Corporate separation is now the name of the game with ailing energy giant, AGL joining the trend yesterday.
Wesfarmers separated Coles a couple of years ago, Woolies has been trying to spin off its grog business, Endeavour Drinks and the four major banks have been selling off unwanted assets like fund managers, insurance companies and wealth advisors.
Tabcorp is another company under pressure to split itself by selling or spinning off its weak wagering business while it keeps the lotteries.
And earlier this month Telstra went to whole hog and confirmed a four-way split of itself.
Usually there is a rationale for the splits – the need to show up better performing growth assets by separating them from underperformers, or just starting to process to be rid of out of date, unwanted businesses.
For AGL, Australia’s biggest energy supplier, it’s more a case of the latter as it plans to split off its unattractive emissions-intensive coal and gas-fired power stations from its consumer facing retail and renewables.
The driver in this case is falling energy prices which is putting more and more financial pressure on older, emissions intensive plant and processes as the shift to renewable energy grows and builds more and more pressure on fossil fuels.
AGL will create two new businesses: the carbon-neutral “New AGL”, which will include the company’s retailing division, and “PrimeCo”, which will be the nation’s largest electricity generator with coal, gas and renewable power operations (solar and wind farms).
“The accelerating market forces of customer, community and technology are driving the imperative to create this new path and separate AGL into two distinct organisations,” AGL CEO Brett Redman said in a briefing document issued on Tuesday.
AGL’s move comes as the rising output of renewable energy from homes, solar farms, wind farms and batteries pushes into the nation’s main power grid, slashing wholesale power prices to multi-year lows, destroying profits of traditional power operators including operators of coal-fired power plants (black and brown coal) and making it tougher for gas to compete.
Earlier this month, EnergyAustralia announced it would close its Yallourn brown coal run station in 2028, four years earlier than forecast because electricity prices are forecast to continue falling for years to come.
The plunging power price has already seen AGL take massive losses to clean up its balance sheet ahead of the closing of its Liddell power station in the Hunter Valley in two years’ time.
AGL, which operates coal- and gas-fired power plants and renewable energy stations, posted a $2.3 billion loss for the first half of 2021, thanks to asset impairments and the writing down of power purchase contracts at prices higher than they are projected to be in coming years (mostly from wind farms, ironically).
Mr Redman said “New AGL” would be Australia’s largest multi-product energy retailer, delivering power, gas internet and mobile services to more than 30% of Australian households with a net-zero carbon footprint.
The other company, “PrimeCo”, would include AGL’s coal-fired power stations, gas-fired power stations and renewable energy assets including wind farms.
“The proposed structural separation would give each business the freedom, focus and clarity to executive their own respective strategies and growth agendas, while playing an equally important, but different role, in Australia’s energy transition,” Mr Redman said.
Besides the about to close Liddell, AGL also operates NSW’s Bayswater plant, which is scheduled to run to 2035, and Victoria’s Loy Yang A coal-fired station until 2048.
And what did investors think? Well, they marked down AGL shares which closed off 3.5% at $9.81. Admittedly that was in a weaker market but the fall in AGL’s share price was much larger than the 0.9% fall in the ASX 200.