Recriminations, investigations and large dollar lawsuits wereflying last week in the wake of the failed Oneok-Southwest Gasmerger.

In the latest development, Southwest filed lawsuits againstOneok, Inc. and Southern Union Co. following what it called”Oneok’s unjustified attempt to cancel the merger agreement betweenit and Southwest Gas.” Southwest is reportedly suing for $1.8billion in damages. A hearing is scheduled for Feb 4 at the ArizonaCorporation Commission, in which Oneok’s motion to close the mergerdocket will be considered.

The lawsuit, filed last week in the U.S. District Court for theDistrict of Arizona in Phoenix, seeks payment from Oneok for breachof contract, breach of the implied covenant of good faith and fairdealing, fraud in the inducement, and fraud related to its actionsconnected to the merger agreement and its cancellation of theagreement.

Southwest Gas also has sued Southern Union Co. seeking paymentfrom Southern Union for breach of contract, breach of the impliedcovenant of good faith and fair dealing, and interference with acontract, all related to Southern Union’s attempts to block theproposed Southwest Gas-Oneok combination after Southern Union’sunsolicited offer was rejected by Southwest Gas in favor of Oneok’soffer.

Meanwhile Arizona Corporation Commission Chairman Carl Kunasek,has sent a letter to Southwest, saying that the ACC is reviewingthe situation in search of any improprieties the utility may havecommitted. “The failed merger has brought hardship to SouthwestGas’ customers and shareholders and created additional andunnecessary conflict here at the commission,” Kunasek said in theletter. “A full review is in order.”

Oneok said earlier this month that its board of directors votedto terminate the merger. The termination decision was made pursuantto a provision in the merger agreement that permitted any party toterminate if certain conditions were not fulfilled by December 14,1999.

“We worked very hard to make this deal happen,” said Oneok CEOLarry Brummett, “but the bottom line is that even if we assume thatall regulatory approvals could be received in a timely manner,there is simply too much financial risk associated with SouthwestGas right now and we have a responsibility to protect ourshareholders from excessive risk.”

Brummett expressed financial concerns about Southwest, citingpending claims against Southwest in a lawsuit filed by SouthernUnion, an Austin, TX, natural gas distributor that made acompeting, unsuccessful bid to acquire Southwest. That lawsuit,filed in July 1999, subsequent to the signing of the mergeragreement, was recently highlighted by Arizona regulatory staff asa reason not to recommend approval of the merger.

The deal had already received unanimous regulatory approval inNevada and had been recommended by the regulatory staff of thePublic Utility Commission for approval in California.

Brummett said Oneok had been focused heavily on the SouthwestGas merger for the past 12 months, but that Southwest’s potentialmulti-million dollar liability was too much risk for Oneok toassume.

Southern Union, meanwhile, is continuing with its role as theattacker, saying it still is proceeding with plans to sue Southwestand others.

“In light of the ongoing investigations, we were not surprisedby Oneok’s announcement…that it is no longer pursuing a mergerwith Southwest Gas,” said Eric Herschmann, Southern Union’s trialcounsel. “Our position remains unchanged – we have no intention ofacquiring Southwest Gas, and we will vigorously continue to pursueour legal remedies against Southwest Gas and others. We areconfident that the disclosure of additional facts will furtherstrengthen Southern Union’s claims.” The lawsuit calls for $750million in damages.

Southern Union gained permission in May to join an existinglawsuit against Southwest Gas in a last-ditch attempt to overtakeOneok. The lawsuit originally accused Southwest Gas’ board ofdirectors of refusing to negotiate with Southern Union in goodfaith.

The lawsuit turned ugly soon thereafter. At one point Oneok evenfiled to hold Southern Union in contempt of court. However, Oneokand Southwest Gas were unable to stem Southern Union’s allegations,which grew from accusing Southwest Gas to involving ACCCommissioner Jim Irvin. This, in turn, prompted a criminalinvestigation by the FBI, the U.S. Attorney’s Office and theMaricopa County (AZ) Attorney’s Office. These investigations arestill ongoing.

Southwest accepted Oneok’s initial merger offer in November1998. The boards of both companies signed the deal after Oneoksweetened the offer from $866 million to $912 million. SouthernUnion had offered a hostile bid in February of $32/share, or $973million, and then increased its bid to $33.50/share, or over $1billion.

The combined company would have had 2.6 million customers infive states. The merger would have created the largest stand-alonegas distribution network in the U.S.

John Norris

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