What’s an El Paso Corp. shareholder to do? With the annual shareholder meeting scheduled for 2 p.m. CST Tuesday in Houston’s George R. Brown Convention Center, the incumbent board of directors will know in less than 48 hours whether they will remain in control of the massive energy services corporation or whether they will be replaced by a tenacious group of energy professionals.

Except for the lack of television advertising, the battle for the board, in energy circles anyway, has not been unlike a presidential campaign, with telephone banks set up by both sides to contact shareholders about their vote, nearly daily literature and, of course, the mudslinging. What’s at stake are the amount of proxy cards each side obtains. Enough white proxy cards would ensure the incumbent board would remain at the helm for at least another year, while more blue proxy votes would bring in a new board. Exit polling aside, it was still anybody’s call on Friday.

Several of El Paso’s largest institutional shareholders have said nothing publicly about which way they will vote, and there are huge voting blocks at stake, including Pacific Financial Research, which controls 11.96%; Capital Research and Management Co., 9.03%; Barclays Bank plc, 3.72%; State Street Corp., 2.92%; Allianz Dresdner Asset Management of America Inc., 2.45%. Also controlling less than 2% are Merrill Lynch Investment Managers LP, Putnam Investment Management LLC, The Vanguard Group and Taunus Corp.

However, El Paso has gained the public support of one influential voting group, Brandes Investment Partners LP, which owns 6.15% of the shares (see NGI, June 9). On May 31, Brandes owned nearly 36 million shares of the company, but some of its clients retain voting discretion.

Also recommending all but three members of the current El Paso board — with some stipulations — is independent proxy research firm Glass, Lewis & Co. LLC (Glass), which issued its endorsement last week.

However, the 31-page Glass proxy paper actually offered few positive comments about the current state of the company, giving El Paso a “failing grade” for its recent performance. Among other things, Glass analyst Kevin Cameron said that the executive officers and CEO “received pay far in excess of the performance they turned in for 2002.” He noted, however, that the executives did not receive any cash bonuses nor stock option grants last year either.

“Nevertheless, the performance of the company…was so poor as to render the base and long-term incentive compensation received by the executives as grossly excessive,” wrote Cameron. Glass used six criteria for its measurements, including the company compared with average performance, CEO compared with averages, shareholder wealth, and business performance.

Cameron said the “choice between the incumbent board (three of whom are not standing for re-election and four of whom were added to the board since this proxy fight began) and Mr. Zilkha’s slate is not an easy one.”

The incumbent directors and some of their predecessors “have swung wildly at every pitch, investing significant sums into unrelated lines of business, from many of which the company now seeks an exit.” And, “with all this wild swinging, there has been, and remains, some significant risk that the company will strike out: its balance sheet is over-leveraged, its costs too high and its management team in some substantial disarray.”

Zilkha’s proxy fight offers a “compelling story,” said Cameron, but in the end, offers a “relatively vague going-forward plan.” A “troubling aspect” of Zilkha’s coup attempt is that it is being financed in part by Oscar S. Wyatt Jr.,” said the report. “We worry that investors may not be best served by a board that might feel beholden to Mr. Wyatt when and if it negotiates the sale of company assets to him or seeks to settle the company’s claim for his debt obligation.”

In the meantime, the incumbent board has improved substantially, according to Glass. “It has removed an overpaid and under-performing chief executive officer. It has made significant progress in selling non-core businesses and de-levering the balance sheet.”

Glass recommended shareholders vote for all but three El Paso incumbent board members: John Bissell, who serves on El Paso’s audit and compensation committees; Joe B. Wyatt, who chairs the compensation committee and sits on the governance committee; and Thomas R. McDade, a senior partner in a law firm that has provided legal services to El Paso and who earned $150,000 in fees for these services in 2002. McDade served on no committees last year. Glass recommended the other nine executives, including interim CEO Ronald Kuehn, be re-elected.

“In particular, the members of the compensation committee who approved [former CEO William) Wise’s compensation during the period from 2000-2003 have hardly distinguished themselves,” according to the report. “Moreover, the board’s track record of linking pay to performance is disappointing, at best” and a concern as the company searches for a new CEO.

Besides Bissell and Wyatt, three other members of the compensation committee include James L. Dunlap, J. Michael Talbert and John Whitmire, who all joined El Paso’s board this year.

To read more of the Glass report, visit the company’s web site at www.glasslewis.com/index.php.

Zilkha, who is also El Paso’s largest individual shareholder, launched his fight for control in mid-February, and in recent days, his slate of opponents has picked up several key endorsements, including that of influential Institutional Shareholders Services (ISS), which issued its recommendation two weeks ago. The ISS recommended the current board be ousted and a new one installed, except for Zilkha, because he was serving on the board when many of the decisions that he is now criticizing were actually made.

Also last Thursday, the Zilkha slate was endorsed by the New York State Common Retirement Fund as well as the Illinois Board of Investment, which oversees many of the Illinois retirement funds. Zilkha’s team also was endorsed by the AFL-CIO.

Said Alan Heveis, the sole trustee of the 945,000-member New York retirement fund, “This board’s mismanagement virtually destroyed the firm’s value and reflects a troubling disregard for shareholder concerns. The directors must be held accountable for their sloppy performance.”

Meanwhile, Friday, A.G. Edwards downgraded El Paso to “sell” from “hold,” but analyst Michael Heim wrote that the downgrade “is not related to developments in the current proxy fight.”

Heim said that “a drop in energy prices, a disappointing legal or regulatory decision, an inability to sell prices in a timely manner, a drop in the overall stock market, and poor operating results are among the many factors that could cause us to lower our estimate of fair value for the company.” He also noted that El Paso shares have climbed 177% from a Feb. 14 low of $3.33.

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