Buried in its Wednesday statement to the market, AGL confirmed that it is proceeding towards separation and divorce – energy utility style.
The statement (see below) revealed why the separation has become necessary – and why it should have happened a couple of years ago.
The company told the ASX that it will demerge itself – much in the way Woolies spun off the its Endeavour drinks, hotels and poker machine businesses earlier this week.
In short its generation business – especially the coal fired power stations – are millstones, uneconomic now and increasingly so in the future.
Not only will the 2020-21 results be weaker than they were thought 10 months ago, but the 2021-22 performance of the company will be weak and the company has taken two key steps to keep as much cash in the business as possible by dropping special dividends and restarting a dividend reinvestment program.
When the company raised the future of the coal-fired Liddell power station in the Hunter Valley in 2018 and announced a 2022 closure date, the company and its then CEO, American Andy Vesey were attacked by the Federal coalition government – especially by then prime minister Malcolm Turnbull, various state politicians, conservative commentators and others in the energy production and supply sectors for daring to raise doubts about the viability of coal fired power stations and exposing the lack of an energy policy in Canberra.
Yesterday’s lengthy statement from AGL confirmed all those criticisms were wrong in many ways and that the end of fossil powered stations is approaching more rapidly than thought three years ago.
AGL’s split into two companies – one that will house the outdated coal and gas fired power stations and the other with growth prospects in renewables – is confirmation that the original plan for the split is the only way to go.
One company will die slowly – the fossil fuel-based stations – the other with renewable and consumer assets – has growth prospects.
And it will take all the pressure and burden of public criticism off the company named AGL when the tough decisions on the fossil-powered stations approaches.
There is no reason why this will not be repeated by rivals such as Origin, Energy Australia and others in energy. BHP is doing something similar by exiting thermal coal, Rio Tinto has already departed.
The buried story was a profit warning for the current financial year, starting today (July 1) and even before the company has started trading confirms the increasingly difficult outlook.
That was after AGL said full-year earnings for the year to June 30 (yesterday) will be “within the lower half of the previous range of $1,585 million to $1,845 million”, and underlying profit in the middle of $500 million to $580 million, including a $90 million insurance payout from a 2018-19 outage at the Loy Yang A power station.
That forecast of $500 million to $580 million is really $410 to $490 million excluding the insurance payment. That is down 25% from the first forecast given in August 2020 annual report of $560 million to $660 million.
The 2020-21 forecast is before the huge multi-billion dollar write downs announced with the December 31 half year figures when AGL reported an after-tax statutory loss of $2.287 billion which included $2.686 billion of onerous contract provision and impairment charges.
The company’s underling EBITDA for the half year fell 13% to $926 million and the underlying after tax profit was $317 million, down 27%, including $74 million of insurance receipts relating to FY20 Loy Yang Unit 2 outage (now $90 million).
That means after tax underlying profit for the June half will be of the order of $230 million.
Given the slide in earnings, the fall in power prices it’s no wonder AGL warned of worse to come this financial year.
So a profit warning for 2021-22 was issued due to lower wholesale electricity prices over the last two years now being realised through forward sold positions, higher wholesale gas supply costs, and insurance payouts not being repeated.
Many of the companies forward energy deals are at electricity prices higher than they are now and are projected to be in 2021-22 and beyond.
AGL also announced it will be terminating its special dividend program. In the statement on Wednesday AGL said it “no longer intends to pay out an additional 25% of Underlying Profit after tax for the FY21 final dividend or in FY22”.
The decision behind the cut was to “preserve approximately $400 million to $500 million in cash within AGL Energy prior to execution of the demerger.”
In other words, AGL can no longer afford to be so generous with investors because of a future need to keep as much cash as possible.
AGL also indicated its intention underwrite the company’s dividend reinvestment plan (DRIP) during the demerger planning period.
That’s another way of saying the company wants to keep as much cash as possible and will dilute existing shareholders by issuing more shares in the DRIP instead of paying cash dividends)
AGL shares fell 6% to $8.54 by the close on Wednesday.
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After months of deliberations, AGL revealed details of the divorce – it will see a new company formed called Accel Energy that will separate its emissions-intensive power stations from its wider retailing business.
The other company, AGL Australia will be headed by the company’s chief customer officer Christine Corbett and will be a carbon-neutral retailer of power, gas and telecommunications serving an estimated 30% of Australian consumers, while also holding some energy generation assets and batteries.
Accel Energy will be led by AGL’s interim chief executive Graeme Hunt and will own the bulk of AGL’s generation fleet including its heaviest-polluting coal- and gas-fired power stations.
Following the demerger, Accel would retain a 15% to 20% shareholding in AGL Australia.
The demerger will happen via a capital reduction, with existing AGL shareholders receiving one share in each entity for each AGL share they own.
“The impact of recent challenging market conditions on our financial performance emphasises that AGL Energy is now at an inflection point as the transition of the energy sector accelerates,” AGL chairman Peter Botten said (he is the former long-time CEO of Oil Search).
“After careful consideration, the board has confirmed that AGL Energy should move forward as two independently listed companies as the board believes this will be in the best interests of shareholders.”
As Australia’s heaviest greenhouse-gas emitter, AGL has been increasingly under pressure from major investors amid concerns about the risks posed by global warming and the gathering momentum around efforts to achieve the goals of the Paris climate agreement to limit temperature rises to 1.5 degrees.
The push to break up the nation’s oldest energy utility was first unveiled earlier this year by former chief executive Brett Redman, who said then now dubbed AGL Australia may lure climate-focused funds who are shunning coal, while other investors would be drawn to Accel as it could offer compelling returns.
Mr Redman’s sudden resignation led to analysts and investors querying whether the separation plan was running into trouble. Mr Redman said the timing of his exit would enable a new leadership team to what he called “lead the business into its next chapter”.
