El Paso's ( EP) unwavering self-confidence has failed to impress at least one credit rating agency.

Houston-based El Paso touted plans Thursday to strengthen its credit rating -- perhaps to a solid A -- in an industry where such ratings are rare enough to be considered luxuries. El Paso Chief Executive William Wise said the company is taking aggressive steps, through asset sales and spending reductions, that should allow it to progress toward an A-rated balance sheet.

But just as it rolled out its plans to bolster its balance sheet and boost its ratings, El Paso endured a minor setback that could loom large as the company keeps an eye on its borrowing costs. Within hours of the company's rosy predictions, offered to analysts during a second-quarter earnings call on Thursday, Standard & Poor's revised El Paso's credit outlook from stable to negative.

Although S&P supported El Paso's claims of strong liquidity -- at least through next year -- the agency questioned whether the company's future cash flow, expected to suffer from cutbacks in exploration and production, can justify the current rating. S&P also pointed to the "persistently weak" merchant energy sector as an ongoing concern.

"The extreme turmoil in the energy sector has caused a decline in credit quality for many top industry participants and a fundamental change in the energy trading and marketing industry, all of which has forced El Paso to take many actions that have ultimately impacted cash flow to the point where it is pressuring current ratings," S&P wrote.

Ralph Eades, president of El Paso's merchant energy group, had attempted to differentiate the company from other players -- including Dynegy ( DYN), Calpine ( CPN) and Mirant ( MIR) -- that have seen their credit cut to junk.

"You can operate a business without being investment grade, and I think some of the participants will make it there," Eades said. "Obviously, in our case, we've got a solid investment-grade rating, and I think that's an important advantage in the environment we are in now."

El Paso currently enjoys an S&P credit rating of BBB+, three full notches above junk. But Dynegy and Williams ( WMB) boasted similar ratings earlier this year. Both saw their ratings spiral into junk territory within a matter of months, fueling bankruptcy fears that have recently abated but not yet disappeared.

Clearly, El Paso is in a much stronger financial position than either of these companies, which barely escaped cash crunches a few weeks ago. Still, some industry watchers have grown a bit nervous about possible problems down the road. The company appears dependent upon asset sales and future access to the capital markets -- both increasingly challenging -- for liquidity beyond 2003. And the company's books remain largely opaque to many observers, a fact that hardly seems comforting in the wake of Enron's collapse.

For now, El Paso describes its liquidity as "absolutely solid," and the market is buying that reassurance. The stock has actually tacked on slight gains, nearing $15 Friday afternoon, since the company slashed its future guidance and S&P reacted on Thursday.

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