Loy Yang coal power station failure sparks demerger doubts for AGL Energy

An untimely breakdown at AGL’s major Loy Yang A coal plant has caused concerns among analysts and investors ahead of a demerger decision.

The breakdown of a coal unit at AGL’s giant Loy Yang A plant in Victoria has raised concerns among analysts and investors. Picture: Jason Edwards

AGL Energy’s loss of a major coal generation unit at a time of booming wholesale power prices has stoked broader concerns over a looming demerger as investors weigh their support for a controversial split of the company.

The power giant was hit with a ratings downgrade by Barrenjoey Capital Partners after the broker said the power giant’s loss of a major coal generation unit at Loy Yang A added to uncertainty over the pending demerger.

Two major investors have also rued the timing of the power plant breakdown, just weeks before AGL is set to reveal scheme documents outlining its case for the company split.

The state’s largest power station, which provides 30 per cent of Victoria’s power needs, could be without a quarter of its generation at the Latrobe plant until August due to an electrical fault.

The Loy Yang outage “adds to uncertainty around the demerger – dis-synergies, transfer pricing, funding, guidance – which we think needs to be resolved before investors consider whether to pay for these future earnings,” Barrenjoey’s Dale Koenders said, downgrading AGL to underweight.

Washington H Soul Pattinson, which has a major stake in AGL, said the loss of the coal unit was ill-timed given high power prices.

“With power prices high, losing one of your major generation assets is obviously not ideal. And the stock has been very strong lately. So it’s not great news,” WHSP chief investment officer Brendan O’Dea told The Australian. “We’re still not necessarily convinced the demerger is in the best interest of shareholders.”

VanEck, another major shareholder, said the incident would not derail the demerger but was a setback as investors awaited documents detailing the split to land in mid-May, ahead of a vote a month later.

“It’s just a bit of a holding pattern at the moment and everyone is waiting to see what happens. Obviously, this power station situation doesn’t help,” said ­VanEck Australia’s deputy head of investments and capital markets, Jamie Hannah.

“I‘m not saying that we’re on board with the demerger at the moment – we’re still waiting on the full details to come out.”

While the loss of a major coal unit could lead to a supply squeeze should other supply sources suffer setbacks, the Victorian government said it showed the unreliability of the fossil fuel, which the state had addressed through major investment in renewable energy.

“We are liaising with AEMO and AGL, but are advised the failure is unlikely to affect the reliability of energy supply due to lower demand during the winter months and the record amounts of renewable energy capacity that is now available,” Victorian Energy Minister Lily D’Ambrosio said. “The reality is ageing coal generation is unreliable – highlighting why our transition to renewable energy is so important.”

The last breakdown at Loy Yang A cost AGL $100m, which was ultimately recovered from ­insurance.

However, the company no longer has that cover and the outage has come at a time of spiralling power prices, equity analysts have previously noted.

It expects an earnings hit of $70m or $20m-$30m per month, hitting the final two months of the financial year and the start of the 2023 earnings period.

Wholesale spot prices have more than doubled in Victoria to $122 per megawatt hour from an average of $57/MWh for the fourth quarter of 2021. AGL’s “portfolio has less excess generation and may need to buy electricity from pool. Victorian electricity prices are ~$115-$138/MWh in next few months, higher than ~$85/MWh in 2019. We understand Unit 1 is already running at capacity, fuel costs are also higher and AGL no longer has insurance coverage for earnings loss,” Barrenjoey’s Mr Koenders noted.

AGL is nearing a major shareholder vote in June on a controversial plan to split the company in two, just months after the company rejected two takeover bids from the Mike Cannon-Brookes and Brookfield consortium, saying shareholders would get more value from the demerger.

Brookfield Asset Management‘s vice chair and head of transition investing, Mark Carney, told a Bloomberg forum on Thursday the world wasn’t “going far enough or fast enough” to shift to low-carbon fuels. Brookfield said in March the pressure is now on AGL to demonstrate the value it could unlock through its ­demerger after the power giant rejected its $8.1bn bid and hinted it may now look elsewhere for alternative deals.

AGL shares rose 1.5 per cent to $8.65 on Thursday.

The stock has jumped 37 per cent since the start of the year.

Originally published as Loy Yang coal power station failure sparks demerger doubts for AGL Energy