Oneok Inc. and Southwest Gas Corp. agreed to a merger that wouldform the largest stand-alone gas distribution company in the UnitedStates, serving 2.6 million customers in five states. ColumbiaEnergy would be No. 2 to the combined Oneok and Southwest.

Oneok agreed to pay $28.50/share for Southwest Gas common stockoutstanding, valuing Southwest at about $1.8 billion, includingassumed debt. The transaction is expected to be accretive in thefirst full year of operations. Oneok will be the primary gasdistribution company in Arizona, Kansas, Nevada and Oklahoma andwill also have a strong presence in California.

Larry Brummett, CEO of Oneok, said, “Oneok has demonstrated itsability to profitably merge gas distribution operations whileenhancing service to customers and opportunities for employees. Weare confident this merger will create value for our shareholdersthrough increased earnings growth in a deregulating energymarketplace.

“We believe the expertise of Oneok as a fully integrated gasdistribution company with gas production, marketing and processingwill create new opportunities at Southwest Gas. Southwest Gasserves two of the fastest-growing states in the country-Arizona andNevada-and we look forward to profitably developing this growthwith our new partner.”

Oneok has not identified any cost savings in any particular areaof the merger, said Oneok COO David Kyle. “We project the deal tobe accretive absent any kind of efficiencies.” As for adding moreregulated assets, he said the company takes deals as they come,whether they be for regulated or non-regulated assets. “Our growthboth on the non-regulated and regulated side is a function of dealflow. It’s clear that this opportunity presented itself, and weintend to pursue it and bring it to conclusion, but additionally,as unregulated deals present themselves, we will pursue them also.”

Michael Maffie, CEO of Southwest Gas said, “The new company willbe solid financially with strong cash flow to enhance growthopportunities in the rapidly expanding Southwest Gas serviceterritories and will minimize regulated business risks with thediversified geographic exposure of five states.”

The terms of the transaction call for three Southwest Gas boardmembers to join Oneok’s board filling a current vacancy and twopositions that will be vacated due to retirements in 1999.Southwest Gas will operate as a division of Oneok Inc. and willretain its name in the local markets it serves. Brummett said, “Themerger is not expected to result in employee layoffs, and we wouldexpect future employee adjustments to be the result of attritionand/or voluntary separation.”

Southwest stock prices soared 9.7%, or $2.31, yesterday to$26.06/share, while Oneok stock prices inched downward 1% to$33.19/share.

The transaction is subject to shareholder and regulatoryapprovals. It is expected to be accounted for using the purchasemethod and is expected to close during the fall of 1999. SouthwestGas provides gas to about 1.2 million customers in Arizona, Nevadaand California.

“From our perspective the reason [for the merger] now is thereare two great plusses here,” said Southwest spokesman RogerBuehrer. “Southwest gas is the fastest growing utility in thecountry. We’ve been growing at an excess of 5% a year for the lastseveral years, and that’s double the national average for gasutilities. And [Oneok brings] an infusion of cash and financialstrength to the company, and this just made good sense. Two majorresources, growth and money, make a really strong company.”

Oneok was formed in 1906 as Oklahoma Natural Gas Co. Regulatedoperations are its core business and are conducted mainly throughOklahoma Natural Gas. They represented roughly 78% of operatingincome before tax in the 1997 fiscal year. Non-regulated businessesare conducted under four separate companies: Oneok Gas Marketing,Oneok Producer Services, Oneok Gas Processing, and OneokProduction. These non-regulated operations grew from 5 to 22% ofoperating income before tax in four years. Last year Oneokcompleted a strategic alliance with Western Resources that combinedthe gas assets of both companies into Oneok. The $660 milliontransaction moved Oneok into the regional midwestern gas arena andmade Oneok the nation’s eighth largest LDC, serving almost 1.4million customers in Kansas and Oklahoma.

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