El Paso Corp. shares rebounded 22% on Friday to $4.19 after bottoming out at Thursday’s low of $3.33. On Wednesday, it was in the unenviable position of being the most heavily traded common stock on the New York Stock Exchange because investors were dumping shares in buckets following the announcement that CEO William Wise would step down as chairman at the end of the year and hand over his title of CEO as soon as the board could find a replacement.
Wise’s announcement was widely expected since El Paso announced a week earlier that it would cut its dividend 82% to 16 cents annually, sell off another $2.9 billion in assets and exit the liquefied natural gas (LNG) business to reduce debt (see NGI, Feb. 10). The company’s stock is down 91% from its 52-week high of $46.89.
Following on downgrades by several investment houses, Moody’s Investors Service dropped its rating on El Paso by five notches last Tuesday afternoon. Moody’s downgraded the senior unsecured corporate debt ratings to Caa1 from Ba2 and lowered the ratings for its subsidiaries. The rating outlook is negative. Moody’s sees too much debt and too little cash.
Moody’s said the downgrades reflect: “1) significantly reduced near-term expectations for operating cash flows; 2) debt that remains high relative to the company’s cash flows; 3) the strain on liquidity from the increase in debt repayments required this year; 4) the uncertainty as to whether asset sales will provide sufficient and timely proceeds to help cover its larger-than-expected cash deficit; and 5) execution risks related to EP’s efforts to scale back its merchant energy activities, including exiting energy trading, consolidating the power business of its Electron affiliate, and divesting its petroleum and LNG businesses.”
The negative outlook reflects the ratings agency’s concern over operating cash flows and debt repayments, along with the uncertainties related to the ruling expected soon from FERC regarding the alleged exercise of market power and violations of marketing affiliate rules. “While the ultimate impact of these proceedings will not likely be known for some time, these proceedings could potentially precipitate other litigation and proceedings that could have a more immediate negative impact on EP’s financial position, liquidity, or business operations,” Moody’s said.
Moody’s notes that El Paso may not announce its 2002 results until March. The agency assessed the company’s various debt and credit arrangements and the prospects for asset sales to relieve the financial pressure. El Paso has raised its estimated asset sales this year from $2 billion to $3 billion, but the bulk of the planned sales are in power and petroleum assets, which the company may have trouble unloading in the current market.
El Paso’s board said last week that it will appoint a search committee to analyze qualified external and internal candidates to lead the company. Wise will continue in his current role as CEO until another chief executive can be found and will remain chairman until his retirement at the end of 2003.
Wise has been CEO since 1990 and chairman since 1994. Over the past decade, he led El Paso through dramatic growth, taking the company from a small sleepy pipeline operator to an energy giant with strengths in every aspect of the energy chain. While he was at the helm, El Paso purchased Tenneco Inc. and its Tennessee Gas Pipeline Co; Sonat Inc. with its large production and pipeline units; Coastal Corp., including its massive pipeline, production and refining operations; and PG&E’s Texas gas transmission and storage assets just to name a few.
Wise also has witnessed El Paso’s equally dramatic decline from its struggles through charges of market manipulation in California (still unresolved) through nearly $4 billion in asset sales last year and another $3 billion expected this year. El Paso’s stock price has gone from more than $60/share in February 2001 to about $4/share today.
Wise joins numerous other top executives who have become victims of the energy crisis following Enron’s fall. They include former CMS Energy CEO William McCormack, Dynegy CEO Chuck Watson, Aquila CEO Robert Green, AES Corp. CEO Dennis Bakke, NRG’s Chairman David H. Peterson, and of course Enron Chairman Kenneth Lay, among many other top energy officials.
Credit Suisse First Boston analyst Curt Launer speculated that Wise has chosen to “avoid the spotlight of personal attacks” in an upcoming proxy battle expected to be launched by an investor group led by Selim Zilhka, El Paso’s largest individual shareholder. Zilhka is trying to wrest control of the board and oust much of the management team. Former Coastal Corp. CEO Oscar Wyatt, one of El Paso’s largest shareholders, also has been a vocal opponent of the company’s recent changes and is part of the uprising against management. Wyatt has alleged that El Paso engaged in fraudulent accounting schemes and other misconduct (see NGI, Nov. 25, 2002, July 15, 2002). The proxy battle would diminish El Paso’s recovery plans.
“In some ways we view this news as an indication that the expected proxy battle may not develop, but we still expect some actions to be proposed relative to other board members and possibilities for future chairman and CEO roles,” said Launer.
Prior to being chairman, Wise served as president and COO of El Paso from April 1989 to December 1989. From March 1987 to April 1989 he was an executive vice president of El Paso. He began his career as counsel to El Paso Natural Gas in 1970.
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