Gas compression company Hanover Compressor became the latest accounting crash test dummy to come out with its head rearranged. The company announced Tuesday that it is being examined by the Securities and Exchange Commission for some apparent financial accidents in Nigeria involving a joint venture with Royal Dutch/Shell. It is restating financial results for 2000 and for the first nine months if 2001, lowering its net income by a total of $8.9 million, because it reported income — mainly from the Nigerian joint venture — that it didn’t have. As if that wasn’t enough, the company reported lower than expected earnings for the fourth quarter and cut its earnings forecast for 2002.

Despite the litany of bad news, however, its stock rose nearly 14% to $16.02 as investors determined that the company had finally put the rumors and speculation to rest.

“The good news is all the bad news is out,” J.P. Morgan analyst Michael Lamotte said in a research note. He said he is maintaining a buy rating on Hanover because of its underlying asset value, including its 2 million horsepower of rental compressors, and “our conviction that management will get it right.” Hanover’s shares have cascaded downward from highs above $41 last spring.

The SEC investigation and decision to restate earnings follows a half-dozen shareholder lawsuits so far this year that accused Hanover’s board of violating common accounting principles in the handling of a Nigerian project joint venture with Royal Dutch/Shell Group.

CEO Michael J. McGhan said yesterday the restatement of earnings will have no impact on the company’s liquidity or its ability to continue to conduct its business. “Management and the board firmly believe in the company’s sound business plan and strong fundamentals,” McGhan said. “We are confident that the restatement and other actions announced today will enable Hanover to fully focus on executing its proven business model of outsourced compression and treating service.”

The company said it expects to wipe out $37.7 million of the total $603.8 million of revenues and $7.5 million of the $58.7 million of net income for 2000, lowering its fully diluted per share earnings of $0.88 by $0.11/share. It expects to cut $25.1 million of the total $781.6 million in revenues and $1.4 million of the $64.5 million of net income for the nine months ended Sept. 30, 2001, reducing diluted per share earnings of $0.86 by $0.02.

Hanover’s problems stemmed mainly from its Cawthorne Channel project in Nigeria, which was conducted through its Hampton Roads joint venture with Royal Dutch/Shell. However, Hanover also reported accounting problems related to the acquisition of two compressors in a non-monetary exchange transaction, in the sale of three turbine engines and in a compressor sale transaction.

In the Cawthorne Channel project, Hanover formed a joint venture in September 2000 known as Hampton Roads Shipping Investors LLC to build, own and lease barge-mounted gas compression and gas processing facilities to be stationed off the coast of Nigeria. It initially owned only 25% of Hampton, which entered into certain construction and leasing arrangements with another company, Global Energy and Refining, in which Hanover also bought ownership interest. The construction and leasing project still has not been completed, yet Hanover booked revenues from the project in 2000 under the percentage of completion method of accounting. The company later determined that it should not have recognized revenues from the deal for the construction activity conducted.

Meanwhile, the Fort Worth District Office of the SEC has requested information relating to the Hampton Roads joint venture. Hanover said it is cooperating fully with the SEC’s request.

In another accounting snafu, Hanover said it mistakenly booked $2.2 million in revenue and $1.4 million in net income in 2000 from the purchase of two compressors it received through a non-monetary exchange of gas reservoir rights that Hanover had obtained in settlement of a payment default by one of its customers. After a second look at its accounting of the deal, Hanover determined that it should not have recognized a gain on the transaction. And in yet two other deals, Hanover booked income from turbine sales at the time of the sales rather than at the point at which it actually was paid.

In a separate statement Tuesday, the company said fourth-quarter earnings fell to between 16 cents and 21 cents a share. The average of analysts’ estimates was 39 cents. Hanover cut its 2002 forecast to between $1.40 and $1.50. The Thomson First Call estimate was $1.67. Earnings were hit by the weakened gas market and slowing economy, Hanover’s new CFO, John E. Jackson, said in a conference call. Jackson joined the company from Duke Energy Field Services and replaced William S. Goldberg as CFO after a 10- month search, the company said.

Hanover is cutting capital spending this year to $250 million to strengthen its balance sheet. The company is under review by Standard & Poor’s for a potential credit rating downgrade because of a heavy debt load. Hanover already is rated a notch below investment grade by Standard & Poor’s.

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