El Paso

(EP)

can't seem to put this year's "strong" first quarter behind it.

In May the troubled energy giant beat first-quarter earnings expectations, with some help from a controversial power deal. Now El Paso is coming under fire for a subsequent transaction that allowed the company to avoid restating the quarter's results, as its auditor had suggested.

People familiar with the situation told

The New York Times

, in an article published Wednesday, that El Paso executed a questionable transaction in August with trading partner Morgan Stanley. The deal allowed the company to escape a $100 million restatement of earnings for the first quarter, which ended March 31.

That transaction -- a modest swap of 50 megawatt-hours of electricity -- was intended to prove the existence of a liquid market for power contracts that extend beyond 10 years. While the deal initially succeeded in satisfying Pricewaterhouse Coopers, which had advocated a restatement, it has now provided new fuel for El Paso critics who have grown suspicious of the company's financials.

"El Paso management is unable to generate a sustainable core earnings stream without the continued use of smoke and mirrors on a quarterly basis," insisted Karl Miller, whose investment firm specializes in energy-related acquisitions.

El Paso has repeatedly defended its practices as proper, but the company has failed to silence its questioners. With the stock 80% off its 52-week high and the

Securities and Exchange Commission

probing the company's trading practices, the latest evidence won't help the company's sagging stock get off the mat. El Paso slid 28 cents Wednesday, to $9.99.

Thin Gruel?

To some observers, the power swap with Morgan Stanley looks particularly troubling. At first, El Paso simply claimed that its first-quarter numbers had included no gains from power contracts that extended beyond 10 years.

But in a revised quarterly report, issued after the transaction, El Paso acknowledged that $228 million came from such contracts. El Paso justified those gains by saying it had "clearly demonstrated" the liquidity of specific long-term markets, despite having only one small transaction -- for which Morgan Stanley collected $40 million in fees -- to back up its claims.

Peter Cohan, a Massachusetts author and investment strategist, said the situation should remind investors why so many companies in the energy trading business popularized by Enron are failing.

"The fundamental problem is that the accounting for energy trading is divorced from economic reality," said Cohan, who has no position in merchant energy stocks. "The economic actors -- energy traders, investment banks and auditors -- exploit this disconnect for their own economic gain.

"As usual, this leaves a buyer of El Paso stock suffering the consequences of holding an empty bag."

Good as Gold

The trading business has turned so sour in the wake of Enron's collapse that El Paso recently said it would

ditch that business. The move came just a month after the company saw its credit rating

downgraded by Moody's and

moved some chairs around in its executive suite.

Yet despite all the turmoil, Miller and Cohan marveled that El Paso executives have managed to keep their jobs throughout that slide.

"I think everyone there is in this so deep that, if they sacrifice one person, the dirt is going to come out," Miller said.

In the meantime, CEO William Wise continues to collect a $10.4 million annual salary that -- with bonuses -- ranks among the most generous in the industry. Cohan predicted that Wise will make every effort to please the Street in order to keep that money coming.

"Wise's stakes for keeping El Paso's Enron-esque shell game afloat are significant," he said.