Builders of El Paso in a Power Struggle
Both men are titans, power brokers who laid cornerstones in the industry that powers America.
Separately, they assembled the pieces of El Paso Corp., a natural gas and oil empire that, so far, stands as a rare survivor in an industry in crisis -- the corporation’s 33-story headquarters still abuzz with life amid the wreckage of Enron Corp., Dynegy Inc. and Reliant Resources Inc. here in the heart of America’s energy capital.
But now, behind the girders and glass and understated “elpaso” logo on Louisiana Street, a power struggle is unfolding between the two men who built the corporation that a federal judge says helped cause California’s energy crisis.
The Federal Energy Regulatory Commission judge’s recent ruling that El Paso illegally withheld gas to drive up California’s prices in 2000 and ’01 is merely the latest wrinkle in a fierce internal struggle. One lawyer here called it “a death dance” between the Iowa-born lawyer who now heads America’s biggest natural gas company and the old Texas wildcatter who built half of it.
On one side is William A. Wise, 58, a competitive and self-assured executive who is fighting for the very survival of his corporation, a once-sleepy regional pipeline company on the Mexican border that now includes oil and gas rigs, refineries, power plants and 58,000 miles of pipeline from Bakersfield to Boston and beyond.
On the other side is Oscar S. Wyatt Jr., 72, a hard-edged South Texas original who has done business with Libyan leader Col. Moammar Kadafi, bargained with Iraqi President Saddam Hussein and helped rescue hostages in Kuwait in the years before he sold his oil and gas company, Coastal Corp., to Wise and his shareholders 18 months ago in a $24-billion deal that doubled El Paso’s size.
The deal left Wyatt with nearly 5 million shares of El Paso stock, but he now says he deeply regrets selling out. On Thursday, he won court approval here to take the lead in a dozen shareholder lawsuits that accuse Wise and other top executives of fraud and misconduct, alleging not only El Paso’s role in the California crisis but also Enron-type trading and accounting practices.
Wyatt, in court papers and in an interview, asserts that since El Paso bought Coastal, it has mirrored Enron both in style and substance. He blasts Wise for his multimillion-dollar annual salary, bonuses and stock options that bought him a palatial retreat in Aspen, Colo., and a personal fleet of luxury cars; for overuse of the company’s luxury jets and perks; and for corporate loans that bought him a posh Houston condo.
Wyatt also accuses Wise and his senior executives of endangering some of the company’s crucial hard assets through off-the-books partnerships, which the company’s Securities and Exchange Commission filings show have taken some $2 billion in debt off El Paso’s books. Filings also show that the federal government is investigating some of El Paso’s trading practices, including “wash” trades that were reminiscent of Enron; El Paso has denied using them.
And Wyatt alleges that El Paso, driven by a desire to compete with Enron’s stratospheric salaries and aggressive accounting, has fostered a corporate culture of deception, effectively “running the company in a closet.”
“It looks so much like Enron, it’s scary,” said Wyatt, who owns so much stock in El Paso that a $1 change in its value alters his net worth by $5 million.
Karl Miller, a former executive at El Paso and Enron who runs a New York energy investment partnership, cited the company’s off-the-books partnerships in dubbing the company “El Enron.” And David Huard, a Los Angeles-based energy attorney who has represented El Paso opponents in regulatory proceedings, likened El Paso to “a dysfunctional family” that has failed to accommodate growth so rapid that the size of El Paso has doubled three times in the last seven years.
Wise bristles at such accusations.
“I have always been focused on doing what is right for El Paso and its shareholders and never gave much thought to what was going on” at Enron, Wise said in a recent interview. He suggested he never wanted El Paso to emulate Enron.
Speaking to analysts here in February, he even blamed Enron for El Paso’s woes.
“Not because we look like Enron or not because we’ve done anything like Enron,” he said. “It’s just because Enron has fouled the nest, and the financial markets don’t have the time to differentiate. They’re just staying away.”
Of the high salaries, bonuses and perks, Wise said: “The challenging times, the difficult times, are what really require you to earn your keep ... and we’re in a difficult time now.”
Most analysts agree that El Paso, whose debt remains investment grade even though its stock has lost 87% of its value this year, has weathered the turbulence of Enron’s collapse better than most. El Paso, along with Dynegy and Williams Cos., is sharply reducing its energy trading business.
And Wise is far from throwing in the towel. The company has taken an aggressive stance in its battle with FERC, setting out on a public relations blitz with full-page newspaper ads and letters to Congress, and challenging the agency to a six-hour showdown over the judge’s ruling.
El Paso has said that it cut back on gas flow to California for safety purposes, and that running gas lines continuously at full volume can cause explosions such as a 2000 inferno that killed an extended family of 12 in New Mexico and has been the focus of numerous civil lawsuits.
“Requiring a pipeline to operate at or near its maximum allowable operating pressure on a sustained basis ... is akin to requiring all motorists to drive at 65 miles an hour at all times, regardless of road and weather conditions,” Wise wrote in a letter to employees and shareholders.
That California has emerged as a key to El Paso’s future is apt. According to thousands of pages of documents on file with federal agencies in Washington and courthouses in Houston, the Golden State and its vast yet fluid energy market lie at the very roots of the company and are the central thread that has run through its 80-year history.
*
Restructured to Grow
For decades, El Paso’s southwestern pipeline monopoly was a money machine. The company bought gas at the wellhead, processed it, moved it cross-country through its own pipes and then sold it for steep profits to the California utilities at the other end. The price, however, was regulated.
Beginning in 1985, the federal government changed the rules, allowing utilities to buy directly from gas producers. As a result, the pipeline companies were rendered little more than railroads that charged a fee to haul the gas. To grow, El Paso had to restructure, so Wise mapped out a new corporate strategy of acquisition.
“The whole history of the company, that our company was built on, is expanding into new markets ... continuously looking at accessing new markets and building new pipe,” Wise stated during a 1999 court deposition in Houston.
That meant growing beyond Southern California, which had become, at once, El Paso’s captive and captivating market. In 1994, El Paso joined with Enron to form Mojave Pipeline Co. and built new lines into Northern California. But by the mid-’90s, it was clear that El Paso had built too much pipeline capacity into a state where growth was beginning to wane.
So, at a time when growth was synonymous with survival in the energy game, Wise looked north.
In June 1996, El Paso and Tenneco Inc. signed a merger agreement that was, for El Paso and its 10,000 miles of pipe, a tectonic shift.
El Paso went national overnight, acquiring $2.5 billion of Tenneco’s debt and tens of thousands of miles of its pipeline. Instantly, it was “one of the nation’s largest natural gas companies,” proclaimed the formal merger prospectus. The $4-billion deal, it added, “will dramatically expand the size and geographic scope of El Paso’s operations.”
The merger created an El Paso Energy Corp. that had a staggering 4.5 trillion cubic feet of gas per year through 33,000 miles of pipe going to new markets, as Wise put it at the time, “from Bakersfield to Boston.” That’s about 20% of the natural gas consumed in the United States each year.
Almost buried in that document was El Paso Energy’s bottom-line motivation: The merger “will create a coast-to-coast pipeline system with access to all of the nation’s major markets and supply basins
Local analysts were worried that the Tenneco-El Paso marriage of convenience also was a clash of corporate cultures.
But there was no alternative. The new markets, Wise and others figured, were El Paso’s only future. And the new El Paso Energy board rewarded him handsomely that year. Setting a lavish tone that would be harshly criticized years later, El Paso Energy gave Wise a $1.2-million bonus, along with $3.5 million in stock, and the $1.5-million loan to buy his new condo in Houston’s prestigious River Oaks area.
Wise selected the 29th floor of the Huntingdon, an elegant, walled and well-guarded high-rise where, two years before, another emerging energy czar had moved in four floors up: Enron’s Kenneth L. Lay.
*
Similar Strategies
Wise and Lay had more in common than their home addresses. Despite divergent personalities -- Wise has always been seen around Houston as conservative compared with the more outgoing Lay -- both chief executives were aggressive, competitive and locked into shopping-spree strategies of acquisitions, often launching new buyout talks before the ink was dry on a previous deal.
Soon after the Tenneco merger, while Enron was gobbling up energy companies large and small from its headquarters just down the street, Wise set his sites on Sonat Inc., another asset-rich, Houston-based power company. And in another multibillion-dollar deal announced two years later, Wise again doubled El Paso’s size.
In October 1999, Wise proudly declared: “From approximately $1 billion in assets seven years ago, we have built a company with an asset value in excess of $15 billion.” Wise’s reward that year: A $3.8-million bonus, plus millions more in stock.
Even as he issued that statement, Wise already was a month into negotiations for the ultimate El Paso buyout -- a mega-billion-dollar merger that would finally catapult El Paso into Enron’s league and, perhaps, lay the foundations for its ultimate undoing.
Wise’s target: Oscar Wyatt’s Coastal Corp.
Even by the cutthroat standards of the South Texas gas patch, the native-born Wyatt was considered cutthroat.
Using plain talk, shrewd instincts and sometimes ruthless tactics, Wyatt raided and acquired company after company for decades to build Coastal piece by piece after creating it in 1955.
But by the time the El Paso Energy deal crossed his desk in early 2000, Wyatt had been retired as Coastal’s chairman for more than two years. He was still on the company’s board, getting $35,500 a month in Coastal consultant fees, when he signed off on the $24-billion merger that gave Wise and El Paso Energy his life’s work.
“On paper at the outset, it looked like a good deal for the shareholders and myself,” Wyatt recalled. So he traded his stock for about 5 million El Paso shares and helped clinch the deal.
Over at El Paso Energy, Wise called it “a transforming event.”
“Our combination of assets, intellectual capital and financial resources creates the largest and most broadly based natural gas company in the world,” Wise declared when the deal closed Jan. 29, 2001.
With the merger, which created El Paso Corp., El Paso got Coastal’s power plants, oil and gas fields from the Gulf of Mexico to Canada and more than 20,000 miles of new pipeline. The new company also inherited some 7,000 of Wyatt’s fiercely loyal employees. And, soon after the merger, El Paso’s stock shot up to its all-time high: $75 a share.
Wise’s reward last year: A $3.4-million bonus on top of a $1.3-million salary and nearly $250,000 in perks.
But even before the merger was final, El Paso’s problems began to unfold.
At 5:26 a.m. on Aug. 19, 2000, while El Paso and Coastal top executives were enmeshed in their intensive merger talks in Houston, disaster struck in El Paso’s backyard, at the core of its corporate foundation. One of the original El Paso Natural Gas Co.’s pipes ruptured a dozen feet underground 20 miles south of Carlsbad, N.M. Within minutes it exploded, killing a dozen members of a family camping nearby.
El Paso has since spent undisclosed millions of dollars settling the family’s claims in and out of court. Federal documents in one of the remaining suits filed by the family’s 70-year-old matriarch, Geneva Smith, help explain why.
*
Accusation of Neglect
For half a century, the section of El Paso’s Pipeline 1103 that blew had sat underground, and not once had the company properly inspected it, according to a National Transportation Safety Board report issued soon after the accident.
What’s more, El Paso had been warned of the risks and formally ordered to make the inspections. Those warnings came after a similar explosion on a parallel, 50-year-old pipeline near Roswell, N.M., in 1996; El Paso’s internal report on the Roswell blast said it was caused by the same conditions that a preliminary investigation would later conclude caused the rupture near Carlsbad four years later.
That internal El Paso report was dated September 1996 -- the month when El Paso was feverishly finalizing the Tenneco merger that first took the company national. And the explosion in August 2000 came as the company was closing the Coastal deal that made it a global powerhouse.
In an interview last week, Geneva Smith said she blames the company’s ambitious growth for the deaths of her son, Bobby, all but one of her grandchildren and most of her great-grandchildren. The company was so busy getting big, she said, that it forgot the basics of when it was small.
“They didn’t care enough to care for these lines,” she said. “They could have just put a new line down there, and none of this would’ve happened.”
El Paso had said little publicly about the explosion near the Pecos River until two weeks ago.
In an open letter to Congress, Wise invoked the August 2000 rupture in an attempt to refute the recent federal ruling against the company in relation to California’s energy crisis. Wise stated that El Paso reduced its gas flows to California because the government ordered it to do so after the explosion, adding, “El Paso has operated its pipeline safely and prudently.”
The implication was clear: El Paso didn’t contribute to the energy crisis by deliberately holding back gas supplies from California, as Administrative Law Judge Curtis L. Wagner Jr. ruled last month; the government did by ordering El Paso to reduce the flows and pressure inside its lines to California after the accident.
The Transportation Department still is investigating the pipeline explosion.
When Wyatt showed up at the last El Paso shareholders meeting at the Adolphus Hotel in Dallas on May 20, the company already was the target of at least five investigations by four federal agencies.
Two of the probes -- one civil and one criminal -- aim to determine whether El Paso had a role in California’s energy crisis. Wise asserts that the company is blameless. Excluding the inquiry into the explosion, the rest of the probes are fallout from Enron, with investigators zeroing in on some of the very practices Wyatt was about to expose at the meeting.
Wyatt flew in from Houston with two corporate jets packed with El Paso shareholders. He had tipped the industry’s trade press that he planned to publicly call for corporate reform. And he staged a news conference outside the hotel ballroom, after the company barred reporters from covering the annual meeting.
Wyatt’s message: The energy industry in general, and El Paso in particular, was losing the post-Enron “war for credibility.”
“The fate of Enron has shattered the hopes of many shareholders, employees, customers, lending institutions and others,” Wyatt declared in a speech that cited Enron’s off-balance-sheet accounting and other practices. Then, he leveled both barrels at El Paso’s management, suggesting they were using similar tactics to run the company “for the personal gain of its officers.”
In the interview, Wise stressed that El Paso’s fundamentals remain sound, that the firm will be cleared of any wrongdoing in California on appeal and that El Paso still “drills more wells ... and moves more gas through our pipelines than anyone else in the United States.”
Of Wyatt’s crusade, Wise said his 5 million shares are dwarfed by the 600 million shares of El Paso that are outstanding. “I work for all the shareholders,” he said flatly. “I’m not spending a lot of time or energy worrying about what Mr. Wyatt may or may not be doing.”
Wyatt’s response: “If I can cause this company to go back to basics of the business it is in ... to come clean on how they have been running it and to do all this with transparency, then they can resume as a credible company.
“Without this, they never will. Until then, I just pray for the thousands of families whose pensions and retirements depend on it.”
*
Fineman reported from Houston and Washington; Rivera Brooks from Los Angeles.
Coming Tuesday: Did El Paso manipulate California’s natural-gas market?
