After a frenzied three months pulling together the case for its demerger, reality hit AGL Energy on Wednesday. Its shares plummeted 10 per cent in the worst one-day price fall since 2007.
Interim boss Graeme Hunt blamed the obvious bad news for shareholders that was attached to its separation – namely a tepid profit outlook and its decision to axe a special dividend – rather than the separation itself for the sharp sell-off.
At the very least it was a brutal reminder of the headwinds facing the business and why the split represents a huge roll of the dice for the 185 year old company.
Part of AGL’s case for the separation is that it needs to combat the low prices and market volatility that’s pressuring its big baseload coal generators against a backdrop of investors turning their back on exposure to the fossil fuel.
By carving out the ‘dirty’ part of its portfolio into the newly named Accel Energy, AGL hopes the demerged retail and renewable focused AGL Australia business will attract a higher re-rating as a green business under the popular leadership of Christine Corbett. The power giant points to a solar-sparked price rout and government intervention which have slammed the brakes on earnings growth. Sit still and it could face an even worse picture in just a few years time.
Certainly, there was some market relief that AGL was able to add a level of debt to Accel with an amortising loan of up to $800m. While several analysts said it may have only got that level of funding by keeping a 15-20 per cent stake in AGL Australia, it does show Accel will attract financial support even amid uncertainty over how quickly the power grid will move away from coal.
The other big question for Accel – and its coal assets at Loy Yang and Bayswater – is whether it can win an underwriting style deal with the Victorian and NSW governments to ensure the plants remain viable amid the renewables onslaught. EnergyAustralia grabbed significant support from the Daniel Andrews-government for Yallourn and AGL must be doing everything in its powers to win a similar safety guard for its own power stations.
Longer-term, Hunt and his Accel team face an even bigger punt – turning the coal plants at Loy Yang and Bayswater and gas at South Australia’s Torrens Island – into energy hubs that can span batteries, hydrogen, waste, ammonia, fertilisers and even data centres. It’s a noble vision but will require big jumps in technology and hefty investment to make it a reality.
Finally, a penny for Brett Redman’s thoughts. The former AGL boss surprisingly resigned in March despite being the architect of the demerger plan. The talk at the time was that Hunt was after Redman’s job even if by Hunt’s account it was the furthest thing from his mind at the time.
Either way, filling all four CEO and chairman roles across the two companies with internal appointments either suggests a deep talent pool or poor corporate governance. AGL has taken the first step to renewal but has a daunting path ahead to pull off its vision.
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