A possible

Qwest

(Q)

decision to restate as much as $1 billion in 2001 revenue could earn it points with accounting investigators -- but it also could jeopardize the company's status with creditors.

New CEO Richard Notebaert is considering the possibility of erasing $1 billion in revenue, most likely related to the sales of network capacity to other telcos, according to a report in Friday's

Wall Street Journal Online

.

If Qwest goes ahead with the move, it won't come as a surprise to telecom industry observers, and it could signal to government officials that new management at Qwest is eager to cooperate. But such a move could look to bankers like fresh evidence that the cash-strapped telco was never as creditworthy as they thought, putting the company in further peril as it seeks to conduct asset sales to bolster its balance sheet.

Qwest, whose shares have dropped more than 90% this year amid a series of financial shortfalls, management changes and government investigations, rose 6 cents Friday to $1.93.

Suspicions

Analysts and investors have long suspected that Qwest would have to

restate some or all of the $1 billion in network capacity sales it booked in 2001. It is precisely these sorts of deals, which critics say offered no business value but served to pump up income statements and balance sheets, which regulators and criminal investigators have been most curious about in the telecom and electricity-trading industry over the last year-plus.

Industry insiders note that Qwest

jumped into at least one of these high-margin deals at the 11th hour on the very last day of at least one of its financial periods. Doing so, these people suggest, may have helped the Denver telco avoid violating debt covenants and continue to tap the financial markets for more cash.

Qwest is the subject of a criminal investigation by the U.S. attorney's office in Denver and is under two separate

Securities and Exchange Commission

investigations into its accounting and business practices.

A Qwest spokesman declined to comment, citing a pre-earnings quiet period.

High Margins

The deals attracted accounting scrutiny in part because Qwest aggressively booked the long-term leases as one-time sales. The transactions also drew attention because they often involved equal amounts of cash exchanged between rivals. Some critics contend these deals were booked solely for their financial value and not for their operational value, since the industry was awash with overcapacity.

A number of people with experience in these sorts of deals say every dollar of swap revenue contributed as much as 85 cents to 90 cents to earnings before interest, taxes, depreciation and amortization. That fact is important in considering the cases of debt-gorged telcos needing to show solid earnings before interest, taxes and depreciation figures to continue funding their cash-burning operations.

Analysts have noted that if Qwest had to subtract as much as $800 million from its EBITDA levels last year, it likely will have to admit it was in violation of its debt guidelines.

Notably, Qwest was among the most aggressive of the telcos when it came to the accounting work on so-called swap revenue, say analysts. Telcos such as Qwest could book the revenue upfront, bolstering the top line, while accounting for the costs of the acquired capacity as an investment in property, thereby keeping those expenses out of the earnings statement.

Curiously, too, the industrywide popularity of these swaps grew just as large network operators were scrambling for revenue amid a growing surplus of network capacity. Qwest stopped its network capacity sales last fall, citing a drop-off in demand.