Business, Climate Change Mitigation, and the Investor

Money
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Dominant wisdom is coal will have a decreasing market share into the future until it becomes a small niche even among fossil fuels, and is already problematic for lenders to participate, for companies to operate under the glare of share markets, but also under the protection of or promotion by governments.

This appears to be a classic example in the making where a company has questionable interests, in this case coal. Rather than wear it the company splits into a good (eg profitable) company and a bad (eg failing) company and distributes shares of each to its shareholders. Over time the good company does well and the bad company stops paying dividends as it is perennially losing money and the share price retracts until it goes into administration or sells itself to a raider at bargain prices. It is a recurring technique in corporate ‘management’ over at least the past half century, second only to reverse share splits (eg 1 for 8). If the board needs to prop up the share price but the company’s fortunes do not justify it; voila a $10/share instantly becomes $80/share and more interesting to institutional investors (for reasons not germane here).

Investors need to be very wary as the boards, usually self serving to the Nth are happy to legally manipulate their company’s as well as their own fortunes in the name of ‘maximising shareholder value’.

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It is interesting that AGL have cancelled their gas import terminal in Victoria. It has been said that gas import is required in the eastern states as the old fields in VIC and SA and reaching the end of their lives. Yet we have vast new fields in WA and QLD. Somehow it is necessary to compress gas put it on a boat to sell it and then buy it back, import it and warm it up for local use. Or so we are told.

If my sums are correct that leaves 4 such projects still going, two in NSW one each in VIC and SA. Of these only Port Kembla in NSW has made a start. How any kind of import terminal makes sense escapes me - the wonders of the free market.

Except that it isn’t ‘free’ as the big extractors have worked together to manipulate the east coast gas market like a marionette.

The ACCC moans about the problem and declares the market to be dysfunctional but seems to think the only solution is accelerating new fields to prevent projected shortages by 2024. Clearly making the market efficient and competitive is too hard. Strange times.

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And yet with such a large loss they can still pay a Dividend to their Shareholders, seems counter to the idea of a loss that you can pay a Dividend out of a loss.

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Cash flows, notional values, tax write downs, and accounting practices. It all comes out as a simple number once all are determined. Something only a CPA might be able to explain. One might need to look to the cash accounts/reserves and loans to understand how they are still solvent. I’m not an accountant. Apparently the Deputy PM is. Whether that is where to seek further explanation or clarity, all suggestions welcomed.

As @PhilT pointed out in the OP, AGL are on the path to splitting the business into two portions. ‘Bottom of the Harbour’ it’s not, but the future prospects of one portion appear limited.

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A little OT but since you mentioned it

Many companies distribute dividends as well as executive bonuses during good and bad years. In the US it is very bad to skip or reduce dividends so companies with variable years keep war chests to fund them either as dividends, shares, or returns of capital, and some will even use their credit facilities to do so.

Our laws and customs are a bit different so dividends do go up and down and get skipped and the ASX reacts with a meh as often as not. The US exchanges would go ballistic under similar outcomes.

Back to the US as example, GE has paid a dividend for 120 consecutive years. They also did an 1 for 8 reverse split a few years ago to prop up the share price. GE has been troubled this century but still pays $0.01/share (after the reverse split) per quarter (as done in the US) to keep its record going. Yield is 0.3%, about what the money market pays.

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It is worth reading AGL 2020-21 Financial Report. The slant placed on the loss by The New Daily is quite different to reality.

The company had a significant operating profit $1.666B EBITDA (down 18% on the previous year), and the ‘statutory result was impacted, largely as already announced, by charges associated with onerous contracts, rehabilitation provision increase, Crib Point cessation, impairment and integration and separation costs’.

The separation costs are against the proposed demerger of the business, and have been assigned to the existing business which is common practice.

The reported loss is a paper losses and not a reflection on the underlying profitability of the business. It could be argued that the paper loss has been brought forward as AGL operational performance 2020-21 financial year was lower (-18%) and businesswise, they have decided to bundle a lot of things (paper losses) into this year (keep bad news in one year rather than spreading over a number which may cause long term confidence impacts on the business).

In the most developed countries yes, but there is significant coal generation under construction or planned in developing countries which is worrying. These new coal fired plants will have lives of 50+years and will need coal to support ongoing production.

An I even heard on the radio that some believe China’s will commit to zero net emissions by 2050, and possibly earlier. News like this indicates that what is being said on one hand, isn’t reflected by what is occurring on the other. It is possible that a Chinese company may be interested in AGL demerged company, to supply new and planned generation in China. Likewise with India and SE Asia. All countries on Australia’s Asian footstep.

It will be some time before it become niche…which is another depressing though.

This is unlikely to happen. Any good coal assets owned by any Australian company has a intrinsic value, and will have such values for potentially the next 30-50 years (assuming that after 2030 no new coal fired power stations are built within the world and that existing ones are decommissioned at their end of life).

Any coals assets shifted into a new demerged company makes it easier for other interested parties to acquire…they acquire the whole company and its assets subject to FIRB approval. It is possible that the demerged AGL assets will be of interest to overseas coal fired generators to secure a source of coal from a country with low geopolitical risks.

Years ago, I thought that if Australia closed all our coal mines were would force change in other countries, especially those currently developing coal generation. After speaking to someone I went through uni with who at the time was with the World Bank, put me straight. The assumption Australia can impact on the internal direction within other countries isn’t correct. He used the uranium example where Australia doesn’t allow export to countries where it may cause nuclear proliferation. Australia’s stance on nuclear non-proliferation hasn’t prevented other countries sourcing the necessary materials to develop weaponry. Likewise for coal/fossil fuels.

The only way for Australia to cause change (say around the world force all mines to close or prohibit fossil fuel export), is if every other country also sign up and ensure that fossil fuels are no longer used. Not having universal commitments means that if Australia closes it’s fossil fuel industry, markets will move elsewhere potentially where environmental, social and economic outcomes may be different. It is a sad reality.

If there is universal world commitment to prohibit the export, mining and use of coal, then AGL coal assets will become a white elephant or a albatross around the neck of the demerged company. Indications are that this is unlikely to happen for some time.

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I am not a fan of the wonderful world of accounting. A write down affects book value affects market sentiment affects value and all that. The dividends may go on but the G/L could still make it a turkey.

Buy on the rumour, sell on the news is as it always has been.

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Yes, markdowns affect asset values or what the business is worth on paper. This may or may not be reflected in share or market value of a company. It is often seen that a company posts a operating loss, shares go up…they post an increase in operating profit, shares go down. Expectations also impact on market value as do surprises.

But you have to love accounting…you can’t just rely on a headline number…the devil is in the detail.

Dividends are usually paid by cashflow, which is separate to asset values. AGL has the cashflow (cash in the bank) to pay dividends, but booked a (paper) loss in 2020-21 due to reasons outlined above. The loss is also for statutory tax reporting (won’t get into that debate about how businesses should be taxed).