Qwest Prepared to Answer Feds

Just as Qwest Communications International Inc. (NYSE: Q) settled the latest round of Wall Street concerns over its financials, a fresh set appeared this morning: The U.S. Securities and Exchange Commission (SEC) has filed what Qwest calls an "informal inquiry" into three aspects of the carrier's accounting records during 2000 and 2001 (see SEC Qwestions Qwest).

Qwest says the inquiry won't affect its debt offering, which is going ahead as planned, nor its planned shelf registration (see Qwest Fights Back and Qwest Takes Steps).

The SEC has asked Qwest to voluntarily produce background documents related to three aspects of its reporting, each of which Qwest has tried repeatedly to lay to rest in media and analyst talks:

  • Optical capacity exchanges. The SEC apparently wants more information about the nature of transactions through which Qwest exchanged capacity on optical circuits with like-minded carriers. Qwest already has been subpoenaed by the SEC for information on its dealings with troubled carrier Global Crossing Ltd. (NYSE: GX) (see Qwest Called on Global Crossing ). Qwest and Global Crossing exchanged leases on each other's networks, recording the transactions as incoming cash revenue and outgoing capex, thereby optimizing the positive and minimizing the negative impacts on their balance sheets. So far, though, neither carrier has been formally charged with wrongdoing.

  • Equipment sales involving Qwest financing. Qwest has long been dogged by questions about the way it recorded two equipment sales with smaller carriers. In what Qwest called an effort to save costs it would otherwise incur to start a series of wavelength services, the carrier sold equipment this past fall to Calpoint LLC, contracting to buy back large amounts of optical capacity when the startup's network went live (see Qwest's Nacchio Pipes Up, Again). Similarly, KMC Telecom bought gear from Qwest "to support delivery of the access ports to Qwest and to take advantage of Qwest's ability to buy the equipment at a lower price than KMC would otherwise pay," according to the carrier. In both cases, critics accused Qwest of trying to inflate its revenues while avoiding capital costs.

  • Changes in the production schedule of Qwest's QwestDex yellow-pages directories. Here again, Qwest has been asked to give more information about why it decided to put out the regional directories a month early. Critics have charged the carrier with trying to bulk up year 2000 revenues by doing so.

On today's call, CEO Joseph Nacchio said Qwest wants to cooperate fully with the SEC in its investigation. He also stressed that these issues have been raised before, that Qwest has dealt with them properly, and that the SEC hasn't made any accusations of wrongdoing.

"This is not a public inquiry. This could have been kept private, but we felt it more appropriate to have this call today," Nacchio told analysts on a conference call this morning, noting that the SEC questions "relate to transactions in 2000 and 2001 we believe we've properly accounted for, and we don't believe are material to... revenues."

Qwest claims that for 2001, revenue from capacity swaps accounted for 5.1 percent ($1.01 billion) of reported revenues of $19.74 billion; revenue from equipment-based financing for $1.7 million, or 0.9 percent of that amount; and revenue from QwestDex scheduling changes $400,000, or 0.2 percent.

For 2000, capacity swaps were about 2.8 percent ($5 million) of $16.61 billion in reported revenue; equipment-based financing, 0.1 percent ($100,000); and changes to QwestDex 0.2 percent ($300,000).

Qwest says no equipment financing or capacity swaps will show up in the present year's accounting.

The SEC says it has no specific categories differentiating "informal" and "formal" inquiries. A spokesman says documents that aren't given over voluntarily may be subpoenaed.

— Mary Jander, Senior Editor, Light Reading

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