AGL must come clean and close coal-powered stations by 2030
7 April 2022 at 8:27 am
AGL’s demerger is all about appearances – it does nothing for the environment and short-changes shareholders, argues Greenpeace Australia Pacific CEO David Ritter.
AGL is a case-study of a troubled company, floundering in a strategic environment that is undergoing radical change. The corporate leadership of AGL admits to having failed to anticipate sectoral trends, and in so doing has lost billions of dollars in shareholder value.
Most recently, rather than accepting a take-over bid from Atlassian CEO Mike Cannon-Brookes and Canadian investment giant Brookfield, AGL is pursuing a commercially suspect and environmentally disastrous plan to “de-merge” the business into two entities.
Coal is the single greatest driver of global warming. The International Energy Agency has modelled that Australia must close all coal-burning power stations by 2030 to be consistent with the Paris climate change agreement – but AGL intends to keep mining and burning coal until the 2040s. AGL is also infamous for being responsible for the greatest number of environmental license condition breaches of any Australian power company.
AGL has already amply demonstrated a greater concern for appearances than reality. The demerger appears to be just another deeply cynical ploy, that is all about what’s on the surface. Under the scheme, there would be two entities – known as Accel Energy and New AGL. The former – Accel Energy – has become widely nicknamed “CrapCo” because it would inherit all the dirty coal assets of AGL. With the bad stuff hidden away, New AGL could then emerge, rebranding itself as a cleaner company because it would be able to claim a so-called “carbon-neutral” portfolio in terms of direct emissions.
However, it is planned that Accel/CrapCo would own a significant portion of AGL Australia. Worse still, Accel/CrapCo would continue to supply New AGL with the majority of its energy – which would be generated by coal-burning power stations.
AGL Energy shareholders will be asked to vote on the demerger in mid-June this year. Meanwhile though, significant doubts are emerging about the commercial viability of the proposal – even putting to one side the environmental downside.
One portfolio manager told Angela Macdonald-Smith of the Australian Financial Review that “the demerger just looks implausible given the amount of debt on what’s been known as CrapCo, so the status quo doesn’t quite work”.
Separately, London-based investors Snowcap wrote to the AGL board describing the proposed demerger as “flawed” and “value destructive”, and urged that the plan be abandoned:
“In our view, the demerger plan is a flawed, and half-baked attempt by management to financially engineer its way around AGL’s problems rather than address their root cause. We believe that the supposed strategic benefits are a fantasy, and any potential valuation uplift will be unlikely to materialise due to the interdependent, cross-ownership structure.”
Snowcap (full presentation here) noted that AGL’s corporate leadership has demonstrated long term inflexibility, and failure to anticipate market trends:
“AGL is a flagship Australian company. It provides an essential service to millions of Australians every day. Yet over the past five years, AGL has drastically underperformed both its peers and the wider Australian market. As a result, the company’s shares now trade at a substantial discount to intrinsic value.
“Underpinning this poor performance has been a failure by AGL’s management to adapt to changing energy markets and a shift in investor attitudes around climate. Since 2012, the company has acquired nearly 7GW of coal power whilst severely under-investing in renewables. As a result, it is now one of the most carbon intensive utilities on the planet.
“Most markedly, AGL has refused to meaningfully bring forward the retirement dates of its two largest coal plants; Loy Yang A and Bayswater, which currently stand at 2045 and 2033 respectively – a decision which stands in contrast to other major coal plants.”
Notably, Snowcap pointed to the significant commercial value that could be unlocked, with accompanying environmental upside, if a different path were taken:
“AGL must abandon the proposed demerger and commit to close down its coal plants by 2030 as part of a broader, accelerated transition plan. Doing so has the potential to unlock 30-60 per cent of upside for shareholders and avoid 385 million tonnes of future greenhouse gas emissions.”
The current corporate leadership of AGL seems backed into a corner of their own making. Apparently much effort is being expended internally on marketing, IT systems decoupling, internal structure and the like – none of which deals with the fundamental underlying problem that New AGL/Crapco/AGL Australia would still be mining and burning coal until the 2040s.
AGL’s leadership is essentially telling shareholders to “trust us”. Snowcap, on the other hand, advocates for a very different path:
“That is to abandon the demerger and pursue an aggressive strategy to transition AGL’s coal assets by 2030. We believe that doing so has the potential to unlock substantial value for AGL’s shareholders, whilst delivering huge environmental and social benefits.”