But it does move us directionally towards our goal. It's just like, I think your first comments right, and again that's a layman's position – that our goal of hitting the mid-thirties on our margin, we still feel that that's very doable inside. And Oren, why don't you answer his question directly on, he took that 50-60 or whatever that number is?

Your math is very accurate, and as you can see, that's why I think the momentum and the growth and the level that we were experiencing in the third quarter is probably more representative of what actually happened in the fourth quarter, and that's what I think our comments about '07 are kind-of based on. In other words, we're... Dick's comments about continued momentum on the revenue side, continued momentum on the growth and EBITDA numbers, and also the cash flow. So that's all kind of third quarter, drawing a line across the third quarter is more representative than drawing a line on the fourth quarter.

Excellent. Thank you very much, guys.

Yeah, operator, we'll take one more question.

Your last question comes from the line of Frank Louthan with Raymond James.

Great, thank you.

Good morning, Frank.

Good morning. You mentioned a couple of things on the enterprise side. The business lines were down a little bit more. I just wanted to... two questions there. Could you characterize some of the business-line changes? Are you seeing increased competition from some of the CLEX, or is that a function of customers moving to higher capped or optical circuits, that come off the line count? And then, you know, continuing to see trends going away from Frame ATM, you mentioned ramping down some of that business – what is your exposure to Frame ATM, and how quickly do you think that's going to transition over to IP-based services in your enterprise unit? Thanks.

On the first part, we looked at where the line loss is. It is where we are not the ILAC. It would be in those parts of the country at the low end of the mid-market. And that's where we're losing the lines. And the second thing I would add is, it is also the fact of customers moving towards higher speeds, higher utilization of the asset. If you think back to the mid-90's when we were moving away from T1 or DS1 and moving to DS3, or moving away from a private- line circuit to a DS1, we were getting high growth, but we were losing the lower end. People were migrating up. Which gets me to the second part of your question. On the Frame and ATM, we still do a sizeable business in that area. We have been aggressively pursuing our MPLS, and our IP network. In fact, Tom Richards isn't here, he runs our business and marketing group, we have consistently, quarter-over-quarter, month-over-month, seen record growth, or higher and higher growth – that's a better way of saying it, in our IT sales. And we have had to, as we talked about on the call, we have been investing in our long haul network, and moving it from 192 to 768. And, by the way, the good news is for us, that's a plug-and-play thing, because we spent billions of dollars back in 2000 for the newest technology, so the upgrade is not nearly as time-consuming, several times quicker, and the costs are much lower than had we been with older, Legacy technology. But customers are moving there, and it's a good opportunity for us. Our IQ networking and our data sales, as Oren pointed out with his statistics, have been very strong for us. And…

Thank you. This concludes today's Qwest fourth-quarter earnings conference call. You may now disconnect.