Range Resources said it will become the Appalachian Basin’s third largest producer by acquiring the remaining 50% of Great Lakes Energy Partners LLC that it does not currently own from Akron, OH-based FirstEnergy Corp. It will pay $200 million in cash plus the assumption of $68 million in debt and will retire $22 million of oil and gas commodity hedges.

Range estimates that it is acquiring 255 Bcfe of net proved reserves in the transaction — Great Lakes has 500 Bcfe of reserves. The purchase will add 35 MMcfe/d to Range’s production, increase its leasehold position by 664,000 net acres and bring it full control of 5,100 miles of gas gathering systems, having a throughput of more than 100 MMcfe/d.

“We are purchasing a substantial volume of high-margin, long-life natural gas reserves in properties we know exceedingly well,” said Range President John H. Pinkerton. “Furthermore, there are significant opportunities to enhance the value of these assets given our sizeable operating base in the basin and extensive leasehold position.

“The properties’ substantial current production and high margins will immediately benefit our shareholders,” he added. “Importantly, the transaction greatly simplifies our corporate structure, allowing us to focus our energies on executing our balanced strategy of growth through the drill bit and complementary acquisitions.”

The company still has a geographically diversified asset base with several key areas of operational focus: East Texas, West Texas, Midcontinent, Gulf Coast and Appalachian regions. However, the acquisition will make the Appalachian Basin its largest core area of operation. It is expected to increase the Fort Worth-based producer’s proved reserves by 30% to over 900 Bcfe, increase its production by 20% to more than 210 MMcfe/d and lengthen its reserve life index 17% to 13 years.

Range and FirstEnergy formed the Great Lakes joint venture in 1999 to hold their respective Appalachian oil and gas reserves and pipeline assets. FirstEnergy said the sale will generate net after-tax cash proceeds of $160 million, which will be used to accelerate the company’s debt reduction. However, it will produce a one-time reduction to second quarter 2004 earnings of $0.02 per share, including the benefits of prior tax capital losses, which will offset the capital gain from the sale.

“This transaction is consistent with our strategy to focus on our core electric business, which is based on serving 4.4 million customers through our seven electric utility operating companies in Ohio, Pennsylvania and New Jersey,” said FirstEnergy CEO Anthony J. Alexander.

According to the deal, FirstEnergy also will be granted the right to participate for up to a 40% interest in future wells in Ohio drilled below the Clinton/Medina formation.

Range said the acquisition cost equates to $1.09/Mcfe of proved reserves after the allocation of $12 million of the purchase price to undeveloped leasehold and gathering systems. Range also said it believes the properties have significant additional reserve potential in and around existing fields, from newly initiated shallow drilling plays on 150,000 acres of recently acquired leasehold, the sizeable potential of the deeper formations, as well as coal bed methane projects.

Due to a close proximity to premium markets in the Midwest and Northeast, production from the assets currently enjoys a premium of $0.35/Mcf over the Henry Hub. With operating costs (including production taxes) of $0.83/Mcfe, the properties generate high margins. Range also predicted administrative efficiencies, reducing general and administrative costs per unit of production 15% by year-end.

Range raised its production growth target for the second half of 2004 to 32-34% as a result of the deal. A preliminary production growth target of 12-15% has been set for 2005, assuming no further acquisitions. The company’s 2004 capital expenditure budget will increase by 10% to $149 million. At current commodity prices, the revised budget will be funded with 70% of projected cash flow.

The transaction is expected to close by June 30 and is expected to be financed through a combination of bank borrowings and the offering of equity and/or subordinated debt.

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