BG plc today announces proposals for a restructuring of the group. A new holding company, BG Group plc, will be incorporated and Transco, the BG business which owns and operates Britain's gas transportation infrastructure, will become a subsidiary of BG Group, ring-fenced for regulatory purposes. BG's other businesses, of which BG International is substantially the largest, will be carried on in separate subsidiaries of the new holding company.

This corporate restructuring will be accompanied by a proposed financial restructuring. BG shareholders will receive new ordinary shares in BG Group and bonds of the Transco sub-group in exchange for their ordinary shares in BG plc. It is currently envisaged that £1 billion to £2 billion of long-term corporate bonds, possibly index-linked, will be issued by the Transco sub-group, thereby increasing the level of debt and bringing the gearing of the Transco business into line with prevailing standards for regulated businesses.

The purpose of the proposed restructuring, which is supported in principle by the Office of Gas and Electricity Markets and the Government, is to increase the transparency and capital efficiency of Transco, to provide greater structural flexibility for the group as a whole, and to enhance the growth potential of the company's other businesses, notably BG International.

These proposals are at an early stage and will require approvals from and other arrangements with a significant number of third parties, notably the Government, the Office of Gas and Electricity Markets and the Inland Revenue. Subject to receipt of satisfactory approvals, and such other arrangements being agreed, BG expects to post detailed proposals to shareholders with the aim of seeking their approval around the end of the year.

Commenting on the proposed restructuring, Richard Giordano, BG Chairman, said:
"To complement the continuing pursuit of operational efficiency, we have needed to address BG's capital and structural efficiency, and reduce Transco's cost of capital. The proposals announced today will achieve this, clearly serving the public interest while giving BG the best platform from which to increase shareholder value."

David Varney, BG Chief Executive, said: "For BG, with our leading international capability in the integrated development and supply of gas markets, there are plenty of good opportunities for value-enhancing growth - organic and structural - inherent in today's energy markets. We see the proposed restructuring as providing the basis for a new phase of growth."

Notes for Editors

1. Background

• The company (then known as British Gas) was incorporated as a public limited company and privatised in 1986. At the time, the company was seen as a regulated natural monopoly covering the entire downstream sector of the British gas industry. The non-regulated Exploration & Production business was small compared with the regulated utility, although the company had ambitions to diversify internationally.

• In February 1997, the demerger of Centrica plc from the company created two independent listed companies, BG plc and Centrica plc, each equipped to succeed in their different roles in the era of liberalised competitive gas markets.

• By virtue of its history, BG has inherited a corporate structure which is now inconsistent with best practice as regards the governance, regulation and capital efficiency of its main component businesses. Specifically, while BG International's operations are carried out, conventionally, within legally and financially distinct group companies, Transco's regulated assets - and the associated Public Gas Transporter's Licence - are held directly by BG plc, the holding company of the group, and are therefore legally and financially indistinct from the other group operations. Moreover, Transco is itself one of the largest utilities in Europe

• In accordance with current best practice, such regulated utility assets would be held in a subsidiary, or subsidiaries, of the parent company with appropriate safeguards for consumers

• It is foreseen that the current major overhaul of the regulatory framework for Britain's converging gas and electricity industries will reinforce the thrust of market liberalisation and lead to far-reaching changes across the utilities sector. Recognising the potential for such changes to benefit both consumers and shareholders, work is already in hand within the group on the separation of asset management and the internal operations which service Transco's assets; and on the disaggregation from the regulated core of Transco's assets of those activities and assets which can beneficially be made contestable

• The MMC report of June 1997 on the Transco price control recommended greater use of debt rather than equity finance so as to reduce the cost of capital. This aspect of regulatory policy has since been reinforced by the Government's emphasis on regulatory consistency and predictability, and the lower inflation outlook of the UK economy. BG's 1997 'B' Share issue was a partial response to the need to increase Transco's capital efficiency.

2. The main features of the proposed restructuring of the BG Group are as follows:

• A Court approved scheme of arrangement will be effected whereby existing BG shareholders will receive ordinary shares in a new listed holding company, BG Group plc, and bonds (referred to below), in exchange for their ordinary shares in BG plc. Small shareholders who would otherwise be entitled to a fraction of a bond will receive cash in respect of their fractional entitlements.

• A new intermediate holding company (BG Transco Holdings plc) will be formed as a subsidiary of BG Group plc, to hold BG plc and its Transco business, with a view to Transco's regulated assets being retained within a sub-group of companies distinct from the group's other businesses. The non-Transco businesses currently carried on by BG plc and other group companies will be transferred to a separate sub-group held by a new intermediate holding company (BG Energy Holdings Limited) formed as a subsidiary of BG Group plc.

• The Transco sub-group would be substantially refinanced to achieve greater capital efficiency, with a structure more suited to the predictable long-term nature of Transco's operations as an infrastructure provider, and the low-inflation outlook for the UK economy

• It is currently envisaged that £1 billion to £2 billion of long-term corporate bonds, subordinated to existing debt and possibly index-linked, would be issued by the Transco sub-group and received by existing shareholders in exchange for part of their shareholdings under the scheme of arrangement referred to above, thereby replacing equity with lower cost long-term debt. Transco's Regulatory Asset Value is some £12 billion. BG's total net indebtedness at 31 March 1999 was £3.8 billion. Net indebtedness at the end of 1999 is currently expected to be in the range of £5 billion to £5.5 billion

• Listings will be sought for the new ordinary shares of the BG Group on the London and New York Stock Exchanges and for the bonds on the London Stock Exchange. Shareholders will receive fewer shares in BG Group than they currently hold in BG plc reflecting the proportion of the capitalisation that will be replaced with bonds

• As well as the detailed approval of the Office of Gas and Electricity Markets and the DTI - following their initial support in principle - the restructuring and refinancing will require tax clearances and many other third party consents. Subject to receipt of satisfactory consents, and such other arrangements being agreed, BG expects to post detailed proposals to shareholders with the aim of seeking their approval around the end of the year

• BG has appointed Cazenove & Co. and Hoare Govett Limited to advise it in relation to the proposed transaction.

The Board believes that this restructuring and refinancing will serve the long-term interests of BG's shareholders and employees and of Britain's gas consumers:

• The separation of Transco within a ring-fenced sub-group of the reorganised group will provide regulatory clarity in line with the Government's prime policy objectives of transparency, accountability and lasting financial integrity for the regulated utilities, and the policy of continuing gas industry liberalisation.

• In due course the refinancing of Transco should facilitate lower prices for the gas consumer. UK regulators have tended recently to assume that utility companies should operate with higher levels of debt in order to be financially efficient, and have incorporated these higher gearing assumptions into their calculations of the cost of capital. BG accepts that, with more consistent and predictable regulation, it is appropriate to operate with higher gearing which should reduce its cost of capital and ultimately help it to meet the objective of lowering the cost of gas transportation to the consumer

• At a time of significant overseas opportunities for BG, and the wider British gas industry and its suppliers, the greater structural flexibility created by the new corporate structure will make it easier to realise such opportunities.

3. Shareholders

BG has 1,225,045 shareholders and the average individual shareholding is 498 shares. There are 3,940,594,577 shares in issue