Enron and the telecommunications giant Qwest Communications struck a deal last fall to swap fiber optic network capacity and services at exaggerated prices in an effort to improve each company's financial picture, executives close to the deal said this week.
Details of the deal, which were not announced at the time but have been disclosed in recent filings in Enron's bankruptcy case, indicate that the two companies raced to complete the transaction as the third quarter was ending in September. Enron and Qwest valued the transaction at more than US$500 million, but analysts said the timing and the valuation would be hard to justify because by last fall a glut of fiber optic capacity had sent network prices plummeting.
Similar deals by other companies in the last few years have become the focus of inquiries by federal prosecutors, the Securities and Exchange Commission and Congress, as investigators try to determine whether the network swaps were legitimate transactions or sham deals meant to lift revenues artificially. So far, in describing its responses to SEC questions, Qwest, the dominant telephone company in 14 Western states, has said publicly that its swaps are based solely on the needs of its network operations.
But executives close to the Qwest-Enron deal, one of the largest recorded, said the swap had other objectives. It helped Qwest soften a deteriorating situation in profit and revenue at the end of last year's third quarter, the executives said. The deal also allowed Enron, which was tumbling toward a bankruptcy court filing, to avoid recording a huge loss by selling an asset whose value had plummeted on the open market, they said.
"Qwest said: we will overpay for the assets, and you will overpay me on the contract," one former Enron executive said. "They had a pinch in the third quarter and needed a deal."
A financial analyst looking at the deal's details for the first time this week, questioned the need for a swap. "It's totally irrational to buy capacity from Enron," said Patrick Comack, a telecommunications analyst at the investment house of Guzman & Co in Miami. "This is clearly a swap for accounting purposes."
Arthur Andersen, which was indicted earlier this month by the Justice Department on obstruction of justice charges tied to Enron's collapse, signed off on the way Qwest and Enron accounted for the deal. An Andersen spokeswoman, Kim Boyland, said the firm had relied on its clients' assessment of the deal's worth. "The auditor is not the business adviser," Boyland said, "and would not advise the company as to the valuation."
A Qwest spokesman, Tyler Gronbach, said Thursday that the company had bought more than network capacity from Enron, including the right to place its equipment at Enron sites and the purchase of power supplies and spare network conduits. Qwest could use the conduits to install fiber or sell space in them to other companies, he said.
"We paid what we believe was fair market value for the package we bought," Gronbach said. He declined to discuss how Qwest valued each element of the deal.
Enron executives declined to discuss the specifics of the deal. "Many of the matters that occurred, while they may have been perfectly appropriate, are being looked at by several different government authorities, so we'll have no further comment," Mark Palmer, an Enron spokesman, said.