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SEC Subpoenas El Paso for Hedging Documents

El Paso Corp. said last week in a Form 8-K filing that it has received a subpoena from the Securities and Exchange Commission (SEC) related to some of its natural gas and oil production hedges.

The SEC subpoena, issued May 24, follows an informal inquiry that it began in 2002 related to some simultaneous, or roundtrip, trades entered into by traders at El Paso and Duke Energy (see NGI, June 10, 2002). El Paso did not detail what time period the SEC is requesting information for, but it said it had complied with SEC's previous request for information and said it would cooperate with the new investigation.

In August 2004, El Paso said it would restate its financial statements between 1999 and 2993 to eliminate hedge accounting for some of its past natural gas transactions (see NGI, Aug. 16, 2004). El Paso in 2004 also had to restate its financials to revise downward its gas and oil reserves by 41%.

When it announced it would eliminate hedges last year, El Paso said that the restatement procedures included a "comprehensive review of the company's accounting during the periods from 1999 through 2003 by both the company and its independent auditor. As part of this internal process and an ongoing investigation of wash trade transactions by the U.S. Attorney's office, the company and its auditor have examined the accounting for natural gas hedges which involved offsetting transactions in the company's merchant energy segment. The company believes that the basis for concluding that those transactions qualified under hedge accounting guidelines is no longer applicable and its financial statements will likely need to be further restated."

Eliminating the hedge accounting was expected to revise incremental ceiling test charges, "primarily during a period of very low natural gas prices in 2001." The restatement to segment earnings was expected to be "largely offset by changes in other comprehensive income. However, stockholder's equity will be reduced by the after-tax impact of ceiling test charges."

In 2003, subsidiary El Paso Merchant Energy LP settled some wash trade allegations with the Commodity Futures Exchange Commission for $20 million (see Daily GPI, March 3, 2004).

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