© 2003 THE NEW YORK TIMES
February 6, 2003

NEELA BANERJEE

There is no question that the scandal that began with Enron and has yet to entirely die away has decimated the energy marketing and trading industry. But some experts question whether the bruising has prompted energy companies to change the business practices that got them into trouble in the first place.

A number of doubts dog the business. Is a huge portion of the profit at some companies the ethereal stuff of mark-to-market accounting, a practice that allows the booking of possible future profits now rather than as they come in? Are companies disclosing more about their trading practices? Have they adopted more sophisticated risk management practices? Are they strengthening their corporate governance structures so that there is actual oversight within?

The Financial Accounting Standards Board has promulgated a rule that should bring about greater transparency in companies' earnings, beginning with this year's first quarter. And a new industry organization, the Committee of Chief Risk Officers, has issued recommendations to its 32 members, which include some of the largest energy marketers and traders, about practices they need to adopt to restore investor confidence.

Yet over all, the energy trading industry must do far more to restore investor confidence, analysts contend. They point out, for example, that the risk officers' group is self-appointed and includes several companies that have been accused of improper business activities. Moreover, some of the largest power traders still attribute an uncomfortably large percentage of net income to mark-to-market accounting. Yet the assumptions that underlie those profits remain opaque at many companies, the critics add.

"Has anything really changed?" said Paul Patterson, an independent energy analyst who publishes The Glenrock Report. "And the bigger question is of greater disclosure going forward. Has that really happened?"

Things may get even worse for energy companies as the year progresses. William F. Hederman Jr., the director of the market-monitoring office at the Federal Energy Regulatory Commission, estimated yesterday that energy companies faced more than $100 billion in debt coming due this year, much of which they will be unable to pay and will have to refinance to avert bankruptcy.

Already, the El Paso Corporation, the country's largest natural gas pipeline company, announced yesterday that it planned to cut its dividend sharply and sell $2.5 billion in assets to raise cash.

Energy trading has dwindled radically over the last year, because the creditworthiness of the trading companies has been severely eroded. Once the Enron scandal broke, credit rating agencies took a much harder look at Enron's former rivals and judged that for most of them, debt loads were too high, cash flow too low and accounting often inscrutable. The agencies downgraded many energy trading companies last year -- some of them several times, several to below investment grade.

As a consequence, many energy marketers are facing a liquidity squeeze, as they use available cash to reduce their debts. And the market for longer-term power trading has essentially dried up, because with credit ratings so low, companies would have to put up sizable collateral to conduct long-term trades.

Those problems, and not a fundamental rethinking of the soundness of industry methods and accounting, have done the most to make the trading companies less freewheeling in their reporting of profits, argues John C. Cassidy, a senior power analyst with Moody's Investors Service.

"I don't think the methodology has changed," Mr. Cassidy said. "It's just that they can't do the one-, two- , four-year deals because they can't find counterparties."

In their much happier recent past, the energy traders could execute such long-term deals and book the profits from them immediately, under mark-to-market accounting. The problem was that no one really knew the prices for power so far in the future, so the profits calculated for the contracts were based on models the traders themselves devised. The drying up of the market makes it harder to use such models now, but companies still do, say analysts, including Mr. Patterson.

Energy trading businesses that still recognize "a considerable level" of revenue from mark-to-market accounting include the Constellation Energy Group, American Electric Power, Duke Energy, Sempra Energy, TXU and Idacorp, Mr. Patterson said in a recent report. He urged investors to watch those companies' numbers carefully.

The numbers are likely to change under the influence of the accounting board's new rule, which limits certain uses of mark-to-market accounting. That, analysts said, will initially knock down the profits of many companies.

Hardly any of the companies have provided guidance about how the rule would affect them. One exception cited in the Glenrock Report is Pinnacle West Capital, which issued a warning of a loss in December. On Tuesday, it reported a loss of $80.6 million in the fourth quarter of last year. It said that all but $14.9 million of the loss reflected the accounting change.

The risk officers' committee is working to improve transparency within the industry through disclosures of the impact of things like the accounting change. According to Michael Smith, the executive director of the group, its initial recommendations include ways to end conflicts of interests within companies; standardization of risk management practices; the creation of a clearinghouse that would ease the industry's liquidity squeeze; and a higher level of disclosure.

Debt analysts say the recommendations are a good start, but worry about whether they will be followed. In a recent report, Standard & Poor's noted that "these firms have always been self-policing, yet many have engaged in or been accused of inappropriate corporate behavior."

Suzanne Smith, director of corporate and government ratings at Standard & Poor's, explained the rating agency's anxiety.

"Over and over again, we talk about the execution risk of a strategy," she said. "And what we ask is if the same management that got a company into this mess is going to be able to get it out."