Good morning. My name is Letricia and I will be your conference operator today. At this time, I would like to welcome everyone to the Qwest second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Stephanie Comfort, Senior Vice President of Investor Relations. Please go ahead, ma’am.

Thank you. Good morning everyone, and welcome to our call. We’re here to discuss our second quarter 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 the call over to Dick, I want to remind everyone that we will be making forward-looking statements. These statements contain risks and uncertainties which could cause actual results to differ materially from those expressed or implied here on the call. The 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. Let me add that in order to supplement the reporting of Qwest consolidated financial information, the company will discuss certain non GAAP financial measures, EBITDA, free cash flow and net debt. We have a full reconciliation of non-GAAP measures included in the quarter earnings section of the web site. With that, I’d like to turn the call over to Dick.

Thank you, Stephanie. Good morning, everybody. Glad to have you with us. Today Qwest reported its second sequential quarter of net income equal to $0.06 per share. In addition, we continued to improve our EBITDA margin and delivered strong free cash flow all in line with our goals for this year. Our performance demonstrates that our strategies are working. We continue to divest in our diverse portfolio of growth products. We also continue to increase ARPU and bundle penetration, improve our customer service, leverage our asset base and reduce costs. As a result, we are steadily driving achievement of our long-term goals of sustainable growth in revenue, profitability and especially free cash flow. As I have said before, this process requires discipline and perseverance to be successful and I hope you agree that we have demonstrated both of these qualities, as well as a commitment to deliver performance and value to all constituents. Here are the highlights of the quarter: First, we remain focused on driving revenue growth. While overall revenue held flat year over year, we saw positive trends for our high-value, high ARPU growth products across all of our business units, offsetting continuing retail access line lost trends which held steady. In addition, mass market revenue grew both sequentially and year over year for the fifth consecutive quarter. This was due to continuing strong volume increases from strategic growth products such as high-speed Internet, long distance and increased bundle penetration. Wireless revenues grew again this quarter. We achieved positive segment income in the second quarter. Let me say that again. In wireless, we achieved positive segment income in the second quarter which is also, for us, an important milestone. We also have seen some positive trends in enterprise. Demand for emerging data products such as metro Ethernet, Voiceover…

Thanks Dick, and good morning, everyone. We are very pleased with the progress we’ve made in the second quarter. The momentum in our growth products, coupled with ongoing cost containment efforts, is driving further and significant margin expansion and improved profitability. EBITDA margins are now solidly in the low 30% range. We are generating significant free cash flow. We posted another quarter of net income. All in all, we’re on track to meet our objectives for the year. Revenues total approximately $3.5 billion in the quarter, bringing year-to-date revenues to $6.9 billion, up 0.4%. We are seeing improved trends across key growth offerings in all our channels, offsetting the impact of retail access line losses, which continued to hold steady. We benefited from strong trends in data and IP services in all channels, mass markets, business and wholesale. An increasing portion of our revenue is coming from higher growth data products such as high-speed Internet, VoIP, VPN, data integration and hosting. Investment continues to be focused on revenue growth. In aggregate, data IP revenues grew more than 8% year over year, and 1.6% sequentially and data now accounts for 32% of our revenues, up from about 29% a year ago. In the mass market channel, revenue growth accelerated in the second quarter to 3.4% year over year, on top of already strong growth in the first quarter. The success in our bundles, the rapid growth of DirecTV in the bundle, and the migration to higher-priced offerings in wireless and Internet services is driving higher consumer ARPU, which has been steadily climbing each quarter. In the second quarter, ARPU increased to $49, a 7% increase year over year. We expect our ARPU and revenue to continue to improve as more and more of our customers take bundles and higher-value, higher-ARPU offerings.…

Thanks, Oren. For 2006, we continue to believe we have the opportunity to drive modest organic revenue growth and improve EBITDA margins, especially as our growth products become a more significant part of our business and as we continue to improve our cost structure and our productivity. In closing I believe, my personal opinion, that our strategies are working. Our progress is demonstrable, conceived and plotted over a period of quarters the direction we are going, and that shows some momentum that is tangible. That causes us to have a positive outlook for the future. Now, Letricia, we’d be happy to take questions.

(Operator Instructions) Our first question comes from Jonathan Chaplin with J.P. Morgan.

Good morning, Jonathan. Jonathan Chaplin – J.P. Morgan: On the facility cost savings, I think you said it was about $11 million in savings sequentially. That seems roughly the same as the savings you got in the first quarter and I’m just wondering if you expect to be able to repeat those kinds of savings in the next few quarters, or whether maybe they can even accelerate from here?

Well, Jonathan, I don’t think we want to get exact on $11 million or $10, but let me just say in general, we believe we still have lots of opportunity on facilities costs of our network. We talked before about hubbing and we’ve talked before about what we can do as far as aggregating traffic versus having things homerun all the way out on long facility runs, so we believe we still have lots of opportunity and we’ve got a great guy in Dan Willis working it and we think we can still make a heck of a difference there. Jonathan Chaplin – J.P. Morgan: Excellent. Thank you very much.

Yeah, thank you. Thanks for the question.

Our next question comes from David Barden with Banc of America Securities. David Barden – Banc of America Securities: Hey, guys. A couple of questions if I could. First was, it sounds like after you make this debt pay down in August, I guess, being opportunistic on the debt fund would kind of suggest that you’re reasonably happy with the leverage that you’re going to be at, which would look like it’s going to be around the three times level. I was wondering if you could just comment if that’s a level that’s going to be comfortable enough to just be opportunistic around, that’d be great. Second, Dick, I guess I think you guys have been talking about the plan to go ahead and return capital to stockholders for awhile. I think that the, you know, a lot of the run up in the stock has been, you know, the market’s debate with itself about, you know, how aggressive, how comfortable you plan, you know, to be with this. I guess if you could comment on, if you give your feedback and thoughts to the Board about what you’d be comfortable doing in terms of magnitude of cash flow, that’d be helpful. The last, the share count just obviously moved up a little bit. If you could talk about the moving parts in that. Thanks.

Oren, you want to go first?

Sure. David, how you doing this morning? David Barden – Banc of America Securities: Great. Thanks, Oren.

The leverage thing, as we’ve said in the comments and then I probably said on a number of other occasions, we’ve done a fairly decent job of scheduling out our maturities and I think if you looked at the whole maturity table between now and 2009, you’ll see it’s rather modest so, when we’re going to, for example, take out the maturity in all of this, the future, if you will, on any opportunistic dealing with the debt can go one of two ways. It can say, you just deal with the maturities as they occur, which would be modest, as I said, out through 09. Or, if there was some attractive way to restructure the whole maturity outlook again we would probably take that up. But basically, we are pretty comfortable with the leverage of where we are and dealing with it as it comes due over the next few years. Dick, I’ll - you want to do the next one, or do you want me to do it?

No, go ahead.

Well, why don’t you go? You want me to try that third one, now?

Yeah, go ahead. Do the third one.

David, I didn’t quite understand the third question totally but it sounds like you were commenting on the slight increase in outstanding shares that we had quarter to quarter? David Barden – Banc of America Securities: Right.

I think what we, as we will say in the queue, we did a debt retirement on the basis of shares and I think the, I don’t recall the exact numbers, but I think the equivalent price of the shares, by the time we captured the discount in the debt, was between $7.90 and $8.60 or something like that and in all cases was well above the market. So we believe again that it was actually a value-creative way to reduce our interest expense while at the same time basically issuing modest amounts of equity at a very substantial premium to where it was trading. David Barden – Banc of America Securities: So a 389 exchange?

He said a 389 exchange, yes?

Yeah. David Barden – Banc of America Securities: Okay. Great. Thanks.

Then on the reward for, you know, the return of capital or using that cash on the equity issue, I think, you know, we’ve got two good quarters as far as positive earnings and you’ve seen the second quarter cash flow which I think was strong. So now I think we are in a position to go to the Board and go through the process that one should go through, a very disciplined process, and make a recommendation on what we should do. I think to have done it prior to that, even though we projected it in our forecast, we needed to have the actuals under your belt and so we’re comfortable with making it meaningful and I think that’s very important. It has to be meaningful, and there are only a couple of options. We all know what they are, and I think the Board will review this, again, very disciplined, diligently, and make their decision in short order. But I think, again, I think the timing is very important to us. David Barden – Banc of America Securities: All right. Thanks for those comments, guys. Appreciate it.

Thanks for the question.

Our next question comes from Simon Flannery with Morgan Stanley. Simon Flannery – Morgan Stanley: Okay, thank you very much. Good morning.

Good morning, Simon. How are you? Simon Flannery – Morgan Stanley: How are you? Dick, could you talk about the M&A environment? You’ve obviously made an acquisition here. Are there other things of this nature or in other directions that are still something that you might consider over the next couple of quarters and then just a question on the employees? Can you just describe the in sourcing in a little bit more detail and is that sort of it for in sourcing and should we expect the attrition to sort of come through in the numbers in the second half? Thanks.

Yeah. On the M&A I think I commented in my remarks, we continue, as we have, to scan the horizon, not just a traditional telco look but maybe over in the hosting or systems integration side but, as we said multiple times, it has to be very disciplined. It has to be strategically fit. Operationally, we have to be able to exercise it and make sure it works and meets expectations. And then we have to apply a financial test to it, the spreadsheet, and say, what’s the payback period? I mean, for example, the one we did, you know, it’s positive in the first year. So we have to be able to sit down with our owners with a pencil and paper and show the benefits and be assured that we can do it. We’ll look. We don’t have to knee jerk into anything. We have organic growth opportunities in revenue that we can look at. So I think we’re doing this thing right. Over the last few years I think the testimonial is, our actions more than our words. And so that’s very important. On the in sourcing what we did, with the help of the Communications Workers of Americas, the CWA, is we were able to renegotiate a wage scale that is significantly lower than what we had been paying. What the trade-off there was that if you can pay somebody $8 or $10 a hour versus $20 or $22 an hour then, in fact, you don’t need to outsource those jobs and we feel very good that, at that cost structure, having someone with Qwest, the Spirit of Service on their shirt really makes a difference when they answer the phone and when they talk to people. So this is call center work that we have brought back in and I think we’re very proud of what the CWA has done and I think it’s a model for other companies in our country to bring work home. We will look at that. We just opened a center over in Logan and we will - we’re pretty close to wrapping that up. What we’ll do is, as more of those call center jobs attrition, they’ll be replaced by the lower pay scale and that’s what’s going on. As far the overall headcount, with the exception of the call center work I think I’m pretty safe in saying that we have continued to take advantage of the natural attrition that our company experiences. So I would expect us to continue down that trajectory. Simon Flannery – Morgan Stanley: Okay, thank you.

Thank you. Thanks for the questions.

Our next question comes from Frank Louthan with Raymond James. Frank Louthan – Raymond James: Good morning. Just a couple of questions. Can you go over what you’re seeing in the wholesale pricing trends in the quarter? I know you’ve driven some wholesale, a little bit of improvement in the wholesale last year, but can you tell us what those are? And as far as the acquisition goes, where do you sit as far as what you think you need to fill in on the long-haul side for some of the cost containment? Do you still think another acquisition – are you still being as aggressive looking for other acquisitions, or just let this one digest? Thanks.

I think on the acquisition and I’d ask Oren when I get done, I think Ken Dunn, who runs our M&A group is being very aggressive in looking at it. But I do believe we’d have to stay with our discipline and, you know, if you could add some pops, those types of things, that’s good but again, if you could add some hosting capability or some systems integration capability as far as working with state and federal governments, that also would be positive. So I don’t think we should just look at facility costs alone. Again, it’s build it versus buy it and if you have to pay too much of a premium because of price points, then you’re better off building it. I mean, I just – that feels very comfortable with me. Oren, you want to add anything to the M&A?

Absolutely the feeling.

Yeah, and then the second part of your question was on – Frank Louthan – Raymond James: The wholesale pricing.

Oh, the wholesale pricing. What we have seen on the traditional wholesale minutes of use, you know, the thing that happens is that that pricing is competitive, especially on dial port business and, in fact, some of us might question similar pricing the competitors put out as far as their ability to have positive cash flow or earnings but, in our hosting wholesale business and in our reseller business and in our IDDD business, we’ve seen good solid performance and feel very good about what’s going on there. I mean, in spite of all of that, you know, the revenue is up, the volumes are up 1.6% sequentially and, you know, when you’ve done a couple of price increases and you strategically readjust your pricing in different laterals, that feels pretty good. As Oren said, that’s where that positive margin was so important to us and we have walked away from some business. Then the last thing I would say would be mergers by two other companies, you know, in the consolidation within our industry, those people took their traffic and put it on net as they should, as we would have done. So that traffic left ours and it was a sizeable amount, and yet we’ve been able to make it up and still grow a little. So that tells you the opportunity in the wholesale business is still pretty solid. Frank Louthan – Raymond James: Okay, great, and just one follow up. You mentioned earlier this year about looking at the small-medium enterprise SME market and a couple of your peers had indicated some strength in that this quarter. What did you see in that part of the market and how do you view that going forward? Thanks.

Yeah, you know, in the small and medium-size business it’s a great opportunity for us. If you said Dick, how are you doing? I would say not nearly as well as I should do. We talk about this constantly. There’s good opportunity there and yet, you know, at the low end we’ve got growth and we’re doing okay but at the middle, the mid-point, that key system area, I just don’t feel that we are performing as well as we should do and I think if you ask the team, and I’m not talking about just the people who report to me, I think you’d get pretty consistent feedback that we feel we can, we’ve got a lot of opportunity there to improve our performance. Frank Louthan – Raymond James: Great. Thank you.

Our next question comes from Ana Goshko with Banc of America Securities. Ana Goshko – Banc of America Securities: Hi. Thanks very much. Oren, I just wanted to clarify on your debt repayment plans. When you say that you’ll be dealing with maturities as they come due, do you mean that you’ll be paying them down with cash from the balance sheet or do you plan to refinance them? As I look ahead over the next 12 months, I see about $1.1, $1.2 billion of debt maturities and if I think of your kind of cash flow generating ability at about, you know, $1.5 billion, if you were to repay all of the maturities from cash on the balance sheet I don’t think there’d be a whole lot left for other kinds of, you know, shareholder enhancement. So again, you know, mainly wanting to know what your plans are for refinancing versus organic delevering? Then secondly, when you talk about adequate liquidity, it that still about $1 billion of cash on the balance sheet in general?

Yeah. No, I’m not suggesting that we would automatically pay down our maturities. I think what we’ve tended to do, if you look at the way Qwest has handled its right-hand side of the balance sheet, I think we’ve always tried to do something that was more elegant than simply paying down an existing maturity and this has served us very well. In fact, if we look back over the last four years I suppose there’s been an occasion where we’ve simply just paid down a maturity but it doesn’t come to my mind right off hand. Most of the time we’ve tried to roll things into a more value creative solution. The debt action we took at the end of last year was, as you know, a larger package put together that restructured debt that was not due and had not matured, but it seemed like an opportune thing to do. So no, we will – I didn’t mean to indicate that we would simply just write checks each time the maturities came up. In fact, we probably will not. But I think it’s important to clarify your thoughts about the cash flow. Yes, let’s suppose we do generate $1.5 billion of free cash flow this year, I think if you look at the report in the second quarter, we’ve managed to move cash in the second quarter to almost $1.5 billion, it’s $1.4 billion something, so we actually have a fairly good portion of cash going not only through 06 but also into 07. As far as the liquidity discussion, I’ve emphasized the word liquidity because we included liquidity or undrawn, standby revolver in the credit line and that gives us even greater flexibility for the use of the actual cash on the balance sheet and we think that, you know, $750 to $1 billion of liquidity is sufficient to tide us over the lumpiness which sometimes occurs in our quarterly generation of cash flow. So maybe that will recalibrate some of your ideas.

You might mention the size of that bank facility.

Yeah, we mentioned – it’s an $800 million undrawn revolving credit line and so, in my thoughts about liquidity added to the $1.4 billion that we’ve got in cash on the balance sheet today that we would really be speaking about liquidity of $2.2. Ana Goshko – Banc of America Securities: Okay, that’s great. Okay, thanks very much. I’m sorry you up.

You’re very welcome. Letricia, we’ll take two more questions, please.

Okay, sir. Your next question comes from David Janazzo with Merrill Lynch. David Janazzo – Merrill Lynch: Good morning.

Good morning, David. David Janazzo – Merrill Lynch: The State of New Mexico is proposing a $265 million settlement for some unfulfilled obligations. Is this in your current planning, your current thought process and what time do you think that’ll take place?

Well, first of all it has not been approved by the PRC so we have to be very respectful of their position. But we found that settlement to be very fair and very good for the people of New Mexico in the sense that we will push high-speed Internet and other capabilities further into the state. The timeframe that that occurs over – by the way, the number’s $265 million, $15 million of which goes to education over a three-year period – but the other part of the commitment, the $250 million, is composed of both capital and expense and it takes place over 42 months. So, 42 months into the future. So we await with anticipation the decision by the PRC. We were grateful to have the support of the governor and the attorney general and again, this is very good for our customers and provides us opportunity, at the same time opportunity for growth. Oren, you want to add something here? Go ahead.

No, no. I just – to make sure that any of the amounts that needed to be reflected were reflected in our second quarter results. It was the correct entries and the books reflected the anticipated settlement. David Janazzo – Merrill Lynch: Thank you.

Thank you. One more question, Letricia.

Your final question comes from Mike McCormack with Bear Sterns. Mike McCormack – Bear Sterns: Hey, guys. Good morning.

Good morning, Mike. Mike McCormack – Bear Sterns: There are a couple questions on free cash flow. It looks like the guidance for the year might be a little conservative. If we look at your margin improvement this quarter and potentially, you know, additional strength in the back half of the year, as well as sort of Capex levels in the first half and second half being relatively equal, is there something I’m missing on working capital that would drive some pressure on free cash flow in the back half of the year? Secondly, on free cash flow in the long-haul business, you know, where do we stand on that and maybe you could just weigh, you know, the pressures, perhaps, of carrier disconnects versus some of the commentary around pricing stability and enterprise growth opportunity. Thanks.

First of all, I think we’ve been very consistent this year talking about working capital. I think we’ve been some very straightforward and very consistent in what we’ve said and I also would take you back to, I think it was the December quarter or maybe back in December when we talked about free cash flow and we said that we had $904 million before one-times and that we would increase that by, you know, 350 to – what was the number? 500 or 600?

350 to 600.

350 to 600? Or 450 to 600, and we said there would be variability within that range and variability possibly outside of that range, as there was last year. So again, I think we’ve been very consistent in what we’ve said so I don’t think you’re missing anything. We just want to make sure that we perform and we meet expectations. Oren, do you want to – I mean, I think that’s – I don’t know what else –

Yeah, that’s – you know, we do have this variability quarter to quarter and I know $595 million a quarter will come to a number greater than but we’ll keep our projections the way they are.

Yeah and again, on the working capital, I want to go back to that, if you look at what we’ve said, we’ve been very consistent in our, you know, in the queues, with what we’ve said about our ranges of capital investment. We’ve also been very consistent in where that capital investment would go. We’ve said it’s 30% to 35% or so, you know, about a third, approximately, that goes into that broadband, pushing that bandwidth out and I would point out, we feel very good about the fact that 25% of the qualified high-speed Internet customers now get 7 megabits so we are pushing it out without a lot of fanfare, but you can see from our net adds on high-speed Internet that we continue to have opportunity there. Mike McCormack – Bear Sterns: I guess I was looking at sort of the second half of last year, you know, if you have the same performance in free cash flow as last year, you’re almost to the guidance trench currently and that’s obviously with an OCF that’s probably quite a bit lower than we’d be looking for this year.

I think we should stay consistent with what we’ve put out. Again, we have said variability within and without so, you know, we’ll just see how – we think we can continue to execute and expand the margin, or we have that opportunity, I should say, to grow that margin, that EBITDA margin a little better. I appreciate the question. I’d like to thank everybody for being on the call. We appreciate your interest and your support. Thank you very much.

Thank you for participating in today’s Qwest second quarter earnings conference call. You may now disconnect.