- The Washington Times - Tuesday, January 29, 2002

NEW YORK (AP) Enron Corp. is not the only energy trader whose books are getting a closer look.
Investors and regulators are increasingly concerned about a standard accounting procedure that allows companies to report the full estimated value of a multiyear contract as a profit, rather than booking the gains over time as the cash actually comes in.
Wall Street analysts and officials at the Securities and Exchange Commission have pinpointed this procedure, known as "mark-to-market" accounting, as a source of potentially misleading information in the financial reports of companies that sign long-term energy contracts. They are demanding more candid information on the issue.
The SEC warned last week that it was concerned about "a lack of transparency and clarity" in the financial reporting of public companies, and made a specific request of companies that trade commodities to disclose more details in the future.
Mark-to-market accounting is problematic for several reasons, analysts said: It can artificially inflate profits, there is no uniform formula used to calculate the value of long-term contracts and some companies refuse to disclose what percentage of earnings are derived this way.
"How are these guys making valuations?" ABN Amro analyst Paul Patterson said. "They're saying contracts are worth so much, but if you haven't realized it, you don't really have it."
While industry watchers believe Enron may have been the most aggressive with mark-to-market accounting, leading energy traders such as Duke Energy, Dynegy Inc. and Williams Cos. have relied on it for years to varying degrees.
The industry is tentatively beginning to talk about the practice, under pressure from Wall Street analysts who have less tolerance for fuzzy financial reports in the wake of Enron's implosion.
When Duke Energy reported its fourth-quarter earnings earlier this month, the company said roughly 37 percent of its $1.9 billion profit in 2001 was of the mark-to-market variety, meaning the gain was "unrealized" and existed only on paper.
Roughly 30 percent of Tulsa, Okla.-based Williams' profits are based on mark-to-market calculations, a spokeswoman said. Officials at Enron and Dynegy refused to discuss the issue in detail.
At Charlotte, N.C.-based Duke, unrealized gains ballooned to $700 million in 2001 from $140 million in 2000, while net profit grew just $120 million. Take away the profits based on mark-to-market accounting, and Duke's profits actually declined by $440 million.
Booking profits upfront from energy contracts longer than a few years is problematic, critics say, because trading volume for these types of deals is low, causing volatility and uncertainty about their value over time.
"The accounting is complicated," Duke Chief Financial Officer Robert Brace conceded.
Yet Mr. Brace described the company's practice of booking projected future profits today as "conservative," since Duke is careful about hedging its bets and selecting creditworthy partners.

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