The war of words continues between El Paso Corp. Chairman William Wise and major shareholder Oscar S. Wyatt Jr., the former chairman of The Coastal Corp., whose company merged with El Paso last year. A three-page letter sent last Tuesday by Wyatt, which took to task the senior management, mark-to-market accounting and off-balance sheet transactions, evolved into an 8-K filing with the Securities and Exchange Commission (SEC) Wednesday, where Wise defended his company’s businesses transactions, and assured regulators that all of the charges could be refuted.

Wyatt’s hand-delivered letter to El Paso’s Houston headquarters was titled, “El Paso Failure to Disclose,” and reviewed in detail his concern about a Utility Contract Funding transaction, which restructured the company’s conventional power supply contract with a 15-year term remaining, with PSE&G, a subsidiary of Public Service Enterprise Group. Wyatt, however, saved his most scathing criticism for senior management.

“I have grave concern about the future plans of El Paso’s senior management,” stated Wyatt. “El Paso’s CEO has stated publicly in his Strategic Repositioning Plan that they will ‘limit energy trading’s call on credit and liquidity; investment in trading portfolio to no more than $1 billion.’ However, the senior executive in charge of trading informed the traders that, in addition to the $1 billion, $2.5 billion in letters of credit and El Paso Corp. guaranties could be issued in support of the trading activities. This makes the total exposure to trading $3.5 billion.”

At best, these statements create an ambiguity — at worst misleading and possibly deceptive,” stated Wyatt. “This is material and should be accurately disclosed. This, along with the off-balance sheet financing maneuvers, has created major uncertainty as to the true value and future of the Corporation.”

Wise responded on Wednesday, and sent copies of Wyatt’s letter and his response to members of Congress and the SEC, noting that Wyatt appeared to “simply disagree with the business strategies being implemented by the board of directors of the company. Unfortunately, in doing so, you have widely circulated numerous inaccuracies, and I feel it is important to set the record straight.”

El Paso has taken the appropriate steps, and is firmly committed, to ensure the integrity of its balance sheet, proper corporate governance, accurate and complete financial reporting and compliance with generally accepted accounting principles,” Wise stated in his letter. He then responded to each charge, noting there was “nothing new or novel” in the approaches the company had taken.

Regarding the trading practices, Wise said, “…we have initiated a program to limit our trading business call on the credit of the company. The implementation of this program has been a key reason why we have been one of the few companies in our industry to be successful in maintaining our investment grade credit rating. To clarify for your benefit, we have limited both our investment in the trading business and the aggregate exposure to trading. We have established a firm $1 billion limit of working capital we will invest in our trading business.”

We have also set a limit of $2.5 billion on the parent company financial guarantees we will make available for trading activities,” said the El Paso CEO. “Trading businesses require credit facilities with trading partners in order to operate. To the extent these credit facilities are utilized, they will be liabilities of our trading business and count against the $1 billion limit. While we may make up to $2.5 billion of guarantees available, we would expect only a fraction of these to be utilized at any time.”

In a letter accompanying his response to Wyatt that was sent to regulators and members of Congress, Wise stated, “although we are uncertain as to Mr. Wyatt’s motives, there are numerous inaccuracies set forth in his letter. Although Mr. Wyatt was formerly Chairman of The Coastal Corporation, Mr. Wyatt has not been involved in the management of the company since the merger with El Paso Corporation in early 2001. As a result, he is not familiar with the day-to-day operations of the Company since that time.”

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