Melissa Davis

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El Paso Veers Off the Wise Course

Melissa Davis

Updated from 1:11 p.m. EST

El Paso (EP Quote) weathered a fresh blow on its first day under the leadership of a lame duck CEO.

Following similar action by Standard & Poor's last week, Moody's slashed El Paso's credit rating five notches to a category known for defaults. Moody's has assigned El Paso a Caa1 credit rating, the fifth-lowest possible, and warned Tuesday that the company's outlook remains negative.

In explaining the downgrade -- more severe even than the recent one by S&P -- Moody's listed the following as primary concerns: El Paso's expected plunge in cash flow from operations; its increasingly onerous debt load; its fast-approaching debt maturities; its dependence on quick asset sales; and its risky exit from the merchant energy business.

Karl Miller, a former energy executive, said El Paso's problems may be too great for even a new CEO to repair.

"The company faces potential insolvency and complete structural reorganization," said Miller, who now leads an energy-related acquisitions firm. "More executive changes are needed before any true damage control can begin.

Just hours ahead of Moody's action, El Paso released plans Tuesday to replace its embattled -- and richly compensated -- CEO.

The troubled energy giant, which saw its fortunes crumble with the merchant energy business, announced early Tuesday that longtime Chairman and CEO William Wise will depart by year-end. Wise is stepping down from a job that, during the merchant energy boom of 2001, paid him more than $27 million -- and ranked him high on the list of America's best-compensated CEOs.

Ronald Kuehn, El Paso's lead director, applauded Wise's contributions to El Paso and his willingness to remain at the company until a replacement can be found.

"We appreciate Mr. Wise's decision to remain in his role during this challenging period for the company as we move aggressively to address the issues affecting our business and move forward with our business plan," Kuehn said in a prepared statement Tuesday. "We thank him for his dedication and leadership."

News of Wise's retirement comes less than a week after El Paso rocked investors with plans to slash its dividend and sell off valuable assets in an effort to halt the company's rapidly deteriorating financial condition. El Paso's drastic turnaround strategy frightened investors, who sent the company's stock in a dive below $5 for only the second time in history.

The stock, which also dipped below $5 last October, opened strongly on news of Wise's departure. But the rally was short-lived. After shooting up 3.8% at the open, shares of El Paso plunged 9.2% to $4.72 following Moody's downgrade.

Still, some analysts remain optimistic. Credit Lyonnais immediately upgraded El Paso's stock from reduce to hold following news of Wise's retirement. And even Houston analyst John Olson, who called himself "a friend and admirer of Bill Wise," viewed the management change as a necessary step in the right direction.

"Bill Wise has presided over a stock price decline from $75 to $5 -- and he's fought a very good fight," said Olson, who owns stock in the company himself. "But it's time to restore fiscal credibility to the company.

"This is the natural order of things; this is the system at work."

During his 13 years at the helm, Wise helped build El Paso into the nation's largest pipeline company and, more recently, oversaw a disastrous foray into the once-hot energy trading business. Since the 2001 collapse of Enron -- the onetime king of energy trading -- El Paso has weathered a steady decline of its own, losing billions of dollars in market value and leaving Wall Street analysts wondering if the company can ultimately survive.

Frustrated by that slide, El Paso's growing camp of critics began calling for change well ahead of Wise's announced retirement. Oscar Wyatt, who founded the last major company acquired by El Paso, began questioning El Paso's leadership early last summer. Once viewed as a vocal -- but somewhat powerless -- dissident, Wyatt has seen his popularity grow as El Paso's fortunes have declined. The oilfield veteran is, in fact, currently planning an official battle to oust El Paso's senior management team.

"Oscar's got a proxy test ready to launch a week from Thursday," Olson said. "He would very much like to see a new management style that's closer to his own philosophy."

Olson said that Wyatt himself would not be pitched as a candidate to replace Wise as CEO. Wyatt wasn't immediately available for comment.

For his part, Wise expressed gratitude for his long career at El Paso and praised the people behind the company.

"Having been with El Paso for 33 years and having had the privilege for almost a decade and a half of leading this company, I have witnessed firsthand the deep strengths, resources and outstanding people that make up El Paso," Wise said Tuesday.

But some of those employees have few praises to return. While Wise collected $4.9 million last November selling El Paso stock -- in addition to an eight-figure salary -- employees saw their own stock investments continue to slide and their jobs, in some cases, completely disappear. As recently as last month, El Paso's staff suffered yet another painful cutback.

In a letter from Wise himself, El Paso informed employees that the company was suspending its matching contributions to the staff's retirement savings plans. Wise estimated that the move will save the company $33 million a year.

"The decision to suspend the RSP match has been a difficult one, and I understand that it will affect many of you," Wise said in a Jan. 28 letter. But "it is imperative that we continue to respond in order to deliver maximum value to our shareholders."

Saddled with fresh sacrifice, employees will no doubt be watching for any signs of a generous "parachute" for Wise that would cut into shareholder returns. Their CEO has already drawn criticism for collecting huge paychecks even as El Paso's fortunes have eroded. Last year, Wise was in fact ranked as one of the best-paid CEOs -- trailing only CEOs at Tyco(TYC Quote), Qwest(Q Quote), Enron and AOL Time Warner (AOL Quote) -- at the helm of a company under federal investigation.