New skirmish over Southwest Gas merger

David Strow

Monday, Dec. 20, 1999 | 11:09 a.m.

Arizona's top utility regulator is accusing a fellow commissioner of working with a spurned company to derail ONEOK Inc.'s efforts to acquire Southwest Gas Corp. of Las Vegas.

Arizona Corporation Commissioner Jim Irvin -- himself the target of a federal investigation -- suggested in a recent letter that ACC Chairman Carl Kunasek and his aide were cooperating with Texas-based Southern Union Co. in a smear campaign against ONEOK. Kunasek has been ONEOK's most vocal critic on the ACC and is a bitter political rival of Irvin.

"It appears Southern has utilized its contacts and financial resources with lobbyists and others in Arizona, California and Nevada to influence the regulatory process in those states," Irvin wrote Dec. 9 to George Lindemann, chairman of Southern Union. "Moreover, some of the practices utilitized by Southern seem questionable and possibly illegal."

Southern Union offered $1.88 billion to acquire Southwest, but the offer was rejected by the company in favor of a $1.8 billion offer by ONEOK. Southwest said it took the ONEOK offer because of Southern Union's regulatory history and concerns over its financial structure.

Irvin has asked Southern Union produce all records of contact it had with Kunasek, Kunasek aide Jerry Porter and former ACC Commissioner Tony West over the past year. Irvin also asked for "all reimbursement records paid by Southern ... to Jerry Porter ... Carl Kunasek, Tony West ... or any employee of the ACC."

Porter fired off a response to Irvin, calling his allegations "ridiculous."

"Your continuing efforts to discredit people, myself and others, through your continued misrepresentations and false allegations ... will result in even greater scrutiny of your own personal dealings," Porter wrote. "In the end if you think I've done something wrong, I challenge you to put the evidence in the public record.

"Better yet, take it to law enforcement -- that's what I did."

Irvin has already been accused in a federal lawsuit of conspiring with ONEOK to subvert Southern Union's bid for Southwest through the regulatory process. These allegations have triggered a criminal investigation by the FBI and Arizona law enforcement officials and have kept Southwest's Arizona merger application in limbo since September.

In the Southern Union lawsuit, Irvin, former ACC secretary Jack Rose, ONEOK and Southwest Gas were accused of conspiring to influence the regulatory process in three states. The suit alleges the group tried to turn regulators and Southwest's board against the Southern Union offer and toward ONEOK.

"Although the allegations as to my conduct have, and will be wholly addressed in the proper forum, it appears that Southern's allegations are designed to delay the ACC from determining what is in the best public interest," Irvin wrote. "Specifically, Arizona consumers deserve a timely determination of the pending merger application, especially one which contains a merger credit of approximately $5.5 million for Arizona gas consumers."

Porter responded that Irvin had missed the point.

"As I see it the issue is now whether ONEOK has been truthful with this commission," Porter wrote. "It appears, however, that you seem to be of the opinion that the merger-related savings of $5.5 million can cure dishonesty with regulators and manipulation of the regulatory process."

ONEOK has also raised concerns that Kunasek has been in regular touch with Southern Union officials, though it has made no suggestions of illegal activity.

In a Dec. 8 letter to Kunasek, ONEOK said it was considering whether or not it would attempt to have him disqualified from voting on the Southwest-ONEOK merger.

"We are gravely concerned about several matters we have learned over the past few months," ONEOK attorney John Henry Rule wrote. "They include repeated contacts with Southern Union and numerous indications that you have already made a decision in this case."

Kunasek hasn't toned down his criticism of ONEOK. In fact, he has also started to question Southwest's behavior.

In a November letter to Southwest Gas Chief Executive Michael Maffie, Kunasek said he was "surprised and disappointed by (Southwest's) handling of this matter." He claimed that Southwest is behind an avalanche of letters to the ACC supporting the ONEOK merger, an effort he says is designed to "put pressure on this commission."

"I remain hopeful that (Southwest) does not feel that ONEOK's conduct in its dealings with Mr. Rose is appropriate, and further, I am especially hopeful (Southwest) did not play any role in what I have already said appears to be a coordinated effort to convince the Southwest board to reject the Southern Union offer due to purported regulatory deficiencies," Kunasek wrote. "Having said that, I have my doubts."

Kunasek said evidence indicates that Southwest executives knew that Southern Union was not as debt-laden as they'd claimed. Debt load was a key factor in Southwest's board rejecting the Southern Union offer.

Southwest has yet to formally respond to Kunasek's letter.

But ONEOK, responding to Kunasek's ongoing criticism, said in a Dec. 8 letter that it knew nothing of Rose's plans to set up a financing deal between ONEOK and Prudential Securities, his new employer.

Rose, who resigned from the ACC in December 1998, reached an agreement with Prudential in June that would provide him with a substantial commission if he could secure a role for Prudential in financing ONEOK's takeover of Southwest. Southern Union claims this deal motivated Rose to work against the Southern Union offer. Rose first began working as a consultant for Prudential in March.

ONEOK's letter repeated the company's stance that it knew nothing about a contract between Rose and Prudential -- and noted that no financing deal was ever signed between Prudential and ONEOK. ONEOK said it did consider Prudential to participate in a July debt offering, but only at the recommendation of lead underwriter PaineWebber, not because of Rose's involvement.

ONEOK's letter did acknowledge its chairman, Larry Brummett, had met with Rose as early as February, but said Brummett thought this meeting was a due diligence meeting conducted at Irvin's request. At the end of this meeting, Rose asked "in passing" whether Prudential could have an introductory meeting with ONEOK, the letter stated. Brummett forwarded this request to ONEOK executive Gene Dubay and ONEOK Chief Financial Officer Jim Kneale, and a meeting was scheduled for April 12.

At the time of the meeting, ONEOK said it first discovered Rose was working for Prudential. However, ONEOK claims it did not know Rose was entitled to a "finder's fee" for closing a financing package until July.

"Mr. Rose is well educated and appeared to ONEOK to have considerable knowledge regarding issues of concern to regulated industries," ONEOK wrote. "It was therefore no surprise to ONEOK when it learned in April 1999 that Mr. Rose had become a consultant to Prudential Securities Inc.

"ONEOK was completely surprised by the terms of the finder's fee contract ... ONEOK still does not understand why Prudential agreed to the terms ... which calls for compensation to Mr. Rose if Prudential were to serve as 'financial advisor' to ONEOK on the Southwest transaction. There was and is absolutely no possibility of Mr. Rose's earning the fee ... because PaineWebber was and is ONEOK's financial advisor on that transaction."

ONEOK said it discussed potential business opportunities in general, but never discussed a potential role in financing the Southwest deal.

"ONEOK saw nothing improprer about its discussions with Prudential," the letter says. "ONEOK knew it was not engaging in those discussions because of anything Mr. Rose had done in connection with the Southwest transaction."

The initial announcement that ONEOK and Southwest planned to merge occurred more than a year ago, but those plans cannot go forward unless two of the three members of the ACC approve the merger.

The ACC is expected to hold hearings on the merger in February, with a final decision expected in March 2000.

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