AGL Energy Ltd. (AGK.AU) said Wednesday it won't exercise an option to acquire A$1 billion worth of coal seam gas and power generation assets in Queensland state from BG Group PLC (BG.LN).

The move to waive the option, which was largely expected by the market, means AGL has more cash for a potential tilt at the retail energy assets of New South Wales state, which lawmakers want to privatize by the end of 2009.

AGL has made no secret of its interest in the NSW power assets and choosing not to exercise the BG option could reduce the need for it to raise equity to participate in the auction.

It gained an option to purchase BG's Lacerta and Polaris CSG fields and the Condamine Power Station in October after agreeing to sell its holding in Queensland Gas Company Ltd. into BG's takeover bid for that company. The options had a four month expiry date, which AGL said Wednesday have lapsed.

The market didn't expect AGL to exercise the options, partly because it didn't exercise them by Feb. 1, when an interest-free period on the exercise price expired. Investors also know AGL is interested in other acquisitions and has recently bought other CSG assets.

AGL wants to acquire equity gas to hedge against expected rises in gas prices. But late last year it bought CSG interests in NSW including a full acquisition of Sydney Gas Ltd. after divesting non-core assets.

Sydney-based AGL said in a statement that it is comfortable its strategic target of securing 2,000 petajoules of equity gas can be achieved from the recent acquisitions.

On power generation, it said its existing 400 megawatt of despatch rights over the Yabulu and Oakey Power stations in Queensland state, together with power station development rights, delivered a better outcome than exercising the Condamine Power Station option.

A spokesman for BG said QGC had no current intention to put the CSG assets or the power station up for sale.

"QGC intends to construct, commission and operate the Condamine power station and integrate and develop the Polaris and Lacerta fields into QGC's coal seam gas portfolio," the spokesman said.

AGL Chief Executive Michael Fraser told Dow Jones Newswires in February that he expected the company to receive strong support if it needed to raise additional debt or equity to fund acquisitions.

By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com
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