Range Resources Corp. and FirstEnergy Corp. last week announcedthe formation of a $1 billion exploration and production jointventure in the Appalachian Basin. Each company will own 50% of theyet-to-be-named venture. The deal is expected to close within 60days.

Once formed, the venture will have proved reserves of 450 Bcfe,of which roughly 90% will be natural gas, as well as 4,700 miles ofgas gathering and transportation lines and a leasehold position of980,000 gross acres.

For Range Resources, the move offers an opportunity to pay downdebt. The Texas-based energy company will contribute $300 millionin assets and $200 million in debt to the project. Half of theventure’s debt will be included as a non-recourse liability onRange’s balance sheet, decreasing its debt by $100 million.FirstEnergy declined to comment on its funding.

John Pinkerton, Range’s CEO, saw benefits through “significantcost savings, and the size and efficiency of the venture should bea catalyst for continued growth. In addition, the transactionrepresents a substantial step in deleveraging Range, reducing ourrecourse bank debt by more than 50%. While the transaction isexpected to reduce cash flow modestly in the short-term, it isprojected to be immediately accretive to earnings.”

This will be the first of a series of moves performed by Rangein order to reduce its debt, said Greg McMichael, an analyst withAG Edwards. “The issue for Range is that they need to putthemselves back into a position where they can grow. They made aseries of acquisitions in 1997 and 1998, then got in trouble whenenergy prices tanked. Now, they cannot solely focus on growingtheir asset base.”

McMichael said he liked the move, but it won’t have a deepimpact on investors. “The properties in question have long-lifepotential and will offer a steady cash flow. These are the goodthings. Unfortunately, wells in the Appalachian Basin tend to beof the slow and steady variety. They won’t produce the kind ofresults that will make an immediate impression on shareholders orbanks.”

FirstEnergy, a holding company for utilities such as OhioEdison, The Illuminating Company, Pennsylvania Power, and ToledoEdison, as well as an energy-related products and services company,said the venture will create its largest Appalachian asset. “Themove allows us to market our share of the energy produced at alow-cost, more efficient rate. Being a full service energyprovider, this opportunity was too good to pass up,” said MarkDurbin, a FirstEnergy spokesman.

John Norris

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