Wrongdoing probed in merger; Arizona again postpones deal

Allegations of wrongdoing are prompting the Arizona Corporation Commission to delay hearings for the second time on the merger of Southwest Gas Corp. of Las Vegas with ONEOK Inc.

The new delay arose Thursday as a second Arizona regulator expressed concerns over the involvement of a former employee of the Arizona Corporation Commission in the transaction.

In a letter to ONEOK Chairman and Chief Executive Larry Brummett, ACC Chairman Carl Kunasek said he is asking the commission's hearing officer to delay the scheduled Sept. 1 hearing 60 days "until the commission can gather more information."

Kunasek made the request after receiving a letter from Commissioner William Mundell on Thursday in which Mundell suggested the hearing be delayed.

"It is my belief that at the present time there are insufficient facts available upon which to base the important decision regarding the fitness of ONEOK to receive a Certificate of Convenience and Necessity (in Arizona)," Mundell wrote. "Therefore, I agree with you that the hearing on this matter currently scheduled for Sept. 1, 1999, should be postponed."

Southwest spokesman Lew Phelps this morning said the company was not yet prepared to comment on the delay.

A formal order delaying the hearing until November is expected today. Without the approval of the three-member ACC, the Southwest-ONEOK transaction cannot be consummated.

Arizona is Southwest's largest market, accounting for more than half of all revenues.

It is the second delay in the Southwest-ONEOK merger hearing. On July 22, commissioners voted to delay hearings until Sept. 1 after they learned Commissioner Jim Irvin was the target of federal and state criminal investigations into allegations that he tried to influence Southwest's board to vote for the ONEOK offer over that of rival company Southern Union Co. Southern Union first revealed those allegations in a racketeering lawsuit filed in July against Irvin, former ACC executive secretary Jack Rose, ONEOK and Southwest.

In a Tuesday letter to Kunasek, ONEOK blamed Southern Union as the source of its current difficulties before the Arizona Commission.

"ONEOK has now been asked several times to provide information to rebut charges based on innuendo and conjecture," wrote ONEOK attorney Michael Grant. "We suggest it is time to ask the source of the innuendo and conjecture, Southern Union, to provide promptly ... any reliable or credible evidence it has to support its accusations."

Southwest Chief Executive Michael Maffie echoed those charges.

"Southern Union is a spurned suitor and, in our opinion, is attempting to corrupt the commission process to stop a merger that is in the best interests of (Arizona) constituents," Maffie wrote in a letter to Kunasek.

But Jerry Porter, Kunasek's spokesman, said the charges are the result of the ACC's investigations, not Southern Union's. Kunasek has expressed concerns that ONEOK has "used the regulatory process to deny shareholders full and complete information about competing offers."

"Until we reach a comfort level that we have enough information to process what actually took place, it's unlikely that the hearing will go forward," Porter said.

Mundell didn't indicate which way he was leaning on the vote, but told Kunasek that there were "important concerns that need to be addressed by this commission in fulfillment of its duty to properly determine whether the proposed merger of these companies would serve the public interest."

Zach Wagner, a Southwest analyst with Edward Jones, doesn't believe the Arizona delay jeopardizes the deal, but expressed surprise that regulators decided to hold off for 60 days.

"Most of us expected a couple of weeks' delay, not 60 days," Wagner said. "My advice to shareholders is to just be patient. I think ONEOK will win out in the end, it just may take longer than originally expected."

Rose and Irvin's involvement in the negotiations between Southwest and ONEOK is the specific target of the ACC inquiries. Rose resigned from the commission on Dec. 31, 1998.

In his conversations with Southwest and ONEOK, Kunasek said he was told that Rose had received a contract with Prudential Securities that would have resulted in substantial fees if he could win business from the ONEOK-Southwest transaction.

Kunasek also noted that court records show Rose made more than 200 phone calls to ONEOK, Southwest Gas, Prudential and the home of Gene Dubay, the ONEOK executive named to take over Southwest after the merger's completion. ONEOK said it only learned about Rose's contract with Prudential on July 20, and denied that it planned to use Prudential in financing the Southwest acquisition.

Kunasek also said that he was told by ONEOK executives that Irvin introduced Rose to ONEOK and Southwest officials, telling them that Rose was "the due diligence guy" for the ACC on the transaction. This meeting occurred 10 days after Rose's resignation from the ACC.

Grant acknowledged that ONEOK was told by Irvin in January that Rose was handling due diligence for Irvin, but said the company was merely cooperating with Irvin's request in working with Rose. The company flatly denies making any payments to Rose or collaborating with Irvin to quash Southern Union's efforts to acquire Southwest.

Irvin later sent a letter to the Southwest board voicing concerns over a potential Southwest-Southern Union combination, and is alleged to have tried to lobby California and Nevada officials to sign the letter as well. Irvin also met personally with Nevada Gov. Kenny Guinn, a meeting Southern Union says was to convince Guinn to voice his concerns about Southern Union. Guinn, the former chief executive of Southwest, has acknowledged meeting with Irvin but denies he was asked to influence the board.

Grant told Kunasek that ONEOK thought it wasn't reasonable "to conclude that (Irvin's) letter had any material influence on Southwest's board. ... Furthermore, ONEOK is not aware of anything wrongful about Commissioner Irvin's expressing honestly held believes about Southern Union to the CPUC or PUCN, sister bodies that would have to consider the ONEOK/Southwest application."

To forward the investigation, Kunasek asked ONEOK and Southwest to allow Southern Union to intervene in hearings, warning that he would probably delay the hearing if the request was not met. Kunasek believes commissioners need to be able to cross-examine Southern Union witnesses to help their investigation.

Both companies rejected this request. In his response to Kunasek's request, Maffie ripped Southern Union as a "rejected suitor engaged in a scorched-earth campaign to undo this business deal at any cost," and argued that Southern Union would simply use the hearing as an opportunity to try to slow or stop the deal.

Southwest rejected Southern Union's $32 per share offer in March, accepting instead ONEOK's offer of $30. Southern Union later increased its offer to $33.50.

Ironically, Southwest said part of the reason it was accepting ONEOK's offer was because of concerns that Southern Union would be unable to win regulatory approvals on a timely basis.

"The natural gas business is very seasonal, and most of your money is made during the winter months," Wagner said. "With any kind of merger in this industry, it's best to have it complete by the (peak) season.

"In your area, because it doesn't get that cold, there's not quite the urgency there would be if this utility was in Michigan or New York. Clearly it is an advantage to get the deal completed before the winter begins. (ONEOK) may still be able to do that."

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