In another move apparently designed to fend off a hostile proxy battle led by a major investor, embattled El Paso Corp. last Tuesday announced that three of its top executives will leave the company within a month. The company said the move was part of its “clean slate initiative” to slim down operations and further reduce costs.

The news came as El Paso reported a first quarter net loss of $394 million, or 66 cents a share, due largely to the disappointing performance of its merchant energy business, one-time charges associated with impairments of assets to be sold and costs related to an accounting change, compared with earnings of $383 million, or 72 cents share, for the same period in 2002. Excluding the one-time charges, first-quarter income was $140 million, or 24 cents a share, compared with $502 million, or 93 cents a share, in the first quarter of 2002, the company said.

Departing from the Houston-based energy company will be H. Brent Austin, president and chief operating officer (COO); Greg G. Jenkins, president of the company’s petroleum and liquefied natural gas (LNG) businesses; and Clark C. Smith, president of El Paso’s trading operations. El Paso plans to eliminate the president and COO positions, and is exiting its energy trading, LNG and petroleum operations — with the exception of the Elba Island LNG facility in Georgia — to shore up the company’s balance sheet.

The three lines of business have been a big drain on the company’s resources. For the first quarter, El Paso’s merchant energy group, which includes trading, LNG-petroleum and domestic/international power operations, posted an earnings before interest and taxes (EBIT) loss of $756 million, down from an EBIT of $93 million for the year-ago period.

The money-makers for the besieged company are its pipeline, production and midstream businesses, said Chairman and interim CEO Ronald L. Kuehn Jr. “The combined pro-forma earnings before interest and taxes…of these businesses totaled $713 million [in the first quarter], which is up 27% from the fourth quarter of 2002 and 8% from the first quarter of 2002,” he noted, adding that El Paso expects the fundamentals for the gas industry to remain strong in the months ahead.

Each of the three businesses finished in the black for the first quarter, with the pipeline group posting an EBIT gain ($429 million vs. $399 million) over the same quarter in 2002, and with production’s EBIT rising $68 million to $244 million in the first quarter. El Paso’s midstream business took a hit in the first quarter, with EBIT falling to $27 million from $51 million a year ago, due to the sale of $1.6 billion of assets to El Paso Energy Partners and other third parties during 2002, the company said.

El Paso said it also will nix the position of executive vice president of administration. David E. Zerhusen, who has held that post, will become senior vice president and deputy general counsel. Overall, El Paso noted it is cutting its slate of executive officers to six from 10.

The remaining six executive officers at El Paso will be Robert W. Baker, president of El Paso Merchant Energy; Rodney D. Erskine, president of El Paso Production Co.; Peggy A. Heeg, general counsel; Robert G. Phillips, president of El Paso Field Services; D. Dwight Scott, chief financial officer; and John W. Somerhalder II, president of El Paso Pipeline Group.

“El Paso’s Clean Slate Initiative is part of the company’s plan to achieve a total of $400 million of cost savings and business efficiencies” by the end of 2004, said Kuehn.

This latest move shows the troubled company “is trying to disassociate [itself] from the Bill Wise management team,” and give the “incoming CEO greater freedom in picking his own people,” said analyst John Olson of Sanders Morris Harris Inc. in Houston.

Wise, who has come under fire for the financial problems at the company, stepped down as El Paso chairman and CEO in March (see NGI, March 17). Kuehn was appointed chairman and CEO on an interim basis, while the company carries out a search for a permanent CEO.

The departing executives are “good people, but there’s a new wind blowing over there [at El Paso] now,” said Olson. He believes the same executives would be toppled if El Paso investor Selim K. Zilkha succeeds in wresting control of the company’s board of directors in the proxy fight that’s expected at El Paso’s annual shareholder meeting on June 17.

The executive changes “are a necessary step to restore El Paso’s credibility with its investors,” he noted. But the question is whether this is too little too late.

In addition to streamlining its executive ranks, El Paso has proposed installing a slate of directors that has more experience in the energy industry than its existing board members (see NGI, April 14). The company took this step after Zilkha offered has own roster of directors, who are steeped in energy experience, for shareholders to vote on at the June meeting.

Last Monday, Zilkha, a wealthy Los Angeles businessman and former El Paso board member, filed a proxy statement with the Securities and Exchange Commission (SEC) in which he formally outlined his plan to wage a campaign to replace the current El Paso board (including Kuehn) with his own nine-member board. Zilkha has strong support from Texas oilman Oscar S. Wyatt Jr.

Both men are among the largest individual stockholders in El Paso, but their combined holdings account for only about 2.27% of the 598.9 million common shares that were outstanding at the end of 2002. Zilkha estimates his 8.9 million shares of common stock represent about 1.48% of the current outstanding shares.

Zilkha, 75, acquired his holdings when he sold his company, Zilkha Energy Co., in 1998 to Sonat Inc., which then was gobbled up by El Paso the following year. Wyatt, 74, sold his company, Coastal Corp., to El Paso for $24 billion in 2001.

The performance of El Paso’s current board and management “has been inexcusably poor and they should be replaced,” said Zilkha in his proxy statement. During the past three years, “the current board has led a once-proud company to the point that its very viability is being publicly questioned.”

He noted the company’s stock plunged from a high of $75 to about $7.63 in early trading Friday, while at the same time Wise was paid $37 million between 2001 and 2003.

Sounding an optimistic note, Kuehn said El Paso now expects to achieve pro-forma earnings-per-share for 2003 that are consistent with the analysts’ estimate of 87 cents a share, as surveyed by Thomson First Call. This is based on expectations of improved results for the trading business in the last nine months of the year and a continuation of the current high gas prices, the company said.

El Paso further said it expects to lower its debt and other obligations by approximately $7.5 billion to $17.5 billion by mid-2005. “The path to this goal is well defined — asset sales, which now include the Aruba refinery, telecommunications assets and additional domestic power assets; the recovery of working capital from the trading and petroleum businesses; natural gas production hedges; and the use of excess cash to pay down debt.”

At the end of April, the company reported it had $3 billion of available cash and lines of credit.

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