AGL Energy has revealed more details of the proposed demerger of its energy business, as the company struggles to catch up with an energy market that is undergoing a massive renewable energy transition, that is breaking down traditional business models faster than it had ever anticipated.
In an update to the ASX on Wednesday, AGL confirmed that it would split its company into two new businesses – one called Accel Energy that will take the company’s coal-heavy generation portfolio, and AGL Australia that will retain the company’s retail businesses and focus on distributed energy and EVs.
The sudden demerger of AGL Energy, which triggered the unexpected resignation of CEO Brett Redman, is deeply significant, because it is an emergency response from one of Australia’s largest and oldest energy companies, and the country’s biggest polluter, caught off guard by the pace of energy transition.
AGL’s portfolio of ageing coal-fired generators, which includes the Loy Yang A, Bayswater and Liddell power stations, has proven to be both a drag on its finances – after a sudden fall in wholesale electricity prices – and a reputational liability for a company wanting to convince customers it is committed to a switch to clean energy.
The split is an effective concession that the company has not been able to react fast enough to the pace of transition.
“There is no doubt that the winds of change in the electricity market has been substantially faster than many people have anticipated,” AGL chair Peter Botten – a former head of oil and gas company Oil Search – told an analysts briefing.
“Certainly, from my perspective, those winds have been extremely fast. And I certainly didn’t see quite the level of change and the acceleration of that change in my thinking 12 months ago, and I believe that would be representative of the AGL board.”
In short, it is an admission that AGL had ignored most energy experts about the realities of new technologies and that it was way too invested in the ‘coal will dominate for decades’ story line pushed by most industry incumbents, the federal Coalition government and much of the mainstream media.
It is way it has now had to throw its long-term business strategy into reverse, and accept that coal generation has no role to play if it is to try and catch up with the transition.
Botten said that AGL is now at an ‘inflection’ point, needing to evolve from away from its established position as a coal-heavy gentailer.
“The impact of accelerating forces from customers, community and technology on the existing operating model and financial performance emphasises that AGL Energy is now at an inflection point, as the transition of the energy sector accelerates,” he said.
“A clear focus and more targeted strategy are now critical to best position both businesses over the longer term.”
In its update to the ASX, AGL Energy reiterated its earnings guidance for the current financial year, with an expected EBITDA of between $1,585 million and $1,845 million.
However, AGL said that it expected to record lower earnings in future years due to falling wholesale electricity prices and the rising cost of gas eroding the profitability of its generation business.
“For FY22, AGL Energy continues to anticipate a material step-down in earnings as a result of the lower wholesale electricity prices of the past two years now being realised through forward sold positions, as well as the non-recurrence of the insurance proceeds noted above and increases to wholesale gas supply costs,” AGL’s update says.
AGL’s chief financial officer, Damian Nicks, told the briefing that the fall in wholesale prices had occurred faster than anticipated, and AGL would not be able to avoid recording the anticipated falls in earnings in future years.
“What we are flagging, as we’ve said over the last couple of updates, is we do expect the material downsides from where we are today based on where the wholesale prices have been. Because wholesale prices have come off a lot quicker, a lot more rapidly than anyone anticipated,” Nicks said.
The rapid changes occurring in the energy market have already had a significant impact the confidence of AGL investors, who have already wiped off around 60 per cent from AGL’s market capitalisation compared to its pre-Covid value, as investors become wary of the difficult future for the business.
AGL shares have fallen from a pre-Covid price of above $20 per share to a current price of around $8.25. AGL Energy shares fell a further 9 per cent during trading on Wednesday, following the release of details about the demerger.
In addition to the challenging financial situation, the demerger is also likely to be a response to growing investor demand for low carbon investments. AGL’s ranking as Australia’s single largest greenhouse gas emitter has made it an easy target for investor campaigns seeking to pressure companies into reduce their exposure to fossil fuel investments.
While the new, retail focused, AGL Australia brand will operate as a carbon-neutral company, the new Accel Energy will inherit AGL Energy’s current status as Australia’s largest greenhouse gas emitter.
Environment group Greenpeace Australia Pacific, which recently claimed success in a legal stoush with AGL over the use of company branding in campaign materials, described the demerger as “putting green lipstick on a pig”.
“This demerger is tantamount to rearranging the deckchairs on the Titanic, with AGL, Australia’s biggest climate polluter, trying to hide its greenhouse gas emissions behind clever company reporting tricks,” Greenpeace Australia Pacific senior campaigner Glenn Walker said.
“At a time when AGL should be taking its role in Australia’s energy transition seriously, and planning for a safe transition away from coal by 2030, the company has instead chosen to try to hide its contribution to the climate crisis by demerging.”
AGL will aim to implement the demerger in the first half of 2022 after receiving approval from shareholders. AGL’s interim CEO, Graeme Hunt, said the demerger would help retain investment value for its shareholders.
AGL’s current chief customer officer and former Australia Post executive Christine Corbett will be appointed managing director and CEO of AGL Australia, while AGL Energy’s interim CEO, Graeme Hunt, will become managing director and CEO of Accel Energy.
Hunt has served as interim CEO of AGL Energy since the unexpected resignation of Brett Redman, understood to have been triggered by Redman’s desire to see new leadership guide the demerger process.