For telecoms, a familiar ring
Level 3 takes huge hit on fiber optic network
By Jeff Smith, News Staff Writer
Level 3 Communications Inc. lost $3.28 billion in its fourth quarter and warned Tuesday that it might violate its bank covenants as early as mid-year should sales continue to be sluggish.
The loss, which nearly matched Qwest's record $3.3 billion loss in the second quarter of last year, primarily stemmed from Level 3 writing down the value of its fiber-optic network in North America and Western Europe.
Excluding various one-time accounting charges such as the write-down, Broomfield-based Level 3 lost $475 million, or $1.24 a share, in its fourth quarter of 2001, better than projections of $1.70 a share.
Level 3 executives remained confident that the company has enough cash to survive the recession and regain profitability. But Level 3 stock slid 15 percent to $3.95 a share on heavy trading.
The fiber optic, or communications transport business, suffers from overcapacity and weak demand. Level 3 competitor Global Crossing filed for bankruptcy protection Monday, and another competitor, Williams Communications, saw its stock fall 17 percent Tuesday when its former parent company said it may have as much as $2.4 billion in costs from the spinoff in April.
Level 3, because of its asset write-down, posted a negative stockholders' equity for the first time. That means that if its assets were sold today to pay off liabilities, there would be nothing left for stockholders.
Level 3 Chairman and Chief Executive James Crowe said that he believes the company's network still has"significant value" but was devalued to reflect current overcapacity. For example, Level 3 installed 12 fiber-optic conduits in the ground."We do not believe it's realistic to assume we will be able to sell or use all these conduits," Crowe said.
But Crowe noted the company still has $1.5 billion in cash and equivalents and access to a $650 million credit line. In addition, he said Level 3 could raise at least $500 million by selling noncore assets such as a toll road, telephone company and coal mine.
"Longer term, we certainly remain optimistic," Crowe said in a conference call.
Chief Financial Officer Sureel Choski said the company already has begun discussions to renegotiate its bank agreements, and that Level 3 anticipates being able to make all of its debt payments.
And Level 3 continues to land big contracts -- announcing Tuesday that it has signed a $100 million, three-year contract to provide dial-up Internet access services to SBC.
Greg Zappin, a telecom analyst for Standard & Poor's, said S&P is reviewing Level 3's junk bonds for a possible downgrade.
"The problem is really their balance sheet," Zappin said."They've made some improvements, but it's still a pretty heavy debt load. We've focused on that, and the possible violations of the bank covenants."
Level 3's fourth-quarter loss compares with a loss of $552 million, or $1.50 a share, for the same period of 2000.
Besides a $3.2 billion write-down of its fiber-optic network, Level 3 reported a $539 million loss from discontinuing its Asian operation, which recently was sold to Reach Ltd. Level 3 also reported a $981 million gain from a debt-for-equity exchange.
Revenues were weak, falling to $326 million for the fourth quarter, less than analyst estimates of roughly $350 million. Level 3 revenues have been hurt by the continued financial problems and bankruptcies of many of its customers.
Level 3 has cut its work force in half to below 3,000 since early last year and has reduced its debt from $7.9 billion to $6.2 billion.
January 30, 2002
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