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El Paso Says It Will Fight Lawsuits

November 22, 2002

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HOUSTON (AP) _ El Paso Corp. said Friday it would vigorously defend the company against stinging allegations of hiding debt and reporting revenue from so-called ``wash″ energy trades in shareholder lawsuits led by Oscar Wyatt Jr., one of its largest shareholders and most vocal critics.

``We fully expect to prevail,″ El Paso spokesman Mel Scott said.

Wyatt, the former chairman of Coastal Corp., holds about 5 million shares of El Paso stock after El Paso’s $22.6 billion acquisition of Coastal last year.

He has accused El Paso executives for months of mismanaging the company with dubious accounting methods as El Paso’s stock plunged much like that of other energy merchants in the fallout of Enron Corp.’s failure last year. Shares closed down 3 cents Friday at $11.30, down from a 52-week high of $49.95.

In July, Wyatt and other shareholders sued El Paso in federal court in Houston on allegations of defrauding investors. He is lead plaintiff of a revised complaint consolidated with other suits that was filed late Wednesday.

Other plaintiffs include William Wise, chairman and chief executive; H. Brent Austin, president and chief operating officer; Ralph Eads, president of El Paso’s merchant energy group; and D. Dwight Scott, chief financial officer.

The revised complaint disputes El Paso’s repeated denials of conducting wash or round-trip trades, alleging that the company recognized $800 million to $1.1 billion in revenue from such trades from September 2001 through May 2002.

It also alleges that the company hid $1.8 billion in debt in 2001 associated with an off-balance-sheet entity, dubbed Chaparral, that was controlled by El Paso and should have been on El Paso’s books.

Wash trades involve buying and selling the same amount of energy at the same time for the same price, increasing trading volumes without netting cash.

Other energy companies, including Duke Energy, Reliant Resources Inc. and Dynegy Inc., have admitted to conducting round-trip trades.

In five public statements issued in May, June and July this year, El Paso said it found no such trades during internal reviews. That position remained unchanged Friday.

The lawsuit said El Paso ``trading sheets,″ or documentation of trades, from Jan. 11 and Jan. 17 showed six round-trip trades that generated more than $10 million of revenue, five of which were with Reliant or Duke.

``These manufactured trades had no economic substance, added no real value to the company’s bottom line, and were entered into simply to create the illusion that El Paso was making money when in truth it was not,″ the suit said.

Other allegations in the consolidated lawsuit include:

_Management encouraged round-trip trades by offering bonuses to traders who showed a high volume of trades on the Atlanta-based Intercontinental Exchange.

_El Paso reported inflated earnings and revenues by misusing ``mark to market″ accounting, a common practice in which companies report the estimated value of a multiyear contract as a profit all at once, rather than booking the gains over time as the cash actually comes in.

_El Paso manipulated the California energy market to artificially boost gas prices and increase earnings.

_The company failed to explain the necessity of giving $12.2 million in ``retention payments″ to senior management after the merger with Coastal when El Paso was the entity making the acquisition.

El Paso has repeatedly said its accounting practices are proper and that it did not manipulate California power markets when the state experienced high prices and rolling blackouts in 2000 and 2001. El Paso has blamed high demand and a shortage of natural gas for California’s woes.

Joseph Cohen, a securities and business fraud attorney with Beirne, Maynard & Parsons in Houston, said the lawsuit will pit two colorful fixtures in the Texas business community _ Wyatt and Wise _ against each other.

``You’ll see a lot of fireworks as time goes by,″ Cohen said.

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