First suits filed over canceled SW Gas merger

ONEOK Inc. not only canceled its troubled $1.8 billion merger with Southwest Gas Corp. of Las Vegas on Friday -- it also sued Southwest in hopes of gaining a federal judge's blessing of the cancellation. Southwest retaliated today with a lawsuit of its own against ONEOK.

The events today and Friday were just the latest fireworks in a saga of a merger gone bad, and more controversy is expected this week. And at least one observer says Southwest, without a merger partner, may have to look at raising natural gas rates in order to finance its rapid growth.

ONEOK's lawsuit states that on Tuesday, ONEOK received a letter from Southwest Chief Executive Michael Maffie that "takes the position that ONEOK is in breach of the merger agreement and demands that ONEOK cure such alleged breach."

This letter was not supplied with the lawsuit, and no details are provided on Maffie's claim. ONEOK, however, denies Maffie's claim.

ONEOK's lawsuit does not ask for damages, but instead a declaration by a federal judge that it properly terminated its agreement with Southwest Gas.

Southwest Gas's lawsuit against ONEOK as well as spurned bidder Southern Union Co. filed today in U.S. District Court in Phoenix alleges fraud and breach of contract.

Market observers expected legal action.

"There are so many issues out there that it wouldn't surprise anybody to see more legal action," said Michael Garvey, analyst with CIBC World Markets.

On Friday, ONEOK Chairman and Chief Executive Larry Brummett said the merger was being called off because of "too much financial risk associated with Southwest Gas right now." Brummett specifically noted legal claims made by Austin, Texas-based Southern Union Co. against Southwest Gas.

Southern Union had topped ONEOK's initial December 1998 offer for Southwest Gas by $3.50 per share, or $80 million. But Southwest Gas rejected this offer, saying ONEOK was a financially stronger company.

Southern Union retaliated by filing a racketeering lawsuit against Southwest Gas and ONEOK in Arizona federal court in July. The lawsuit, which seeks more than $750 million in damages, accuses the companies of conspiring to manipulate Arizona regulators in an attempt to derail the Southern Union offer and assist the ONEOK offer.

These claims touched off an investigation by the FBI, the U.S. Attorney's office and Arizona officials against the companies, Arizona Corporation Commission member Jim Irvin and former ACC Executive Secretary Jack Rose. The claims also led to repeated delays in approval hearings in Arizona, as ACC Chairman Carl Kunasek began questioning ONEOK's actions.

"I'm definitely surprised (by ONEOK's announcement), given their insistence they would clear their name and substantiate for the commission that the allegations were untrue," said Jerry Porter, aide to Kunasek and one of ONEOK's most outspoken critics.

The criminal investigations are continuing.

For its part, Southern Union has no plans to throw its hat back into the ring.

"Southern Union has no intention of acquiring Southwest Gas," said Southern Union Treasurer George Yankowski. "We will continue to vigorously pursue our legal claims."

The broken merger sent Southwest Gas stock down today -- as of midday, Southwest Gas traded at $20.81, down $1.50.

ONEOK's decision caught Southwest Gas completely unaware -- spokesman Lew Phelps said the company received notification of the termination Friday afternoon, just a short time before the ONEOK press release announcing the decision was issued.

"ONEOK appears to have come to the conclusion that it could not obtain regulatory approval in Arizona, and that rather than running the risk of regulatory disapproval, it abrogated its commitments to Southwest," Maffie said in a statement.

Porter called ONEOK's decision to blame Southwest Gas for the failure of the merger "absurd."

"Although I think Southwest Gas may have some problems, the bulk of the problem rests with ONEOK," Porter said.

ONEOK officials could not be reached for comment.

Moving forward, both companies are expected to immediately enter into fresh merger talks with other companies. For Southwest Gas, the need to find a new partner is growing dire.

As early as 1996, Southwest Gas began pursuing merger possibilities. The company's proxy statement of June 30, 1999, filed with the Securities and Exchange Commission, states that "in order for the company to survive the anticipated restructured utility environment, the company would need to become larger and financially stronger or become part of a larger and financially stronger organization."

As of November, Southwest Gas reported about $900 million in long-term debt. That well exceeds its current market capitalization of $625 million -- and makes it difficult for the company to raise cash at favorable interest rates. Yet the company, which serves the fast-growing cities of Las Vegas, Phoenix and Tucson, has no choice but to continue rapidly expanding its infrastructure.

That raises the possibility that Southwest Gas will ask for rate hikes, Porter said.

"They can always try to raise more equity, but I don't know who's going to buy more equity in that company," Porter said. "They're spending more than $200 million a year on infrastructure, so clearly, they need to fund that in some way. It's a question whether they can fund that for any measurable period of time.

"Any effort to obtain a rate hike will be looked at very closely. They aren't going to be asking ratepayers to pay more because of past follies, I can tell you that."

A spokeswoman for the Public Utilities Commission of Nevada declined to comment on the possibility of rate hikes. Phelps said it's premature to speculate about rate hikes.

Garvey said Southwest Gas remains an attractive target, but said potential buyers might be deterred by what happened in Arizona with the ONEOK-Southwest Gas deal.

"Southwest serves a fast growth market, so I think you'd see interest in this company," Garvey said. "But people may hold off until everything out there is fully resolved.

"This fall, there will be elections (in Arizona). Politically, the commission may look quite a bit different in the fall, if you get some changes out there."

Southwest Gas must also deal with resolving its legal issues first, Porter said.

"Even though the merger application with ONEOK is gone, the potential legal liability remains," Porter said. "That's something we'll look more closely at. There are allegations of impropriety by Southwest Gas, and I think the commission should clear that up.

"I doubt there's another company in this country that conducts business like ONEOK conducts business. So I don't think (another merger partner) would have a problem."

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