The largest individual shareholder of El Paso Corp. gave notice Tuesday that he will seek to unseat the financially troubled company’s board of directors at the upcoming shareholder meeting.

In a letter delivered to the Houston-based energy company, Selim K. Zilkha, holder of more than 8.9 million shares of common stock in El Paso, said he could “no longer watch passively as the value of the company continues to decline.” In an effort to reverse the “disastrous decline” in the company’s stock and debt ratings over the past months, he signaled he will “seek the support of my fellow stockholders” to replace El Paso’s current 12-member board.

The embattled company immediately called on shareholders to reject Zilkha’s proposal, saying it would be “highly disruptive” to El Paso’s ongoing efforts to improve its balance sheet. El Paso has made “numerous efforts to reach out to him,” but Zilkha instead has chosen to launch “this counterproductive proxy campaign,” said company spokeswoman Norma Dunn. She noted El Paso has not set the date yet for its shareholders’ meeting this year. It was held in May in 2002. As of last November the company had 598.9 million common shares outstanding.

Zilkha’s large holding is by virtue of the sale of his company, Zilkha Energy Co. to Sonat Inc. in 1998 for shares worth just over $1 billion. This translated to an interest in El Paso when El Paso bought Sonat in late 1999.

Zilkha said he expects his El Paso bid to be “broadly supported” by stockholders. One of his key backers is reported to be Oscar S. Wyatt Jr., also a major El Paso stockholder, who has been scathing in his criticism of the company and Chairman William Wise in recent months, and has been at the forefront of a major class-action lawsuit accusing the energy company of engaging in fraudulent schemes and conduct.

Wyatt owns 4.678 million shares of El Paso common stock. Wyatt, who is considered a legend in the energy industry, founded Coastal Corp., which El Paso acquired for $24 billion in 2001. He currently heads up a Texas energy company called NuCoastal.

El Paso’s stock price has plunged 90% in value over the past year to trade at around $4.05 a share late Tuesday, and its debt has been slashed far into the junk range. “I believe this drastic decline is the result of the ever increasing loss of confidence in the current board and management,” Zilkha said.

The announcement last week that Wise would resign as El Paso chairman at the end of 2003 and hand over his title of CEO as soon as the board finds a replacement is “woefully inadequate to address the many problems that plague El Paso,” the disgruntled investor said (see Daily GPI, Feb.12). The only solution is a new board with members who “have the credibility and the solid experience in the energy industry to maximize the value and productivity of El Paso’s employees and assets.”

The proposed board would include the 75-year-old Zilkha, half owner of Zilkha Renewable Energy LLC in Houston; G. Gerald Bennett, chairman and CEO of Total Safety Inc., which provides safety solutions to industrial and energy markets, and formerly an executive with several gas pipeline companies, including Equitable Resources Inc.; C. Robert Black, retired from Texaco Inc. after 41 years; Charles H. Bowman, professor emeritus at Texas A&M University; Ronald J. Burns, chairman of Burns Capital Partners LP, which is involved in private equity investments, and former president and CEO of Entergy Corp.; Stephen Chesebro, non-executive chairman of Harvest Natural Resources, and previously associated with Pennzoil and Tenneco Energy; Ted Earl Davis, energy industry consultant, and ex-Conoco executive; John D. Murphy, retired, former chairman and CEO of Dresser Industries Inc., and past managing director of SMG Management LLC, a privately owned investment group; and John V. Singleton, a retired federal district judge.

In addition to offering the nominees for the El Paso board, Zilkha said he plans to bring up a series of proposals for a vote at the company’s stockholder meeting, including one to scale back the number of board members to nine. He has not filed the necessary proxy materials with the Securities and Exchange Commission (SEC) yet, said a spokesman for Zilkha, adding this will be “forthcoming.”

In a related development, Credit Suisse First Boston analysts, led by Curt Launer, indicated El Paso would face Chapter 11 bankruptcy in the event it is hit with a “multi-billion [dollar] judgment” in the long-running FERC proceeding that has pitted California regulators against the El Paso natural gas pipeline. Launer believes a settlement of the price manipulation allegations could be achieved for $300-800 million.

“Recent indications of a $1.5-6 billion settlement,” as reported in The Wall Street Journal, “would result in a bankruptcy filing by [El Paso] and are therefore unlikely,” the analysts said.

The loss of El Paso stock value in response to the ratings downgrades and Wise’s resignation announcement last week was “overdone, in our view, because no new collateral is needed or debt due or default created by the downgrade action,” they noted. Moody’s dropped El Paso’s stock by five notches.

Despite the gloom shrouding the company now, Launer expects El Paso shares to more than double during 2003, hitting $11. This is still a far cry from the company’s $71 stock price in early 2001. Launer also stuck with Enron right up until the end.

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