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KN Energy to Acquire Oxy's MidCon Unit

Energy: $3.49-billion deal would help the oil company pay for purchase of the Elk Hills Naval Petroleum Reserve.


Occidental Petroleum Corp. is selling its MidCon Corp. natural gas pipeline network, one of the nation's largest, to KN Energy Inc. in a $3.49-billion cash transaction.

Oxy put the subsidiary on the block in October to help pay for its $3.65-billion purchase of the Elk Hills Naval Petroleum Reserve from the U.S. government. On Thursday, it said it would take a $750-million charge during its fourth quarter to complete the transaction after classifying MidCon as a discontinued operation.

The Westwood-based oil company did not offer any further explanation for the charge, which would reduce earnings, other than saying it reflects the difference between the sales price and MidCon's book value. Nor did the company describe the bidding. After the October announcement, some analysts expected a utility to end up with MidCon, continuing a trend toward electricity-gas company matchups.

Based in Lombard, Ill., MidCon is among the nation's top natural gas systems, ranking with Enron Corp. and Coastal Corp. MidCon delivers about 2.3 trillion cubic feet of gas a year--or 10% of the total consumed by the nation--over about 15,800 miles of pipeline.

MidCon sales last year were $2.6 billion, or 25% of Oxy's total revenue. But it was an even more important contributor to Oxy's profit with earnings of $296 million, or about 44% of Oxy's total $668 million last year.

Oxy said in October that it would sell the unit to pay for Elk Hills as part of its strategy to focus on oil and gas exploration and production, and on chemicals. The restructuring has been underway since the death in 1990 of legendary Chairman Armand Hammer, who bought far-flung businesses.

Although the pipeline has been a dull but steady cash cow, Oxy sees Elk Hills, in southern Kern County, with a billion barrels of crude oil reserves, as offering greater potential for profit growth. The field encompasses 47,000 acres and 1,000 oil wells and produces about 60,000 barrels of crude daily.

"This sale is a key step in the transformation of Occidental into a simpler and more profitable company," Chairman Ray R. Irani said in a statement.

KN Energy is an integrated, natural gas gathering and transportation company based in Lakewood, Colo., that has grown rapidly in recent years through a succession of acquisitions. It controls more than 8,000 miles of pipeline.

The MidCon transaction, which is expected to close early next year, also calls for KN to assume $500 million in MidCon liabilities. MidCon's grid extends from natural gas fields in Texas and the Midwest to big industrial and agricultural users in the Great Plains and Chicago areas.

"This is a strategic extension of our geographic assets and is consistent with other acquisitions we have made," KN Chairman Larry Hall said in a statement. The addition of MidCon will give KN operations in 15 states and annual revenue of $4.7 billion. After the acquisition, its network will transport or sell 17% of all natural gas in the United States.

The fate of MidCon's 1,700 employees was not immediately clear.

The proposed sale, which is subject to a federal antitrust review, was announced after the close of stock markets. In Thursday trading on the New York Stock Exchange, KN shares rose $1.56 to $48.50 and Oxy shares fell 25 cents to $29.25.

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