The management plans proposed by El Paso Corp.’s current directors and the replacement directors chosen by some of the company’s top shareholders are similar in how the company would be run going forward. However, differences abound in how management and directors would be compensated and how businesses and executives would be evaluated going forward.

El Paso has been revising its business plan and its management team since Enron Corp. blew up two years ago. It has been selling off some assets, reworking its operational strategy and attempting to make it itself less top heavy by dismissing some top level managers and employees. However, many of the changes have done little to convince investors that the company is moving in the right direction. That is what moved one of its top shareholders, Selim K. Zilkha, to challenge the board in a proxy fight.

El Paso’s annual meeting is scheduled for June 17 in Houston, and for the past several weeks both El Paso and Zilkha have waged a battle for the minds and proxy votes of El Paso shareholders. It’s a close call as to which slate will win, and neither side has an estimate as to the number of proxies voted so far. The consensus appears to agree with analyst John Olson of Sanders Morris Harris, who predicts a close vote regardless.

El Paso had no comment on the proposals made Wednesday by Zilkha, but did have two announcements: that it had completed its sale of Mid-Continent and northern Louisiana midstream assets for $119 million and that it had filed a structural settlement to resolve claims related to the California energy crisis (see related story).

Zilkha, who together with former Coastal Corp. Chairman Oscar Wyatt holds about 2% of the company’s shares, is counting on the perception that El Paso’s current management is out of touch and unfocused. The Zilkha-led slate got a huge boost on Tuesday, when influential proxy service Institutional Shareholder Services (ISS) advised investors to elect all of Zilkha’s board nominees except Zilkha himself to the new board because the group of candidates “appears well balanced and seems to possess the necessary industry experience to minimize disruption in the event of a board change” (see Daily GPI, June 4). The ISS excluded Zilkha because he was on the El Paso board when many of the decisions that he is now criticizing were actually made.

The ISS has a pretty convincing track record. Since the beginning of this year, ISS has made recommendations in 18 proxy contests involving board seats, siding with the dissident slate in six companies. Of the 12 that have come to a vote, ISS has backed the winner eight times. Last year, the ISS recommendation in a proxy fight over Hewlett-Packard’s plan to buy Compaq Computer Corp. was said to play an important role in the outcome when it supported the merger effort. Walter Hewlett, son of co-founder Bill Hewlett, had led a fight to convince shareholders to vote against the merger, losing by the narrowest of margins, just under 50%.

While the Zilkha plan is “substantially similar” to El Paso’s plan, “we believe the biggest difference will be one of credibility,” ISS wrote in its report. El Paso management was quick to remind shareholders exactly what has happened to the industry in two years.

“I think it is important to put the past year and a half in context because today we are living in a vastly different environment,” Ronald L. Kuehn, El Paso’s interim CEO said in a letter to shareholders Monday. “Up until late 2001, there were premium valuations for energy companies focused on what were widely believed to be high growth areas such as trading, merchant power, international energy projects and telecom. Like a number of our peers, we pursued these opportunities.”

However, Kuehn noted that “the environment changed dramatically with the collapse of Enron in late 2001, the severe downturn in energy trading and merchant power markets, changes in rating agency criteria, and the aftermath of the California energy crisis.” In turn, he said, El Paso reacted beginning in December 2001 and all of last year with the following series of moves:

The Zilkha team’s plans are similar to the direction El Paso’s existing directors currently are taking. Additional details were unveiled during an investor conference call on Wednesday. Under the new nine-member board, the Zilkha team proposes to make El Paso a company focused on earnings from core assets, not through mark-to-market accounting or off-balance sheet transactions. To achieve its earnings, the new board proposes to do the following:

What the opposing slate is bringing to the table is “more than 300 years” combined energy industry experience, according to Zilkha board nominee R. Gerald Bennett. Bennett, a former Enron executive. He said that “all assets must earn the cost of capital or greater.” Productive assets would be defined by their ability to generate returns on invested capital. Assets that generate returns that equal or exceed the cost of capital would be supported and encouraged to grow and provided with the necessary capital.

If an asset is not productive, the Zilkha-led board would determine with management the strategies to make the asset productive. If the asset cannot be made productive, “we will sell the asset and use the proceeds to fund growth or retire debt. If it cannot be sold, it will be shut down and its working capital reinvested.” Asset review would be headed by a board member with expertise in that asset category.

Non-productive assets would be addressed systematically, taking those with the most value first. The first review would be of all assets with $50 million in net book value or greater and would be done within 30 days of the board being seated.

In the areas of severance and compensation, there are several striking differences between El Paso’s current plan and the opposition. Currently at El Paso, the company provides “golden parachutes” for dismissed executives, insurance policies, substantial retirement benefits and also will make loans. For instance, former Chairman and CEO William Wise, who still has an office in the El Paso building in downtown Houston, received a $9.4 million severance and a retirement benefit of $15.3 million. He also had a $9 million loan from the company.

According to El Paso’s Security and Exchange Commission filings, severance arrangements are payable only if there is a change in control over a two-year period with a change in the majority of the board members “unless the election or nomination for the election by El Paso Corporation’s stockholders of each new director was approved by a vote of at least 2/3 of the directors then still in office who were directors at the beginning of the period.” Under its current plan, El Paso’s board could prevent a payment of at least $75 million and an obligation to set aside at least $123 million by allowing shareholders to select a board — without the threat of a financial payout to current management.

Under the Zilkha plan, “there would be no stock repricing, no golden parachute, no contract,” said board nominee Ted Davis, former president of Conoco Inc.’s international exploration and production. Also, Zilkha would waive any compensation as a director. Other compensation would consist of the following:

El Paso has 12 candidates up for re-election to its board, including several former directors of Coastal Corp., which ironically, is the former company of opponent Wyatt. The El Paso slate includes current Chairman John M. Bissell, 72, a director of the board since 2001 and a former director of Coastal. Also up for re-election are Juan Carlos Braniff, 45, director since 1997; James L. Dunlap, 65, former vice chair of Ocean Energy elected this year; Robert W. Goldman, 60, a business consultant elected this year; Anthony W. Hall Jr., director since 2001 and former Coastal board member; current CEO Ronald L. Kuehn Jr., director since 1999; J. Carleton MacNeil Jr., director since 2001 and former Coastal director; Thomas R. McDade, director since 2001, also former Coastal director; J. Michael Talbert, 56, elected this year and former chair of Transocean Inc.; Malcolm Wallop, 70, director since 1995 and chair of Western Strategy Group; John Whitmire, 62, chair of CONSOL Energy Inc. elected this year; and Joe B. Wyatt, 67, director since 1999 and chancellor emeritus of Vanderbilt University.

The Zilkha-led team includes two with former Enron ties as well as several with indirect El Paso experience. The nine standing in opposition to the El Paso board include R. Gerald Bennett, 60, chair of Total Safety Inc. and a former Enron executive; C. Robert Black, 67, retired from Texaco Inc. after 41 years; Charles H. Bowman, 67, professor emeritus at Texas A&M University; Ronald J. Burns, 50, chair of Burns Capital Partners LP and a former Enron executive; Stephen D. Chesebro, 61, proposed CEO and former CEO of PennzEnergy and Tenneco Inc.; Ted Earl Davis, 63, consultant and former Conoco Inc. executive; John J. Murphy, 71, retired, former managing director of SMG Management LLC; John V. Singleton, 84, retired U.S. federal district judge; and Zilkha, 76, 50% owner of Zilkha Renewable Energy LLC and former director of El Paso from November 1999 to February 2001. Zilkha also was an El Paso advisory director until June 2002.

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