El Paso Veers Off the Wise Course - TheStreet

Updated from 1:11 p.m. EST

El Paso

(EP)

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 themerchant energy business, announced early Tuesday that longtime Chairmanand CEO William Wise will depart by year-end. Wise is stepping down from ajob that, during the merchant energy boom of 2001, paid him more than $27million -- and ranked him high on the list of America's best-compensatedCEOs.

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

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

News of Wise's retirement comes less than a week after El Paso rockedinvestors with plans to slash its dividend and sell off valuable assets inan effort to halt the company's rapidly deteriorating financial condition.El Paso's drastic turnaround strategy frightened investors, who sent thecompany'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 onnews of Wise's departure. But the rally was short-lived. After shooting up3.8% 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 Houstonanalyst 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 declinefrom $75 to $5 -- and he's fought a very good fight," said Olson, who ownsstock in the company himself. "But it's time to restore fiscal credibilityto 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 thenation's largest pipeline company and, more recently, oversaw a disastrousforay into the once-hot energy trading business. Since the 2001 collapse of

Enron

-- the onetime king of energy trading -- El Paso has weathereda steady decline of its own, losing billions of dollars in market value andleaving Wall Street analysts wondering if the company can ultimatelysurvive.

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

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

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

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

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

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

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

"The decision to suspend the RSP match has been a difficult one, and Iunderstand 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 delivermaximum value to our shareholders."

Saddled with fresh sacrifice, employees will no doubt be watching forany signs of a generous "parachute" for Wise that would cut intoshareholder returns. Their CEO has already drawn criticism for collectinghuge paychecks even as El Paso's fortunes have eroded. Last year, Wise wasin fact ranked as one of the best-paid CEOs -- trailing only CEOs at

Tyco

(TYC)

,

Qwest

(Q)

, Enron and

AOL Time Warner

(AOL)

-- at the helm of a company under federal investigation.