Almost two years after Enron Corp. imploded and exposed the flaws in the rest of the energy merchant sector, a Standard & Poor’s (S&P) analyst suggests in a new report that diversified energy companies with marketing and trading activities still don’t provide enough information for investors to discern all of the credit risks or the potential earnings.

Suzanne G. Smith reviewed the marketing, trading and hedging accounting disclosures of two companies, Dominion Resources Inc. and Duke Capital Corp., using their financial statements and reports in the first six months of 2003. Smith noted there had been improvements in the past 18 months, but “it is still not possible for an analyst to draw conclusions about the financial performance of trading and hedging activities.”

Overall changes in accounting policies at energy companies have further complicated the analysis, she added, and quarterly accounting doesn’t offer enough details “to adequately quantify the market, credit and operation risks inherent in the two companies’ trading and hedging portfolios.”

Because of the complexity of financial reports, Smith said that information on merchant activities are “scattered” throughout financial statements and notes. Smith found that because of the way they categorize income and derivative contracts, neither Duke nor Dominion have made it clear as to how much hedging is actually reflected in their revenues.

“It will take a few more accounting periods before valuable period-to-period comparisons can be made. The changes do not affect cash flow, which is the most important component that Standard & Poor’s analyzes for corporations,” Smith said. Although disclosures by Duke and Dominion differ, “the overall quality of the disclosure is similar, with neither company presenting a really full picture that allows an analyst to determine the extent of market, credit and operational exposure.”

The analyst found that neither of the two companies offered enough detail for her to confidently determine financial performance. She said “additional disclosure of trading and hedging activities would serve companies well by increasing investors’ ability to discern the risks, as well as the related potential for earnings and cash flows. Better disclosure would facilitate more meaningful comparisons of each companies’ activities.” Among other things, the S&P analyst suggested more information on the following:

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