Investors on edge with D-Day looming for AGL Energy demerger

AGL Energy is poised to detail plans for a historic demerger this week as it seeks to reinvent the utility with a green image.

AGL interim CEO Graeme Hunt. Picture: AAP

AGL Energy is poised to detail plans for a historic demerger this week as it seeks to reinvent the utility with a green image amid volatile conditions in electricity markets.

Both shareholders and staff at AGL are on edge as Australia’s oldest utility plots whether to proceed with a split of its retail and supply arms to form a green electricity retailer and a generation giant dominated by coal power.

The separation had a rocky start after former boss and long-time AGL executive Brett Redman suddenly resigned from the company in April, just four weeks after touting the merits of the plan.

The appointment of former chairman Graeme Hunt as his interim replacement also unsettled some in the market.

Investors are cautious over how $2.8bn of debt will be split between the businesses, the prospects of investment-grade credit ratings and whether an equity raising might be needed, depending on the structure of contracts between the two companies.

Wholesale power prices have jumped in May and June after tumbling 50 per cent but it is not clear that rise will be sustained.

Some question whether AGL can pull off a true separation given a likely need for rehabilitation cross-guarantees between NewAGL and the coal-heavy PrimeCo.

“While higher electricity prices are positive for PrimeCo, we believe it may be difficult for AGL to put any debt in that vehicle. There is also too much debt to solely reside with the retail assets,” JPMorgan analyst Mark Busuttil said.

MST Marquee analyst Mark Samter, critical of AGL’s ­explanation of Mr Redman’s exit, said a raft of problems remained for the company.

“Sure, wholesale prices have been strong short-term, but they are largely hedged for FY22 by now and futures still aren’t exactly great, even if a bit stronger,” Mr Samter said on Sunday.

“There are some pretty insurmountable challenges, including those cross guarantees, that are going to mean the devil will be in the detail, whatever they announce.”

The wholesale power price rebound might at least boost market sentiment for AGL, ITK principal David Leitch said.

“Market anxiety will be a lot less than it’s been for some considerable time because wholesale power prices are up to four times what they were a year ago,” Mr Leitch said.

AGL plans to provide further details of the proposed split by June 30 including asset allocations, capital structures, funding and key commercial agreements.

An update on the chief executive position is also planned amid considerable internal debate about who will lead AGL’s two units.

While some view Mr Hunt’s elevation from chairman to the company’s acting chief executive as a precursor to taking the New AGL role, the company’s chief customer officer Christine Corbett is now seen as the frontrunner for the position. She has strong retail experience after a long career at Australia Post.

Chief operating officer Markus Brokhof would be considered for leading PrimeCo but Mr Hunt could ultimately be better suited to the generation-heavy company given his resources experience with over a decade at BHP.

Under AGL’s proposed restructure, the new AGL business will provide electricity, gas, internet and mobile services to 30 per cent of Australian households.

Originally published as Investors on edge with D-Day looming for AGL Energy demerger