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Oneok-Southwest Merger Creates Largest U.S. Distributor

Oneok-Southwest Merger Creates Largest U.S. Distributor

The combination announced last week of Oneok Inc. and Southwest Gas Corp. would be the largest stand-alone gas distributor in the United States, with Columbia Energy in second place, and the fourth largest when gas and electric combination utilities are considered. The combined company would have 2.6 million customers in five states and would capitalize on Southwest's growth potential and Oneok's strong balance sheet.

Last week, Oneok agreed to pay $28.50/share for Southwest Gas common stock outstanding, valuing Southwest at about $1.8 billion, including assumed debt. The transaction is expected to be accretive in the first full year of operations. Oneok would be the primary gas distribution company in Arizona, Kansas, Nevada and Oklahoma and will also have a strong presence in California. Southwest Gas currently provides gas to about 1.2 million customers in Arizona, Nevada and California.

PaineWebber's Ron Barone called the deal a "win-win" and noted Oneok would get Southwest for a price about 1.9 times its book value when similar transactions have been priced at about 2.5 times book value. In explaining the seemingly low price, Barone noted some leverage to Southwest's balance sheet and the fact that Southwest's earnings next year are expected to be about $1.25/share, down from $1.70/share projected for the current year. Last winter saw colder than normal temperatures in Southwest's service territory, something not expected to happen again this winter, Barone explained.

Larry Brummett, CEO of Oneok, said, "We believe the expertise of Oneok as a fully integrated gas distribution company with gas production, marketing and processing will create new opportunities at Southwest Gas. Southwest Gas serves two of the fastest-growing states in the country - Arizona and Nevada - and we look forward to profitably developing this growth with our new partner."

Oneok has not identified any cost savings in any particular area of the merger, said Oneok COO David Kyle. "We project the deal to be accretive absent any kind of efficiencies." As for adding more regulated assets, he said the company takes deals as they come, whether they be for regulated or non-regulated assets.

Michael Maffie, CEO of Southwest Gas said, "The new company will be solid financially with strong cash flow to enhance growth opportunities in the rapidly expanding Southwest Gas service territories and will minimize regulated business risks with the diversified geographic exposure of five states."

The terms of the deal call for three Southwest Gas board members to join Oneok's board, filling a current vacancy and two positions that will be vacated due to retirements in 1999. Southwest Gas will operate as a division of Oneok Inc. and will retain its name in the local markets it serves. Brummett said, "The merger is not expected to result in employee layoffs, and we would expect future employee adjustments to be the result of attrition and/or voluntary separation."

Southwest stock prices soared 9.7%, or $2.31 last Tuesday, when the deal was announced, to $26.06/share, while Oneok stock prices inched downward 1% to $33.19/share. The transaction is subject to shareholder and regulatory approvals. It is expected to be accounted for using the purchase method and is expected to close during the fall of 1999.

"From our perspective the reason [for the merger] now is there are two great plusses here," said Southwest spokesman Roger Buehrer. "Southwest Gas is the fastest growing utility in the country. We've been growing at an excess of 5% a year for the last several years, and that's double the national average for gas utilities. And [Oneok brings] an infusion of cash and financial strength to the company, and this just made good sense. Two major resources, growth and money, make a really strong company."

Oneok's regulated operations are conducted mainly through Oklahoma Natural Gas and represented roughly 78% of operating income before tax in the 1997 fiscal year. Last year Oneok completed a strategic alliance with Western Resources, combining the gas assets of both companies into Oneok. The $660 million transaction made Oneok the nation's eighth largest LDC, serving almost 1.4 million customers in Kansas and Oklahoma.

One day before announcing the Southwest merger, Oneok said it had made a strategic alliance with Magnum Hunter Resources Inc. to boost gas production and development opportunities for both companies. Oneok will buy $50 million of Magnum Hunter convertible preferred stock, becoming a 31% equity owner. Oneok will acquire $10 million of Magnum Hunter's pending acquisition of Spirit 76, including reserves and a gathering system.

The Southwest transaction is not expected to slow down Oneok in making similar deals, Brummett said. "We have a number of deals in the works even as we talk," he said during an analyst conference call last week. "We have been continuously announcing the deals, and again our criteria there is the same as it is on the regulated side, that those deals must be accretive, and that makes it difficult. It makes us work harder to find those kinds of deals. It's a very good time to be buying if you have faith and confidence in the long-term prospects of this business, as we do."

Joe Fisher, Houston

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