As AGL attempted to clean up its energy, Josh Frydenberg intervened to have its chief executive sacked. Now the company is de-merging to salvage its failing coal assets. By Mike Seccombe.
Exclusive: Frydenberg pushed AGL to sack boss
It was late 2017 when Josh Frydenberg started calling board members at AGL. The then Environment minister had become frustrated with the company’s chief executive, Andy Vesey, and wanted him sacked.
According to two former senior executives, the pressure on Vesey and those who supported him was enormous. In multiple phone calls, Frydenberg pressured the board to drop Vesey over his plan to close the Liddell power plant, one of Australia’s oldest and dirtiest coal-fired power stations.
As one executive put it: “Frydenberg was calling individual directors, suggesting he be sacked over Liddell.”
Andy Vesey had been appointed less than three years earlier, in 2015. At the time, as now, AGL was Australia’s biggest emitter of greenhouse gases. The new American chief executive came to the job intent on steering the company away from coal generation, towards renewables.
A year after he took the job, it was announced that AGL would close the Liddell plant in the New South Wales Hunter Valley by the end of 2022. Coal would be replaced largely with renewables and battery storage.
The timing of the Liddell announcement was embarrassing for the federal Coalition, two months out from an election and running hard with an anti-renewables, pro-coal narrative it saw as politically advantageous.
The government insisted that AGL keep operating Liddell for five years longer or sell it to someone who would. Vesey refused.
In the protracted political fight that ensued, the government impugned Vesey’s motives, suggesting his plan was to remove generating capacity from the grid to push up power prices. A few months after Frydenberg’s phone calls, under constant political pressure and internal “white-anting”, Vesey left AGL in August 2018.
Frydenberg, who is now treasurer, did not respond directly to questions about his conduct. He said, simply: “Executive appointments are matters for boards.”
In 2019, under a new chief executive, Brett Redman, AGL agreed to extend the life of Liddell by a year.
Two years later, in 2021, AGL is a company in turmoil. Redman is gone and last week a new chairman, Peter Botten, tried to gloss over the various ways in which AGL had botched the test of the past five years.
He announced the company was to undertake a major restructuring, necessitated by its failure to foresee the devastating impact the shift to renewable energy would have on companies that generate electricity through the burning of coal. At the same time, he apologised to shareholders for his company’s tanking value.
“The winds have changed and have been substantially faster than many people anticipated,” Botten said on Wednesday last week, as he formally announced a decision to split the business into two separately listed companies.
“From my perspective, those winds have been extremely fast and I didn’t see quite the level of change and the acceleration of change in my thinking 12 months ago. And I believe that is representative of the AGL board.”
Tim Buckley, of the Institute for Energy Economics and Financial Analysis, is incredulous at the idea the company did not see this change coming. He and others have been talking about it for years, including with AGL.
The entry into the electricity market of large amounts of cheap, zero emissions renewable energy, he says, would inevitably have a “massively deflationary, massively disruptive” effect on the incumbent industry. And it has.
In the past four years, AGL’s share price has dropped 70 per cent. It is down 50 per cent in the past year alone.
The board’s plan, subject to approvals by government, the courts, tax office and shareholders, would see one company operate as a “retail, trading, storage and supply” business under the name AGL. A second company, called Accel Energy, would hold AGL’s power generation assets – mostly coal. Over time, the company says, it would move into more clean energy.
These two parts were promptly dubbed CleanCo and CarbonCo by analysts. The latter was called ShitCo by one, in recognition that the new entity would be burdened with the dirty part of the business.
The “de-merger” is a desperate move, says Buckley. It’s not so much rearranging the deck chairs on the Titanic, he says, as cutting the Titanic in half and hoping “only half the ship goes down”.
Buckley’s view of the separation plan is widely shared among analysts who suggest it will be vastly expensive, paid for through $400 million to $500 million in reduced shareholder dividends, and could yet fall at regulatory hurdles. Markets see it negatively, too: the price of AGL plunged almost 10 per cent after the announcement. There are also suspicions among environmental lawyers that the plan could allow the company to avoid the costs of remediating its power plant and mining sites.
So how did AGL – one of Australia’s oldest companies, established in 1837 as the Australian Gas Light Company, and provider of gas or electricity to 3.7 million people in eastern Australia – come to this?
Ten years ago, it was regarded as the national leader in rolling out renewable generation. Then it went on a coal-fired buying spree.
In 2012, it acquired Victoria’s Loy Yang A power station and associated mine. In 2014, it bought the Liddell and Bayswater power stations in NSW, among other fossil fuel interests.
As a result it became by far the biggest single contributor to climate change in Australia, responsible for 8 per cent of all national emissions of greenhouse gases.
Then, in February 2015, Vesey was hired as its new chief executive and managing director. He immediately flagged a change of course away from coal. He commissioned a detailed internal report into how AGL might adapt to a “carbon constrained future” and subsequently told Guardian Australia that: “We need to be out of the CO2 emissions business.”
The same month, AGL announced its intention to close Liddell. The government came down on it like a tonne of bricks.
“I think the government was looking for a fall guy,” says Dan Gocher, director of climate and environment at the Australasian Centre for Corporate Responsibility. “They were looking for someone to pick a fight with over accelerating the transition.”
The fight went for two years and when it was over Redman was installed in Vesey’s role. According to Buckley, his “No. 1 mandate [was] to appease the federal government”.
Buckley notes that Redman “was also the CFO before Vesey’s appointment, who signed off on the acquisition of the coal plants”.
Following Redman’s appointment, another former executive says, many of Vesey’s transition initiatives were abandoned.
“AGL had built up quite a big pipeline of projects, new potential solar and wind projects. And Brett set about selling those off,” the former executive says. “Then, this not long before Redman himself left, [in April this year], AGL bought into Tilt Renewables for their development pipeline”.
By that time it was obvious even to AGL’s new bosses that the situation was dire. Wholesale power prices, which had averaged more than $100 a megawatt in 2017, had more than halved.
In February the company wrote down the value of its production assets and contracts by $2.7 billion, a move it blamed on “lower technology costs”, by which it meant cheaper renewables. It also pointed to “policy measures to underwrite new build of electricity generation”, by which it meant the NSW government’s decision to foster 12,000 megawatts of renewables by 2050.
Other big generators, including Origin Energy, also suffered write-downs. But AGL was particularly exposed because it was so strongly into coal, says Laura Hillis, director of corporate engagement at the Investor Group on Climate Change, who engages with companies including AGL, on climate risk.
“Actually,” she says, “companies like AGL have a fairly straightforward pathway to decarbonise, compared with airlines or cement makers for example. You close your coal-fired power stations over a period of time and you invest in renewables.”
In other OECD nations, most utilities will have closed their coal stations by 2030, in line with the advice by the International Energy Agency on the steps that must be taken if global warming is to be limited to 1.5 degrees Celsius, she says.
Origin has only one coal-fired power plant, Eraring, near Newcastle, “which is slated to close around in 2032,” says Hillis. “So it’s much more closely aligned with that trajectory. They also have a science-based emissions reduction target.”
But AGL plans to run Bayswater to 2035 and Loy Yang until 2048.
“If you’re an investor,” Hillis says, “you would be wondering, even if the asset is something that is still possible to operate, whether it would actually be delivering energy at a reasonable price. It’s likely that it won’t be.”
Through its own short-sightedness and by pandering to the Coalition’s climate reactionaries, says Buckley, AGL finds itself “stuck between a rock and a hard place, between the government and global shareholders”.
The major asset managers are now “all in on climate change”.
Take the giant US fund Blackrock, which has $US9 trillion under management, including a substantial stake in AGL. At last year’s annual general meeting, Dan Gocher’s outfit put up a resolution that AGL bring forward its plant closures by 12 years, to 2036. Blackrock voted with them.
In a bulletin, the giant asset manager said it was doing so “because we believe the company, and its shareholders, would benefit” from earlier closure. Blackrock cited AGL’s own analysis, commissioned by Vesey.
So why is the company so resistant? According to Gocher, the new time line would require AGL to rehabilitate its heavily polluted sites, a massive expense for which it has not sufficiently provided.
He cites analysis of the company’s financial statement, done in March by Environmental Justice Australia, which showed AGL had allocated $344 million for four sites – Liddell, Bayswater, Loy Yang A and its Camden Gas Project.
The report concluded that this amount was “unlikely to cover the costs of rehabilitating one power station, let alone four”.
Nick Witherow, principal lawyer at Environmental Justice Australia, says AGL has subsequently increased it rehabilitation provisioning – perhaps to as much as $1.1 billion.
But the accounting is complicated, he says, by the “discount rates” the company has applied to the expenditure at those planned future closure dates – essentially the future value of money.
“In today’s dollar terms, to my understanding, they’ve increased the provisioning by $313 million.”
He doubts this is anywhere near enough to cover the costs of rehabilitating AGL’s sites. And the company’s de-merger plan, which loads those assets into the new company, has fuelled further suspicion about whether it intends to meet its obligations.
Greenpeace Australia has described the de-merger plan as “putting green lipstick on a pig”.
Last month, AGL failed in a copyright and trademark court action against the environmental group over a campaign to draw attention to AGL’s huge carbon emissions, using the AGL logo and featuring the slogan, “AGL – Australia’s Greatest Liability”.
Greenpeace now plans to escalate. “We’re only really just getting started,” says senior campaigner Glenn Walker.
As well as raising public awareness about AGL’s emissions, he says, Greenpeace is building a database of the company’s customers and financiers.
“It’s about time people understood that AGL is a coal company, essentially. Eighty-five per cent of their power is generated from coal,” Walker says.
“We are engaging directly with AGL’s investors and making sure that they know how risky it is to continue supporting the company.”
On recent evidence, from the likes of Blackrock, as well as from analysts and the tanking share price, they might not take a lot of convincing.
This article was first published in the print edition of The Saturday Paper on July 10, 2021 as "Exclusive: Frydenberg pushed AGL to sack boss".
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