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Dissidents Take a Round in El Paso Dustup

An influential proxy adviser sides with a group seeking to oust the energy company's board.

El Paso


is starting to fight like a scrappy underdog.

The Houston energy giant was knocked down Tuesday by a powerful recommendation against current leadership in a heated proxy fight. With the odds now tilted against it -- and just two weeks left to cast votes -- the company is throwing some fierce punches at a strong dissident camp.

On Tuesday, El Paso criticized proxy adviser Institutional Shareholder Services for a "flawed" decision that went against incumbent management, even as it vowed to win the fight anyway. And in attacking ISS, the nation's leading proxy firm, El Paso jumped on the opportunity to kick around its opponents anew.

"Notwithstanding ISS's flawed evaluation," the company stated, "we believe our shareholders share our concerns regarding the risks of replacing our entire board with a slate of nominees that has no well-defined business plan for El Paso and that has selected one of its own as CEO without undertaking a process to select the best possible candidate for this critical post."

El Paso is now relying heavily on its "sizable retail shareholder base" to carry it to a victory. In the meantime, the company is taking direct aim at several dissident candidates who are among those fighting to replace the entire board. The company has specifically linked one candidate to a long career at


and two others to the boardroom of a bankrupt energy company. But El Paso's targets are now dodging those punches and criticizing the company's aim.

El Paso stock, having nearly tripled off its winter low after a long plunge, rose 7 cents Tuesday to $9.

The Enron 'Taint'

Ron Burns, a veteran of Enron, was the first to fight back. In a research note issued last week, Prudential analyst Carol Coale mentioned that Burns' history as "co-head with Jeff Skilling of Enron Capital and Trade may not sit well with certain shareholders." But the dissidents insist that El Paso latched onto the one -- very brief -- part of Burns' career that might trigger worry. Burns himself stresses that he spent only one of his 21 years at Enron working alongside the now-scandalized Skilling.

"Basically, I spent 20 years of that career running pipelines," Burns said. "If anybody did the research, they would find that my record was pretty unblemished at Enron."

At one point, Burns was viewed as a potential heir to the Enron throne then filled by longtime CEO Ken Lay. But Skilling outlasted Burns by far. In mid-1995, after just one year of leading the trading department with Skilling, Burns left Enron to accept an offer to become CEO of

Union Pacific

(UNP) - Get Union Pacific Corporation Report

in his hometown of Omaha. He later spent a brief stint as president of


(ETR) - Get Entergy Corporation Report

, a big New Orleans utility, before returning to his family in Nebraska.

Today, he offers no apology for his long career at Enron, which began shortly after he graduated from the University of Nebraska at Northern Natural Gas -- now Enron -- in Omaha.

"There was no trouble at Enron until 1997 or 1998," Burns insists. "Everything was run completely above board then."

Another Company Man

Another dissident candidate, also attacked by El Paso, makes similar claims.

To be fair, El Paso has yet to raise a stink about Gerald Bennett's five-year career at Enron. Instead, the company has apparently dwelled on the role of Bennett -- and fellow dissident candidate Ted Davis -- at bankrupt TransTexas Gas. But "in the interest of full disclosure," Bennett volunteered to

that he had built the gas marketing division Skilling inherited when he left in 1989.

"I swear that I'm proud of everything we did when I was there," he said. "During that time, Enron had one of the best operating companies around."

But Bennett claims he eventually felt the rumblings of a culture shift that rendered him too uncomfortable to stay.

"Ken Lay and Rich Kinder

the founding CEO of

Kinder Morgan

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were pushing the company into what I would call 'virtual operations'" -- and what Skilling would later hail as "asset-lite" business. "I did not want to be a part of that."

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Instead, Bennett walked away from his new, five-year contract at Enron and went on to engineer turnaround jobs at several energy companies. So he probably seemed like an attractive candidate to serve on the board of TransTexas, a bankrupt company whose founder had tasted failure more than once.

But Bennett wasn't interested.

"My response was not just no -- but hell no!" Bennett said. "If I had known from day one

what I know now, I would have never gotten involved."

The Stanley Man

Urged by desperate bondholders, Bennett and other energy veterans reluctantly agreed to join the TransTexas board with one understanding: They could get rid of founding CEO Jack Stanley if he caused any trouble. But an "iron-clad" contract, hammered out by the prior board, kept Stanley's job safe for another two years.

The new board finally fired Stanley the minute that deal expired.

By then, Stanley had led three energy companies into bankruptcy. He had also wrapped up a high-stakes fight against Oscar Wyatt, who he blamed for all of his troubles -- and who El Paso now blames for the current proxy fight. Stanley had accused Wyatt of orchestrating the so-called "Armageddon strategy" in an effort to cripple him with lawsuits and gain control of his prized natural gas assets. The two parties eventually reached an undisclosed settlement in the spring of 2000.

By then, the two Houston men had swapped multiple lawsuits. And they had earned colorful reputations for being self-made oilmen who knew how to play hardball.

"There are some people who feel you haven't really earned your stripes in the Houston energy business unless you've been fired by Oscar Wyatt or Jack Stanley," Doug Pedigo, an industry attorney, told the

Houston Chronicle

last year.

If Wyatt wins his current war, El Paso's interim CEO will be the first to go.

Wealth of Experience

In his last full-time job -- before stepping in to fill Wise's shoes at El Paso -- Ronald Kuehn presided over a spectacular decline at Sonat.

The ailing energy company weathered writedown after writedown before finally becoming a weak takeover target for El Paso in 1999. One former Sonat employee, privy to crucial exploration information, blames Kuehn for much of that downturn.

"Through a series of poor management decisions,

Kuehn brought the company to its knees," he said. "The appointment of Ron Kuehn as interim CEO

of El Paso is more than disappointing. ... It's like a final slap in the face."

El Paso has promised to replace Kuehn with a permanent CEO after the proxy contest ends. In the meantime, the company said it is already talking to "a number of outstanding candidates" -- including CEOs and operating chiefs at big energy companies -- who are interested in the job.

At the same time, the company has taken swipes at the dissidents' choice for CEO. In a recent letter to shareholders, El Paso portrayed Stephen Chesebro as the "wrong choice" for El Paso's CEO because he's spent less than two years as an energy CEO in the past. But Chesebro spent the last nine years of his career -- from 1990 to 1999 -- as either an operating chief or CEO, which appears to put him on equal footing with some of the candidates the company is now considering.

Rick Hare, a former Tenneco employee, portrayed Chesebro as a good man for the job.

"Since El Paso bought Tenneco's energy assets some years ago, Chesebro will be familiar with the assets and many of the people," Hare said. And "he's a no-nonsense guy. He won't take long to separate the wheat from the chaff."

Of course, Chesebro's group now enjoys much more powerful backing as well. The dissidents won over ISS by stressing both recent failures and promising sweeping change.


the incumbents' missteps in the past, management and the board face credibility issues, and the negative surprises by El Paso have not helped restore confidence," ISS stated. "In light of the likely benefits of a fresh start, the proposed improvements to the compensation practices by

dissident nominees and the failure of the incumbent board ... to monitor management's questionable action, ISS does not believe that the incumbent board should be supported."

Ironically, ISS withheld support only for dissident Selim Zilkha -- the candidate formally leading the proxy fight. ISS instead recommended a totally new board that would exclude Zilkha, who has served on El Paso's board in the recent past and voted on many of the company's failed decisions.

Zilkha quickly brushed off the slight, however.

"My involvement in this proxy contest has never been driven by personal reasons," said Zilkha, who has vowed to accept no compensation as a returning board member. "What is noteworthy is that this respected, independent organization has come out strongly in favor of instituting systemic and fundamental change at El Paso."

For Wyatt -- who launched his campaign for reform at El Paso's annual meeting more than a year ago -- the victory would be a sweet one.

"Whether I lose at tennis, gin rummy or marbles," he told the

New York Times

in 1985, "I don't like it."