New problem jeopardizes Southwest Gas merger

Arizona's top utilities regulator is now expressing serious doubts about allowing the completion of Southwest Gas Corp.'s merger with ONEOK Inc., concerns that may result in the delay of hearings in that state.

Carl Kunasek, chairman of the three-member Arizona Corporation Commission, stated in an Aug. 19 letter to Southern Union Co. attorneys that he is now questioning "whether the merger in in the public interest." He suggested that he may try to block hearings on the matter, now set to begin Sept. 1.

"In particular, I am concerned about allegations that reflect on the fitness of ONEOK to hold a Certificate of Convenience and Necessity in Arizona," Kunasek wrote in the letter to Eric Herschmann, attorney for Southern Union.

"The bottom line is, we're concerned that the regulatory process was abused because of the proxy battle for (Southwest)," said Jerry Porter, spokesman for Kunasek. "It all smells very funny. I don't know who can be comfortable voting on this with the information that's now out there."

Kunasek is referring to ongoing federal and state investigations into charges that former ACC executive secretary Jack Rose and current Commissioner Jim Irvin improperly tried to influence regulators in California and Nevada to vote against Southern Union's hostile takeover bid for Las Vegas-based Southwest. Those allegations are at the center of Southern Union's $750 million racketeering lawsuit against Southwest, ONEOK, Irvin and Rose.

Southwest's board accepted a $30 per share cash offer from ONEOK, valued at $1.8 billion, spurning Southern Union's rival bid of $33.50, or $1.88 billion. Southwest's shareholders approved the ONEOK offer earlier this month, but the deal cannot go forward without the approval of Arizona regulators.

To address Southern Union's allegations, Kunasek asked Southern Union to provide testimony in the Arizona hearings. He made a simultaneous request to Southwest and ONEOK to allow Southern Union to testify.

Southwest's and Southern Union's consent are necessary because Southern Union is currently under a federal restraining order preventing it from attempting to influence the merger process. Without the consent of the two companies, Southern Union could be held in contempt for testifying in Arizona.

"Absent such concurrence, I will oppose moving forward with the proposed transaction until such time as the Commission can fully evaluate ONEOK's fitness in light of the very serious allegations of impropriety that I too am concerned about," Kunasek wrote.

But Southwest refuses to allow Southern Union any leeway. Michael Maffie, president and chief executive of Southwest, responded to Kunasek that "the selection of a merger partner is a board room decision, not one to be made by regulators." He pointed out that a federal judge in Arizona had already questioned the validity of Southern Union's racketeering charges.

"In Southern Union the ACC is confronted with a rejected suitor engaged in a scorched earth campaign to undo this business deal at virtually any cost," Maffie wrote to Kunasek.

Southwest's attorneys instead suggested that the commission send a written request to Southern Union asking the company to produce all evidence of its charges against ONEOK and Southwest.

Because Southwest has not consented to allow its testimony, Southern Union will not testify for fear of violating the restraining order, said Southern Union Treasurer George Yankowski.

But Kunasek isn't totally satisfied with Southwest's proposal, and may still delay hearings.

"Obviously, we understand that Southern Union did not prevail in their efforts to get Southwest Gas, and we'll weigh their allegations in that light," Porter said. "But the information we possess personally, coupled with their statements ... that's just very troubling.

"We're trying to figure out another way to do this (instead of delaying the hearing), but it just doesn't seem to make a whole lot of sense to hold a hearing without this being addressed in a fair and equitable manner."

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