El Paso ( EP) is bracing for judgment day.

Tuesday in Houston, managers at the disgraced energy giant will learn whether they'll be held accountable once and for all after losing billions of dollars in pursuit of a risky strategy that failed along with Enron. Having paid an enormous price for that mistake, El Paso investors now hold all the power. They can forgive their leaders by re-electing them. Or they can throw the book at them and kick them out the door.

El Paso incumbents claim they have changed their ways and are headed down the right path. But a powerful group of dissidents, seeking to oust the current CEO and entire board, warns against letting the old guard off with the equivalent of a slap on the wrist.

"If El Paso's management slate is re-elected, there is significant risk that, without the steady pressure we have been applying, they would revert to their old ways," Selim Zilkha, the big shareholder leading the proxy fight, said in a recent letter to investors. That is "a risk that El Paso shareholders simply can't afford."

El Paso has flooded the news wires with even more frantic warnings of its own. In recent days, the company has repeatedly claimed that Zilkha's team will derail a solid turnaround plan and replace it with an "uninformed and unworkable" strategy that's based on little more than "alchemy."

So far, the dissidents have snagged key support from influential groups such as the proxy adviser Institutional Shareholder Services and the big labor organizer AFL-CIO. But El Paso has gone on to win the vote of Brandes Investment Partners -- its third-largest shareholder -- indicating that the result of the vote is far from a foregone conclusion.

"I'd say it's even odds right now," said John Olson, a veteran energy analyst at Sanders Morris Harris who's a longtime holder of El Paso shares. "I don't think anybody knows" how the contest will end.

Racking Up Points

By now, the dissidents already have won the easy half of the battle.

They proved, even to the satisfaction of El Paso supporters, that the company's leadership had failed. Of course, they had no shortage of evidence.

With the blessing of a board that's still largely intact, El Paso embraced a number of Enron-like practices -- including massive borrowing, off balance sheet financing and mark-to-market accounting -- during its doomed foray into energy trading. It also wrote huge paychecks to the executives who led that disaster. And until Zilkha launched his proxy fight, the company seemed bent on retaining the very leaders who already had presided over the destruction of more than $30 billion in shareholder wealth.

Both ISS and the AFL-CIO pointed to these failures last week when endorsing Zilkha's bid.

"While external incidents added to the company's woes, the board carries ultimate responsibility for the flawed decisions and failure to exercise financial and strategic discipline," ISS stated. "A 'clean slate' with a fresh start, unencumbered by the legacy of past mistakes, can help move the company forward."

If anything, the AFL-CIO came down even harder on the incumbents. After hosting rare back-to-back presentations by the competing sides last month, the powerful labor group quickly sided with the dissidents and promised to use its own influence to push others -- even outside pension funds -- to follow its lead. The labor agency felt reassured by Stephen Chesebro, the dissidents' choice for CEO, and applauded the entire dissident slate for their "industry experience ... credibility and integrity."

In contrast, the AFL-CIO cracked down on the incumbent team for its failure to hire a new CEO, provide clear debt figures and promise "basic executive compensation reforms."

"In addition," the AFL-CIO stated, "we believe that many of the board's recent reforms, including those to replace the former CEO and restructure the board, were only made in response to outside pressure from the independents. Such reactive decision-making reflects the same disturbing lack of independent thinking that previously led to the board's ill-fated decisions to follow Enron."

Many powerful El Paso shareholders heard the same presentations that led to the labor group's decisive conclusion. Following the meeting, the AFL-CIO estimated that institutions representing 42% of El Paso's shares had listened in on the unusual forum.

But another forum -- this one sponsored by the dissidents themselves -- has since pushed some votes in the opposite direction.

Using Enemy Fire

During the meeting itself, hosted by Zilkha's team last week in New York, El Paso's stock moved higher.

Shares of El Paso jumped 7% as the dissidents laid out a strategy that relied on keeping, rather than selling, some profitable assets. To satisfy El Paso's huge debt load -- and ultimately rebuild its balance sheet -- the dissident group pledged to sell only noncore assets and slash capital expenditures by roughly one-half until the company could afford to spend more. It also vowed to review a huge $1.7 billion settlement that El Paso had negotiated with California to put market manipulation allegations -- the company's biggest threat -- behind it.

Suddenly, the incumbents had powerful new artillery.

"After refusing to spell out a detailed plan for El Paso for almost four months on the grounds that they lacked the information to do so, the dissidents have belatedly decided to offer up their own so-called 'business plan,'" the company said last week. "We believe they were right the first time; they do not have enough knowledge about El Paso to develop a detailed plan."

Before, El Paso had relied on arguments that largely failed. First, the company warned that Zilkha's efforts could trigger expensive "change-of-control" parachutes -- a tactic that backfired as self-serving. Then it settled for general warnings about turnaround disruptions, as well as personal attacks against some in the dissident camp, in an effort to get its point across.

But the dissidents' own plan, viewed by some as unrealistic and even dangerous, gave the incumbents their first real boost since the proxy war began.

"We fail to understand how this plan is possible," Glass Lewis, an upstart proxy advising firm, said recently when endorsing the incumbents instead.

Prudential analyst Carol Coale -- while more hopeful -- expressed similar concerns.

"We believe that Zilkha's is a better fundamental strategy," Coale recently wrote. But "we are concerned that the Zilkha plan may require ... time that El Paso may not have."

Most troubling, to some, was the mere thought that Zilkha's team might tamper with the big California settlement whose possible enactment has brought investors so much relief. El Paso pounced on this "implicit threat" almost the instant it heard it.

Winning the West

By now, El Paso has repeatedly warned that Zilkha's team might derail negotiations that so far have spared the company from doom.

Rather than attempt to prove its innocence -- and risk the company's future -- El Paso decided earlier this year to pony up $1.7 billion to settle price-manipulation charges and put the California scandal behind it. The market applauded with relief. El Paso shares, which sank to a record low of $3.33 before the settlement, have tripled since the California deal was inked.

But the dissidents, who take credit for much of that rally, have yet to agree that the settlement is fair. And to the horror of some, they have pledged to review the deal -- still subject to change -- before they sign off on it.

With support from outsiders, El Paso has warned of dire consequences.

"El Paso believes the dissidents' implicit threat to back away from the settlement if their slate is elected is utterly opposed to the best interests of El Paso shareholders and demonstrates a fundamental lack of understanding of this critical issue," the company stated. "El Paso continues to believe -- and we believe that analysts and shareholders agree -- that this settlement is a positive for all stakeholders in El Paso and will put this issue behind us, allowing management to focus on the company's future."

But the dissidents have come roaring back. The group insists that it plans to review -- rather than cancel -- the California settlement. And it accuses El Paso incumbents of resorting to "scare tactics" in a desperate attempt to hang on.

"While we are outraged that El Paso's actions led it to believe it had to pay $1.7 billion to settle the California matter, we will not interfere with anything that is in the best interests of shareholders," Zilkha said. "Far from being a derailment of the proposed settlement, this is our demand for transparency. It is time for this board to come clean."

Taking Final Stabs

Industry veteran Karl Miller believes a new board would be obliged to evaluate a transaction of that magnitude. He's also convinced that new leadership -- untainted by fraud allegations -- would be far better positioned to hammer out more favorable terms with California.

"That is a tremendous penalty for a company that says it has done no wrong," said Miller, who now runs an energy-related acquisition firm.

From the beginning, Miller -- a former El Paso executive himself -- has thrown his support behind the dissident team. He is looking for El Paso, with its proactive base of shareholders, to lead a revolution for reform throughout the entire sector.

"This is a huge benchmark case," Miller said. "This is the only company that has active shareholders who understand the business and are trying to turn the company around.

"If you can't change control of this company," he concluded, "there's no hope for the rest."

Miller predicts the race will be close, decided by as little as 1% of the vote. Olson isn't even certain the battle will conclude with El Paso's shareholder meeting on Tuesday. Rather, the fight -- which Fortune magazine recently dubbed "one of the biggest proxy battles in a decade" -- may wind up resembling the closest presidential election in recent U.S. history.

"If it's close ... there may be a demand for a recount," Olson said. "And it could drag on for another couple of weeks."

Meanwhile, both sides continue to solicit votes -- courting even the small retail investors who are generally ignored outside Internet chatrooms. Everyone involved, including El Paso's top executive, seems to recognize that this all-or-nothing contest could be decided by a hair.

"Your vote is critical," El Paso CEO Ronald Kuehn stressed on Monday, "no matter how many shares you own."

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