Roundly criticized for its murky bookkeeping, El Paso ( EP) began a new era of "full disclosure" Thursday by revealing some news investors didn't want to hear.

The Houston-based energy company managed to meet second-quarter earnings expectations but slashed its 2002 and 2003 guidance by 20% and 33% respectively. The company also scaled back its full-year trading profit forecast, to $150 million from $400 million. The revisions came after the company promised a much stronger performance in May.

El Paso's darkened outlook caused an immediate selloff that pushed the stock down 13% to a morning low of $12.80 a share. But investors, cheered by an upbeat conference call, quickly digested the new guidance and sent the stock past its opening price to $14.89.

"We weren't expecting that kind of hit," said John Olson, an analyst at Sanders Morris Harris and longtime El Paso stockholder. "El Paso looked very smart downsizing its marketing and trading operations before anyone else did. But apparently, that was not enough."

Even after that gain, which pushed the stock up 14 cents on the day, Olson said El Paso continues to trade for far less than the $22.50 to $23 it is worth.

The company agreed, while attempting to differentiate itself from its beleaguered peers.

"We turned in a solid second quarter," said El Paso Chief Executive William Wise. "Our core businesses performed quite well."

Huge Writedown

But the quarter wasn't without its share of questions. El Paso posted a second-quarter loss of $45 million, or 8 cents a share, due primarily to one-time charges totaling $279 million. The largest was a $234 million "ceiling test charge" associated with some oil and gas properties in Canada.

"That's an enormous writedown," one critic said. "I'd like to know what the reserves were prior to the writedown."

El Paso did not respond to a request for that information.

Excluding one-time charges, El Paso met analysts' expectations with pro forma earnings of $234 million, or 44 cents a share. But some industry experts raised questions about a significant slice of those earnings, generated by a $66 million lawsuit settlement in El Salvador.

Analysts at both JP Morgan and Prudential Securities questioned the inclusion of that settlement, which boosted international earnings to $110 million for a significant upside surprise. Carol Coale of Prudential Securities said the "one-time contract" tacked 8 or 9 cents a share onto normal earnings.

El Paso defended the settlement as a normal part of business. Daniel Tinkelman, an accounting professor at Pace University in New York, said the accounting decision landed in a "gray area" that would be colored by the nature of the settlement.

"If the underlying factor that led to the lawsuit was not recurring, then you would not be able to do that every year," Tinkelman said.

Some critics also saw perceived weakness in El Paso's full-year earnings guidance, even after the sharp downward revision. In refiguring its forecast, they said, El Paso has assumed it can sell natural gas at well above market prices through the next few months. Those assumptions are difficult to justify, they said, even after crediting El Paso for locking in high prices on 30% of its gas sales.

The company expects to earn between $2.05 and $2.15 a share in 2002, and between $1.80 and $2 a share in 2003.

Plenty to Drink

In the meantime, El Paso assured investors that it faces none of the liquidity woes that have hobbled the likes of Dynegy ( DYN) and Williams ( WMB). It boasted of "absolutely solid" liquidity, saying it has $5.8 billion in cash and credit available to more than meet its needs.

To further strengthen its position, the company said it will slash its 2003 capital expenditures by one-fourth to $3 billion and fund that spending entirely with cash flow from operations.

Some have questioned whether this funding shift is entirely voluntary or the result of the increasingly strict bank agreements that now define the industry. Observers also challenged El Paso's claims that it has "set the standard in transparency" with a newly amended earnings report, filed Thursday, that further details a complicated power restructuring contract that significantly boosted first-quarter results.

"The amended 10-Q raises far more questions than it answers," said Peter Cohan, a Massachusetts author and investment strategist with no stake in the company. "It highlights how little El Paso management is really disclosing and raises questions about its willingness to provide transparent reporting to its shareholders."

The questions still looming?

"Why is this restructuring business conducted off El Paso's balance sheet?" Cohan asked. "And how much debt do these off-balance sheet entities carry?" posed similar questions to El Paso last month but received no direct response.

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