Southwest Gas, ONEOK urged to withdraw merger request

David Strow

Wednesday, Jan. 5, 2000 | 11:05 a.m.

The staff of the Arizona Corporation Commission is recommending against approval at this time of ONEOK Inc.'s proposed acquisition of Las Vegas-based Southwest Gas Corp., calling such a move "premature."

A staff report issued Tuesday cites concerns about ONEOK's safety record, customer service issues, ongoing lawsuits and "corporate conduct matters" as grounds for the negative recommendation. Deborah Scott, director of the staff's utilities division, recommended in her testimony that ONEOK and Southwest Gas should voluntarily withdraw their application.

However, the staff fell short of urging rejecting of the application outright. Should ONEOK withdraw the application, it could resubmit the application after lawsuits surrounding the merger were resolved, the staff recommended. The staff also suggested that the ACC could dismiss the application without prejudice, leaving the door open for ONEOK to reapply "when there is sufficient evidence to meet their affirmative burden of proof."

ONEOK, based in Tulsa, Okla., announced its intention to acquire Southwest Gas more than a year ago. After facing a rival offer from Texas-based Southern Union Co., ONEOK eventually offered $1.8 billion for the natural gas provider, an offer that was accepted by Southwest Gas shareholders.

Nevada regulators have approved the merger, but Southwest's Arizona application has become bogged down as allegations of questionable conduct by ONEOK surfaced in Arizona. Without Arizona's approval, the merger cannot be consummated.

The staff's report is not binding on the ACC, which is scheduled to begin hearings next month. But an ACC official said the report would have substantial weight in the ACC's final decision.

"There are times when the commission differs with staff, but in matters like this, the staff has very significant weight," said Jerry Porter, aide to ACC Chairman Carl Kunasek. Porter estimated the ACC generally votes with the staff's recommendation in about 99 percent of the cases considered.

A ONEOK spokesman said he was not prepared to say if ONEOK would withdraw its application, as recommended by the staff.

"We are not prepared to comment, other than to say we're disappointed in the delay," said Weldon Watson. "We just have to look at it and see what makes the most sense. We would like to see this completed at this time, but we have to consider all of these (issues) and look at them in depth."

A Southwest Gas spokesman could not be reached for comment.

An analyst following Southwest Gas downplayed the significance of the report, but still expressed concern about the merger's chances of success.

"Generally speaking, the commission is free to make decisions regardless of what the staff recommends or suggests," said Edward Jones & Co.'s Zach Wagner. "I don't see it as being a huge setback, although it's certainly not going to help the process.

"I still think (the merger) makes good business sense, but clearly there's a lot of political factors that have crept into the process that have made it less likely to be approved. I give it a 50-50 shot."

Investors appear to be getting more and more doubtful as well. Tuesday's news sent Southwest's stock down 69 cents, a 3 percent drop. Southwest now trades at $20.56, nearly $10 below ONEOK's offer price of $30.

"Twenty dollars is purely based on earnings," said CIBC World Markets analyst Michael Garvey, who follows ONEOK. "Clearly this throws a wrench into this deal and lowers the odds of it going through."

ONEOK's stock rose 19 cents, to $24.69.

One of the most volatile issues that has arisen in Arizona is the alleged involvement of current and former ACC officials on behalf of ONEOK.

In a lawsuit, Southern Union has accused ACC member Jim Irvin of conspiring with ONEOK to derail Southern Union's rival offer, which was $3.50 per share higher than ONEOK's. Former ACC Executive Secretary Jack Rose is also accused of working to help ONEOK, allegedly because he was trying to get a financing deal for Prudential Securities Inc., his new employer.

This lawsuit levels charges of racketeering against Irvin, Rose, ONEOK and Southwest. It demands damages of at least $750 million.

These allegations are currently the target of investigations by the FBI, the U.S. Attorney's office and Arizona law enforcement officials.

Deborah Scott, director of the staff's utilities division, said that because of "the allegations set forth in the civil litigation and the questionable conduct of ONEOK representatives ... Staff is unable to recommend approval of the merger at this time."

Scott said the staff was also influenced by the potential financial damage that could be suffered by ONEOK if it lost the Southern Union case, as well as "ONEOK's poor safety record as compared to that of Southwest Gas (and) numerous consumer service complaints" in Kansas and Oklahoma.

ONEOK, however, hotly disputes that there are problems in either state.

"You're talking about a company here (ONEOK) that has an exemplary customer service record and an exemplary safety record," Watson said. "The vast majority of complaints we see at the Oklahoma Corporation Commission are coming from people who don't pay their bills."