The loud fight for control of El Paso ( EP) has notched up a few more decibels.

With less than three weeks left to plead for votes, El Paso incumbents and dissidents alike have cranked up the volume in their campaigns for control of the company's board. By now, both sides have formally solicited votes from shareholders and have followed up by presenting their cases before Institutional Shareholder Services, the largest proxy advising firm in the nation. The firm's final recommendation, which could tilt the balance in either direction, is expected sometime next week.

But neither side is quietly waiting for that decision. Rather, both parties have gone on to personally argue their cases before big shareholders -- who own roughly one-third of El Paso's stock -- in rare, back-to-back presentations hosted by the AFL-CIO this week in the nation's capital. While the two sides did not actually debate, they have been engaged in a virtual shouting match for months by now. That argument, fought primarily through letters to shareholders and press releases, has grown increasingly testy in recent days.

During the past week, each side has rushed anew to tout its own strengths and rip at the other's weaknesses through familiar reminders and a sprinkling of interesting new disclosures. The incumbents continue to point out their recent successes, including liquidity improvements and a key settlement with California, while stepping up their criticism of a dissident group led by former El Paso director Selim Zilkha and supported by vocal shareholder Oscar Wyatt. Meanwhile, the dissidents keep pounding on El Paso's "inexcusably poor" performance -- contrasting the company's low share price with its rich executive pay -- as they try to flesh out a turnaround plan that's still criticized as too vague.

And in the background, the clock continues to tick away the days before the final showdown -- scheduled for June 17 in Houston -- when the season's last big proxy fight will finally conclude.

Slight Favorites

As a rule, incumbents ride into proxy wars as heavy favorites. But many experts have declared this particular race too close to call. Only in recent weeks, as El Paso's share price has more than doubled, have some people started to hint that the incumbents will probably win.

Prudential analyst Carol Coale, who has stuck by El Paso even as others grew bearish, cautiously predicted a victory for the incumbents in a research note this week.

"Positive sentiment toward El Paso appears to be gaining momentum," Coale wrote on Thursday. "We are assuming, although not necessarily advocating, that the existing board is retained."

But El Paso isn't taking any chances. Instead, the company continues to insist that it has adopted a strong recovery plan that the dissidents will only disrupt. It has promised to simplify its business strategy and reduce its onerous debt load over the next two years. It has also pledged to cut unnecessary costs and has already trimmed its executive staff by nearly half. In addition, it has worked to strengthen its board ahead of the proxy fight by replacing three veteran directors with four new ones who possess better energy backgrounds. The company's board, blasted by critics for lax oversight, now portrays itself as a model for others.

"We have adopted corporate governance standards that we believe place us in the vanguard of corporate governance best practices," the company stated in a letter to shareholders this week.

But the dissidents continue to attack El Paso's claims and, in many cases, use the company's own touts against it.

Heavyweight Underdogs

In a presentation to ISS last week, Zilkha's group tore apart El Paso's "progress" sheet.

First, Zilkha began by arguing that El Paso shares at one point had tumbled 90% from their year-ago highs -- rising only after he launched a proxy battle -- because the company never really had a clear business strategy. He pointed to expensive forays into telecommunications and energy trading and insisted that, even today, El Paso continues to be unsure about what its "core" businesses are. This year alone, he said, El Paso has announced plans to exit at least two divisions that it had previously described as important to its future. In the meantime, he said, El Paso continues to sell far more core assets than noncore assets in an effort to stay afloat.

"Since Jan. 1, 2002, approximately 72% by value of El Paso's asset dispositions have been in core areas as identified by El Paso," Zilkha stated in the presentation to ISS.

Zilkha also argued that cash from those asset sales hasn't lightened El Paso's debt burden. In fact, he speculated that El Paso's debt-to-capitalization ratio has actually expanded in the past year. But he admitted that even Wall Street couldn't pinpoint El Paso's exact debt load.

He backed his arguments with quotes from analysts puzzling over El Paso's disclosures. One analyst, cited as an expert at A.G. Edwards, took a hard swing at the quality of El Paso's earnings.

"In total, El Paso has taken nonrecurring charges in excess of $5 billion, or almost $7.50 per share, since 2002," the analyst concluded. "El Paso has written off more than it has reported in pro forma earnings for this time period."

Overall, Zilkha portrayed El Paso as a weakened company that is simply pretending to change. He even challenged some recent executive firings, claiming that former El Paso leaders continue to pick up checks as paid consultants for the company. And he was particularly critical of El Paso's "outrageously expensive golden parachutes" for ousted CEO William Wise and other departing executives.

In contrast, Zilkha's group has established plans to scale back pay to top executives and eliminate golden parachutes altogether. They have also volunteered to reduce the current pay for directors, and Zilkha has pledged to accept no compensation at all.

In essence, they have basically promised to give shareholders far more for their money.

"Our nominees are a world-class group with a vast wealth of industry-specific experience and expertise," Zilkha stated. "They are not burdened by the lack of credibility or history of failed business initiatives that afflicts the current board. And they are not beholden to anyone."

But El Paso -- and even Coale -- begs to differ.

Fighting Words

From the beginning, El Paso has blamed the current proxy fight on Wyatt.

The founder of Coastal -- a big energy company acquired by El Paso -- Wyatt is seeking neither a chair at El Paso's board table nor a room in its executive suite. But he is clearly involved in Zilkha's proxy fight. He has lent both his name and his funds to the effort. As a result, El Paso insists the fight is really Wyatt's own. And the company has taken easy aim at the colorful oilman.

"We think you should be concerned about Oscar Wyatt's leading role in orchestrating this proxy contest and statements he has made to El Paso representatives about his plans after he takes control of El Paso, because we believe there are significant conflicts of interest," the company stated in its most recent letter to shareholders.

El Paso went on to note that Wyatt is the lead plaintiff in a shareholder lawsuit against the company, that he has defaulted on a $2.5 million payment for a loan guarantee from the company, that he owns an energy company that has attempted to purchase assets that compete with El Paso and that he has a checkered track record that includes a criminal guilty plea and a permanent injunction.

Of course, the company also takes some shots at Zilkha as well. Zilkha is formally leading the dissident fight and will regain his old board seat if he prevails.

"Remarkably, while criticizing the El Paso board for its decisions, Mr. Zilkha has entirely ignored the fact that he sat in the same board meetings and made the same decisions," the company stressed.

El Paso also belittled Stephen Chesebro, a dissident candidate who will become El Paso's next CEO if Zilkha's fight succeeds. The company pointed out that Chesebro has only limited experience as a corporate CEO and declared him the "wrong choice" for El Paso.

It also criticized the entire dissident slate for its lack of boardroom experience.

Coale chimed in with some concerns of her own. In her research note on Thursday, the Prudential analyst pointed out that one dissident candidate had co-managed the Enron Capital & Trade unit alongside Jeff Skilling. She went on to note that two other board members are linked to an energy company that filed for bankruptcy last year. And she suggested that Zilkha, the proxy leader himself, may be tarnished by a history of "taking action to reclaim unfruitful investments."

Even after some big sales after exiting El Paso's board last year, Zilkha owns nearly 9 million shares of the company's stock -- more than any other single individual.

"We believe there are pros and cons to both proxy filings," Coale concluded Thursday. But the "annual meeting should be a positive catalyst -- whatever the outcome -- by creating the certainty of who the next board members will be."

In the meantime, the campaign thunders on.

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