AGL will pay Sydney Gas $42.25 million on contract settlement and a further $51 million by the end of 2008 if additional CBM reserves are proved up at Camden.
Sydney Gas chairman Michael Knight said the company would change its name and halt exploration in the Central Coast of NSW.
Community-based pressure group The Australian Gas Alliance, which was formed to oppose this exploration program, welcomed the company's withdrawal from the Central Coast.
"The Australian Gas Alliance is pleased the new leadership of Sydney Gas has acknowledged that these areas are not suitable for methane gas exploration and production," the group said.
Knight said the company's internal reviews, begun after the departure of former CEO Dr Bruce Butcher, identified a need to increase the priority given to gas production and sales, as well lowering company borrowings.
"A substantial re-organisation of the company's affairs was necessary if the great potential benefits of coal bed methane development are to be enjoyed by the Sydney Gas shareholders," Knight said.
He said the company reorganisation included: the joint venture arrangement with AGL; repayment of existing high-cost debt; a significant reduction in corporate overheads; a streamlined senior executive team; and a restructured board.
"At present, Sydney Gas has high cost debt - $30 million of convertible notes where the conversion price is above the current share price, and an unusual and restrictive debt facility," said Knight.
"The company will introduce a new approach to finance so that exploration and early stage development will be entirely equity-funded. Debt will only be used in future to the extent that it can be comfortably serviced from operational cash flows."
Sydney Gas's new CEO, Andrew Purcell, said the joint venture with AGL provided the means to eliminate reliance on debt.
Funds contributed by AGL in order to become a joint venture partner will enable Sydney Gas to reduce dramatically the cost of short term financing and allow appropriate long-term arrangements to be put in place," Purcell said.
Under the joint venture arrangement, AGL will contribute 50% of all future capital expenditure across all of the licences, ensuring an orderly and more cost-effective continuation of the development program, he said. All operational costs associated with the joint venture will also be shared 50/50.
A new 10-year gas sales contract will be drawn up, giving AGL a five-year extension option for the Camden project. This would enable a ramp up to a total annual contract quantity of 14.5PJ per annum, with potential aggregate sales in excess $600 million over the life of the contract.
Sydney Gas said it would focus on fulfilling the gas supply contract in Camden and developing opportunities with high-value potential in the Hunter Valley.
"In both its existing and new operations, Sydney Gas will be working very hard to sustain positive relations with landowners, communities and other stakeholders," said Purcell.
"We will try in every case to achieve the best outcomes through cooperation rather than confrontation and litigation."
In changes to the board, three long-standing directors and shareholders, Artur Birkner, John Castleman Jnr and Domenic Martino, have retired.
Knight said a formal name-change proposal for the company would be put to the Annual General Meeting in November.
