Apr, 2002 : Financial Analysts Question Enron-Qwest Fiber Optic Swap

📅 April 1, 2002 - The New York Times reported on Friday that executives who were involved in a deal between Enron and Qwest Communications last September, to swap fiber optic network capacity and services, admitted that the companies had inflated prices in an effort to improve each company's financial picture.

Details of the deal, recently disclosed in Enron's bankruptcy filings, indicate that the two companies sped through the transaction as the third quarter was ending in September. The deal enabled the near-bankrupt Enron to avoid recording a huge loss by liquidating assets after the value of the assets had nose-dived on the open market. Analysts said the timing and the valuation of the $500 million deal is difficult to justify because a glut of fiber optic capacity had sent network prices plummeting.
This Enron-Qwest transaction and other, similar deals have forced the Securities and Exchange Commission and Congress to investigate whether network swaps are legitimate transactions or just tools to falsely improve revenues.
?Qwest said we will overpay for the assets, and you will overpay me on the contract,? one former Enron executive said to the New York Times. ?They had a pinch in the third quarter and needed a deal.?
Encountering criticism last year, Qwest started receiving heat from analysts and investors over a series of swaps in early 2001. The S.E.C. followed up by sending inquiries in 2002 about its network capacity swaps in 2000 and 2001. Recently, Enron executives declined to discuss the specifics of the deal.
Patrick Comack, a telecommunications analyst at the investment house of Guzman & Company in Miami, said, ?It's totally irrational to buy capacity from Enron. This is clearly a swap for accounting purposes,? after reviewing the deal's details for the first time this week.
Indicted in March on obstruction of justice charges tied to Enron's collapse, Arthur Andersen, signed off on the way Qwest and Enron accounted for the deal. An Andersen spokeswoman, Kim Boylan, said that the firm had relied on its clients' assessments of the deal's worth.
?The auditor is not the business adviser, and would not advise the company as to the valuation,? said Ms. Boylan.
Defending the transaction, Tyler Gronbach, a Qwest spokesman, told the New York Times that the company had also obtained power supplies, spare network conduits and the right to place its equipment at Enron sites, at what was believed to be fair market prices. Qwest could use the conduits, he said, to install fiber or sell space in them to other companies.
People close to both Joseph P. Nacchio and Jeffrey K. Skilling, Enron's and Qwest's CEOs revealed that the two companies had tried to negotiate an even larger deal, involving most of Enron's fiber optic cable and access to Qwest's network in the second quarter of 2001.
Witnesses said that discussions lasted into the final days of the third quarter, mediating how to account for the deal so that each would gain accounting benefits and improve its quarterly earnings report. Announcing third-quarter results on Oct. 31, Qwest boasted news of its fiber optic network expansion, without naming Enron.
Providing an $86 million increase to Qwest's reported revenues in the third quarter, the deal reduced reported earnings by an undisclosed amount.