Qwest and Immunex: Your Local Enron Wannabes
March 13, 2002

Maria Tomchick


Enron is on everyone's lips. It's sparked over 30 separate bills introduced in Congress to reform everything from accounting to 401(k) plans. But the Enron road--a too-fast expansion followed by a spectacular collapse--is not unique. A couple of local examples quickly come to mind.

Last week, Immunex, the local high-flying biotech pharmaceutical company, admitted that it had a $671 million off-balance-sheet liability from the construction of its waterfront headquarters in Seattle. Like Enron, Immunex had used a tricky accounting move (setting up an outside partnership) to hide the debt and construction costs from investors, thereby inflating its earnings. Immunex called it a "synthetic lease."

Now, I'd love to ask my landlord for one of those, but he wouldn't go for it. Neither should we. Immunex bought the Elliott Bay property from the Port of Seattle, after finagling a new, publicly-financed $19 million overpass so its employees wouldn't have to stop at a train crossing. That $19 million came from the City, Port of Seattle, King County, and the federal government. That money could have filled a lot of potholes and financed partial construction of a monorail through the same area, instead, it's money down the toilet.

With the recent news that Immunex is being bought out by California-based Amgen, an obvious question arises: what will happen now to the Elliott Bay headquarters construction? Immunex originally said it would build 15 separate buildings, including its new headquarters and a state-of-the-art research facility, on that 19-acre parcel over a period of 15 years. Everything is now up in the air, especially after Immunex's bombshell.

The original cost of the construction was estimated at $450 million in 2000, but Immunex's liability is now $671 million. With costs spiraling upwards, Amgen may abandon all or a part of Immunex's plans, sell the property, or, worst of all, simply let the property sit idle while it appreciates in value. Or Amgen could do what Dynegy did to Enron: cry foul and reverse its decision to buy Immunex.

This would leave Immunex with a big, newly disclosed debt on its balance sheet. But that's not its only problem. Last week, Zymogenetics filed a lawsuit charging that Immunex infringed on six of its patents when producing Enbrel, Immunex's cash-cow drug. And a month ago, the medical journal Lancet reported that 4 patients in a Chicago hospital had developed lupus from taking Enbrel. Lawsuits are expensive and eat into cash flow. Even more expensive would be a drug recall, because Enbrel is Immunex's main money-making product, and none of the other drug it has in development are nearly as promising.

You would think that the local newspapers and TV stations would be all over this story, but you'd be wrong. Local companies can do no wrong, as Microsoft, Amazon, and Boeing (who's no longer local, but still benefits from favorable press here) have discovered.

So a company based in Denver, Colorado, which has a virtual lock on local phone service in a 14-state region (including Washington State) and a reputation for shoddy customer service should be fair game, right? Not so.

I'm talking about Qwest, of course. Nearly everyone I know has a story to tell about double billing, denial of service, a DSL line that unaccountably stopped working, getting billed for services not ordered, waiting weeks for a line to be installed, and a host of other complaints about Qwest.

Qwest has traveled a long way down the Enron road. After two years of rapid expansion, including the purchase of UW West in 2000, Qwest has billions of dollars of debt on its balance sheet and no cash. It recently drew on a $4 billion line of credit to pay its day-to-day operating expenses (similar to using your credit card to pay rent, buy food, and pay your other bills).

All of this debt adds up to trouble. This summer, Qwest will have $850 million in debt payments coming due; that amount will rise higher as it draws on its line of credit. In addition, last week Moody's Investors Service cut Qwest's credit rating down to one level above junk status and warned that Qwest's rating could fall further. That means Qwest's interest payments on its debt will soon be skyrocketing.

Qwest says it has a plan to boost cash flow and eventually pay off its debts: sell some of its assets, cut its expenses, and issue "equity-based securities."

These moves will probably add to the company's woes. Now is not the time to be selling off assets. All the other big telecom companies are in bad shape, too, with too much debt and too little cash flow, so there are no buyers. Cutting expenses--in particular, laying off employees--will only drive customers away and mean additional fines for Qwest, who already owes its Washington State customers over $3 million for service problems. The vague term "equity-based securities" could mean nearly anything in today's free-for-all accounting climate. Investors, however, are becoming wary of derivatives, junk bonds, and other risky financial schemes. Qwest may find that no one wants to pay very much for bits and pieces of a falling telecom empire.

Probably Qwest will default on some or all of its debt. That means bankruptcy. And if you think that it's hard to get good customer service from Qwest now, just try when it goes into Chapter 11. Bankruptcy also can mean a big jump in rates or an expensive taxpayer bailout (as with California utility companies)--or both at the same time.

The Seattle Times and P-I should be on top of this story, since it has the potential to effect everyone who has a telephone. Instead, they're busy writing flattering stories about Microsoft and Boeing and engaging in happy talk about the end of the recession (it's coming any day now!). They're sleepwalking, instead of practicing journalism.

Remember, you read it here first.