MessageFrom: Norman, Jim [Jim_Norman@platts.com] Sent: Thursday, June 24, 2004 6:58 PM To: rule-comments@sec.gov Cc: Heine, John Subject: File Number S7-28-04 Dear SEC: BRAVO!!! As an appreciative journalist recipient of a recent FOIA disclosure of SEC comment letters, I highly commend the SEC's decision to open up this category of government documents to broader scrutiny. I also hope it will clear the way for full compliance with my still-pending FOIA request in its entirity (No. 2004-1909), and expedite and regularize future such disclosures. Armed with a partial disclosure of the SEC comment letters requested, I was able to persuade the company in question, ExxonMobil, to provide at least a small portion of its reply letters. However, the company was under no onus to do so and provided minimal disclosure. The SEC has never supplied any of the relevant reply letters. To get only the comment letters, without the replies, is like evesdropping on one end of a phone call: rather frustrating and sure to create errors or misimpressions. For the sake of public confidence in the SEC surveillance and enforcement process, it is important for people to be able to see the efforts made by the commission staff to challenge, test and clarify the disclosures made by corporations. It will no doubt spare the SEC much criticism when the next Enron meltdown occurs, and the comment letters will be proof that questions were, indeed, being raised ahead of time. Below please find the result of the partial FOIA response by the SEC to my request. James R. Norman Senior Writer Platts Oilgram News 212-904-4108 Jim_Norman@platts.com Volume Volume 82 NumberNumber 95 May 19, 2004 SUIT CLAIMS EXXONMOBIL CHEATED SHAREHOLDERS New York-ExxonMobil's decision more than five years ago to not write down its oil and gas assets when commodity prices nosedived in 1998 is coming back to haunt retiring CEO Lee Raymond. Claiming Exxon's overstated balance sheet was used to cheat shareholders of rival Mobil in their $79-bil merger in 1999, Ohio Attorney General Jim Petro said May 18 he would join a suit in New Jersey federal court for what could be billions of dollars in class-action damages. "By failing to properly state the value of its oil reserves," said a statement by Petro, "Exxon underpaid Mobil shareholders because Exxon grossly overstated its value." Petro noted Exxon was the only one of the 11 largest public oil companies not to take asset write-downs when prices tanked in 1997, falling some 60% to a December 1998 low of barely $10/bbl for Brent. "In fact," Petro stated, "the 10 oil companies who followed the proper accounting standards reported, on average, a $7.2-bil impairment to reflect the fact their oil reserves had lost value." Mobil took a $662-mil impairment at year-end 1998, after the Exxon deal was announced but before it closed in late 1999. Much larger Exxon took no charge that year even though the $30-bil book value of its oil and gas assets was $8-bil more than their discounted future cash flows (ON 4/6/99). The allegations seem dated and even irrelevant at current high oil prices. But they fall just within the statute of limitations for such claims and raise troubling questions about ExxonMobil's compliance with basic accounting rules on Raymond's watch. Vowed Petro: "My office will hold any company that tries to mislead investors accountable." ExxonMobil has long been fiercely proud of its professed accounting conservatism, although it aggressively uses "materiality" rules to sharply limit public disclosures. Raymond has noted ExxonMobil's high standards versus rivals like Royal Dutch/Shell, devastated by a 21% downgrade of proved reserves this year. Indeed, Raymond has touted ExxonMobil's record of no asset impairment charges since at least 1995, despite the 1998 price drop. The company credits its internal Asset Management Program for weeding out uneconomic properties. "We have yet to review the complaint, but we will respond in due course," said a company spokeswoman: "ExxonMobil takes exception to any accusation that we issued false and misleading financial statements and that the merger was not in the best interest of shareholders." Petro, a former Ohio state auditor who has sought to lead similar class actions against Freddie Mac and AOL Time Warner, is suing on behalf of the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, claimed to have lost "between $40- and $120-mil." He is taking control of a case originally filed against ExxonMobil and Raymond Mar 17 by the Seattle law firm of Hagens Berman on behalf of shareholder Irene Binz. Among co-counsel listed in the Binz case is former Exxon accountant Franklin Bennett of Salt Lake City. No response ExxonMobil has not responded to the Binz case, which alleges Exxon failed to comply with the Financial Accounting Standards Board's Statement of Financial Accounting Standards 121 on asset write-downs. It is not the first time ExxonMobil has been challenged on that rule. Correspondence from US Securities and Exchange Commission staff, obtained by Platts through a Freedom of Information Act request in February, show the SEC quizzed Exxon in 1995 and again in 1999 on its handling of SFAS 121. In a March 1999 reply, provided to Platts by ExxonMobil, the company claimed "temporarily low oil prices are not a trigger event for conducting an impairment test." Instead, the company ran an internal "screening" of properties assuming $10/bbl Brent. That "highlighted" at least three properties that could "potentially be impaired:" its US Wasson and Talco fields and Fulmar in the UK North Sea. The company took no charges, however, since the $300-mil carrying basis of Wasson in Texas' Permian Basin was below its $343-mil of expected future cash flows based on an assumed 1999 Brent price of $16/bbl, rising to $22 in 2009. The smaller Talco and Fulmar fields were also valued slightly under their cash flows. Asset review The SEC seems to have accepted that explanation. But the letter appears to admit ExxonMobil did not fully review its assets field-by-field at year-end 1998 prices, and never went to the crucial third step of SFAS 121. That requires any asset unlikely to recover its cost must be written down against discounted after-tax future cash flows. The discount factor is generally a company's required internal rate of return. For ExxonMobil that is a secretive number assumed to be about 15%. On that basis, a source familiar with Exxon's asset base suspects it could have faced a massive charge at year-end 1998: "You would have had hundreds of fields impaired. Not just three. That letter indicates they didn't follow the rules."-James Norman