Level 3 improves free cash flow through higher EBITDA, lower capex

By Jennifer Lanning Drey

Portland, Ore., April 28 - Level 3 Communications, Inc.'s first-quarter unlevered free cash flow improved by $64 million over the comparable prior-year period, driven by higher EBITDA and lower capital expenditures, Sunit Patel, Level 3's chief financial officer, said Tuesday during its quarterly earnings call.

Unlevered free cash flow was $43 million for the period.

Consolidated free cash flow also showed improvement at negative $82 million, versus negative $160 million in the first quarter of 2008.

The company expected free cash flow to be negative for the period, as the first quarter requires a heavy use of cash related to factors including annual bonuses and severance payments, Patel said.

Level 3's first-quarter adjusted EBITDA was $250 million, up 18% from $211 million in the prior-year period.

As previously reported, following the close of the quarter, Level 3 raised $220 million of incremental term debt through a wholly owned subsidiary with net proceeds of $214 million. Including the net proceeds from the transaction, the company's cash balance at quarter end would have been $886 million, leaving it very comfortable with its liquidity position, Patel said.

Level 3 now has cash on hand to cover all of its debt maturities in 2009 and 2010, as well as some of the 2011 maturities, he said.

Combined with projected free cash flow generation, the company expects to be able to handle the maturities through 2011 without raising further capital, he said.

At the same time, the company looks to be conservative in maintaining high levels of liquidity and would consider further capital-raising opportunities in the future, he said.

Level 3 also continues to look at the pricing on all of its securities for possible opportunities to repurchase debt at a discount, but Patel said he had no specific comments on the matter during the call.

The company continues to expect to be free cash flow positive for full-year 2009.

Signs of improvement

During Tuesday's call, Level 3's management also noted that near-term pressures within its core communications services revenue base, including the lengthening of sales cycles and reduced customer purchases, appear to be stabilizing.

Sales activity picked up in March and continues to look good in April, Patel said.

However, he cautioned that there weren't enough data points to call it a trend.

As a result, Level 3 will continue to look to offset revenue pressures with reduced capital expenditures in the remainder of 2009.

Level 3 reported first-quarter consolidated revenue of $980 million, compared to consolidated revenue of $1.09 billion for the first quarter of 2008.

The company's goals for 2009 include ensuring that its cost structure is appropriate for a wide range of potential growth ranges and improving credit quality through better results and de-leveraging transactions.

Level 3 is a Broomfield, Colo.-based provider of fiber-based communications services.

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