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Sat, Mar 30, 2002 - Page 19 News List

Enron's swap with Qwest raises more accounting questions

The two companies struck a deal last fall to swap fiber optic network capacity and services at inflated prices in an effort to improve each company's financial picture


Qwest began encountering criticism last year from analysts and investors over a series of swaps in early 2001. The SEC started asking questions earlier this year, sending Qwest a letter requesting information about its network capacity swaps in 2000 and 2001. One deal involved Global Crossing, which is operating under bankruptcy protection and is also the focus of government investigations.

For Enron's part, the company had been known to be a sometime player in the network swap market. In the second quarter of last year, Enron had negotiated to swap much of its unused fiber with Global Crossing, the former Enron executives said, but that deal fell apart because of Global Crossing's credit problems. But the disclosure of the September deal places Enron as a central participant in the market even as the company was hurtling toward a bankruptcy protection filing.

In the second quarter of 2001, Qwest and Enron had tried to negotiate an even larger deal, involving most of Enron's fiber optic cable and access to Qwest's network, according to people close to both executives. The discussions involved Joseph P. Nacchio, the chief executive of Qwest, and Jeffrey K. Skilling, Enron's chief, but the talks broke down in June.

People close to the September deal said that executives at Enron and Qwest held discussions that lasted into the final days of the third quarter, pondering how to account for the deal so that each would gain accounting benefits and improve its quarterly earnings reports.

The deal came shortly after Qwest said that it would reduce its work force by 4,000 amid a sharp downturn. On Sept. 10, the company also trimmed its revenue and profit forecasts for 2001 by about US$1 billion and US$500 million, suggesting a sharp slowdown in the second half of the year.

Then, on Sept. 30, a Sunday and the final day of the third quarter, Qwest signed a deal to pay Enron US$308 million for assets that included so-called dark fiber along a route from Salt Lake City to New Orleans. Dark fiber refers to idle network strands that require additional investments in electronic equipment before they can be put into service. In exchange, Enron agreed to pay Qwest US$195.5 million for "lit wavelength," or active fiber optic cable services, over a 25-year period; each company exchanged checks for about US$112 million around the close of the deal.

To Comack, the Guzman & Co analyst, Qwest may be paying for assets for which it has little use. "I can't conceive of any reason they would need more dark fiber in the US," he said.

The deal enabled Enron to book a sale and avoid recording a loss on the dark fiber assets, whose value in the open market had dropped far below the price on Enron's books.

Qwest did not announce the Enron deal after it was made, although the company had regularly issued news releases for smaller deals, including a US$20 million contract with Perot Systems Inc on Sept. 27.

When Qwest announced third-quarter results on Oct. 31, however, it boasted about the expansion of its fiber optic network, without naming Enron: "In a transaction with a significant business customer, Qwest purchased approximately US$300 million of assets -- including the 5,500 miles of domestic fiber routes, co-location space and power -- to diversify and extend its network and to provide backup facilities."

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