January 8, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549-0609
Director of Research & Technical Activities
Re: Petition for Issuance of Interpretive Release
Dear Mr. Katz:
We applaud the proactive efforts of the five major accounting firms, as endorsed by the American Institute of Certified Public Accountants, regarding the need for interpretive guidance under Regulation S-K Item 303, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). We embrace the concept of consistent and transparent disclosure by all registrants and we are pleased that the Petition relied on existing disclosure requirements in MD&A as a basis for providing such guidance.
As you are aware, the emphasis of the Petition focuses on three areas of disclosure: (1) liquidity and capital resources including off-balance sheet arrangements; (2) certain trading activities that include non-exchange traded contracts accounted for at fair value; and (3) relationships and transactions on terms that would not be available from clearly independent third parties. The Petition provides a package of comprehensive disclosures that the accounting firms believed have merit in addressing those issues that recently resulted in impaired investor confidence. Philosophically, we concur with the proposed package, we embrace the concepts therein and we plan to expand our existing disclosures to meet the granularity desired by this proposal.
We believe the impaired investor confidence is principally a result of the collapse of Enron Corp. In our view, the collapse of Enron resulted from a combination of significant investment in underperforming assets that drained cash flow and earnings, the extensive use of off balance sheet structures and financings, some of which were equity-backed and some involving related parties, and potentially an intentional lack of transparency in the financial statements related to these matters. Enron's business failure is not an indictment of the merchant energy business model, the industry sector, its participants or deregulation.
The second area of disclosure, "certain trading activities that include non-exchange traded contracts accounted for at fair value", appears to focus principally on energy trading companies as defined in Emerging Issues Task Force Issue No. 98-10. It is our belief that the concept of consistent and transparent disclosures applies to all public registrants. A fair value accounting model also applies to other industries including financial institutions, companies that operate under the Investment Act of 1940, as amended, certain subsidiaries of insurance companies and, in general, any company impacted by Statement of Financial Accounting Standards Nos. 133 and 140. Such entities often enter into financial instruments that do not have quoted markets and thus use models to determine fair value. Examples include credit derivatives, exotic financial instruments, and, in many instances, energy-related contracts. Guidance suggested in the Petition, albeit principally a result of recent events in the merchant energy industry, should not be construed as applying only to companies having material commercial operations in this business sector. Financial transparency provided by the disclosures in the Petition has significant applicability to these other industries and the enterprises conducting business therein. We ask the Staff to strongly consider amending the proposed Petition to eliminate references specific to a particular industry or industries, or at a minimum require all enterprises engaged in aspects of the merchant energy industry to comply with these disclosure requirements regardless of the significance of these operations. We believe that such amendment would broaden the application of the disclosure proposals, thus eliminating potential subjective decisions concerning the applicability of such disclosures as a result of industry, materiality, commercial activities, etc. Our proposed amendment to the Petition does nothing but enhance the overall usefulness of the Petition by assuring that the investing public receives consistent and transparent disclosures of financial condition and results of operations regardless of industry or business segment.
* * * * *
We appreciate the opportunity to express our views. If you have any questions regarding our comments, please contact us at 713-507-6400.
/s/ Robert D. Doty
Robert D. Doty, Executive Vice President and Chief
/s/ Michael R. Mott
Michael R. Mott, Senior Vice President, Controller
Cc: Harvey L. Pitt, Chairman
Robert K. Herdman, Chief Accountant
Robert A. Bayless, Special Advisor to Office of Chief Accountant