Papers outline events stalling SW Gas merger

David Strow

Monday, Oct. 25, 1999 | 11:31 a.m.

Documents newly obtained by the Las Vegas Sun spell out in new and greater detail a regulatory scandal that has paralyzed an Oklahoma natural gas company's $1.8 billion deal to buy Southwest Gas Corp. of Las Vegas.

These papers provide ammunition to allegations of wrongdoing against a former utility regulator in Arizona, where Southwest does business.

The chief allegation against the official, Jack Rose, is that he improperly used his position on the Arizona Corporation Commission to assist his new career brokering financing for mergers involving companies he once helped to regulate -- including Southwest Gas.

Rose's critics say that in trying to win lucrative fees from Wall Street for setting up merger financing, he and an ally at the Arizona agency abused the utility regulatory systems in Arizona and Nevada.

This abuse, critics claim, helped Southwest's chosen merger partner, ONEOK Inc. of Tulsa, Okla. -- while hurting spurned Southwest suitor Southern Union Co. of Austin, Texas. ONEOK, in the meantime, is accused of lying to Arizona authorities about its role in the scandal -- charges ONEOK denies.

State officials in Arizona are hurling political bombs at each other over the role of Rose in the merger.

The FBI and the Maricopa County District Attorney's office in Phoenix are conducting a criminal investigation of the merger.

And one of America's most prestigious financial companies -- Prudential Securities Inc. -- is caught in the crossfire.

ONEOK's application to acquire Southwest stalled in Arizona following the filing of a racketeering lawsuit in Arizona federal court July 20. That lawsuit, brought by Southern Union, alleged that Southwest and ONEOK conspired with Arizona Commissioner Jim Irvin and Rose, the former ACC executive secretary, to derail Southern Union's $1.88 billion hostile bid for Southwest Gas through the regulatory process.

ACC Chairman Carl Kunasek is now attempting to find out if ONEOK engaged in negotiations with Rose while he was a consultant with Prudential for a role in financing the Southwest acquisition.

Southern Union has alleged that Rose, as part of his efforts to win this financing contract, engaged in efforts to derail the Southern Union bid. Rose is accused by the Texas company of presenting himself to regulators in Nevada and California as a representative of ACC -- well after his resignation from that body -- and pushing for approval of the ONEOK offer, a deal in which he allegedly had a financial interest. Irvin is alleged to have cooperated in these efforts, drawing the fire of his political rivals on the Arizona commission.

ONEOK Chairman and CEO Larry Brummett testified last month that ONEOK worked with Rose through March, and that it believed Rose was conducting due diligence on behalf of Irvin. ONEOK has repeatedly insisted that it did not negotiate a financing agreement for the Southwest transaction with Rose.

The Southwest-ONEOK merger was announced Dec. 14, 1998. Rose had resigned from the ACC on Dec. 31, 1998.

Documents presented to the ACC last week indicate Prudential thought differently than did ONEOK of Rose's involvement in the deal.

Documents from Prudential executives, obtained by the Sun, indicate the company believed Rose had won a co-managing role for Prudential in an $800 million financing package directly tied to the Southwest deal.

"PSI (Prudential) was introduced to OKE's (ONEOK's) senior management by Jack Rose, a consultant who advises businesses on utility regulatory matters and with whom PSI has formed a relationship," wrote Joseph Fichera, managing director of Prudential's business origination unit, in a July 19 report detailing the ONEOK offer. "Mr. Rose is advising the company (ONEOK) on its strategy in acquiring Southwest Gas and obtaining regulatory approvals in Arizona, Nevada and California."

Prudential documents show Rose was awarded a contract by Prudential on March 19, after promising to negotiate a financing deal related to the Southwest acquisition.

ONEOK said it was unaware of this contract or its terms until after July 19, the day it was publicly disclosed in a Southern Union lawsuit. In an Oct. 21 press statement, ONEOK said "Rose told a ONEOK official that he was considering a career in investment banking and was working on something with PSI" on March 22.

From March to July, Prudential executives believed Rose was brokering a deal to get the company a piece of the Southwest financing package. Rose said his main contact was Gene Dubay, president of ONEOK subsidiary Kansas Gas Service -- and the man ONEOK has designated as the new CEO of Southwest once its acquisition is complete.

One receipt provided by Rose to Prudential shows that Rose made a visit to Overland Park, Kan. -- the home city of Kansas Gas Services -- on Apr. 11-12. This receipt indicates Rose was an employee of the ACC -- though he had resigned from the Arizona agency four months earlier.

Later on the 12th, Prudential officials, including Director of Business Origination David Dubin and Fichera, met with ONEOK officials in Tulsa. ONEOK acknowledges this meeting took place, and that Rose attended as a Prudential consultant. ONEOK said the meeting was a general presentation, and said it declined to sign up with Prudential.

Fichera said that this meeting included Brummett and ONEOK CFO James Kneale. He told Prudential internal investigators that the meeting "focused on the full resources of the firm," but didn't indicate if the meeting focused specifically on Southwest Gas. Later, Fichera said he spoke "extensively" with Kneale as Prudential's "relationship manager."

The Prudential documents also indicate officials there were told by Rose that Dubay alone was overseeing negotiations regarding Southwest Gas, at least in the early stages -- and that Dubay was trying to keep it that way.

"(Rose) had anticipated that OKE would pay a substantial retainer to PSI and that he would receive a portion of that money," Dubin wrote in a May 17 e-mail. "Gene Dubay, however, advised (Rose) that incorporating upfront fees for PSI (and Rose) would require Dubay to get sign-offs from Jim Kneale, CFO, and from David Kyle, OKE's president and Dubay's potential rival as successor to Larry Brummit sic--, the ailing chairman. This would elevate the PSI deal out of Dubay's exclusive purview and entangle it in unrelated internal political debates.

"(Dubay) therefore recommended strongly that we NOT do this."

Updates provided by Rose to Prudential in May and June indicate he was in talks with Dubay about finding deals for ONEOK and Prudential based on connections made while Rose was with the ACC. Specifically, Rose said he'd talked to Dubay about acquiring Unisource Energy -- parent company of Tucson Electric Power -- and the natural gas holdings of Citizens Utilities, a national energy company with operations in rural Arizona. Rose also strongly pushed for contracts with telephone company US West, where Rose claimed strong connections from his ACC tenure.

Starting in mid-June, Prudential's documents indicate that direct talks began between ONEOK and Prudential. The documents indicate that some of these talks included a potential deal involving the Southwest Gas acquisition, contradicting ONEOK's statements to Arizona regulators.

On June 21, Dubin's calendar indicates he flew to Las Vegas for a meeting to discuss the ONEOK deal. The calendar indicates he and Fichera were scheduled to have dinner with Rose and Dubay. No notes were available on this meeting, but a Dubin e-mail indicated the planned topic of discussion was the ONEOK-Southwest deal. On June 28, Dubin wrote that Rose was entitled to a payment advance as a result of the meeting. One day later, Dubin held a conference call with Dubay to discuss a potential Citizens Utilities deal.

These talks culminated on July 13 with a call from ONEOK CFO Jim Kneale to Fichera. According to a Dubin e-mail, Kneale invited Prudential to be a co-manager on a ONEOK financing package.

"As you will recall, this is an element of the financing package for the Southwest Gas transaction and was promised to PaineWebber (ONEOK's lead investment bank) as part of its representation of OKE in the purchase of SWX," Dubin wrote.

ONEOK flatly denied this, saying that it had contracted with PaineWebber as its sole financial advisor on the Southwest deal in October 1998.

"The PSI documents ... filed with the ACC contain information regarding ONEOK that was apparently relayed to PSI by Rose," ONEOK's Oct. 21 press statement said. "Standing alone, the PSI documents are not accurate in this regard. ONEOK never told Rose or PSI that ONEOK would retain PSI as the 'sole' or 'lead' manager in any financing, including any Southwest Gas acquisition financing. In fact, ONEOK never told Rose or PSI that ONEOK would consider engaging PSI in any capacity in any Southwest Gas acquisition financing matter."

A draft Securities and Exchange Commission document, dated July 19, seems to reinforce ONEOK's story.

The document, for the sale of an unspecified amount of preferred stock, does list Prudential Securities as a co-managing underwriter, and does state that ONEOK was planning to acquire Southwest Gas. However, the document clearly states that ONEOK would use proceeds to fund the acquisition of Koch Midstream Enterprises, an Oklahoma natural gas processing company acquired on May 1 for $285 million. This was also indicated in the original draft, filed with the SEC six days later, in which ONEOK said it wanted to raise $300 million.

Despite the language in the prospectus spelling out the funds raised were for the Koch acquisition, Prudential apparently thought it was raising money for the Southwest Gas deal.

On July 19, Fichera informed Prudential's business review committee that the company had been awarded the co-managing role in a financing. This report stated that "this issue is one part of approximately $1 billion that (ONEOK) will raise to finance the purchase of Southwest Gas Corp."

"Prudential has been in discussions with the company about participating in these transactions," Fichera's report said.

The next day, the Wall Street Journal reported that Southern Union had filed its racketeering lawsuit. That day, Dubin said he received a call from Dubay, saying that he expected ONEOK's attorneys to insist that ONEOK-Prudential meetings should not include Rose. Also on that day, Prudential ordered its security department to initiate an investigation of Rose and his activities.

It is not known what Prudential's internal security report said.

However, on July 23, the Prudential committee decided not to move forward with the ONEOK financing package until more information was gathered. The committee also ordered a halt of all fee payments to Rose.

The Prudential documents do not contain information about Rose and Irvin's alleged efforts to turn regulators in other states against Southern Union. In a deposition, Judy Sheldrew, then chair of the Public Utilities Commission of Nevada, testified that Irvin and Rose lobbied her in an attempt to secure Nevada's support for the ONEOK bid. At this meeting, Sheldrew testified that Rose claimed to be working for the ACC. Southern Union has accused Irvin and Rose of making similar efforts in California.

Kunasek's office has been enraged that Irvin and Rose claimed to be working on behalf of the ACC, even though the commission had taken no position supporting the ONEOK bid. Kunasek and Irvin have been engaged in a vicious two-year feud at the ACC. Over that time, one of Irvin's closest political allies has been Rose.

As a result, Kunasek's office has leaped at the opportunity to prove its long-standing suspicions of impropriety by Irvin and his allies.

Jerry Porter, chief aide to Kunasek, believes the evidence provided is damning.

"The Prudential documents confirm that ONEOK has blatantly lied to the Arizona Corporation Commission," Porter said, pointing to ONEOK's statements that the firm did not discuss or offer Prudential any contracts relating to Southwest.

"The docket speaks for itself. They said they never had any discussions. That's belied by numerous internal documentation from Prudential."

Porter stressed that he was not speaking for Kunasek.

"Kunasek is in the process of deliberating the matter, and won't discuss it until after the vote," Porter said.

Porter has been ONEOK's most vocal critic at the ACC. After Porter told the Sun that he believed the Southwest merger "was dead" Oct. 14, ONEOK attorneys fired off a letter to Kunasek saying that Porter had allied himself with Southern Union lobbyists and attorneys and tainted the Arizona hearings process.

"We ask that you immediately and publicly reprimand Mr. Porter and disavow that you share the opinions he stated in his deposition and those reported in the Sun article," wrote ONEOK attorney John Henry Rule Oct. 18. "Your failure to do so will in our view be further and compelling proof that your mind is irrevocably made up regarding the ONEOK-Southwest Gas merger application."

Rule also accused Porter of using the controversy as grounds to "get Jim Irvin," saying that Porter reported to Southern Union lobbyist Paul Smith that Irvin was making trips to California that he found suspicious. When Southern Union filed its lawsuit, it accused Irvin of flying to San Francisco to try to persuade California regulators to support the ONEOK-Southwest merger.

"Commissioner Kunasek and I were concerned about (Irvin's) involvement and what was going on with respect to Southwest Gas and ONEOK, his trip to California ... so we were trying to figure it out," Porter testified in a deposition. "My view at that time that Southern Union was a spurned suitor, that they had a financial vested interest in figuring out what may have occurred ... and so I gave (Smith) the information with the expectation that he would pass it on."

ONEOK believes it has been unwittingly caught in the middle of the Kunasek-Irvin feud.

"This is a very frustrating process here," said ONEOK spokesman Weldon Watson. "It was obviously complicated by the problems that existed at the Arizona Corporation Commission before we got there. We want to move forward."

"There is animosity that exists between two commissioners there," Watson said. "It has definitely had an impact, and obviously, Southern Union has taken advantage of the opportunity."

Porter acknowledged that he is a long-time friend of Smith, but denied having any interest in assisting Southern Union.

"I have a friendship with (ONEOK's) lawyer, Mike Grant, as well," Porter said. "When the facts and evidence aren't on your side, you throw stones. ONEOK is throwing stones.

"This was motivated by our distrust of Irvin and Rose and their dealings on behalf of the Commission. This is going to be laid wide open. We shall forever remove all doubt about the veracity of Rose and Irvin."

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