Australian Gas to split in two

Australian Gas Light, the nation's biggest energy utility, will spin off its transmission business to focus on expansion, including further plant acquisitions.

The purchase of Southern Hydro for A$1.43 billion ($1.53 billion) from New Zealand's Meridian Energy is part of a strategy of buying plants to meet peak power demand, Sydney-based Australian Gas said. The company's shares rose to a record.

Chairman Mark Johnson said the energy business, which will retain the AGL brand name, would have more than A$2 billion to fund expansion to help boost earnings growth. Forecast 2.1 per cent a year growth in energy demand until 2010 is prompting utilities and banks to sell shares in transmission or networks business as investors seek predictable incomes.

"Southern Hydro looks steep in terms of the purchase price, but the demerger will be the bigger theme today, which will hopefully override any concerns that the market will have on this acquisition," said Jason Teh, who helps manage about US$3.7 billion ($5.3 billion) at Investors Mutual, which holds AGL shares.

"There will be a perception that a demerger will unlock some value, so I would have thought that's a positive," said Jason Mabee, a utilities analyst at ABN Amro Australia.

"There's been a view that there was hidden value in AGL's networks businesses that wasn't being factored in because of the conglomerate discount."

Shares in Australian Gas Light rose as much as 84Ac, or 5.8 per cent, to A$15.34 on the Australian Stock Exchange. Before yesterday, they had risen 9.7 per cent so far this year, lagging the 13.4 per cent gain in the S&P/ASX's benchmark utilities index. The company has a market value of A$6.9 billion.

AGL's energy business will include retailing, Southern Hydro, power generation and other units. The infrastructure company will include the power and gas distribution business, the Agility infrastructure management unit and stakes in pipeline and distribution companies.

"Now is the right time to proceed with the demerger of AGL," managing director Greg Martin said.

"Following the acquisition of hydro-electricity generator Southern Hydro, each business has the critical mass required to successfully operate on a stand-alone basis."

Expansion opportunities for the transmission business include the proposed gas pipeline between Papua New Guinea and Australia, in which AGL has a stake, Martin, 46, said. The energy business would seek growth in power generation and gas supply, he said.

AGL's existing shareholders will hold one share in each of the energy and infrastructure businesses for each share held. Shares in both companies will trade on the Australian Stock Exchange, with AGL Energy shares due to list in April.

Martin, who has been chief executive for five years, will leave the company while new chief executives will be appointed to both companies.

Johnson will be the chairman of the new energy business, Graham Reaney will be chairman of the infrastructure unit.

- BLOOMBERG