AGL Energy Limited (AGL) Earnings Call Transcript & Summary

Good morning, everyone, and thank you very much for joining us. My name is Peter Botten, AGL Energy's Chairman. And I'm joined today by our Interim Managing Director and Chief Executive Officer, Graeme Hunt; Damien Nicks, AGL's Chief Financial Officer; and Christine Corbett, AGL's Chief Customer Officer. Today, we're making 5 key announcements in relation to our proposed structural separation. We are confirming our intention to demerge with AGL Energy becoming Accel Energy Limited and demerging AGL Australia as a new company. We've received funding commitments from banks to support independent investment-grade capital structures for both new entities. We have appointed the chairs and identified CEOs for both new businesses, myself and Graeme Hunt for Accel Energy and Patricia McKenzie and Christine Corbett for AGL Australia. We are providing more detail about the offtake arrangements that will operate between the 2 companies. And we have provided updated carbon statements for each new business, demonstrating this separation is about accelerating our role in the energy transition. In addition, we have provided affirmation of our full year '21 earnings guidance and announced some actions in relation to our dividend to help fund near-term growth commitments. The demerger proposal will create 2 leading energy businesses, both separately listed on the Australian Securities Exchange. The Board believes that operating as 2 independent companies will provide a stronger clarity of purpose, enabling both entities to focus on the unique strategic opportunities and challenges presented by the accelerating energy transition. As one of Australia's oldest companies, AGL Energy has a proud heritage of evolution and leading change in the energy industry. This change has created significant value for shareholders in prior years by the integration of AGL Energy's strong retail footprint with its baseload energy-generating business. However, the impact of accelerating forces from customers, community and technology on the existing operating model and financial performance emphasizes that AGL Energy is now at an inflection point as the transition of the energy sector accelerates. A clear focus and more targeted strategy are now critical to best position both businesses over the longer term. Subject to final Board and other relevant approvals and importantly, shareholder approval, the separation will be complete in the fourth quarter of full year -- financial year '22. Today is an exciting day for AGL Energy, and I'm honored to be here delivering our demerger proposal as your Chair. This is not a decision we made quickly or took lightly. It's a decision that will position both entities well for the next decade. We are very confident this demerger proposal is the next step in a longstanding heritage of innovation, investment and structural adaptation to meet the needs of a rapidly changing energy industry. I want to thank you again for your time. And now I'll hand over to Graeme to continue the briefing.

Thank you, Peter, and good morning, everyone. Our demerger proposal is the next evolution in AGL's 180-year-old history and an important step in positioning us to protect shareholder value and establishing platforms for growth while providing greater customer focus and opportunities for our people. I'm now going to look at both entities in a little more detail, starting with Accel Energy. Accel Energy will retain AGL Energy's position as Australia's largest baseload electricity supplier via the Loy Yang A, Macquarie Generation and Torrens Island sites, prioritizing the responsible operations of these sites while facilitating their transition to low-carbon industrial energy hubs. Accel Energy will remain Australia's largest operator and offtaker of wind energy via the Macarthur, Hallet, Wattle Point and Oakland Hills wind farms, with the added potential to develop a further 1,600 megawatts of new wind projects. Turning now to the contractual arrangements between the entities. At the merger, there will be contracts in place between Accel Energy and AGL Australia to assist both companies in managing electricity market price and supply risks over the short to medium term. The arrangements will comprise multiple derivative contracts between the 2 entities across relevant states including fixed contracted volumes and volumes under option contracts at market prices reflecting expanded commercial energy market terms. The use of market prices and predominantly market-traded products, taking into account the liquidity of the different markets, will ensure minimal offtake market value transfer between the organizations and transparency for investors. The tenor of the contract is a reflection of the available energy in the market and hedging frameworks, while the decreasing profile over time provides Accel Energy with the opportunity to contract directly with major industrial customers and other retailers and for AGL Australia to increase supply from other sources. Looking now at the capital structure. The Accel Energy shareholding of between 15% and 20% in AGL Australia will enable it to share in value creation while providing balance sheet flexibility. The holding will have no associated Board position attached. On financing, Accel Energy has seen strong support from banks to establish a prudent investment-grade debt structure. We have received commitments from an -- for an amortizing line of up to $800 million and additionally, revolving cash and swingline facilities to fund short-term working capital requirements. And subject to Board approval, this prudent capital structure is expected to enable sufficient free cash flow to support the payment of dividends. Moving on to the advocacy price of Accel Energy. Importantly, Accel Energy will work with government and other key stakeholders and policy decision-makers to advocate for the establishment of effective frameworks to enable an accelerated energy transition. We will look to drive a framework that protects affordability and system security as well as the fair economic interest of its workforce and capital providers. This will require market design that recognizes the value of existing infrastructure, support required for new generation and system security services and the benefits that can be derived from incentives to accelerate industrial decarbonization. I'll now turn to an overview of AGL Australia. AGL Australia will be Australia's largest energy-led multiproduct retailer of essential services for households and businesses, providing more than 4.5 million electricity, gas, broadband and other services. AGL Australia will retain the AGL brand. It will own and operate AGL's largest private hydro fleet as well as AGL Energy's fast-start gas-fired power stations, a growing portfolio of battery development and other wholesale and decentralized electricity and gas trading, storage and supply capabilities. The flexible generation and storage assets will enable AGL Australia to manage its short energy position and reduce the risk and volatility of high price [ stakes ]. In addition, AGL Australia will be carbon neutral for scope 1 and 2 emissions with a clear pathway to carbon neutrality for all electricity supply. AGL Australia will work to drive reforms that continue the uptake and integration of decentralized energy systems, services, electric vehicles, broader demand-side participation and the development of new flexible generation. These reforms must aim to maximize shareholder value between energy businesses and customers, leverage private sector investment and minimize energy costs on households and businesses. Moving to the capital structure for AGL Australia. Again, pleasingly, we have received strong bank commitment for AGL Australia capital structure. Here we have received commitments to facilities totaling up to $2 billion, complemented by our USPP notes. The essential nature of the services AGL provides is strong brand and competitive position support the investment-grade credit rating. And subject to Board approval is we're expecting -- is we expected AGL Australia will target a dividend payout ratio range referable to underlying earnings after tax. Speak now to the merger process and timing. The proposed demerger is still subject to final AGL Energy Board, relevant regulatory court and shareholder approvals. The team has put in a gargantuan effort to date, and I want to thank them for all their hard work. There is still a lot more to be done, but we anticipate completion in the fourth quarter of FY '22. In the meantime, AGL will progress towards implementing new internal operational structures during FY '22 with a view to accelerating its efforts of more focused organizations following the demerger. In closing, as the Chairman rightfully stated, this is an immensely exciting time in AGL's 180-year-plus journey. We certainly have a lot of work ahead of us. However, we are confident of our strategy. I would like to take this opportunity to congratulate Patricia and Christine and to say how honored I feel to be given the responsibility of leading AGL Energy through its transition and subsequently to lead AGL -- sorry, to lead Accel Energy. I'm proud to be and look forward to working with our Chairman, Peter Botten, and the rest of the leadership team to drive the separation on completion, creating 2 leading energy businesses and delivering a successful outcome for AGL shareholders and stakeholders. On that note, I will hand over to Chantal Travers, AGL's Head of Investor Relations, who will moderate today's question-and-answer session.

Thank you, Graeme. [Operator Instructions] Now our first question comes from the line of Tom Allen. Please go ahead, Tom.

First, congratulations to the newly appointed executives of each of the respective entities. My first question is to please clarify the strategy behind Accel owning 15% to 20% equity in the demerged AGL Australia entity. So what additional balance sheet flexibility are you expecting to arise from that ownership stake? And then is it the intention for Accel to sell that stake and demerge entirely within the next 2 to 3 years?

Thanks, Tom, for that question. I'll start off and then I'll invite Damien to add anything to my answer. The intention, obviously, as you've identified is to give Accel more balance sheet flexibility. It's obviously an asset on Accel's balance sheet. In terms of the future use of that asset, it will depend obviously on the future outlook for Accel, its growth opportunities and other factors obviously that will drive the cash generation and earnings of Accel Energy over time. So we're not predicting or expressing any likely timing of what we would do with that cross-shareholding. That's a decision for Accel Board in the future. Damien, anything to add?

No. I think the only other comment I would make is there won't be a Board seat held by Accel into AGL Australia. So that's probably the only comment I'd make. But it is for that balance sheet flexibility. And also, I suppose to enjoy any uptick in the value of AGL Australia as it launches.

Right. Right. So then just staying with the same question on the balance sheet then. Can you confirm that the 2 entities are targeting a Baa3 credit rating? And can you then perhaps provide color on how much additional capacity you might receive on credit metrics like FFO to net debt by dropping to Baa3?

Yes. Look, I don't want to preempt the final rating by our credit agency. What I would say is AGL today is a Baa2 rating. What we expect will be, if you think about the 2 entities, AGL Australia [ is ] a strong customer, it's high-quality assets and lower ESG profile, it should rate higher, whilst Accel Energy is going to have a really strong cash flows, but it will have a high ESG profile. So it may rate lower. So that's why I don't want to preempt what those outcomes would be. But just to say today, AGL is Baa2.

Thanks, Tom. The next question comes from the line of Ian Myles.

Just more on the near-term earnings. You lowered expectations into the -- for EBITDA to the bottom half of the guidance range. Just sort of wondering how much more -- and you flagged FY '22 further pressure. Can you sort of quantify the sort of dollars per megawatt hour? How much is sort of in the pricing that still has to come through into the earnings?

Look, it's Damien again. Look, I'll take that question. We will provide, as we ordinarily do, subject to Board approval, update to our guidance when we come back out in results. What we are flagging, though, and as we said the last couple of updates is we do expect the material downside to where we are today based on where the wholesale prices have been. But as you're aware, wholesale prices have come up a lot quicker, a lot more rapidly than anyone anticipated. And just to pick up on your comments around the last quarter, if you like, what we've seen is we have seen a step-up in wholesale prices, but there has been some volatility through that period where we've had both outages and there's been some other outages in the market at the same time. So we will provide that update when we come back to the market in August. But look, what I would say is when we then look forward our hedge position, we will have already been relatively well-hedged by the time we get into next year, and that will also roll into our customer pricing as well.

Okay. And previously, you talked about divestment of assets like some of the gas assets and the likes. Is that still intended to be done prior to the merger or demerger? Or is it going to be done post demerger?

So look, again, I'll take that one. So there are processes underway. I won't necessarily comment on timing, but we're looking to, I suppose, move through that as quickly as we can. We have a few processes underway as we currently speak.

Thanks, Ian. The next question comes from Peter Wilson.

One for you, Damien. At last update, you said that you expected this demerger could be done on a neutral cost basis. Just hoping you could provide an update on what you expect in terms of the ongoing costs of separation and also the additional working capital requirements?

Yes. Let me break it into a couple of parts. I think the comment I made at the last update in March was to do with our expectation the dissynergies of having 2 organizations would be offset through the synergies of having leaner, more focused organizations. There will be, on top of that, the cost of separation. Now I know there have been some comments through the market, but we haven't provided that update today. That will come at a later stage as we continue that detailed planning. There will be significant costs. And I think the way to think about those costs is in the realm of other complex demergers that have taken place in the marketplace. AGL is an integrated business, which we need now to unwind over the next 12 months. And if you think about it, the key costs we'll have will be the IT separation, the trading separation and then the advisory costs around that. But I would say that a huge amount of work has gone into this today, and it's now into sort of fine-tuning basis.

Okay. Can you just clarify what you mean, I guess, significant? Just to clarify whether you're talking about the one-off costs related to separation or also the ongoing cost of having duplicate...

Yes, just the one-off costs of the physical separation. Then go forward, we expect the synergies to offset the dissynergies of having 2 organizations in the market.

Thanks, Peter. The next question comes from the line of Rob Koh.

And yes, congratulations to AGL and the team for all the work that's been done. So I guess my question is just drilling into the operations involved. Can you give us a sense of how many systems need to be transitioned? And maybe, does one of the entities need to invest in new systems? Just give us some color on how that risk is going to be managed.

Thanks, Rob. It's Graeme. Look, that's one of the reasons why we're giving ourselves the appropriate amount of runway to get this done, as you would envisage both entities need to have a trading capability. So we need to be able to set up that approach. And as Damien said before, unscrambling the egg, if you like, of a vertical integrated business, particularly from a systems perspective, is complex and has to be done appropriately. So we've given ourselves a substantive amount of time to do that. But obviously, there is a significant number of approvals that we also need to work through. But the -- in terms of where we go to post-separation, the intention is to be as lean as possible on both sides, which means that each system's development will be very focused, and we'll do everything we can to make it fit for purpose and lower cost both from an investment and an operating cost perspective. So I don't know, Damien or Christine, do you want to add anything to that?

Yes. Maybe I think, Rob, your question is also sort of getting to the type of TSAs that will be in place. The principles we're working towards are to have the separation as clean as we can on day 1. It is likely, and we will have some form of TSA between the entities. Again, that will sort of come down to the final IT separation pieces. I don't want to go through the sheer number of systems, we have because some sit within one side or the other ordinarily anyway. But things like ERPs that sit between the 2 businesses, they'll need to be separated. Trading will need to be separated and some of those bigger parts. But again, we'll use this as an opportunity -- is there any system to grow and split that we also don't need going forward as well.

Yes. Okay. Great. That's very helpful color. If I can just add another question, just, I guess, on approvals. I imagine things like counterparty approvals for offtake contracts and maybe regulatory approvals for things like rehab bonds are also part of the critical path. Could you just let us know if that's right and where you're at with those?

Obviously, we've identified where all the approvals need to be, and we've started initial conversations in various areas, for example, with the IPO. You -- I encourage you to think about this also, though, through the lens of Accel remaining the mothership, if you like, and with those sites that might have large rehabilitation obligations in the future. So from that perspective, they remain unchanged. With respect to other approvals from customers and counterparties, that will be somewhat influenced by that point as well. But obviously, we'll have discussions with those parties. And obviously, we've also spoken with government extensively about this in terms of our intention. And we'll be following up again with some more detail based on what we've announced today.

Yes. And maybe just -- sorry, Rob. There's no red flag that we have in front of us as we said we stand here today going out to the market.

Thanks, Rob. And the next question comes from the line of Dan Butcher.

Just [ more of top ] line of questioning on the shareholding and debt structure. I guess is there an escrow lockup period for the 15% to 20% shareholding? And can you comment on whether you would have got that $100 million of debt into Accel without that cross-shareholding?

There is no lockup on that shareholding from Accel in AGL Australia. Obviously, the shareholding in AGL Australia from Accel is an asset. And as you would expect, ability to borrow is requested based on the balance sheet that they've got. So obviously, that was an element as you would expect all the other assets on Accel side and its future earnings and cash flow potential.

Right. And maybe just a follow-up to that. CleanCo or New AGL's implied about a 4x debt-to-EBITDA ratio based on FY '20 pro forma. Just curious how you see that as sustainable. And what are the sort of comps your internal team looked at to sort of gauge whether that was an appropriate capital structure?

Look, as you'd appreciate, I can't be sitting here today putting out forward-looking statements on what that looks like. But what I would say is, clearly through our modeling and through the work we've done with both our banks and the discussions through the rating agencies, we are comfortable where we sit today. In fact, if you think about the debt today, what we've gone out to the market for is to ensure that we sit in a relatively comfortable position. I would say it's comfortable, it's prudent, and the numbers we're giving you today is a gross debt number as well. So we'll continue to refine that as we work through with the banks and over the next 6 months.

Thanks, Dan. The next question comes from the line of Bruce Low.

Yes, just a quick one on kind of remediation, rectification cost of restoration. It sounds like from reading the release, you're hoping sort of by the end of the decade to largely have the onerous contracts for wind and also the debt largely amortized and then you sort of kick in more with restoration and remediation costs. You haven't given us any guidance in terms of if we look at Hazelwood, is that a fair comp in terms of a per megawatt cost? And what's the sort of timing? Will it kind of generally be around a couple of years around retirement date for those generators?

Look, I think the other -- you're right in terms of the changes to the capital structure over time with the amortization of the debt and the roll-off of the wind contracts. On the timing of rehabilitation, I'd draw your attention to the work that we've done already and we'll continue to do on development of energy hubs for those sites. And we see that as also affecting in a positive way, the timing of rehabilitation obligations because of the fact that the sites will be repurposed and so rehabilitation might need to occur on the closure of the coal plants. And obviously, also, we're looking for additional earnings to come out of those energy hubs progressively over time. And so the opportunity for the Board to make decisions about how we apply that increased free cash flow, after the amortization of debt and the wind contracts end, what will be an arrangement with opportunities. We also see that those energy hubs will provide opportunities for other investments. We're confident that there will be people that want to invest in the transition. And so the kind of activities we see on those sites, we think there will be other debt and equity providers for over time.

And maybe just to add to that point. I think you asked the question, the majority of -- not all, but some of the PPAs are probably a little bit longer than that. But the majority of the key component of those PPAs have gone by buyback period and with a few rolling for the next 4 or 5 years afterwards.

Okay. And then Damien, just in terms of your comfort around remediation costs.

Well, very comfortable. We put out at the half year, an update to the remediation after doing significant work over the last 9 months. You'll see a further update of that -- I wouldn't say update, some more detail on the rehab as part of the accounts when we publish in August in terms of just breaking that out as you expect by the sites as well. So very comfortable, yes.

Thanks, Bruce. The next question comes from the line of Mark Samter.

Yes. Peter, I might ask this one to you just because you're at least used to my irritating questions over the years. It's 53 weeks since you completed a $620 million buyback. I know this sounds confrontational, but obviously, 3 of the 4 new jobs announced today have gone through Board Members of AGL that signed off on that buyback. Can you tell us what, I mean, you think the Board has learned? And I guess, why we should have confidence that clearly, forward-looking wasn't exactly optimal 53 weeks ago, why we should have conviction that the Board is progressing with the right path with this demerger with high structuring?

Yes. Thanks, Mark. As always, I appreciate the question, and I'll do my best to answer it appropriately. Look, I suppose, there is no doubt that the winds of change in the electricity market have been substantially faster than many people had anticipated. Certainly, from my perspective, those winds have been extremely fast. And I certainly didn't see quite the level of change and the acceleration of that change here in my thinking 12 months ago. And I believe that, that would be representative of the AGL Board. There's no doubt that the progressive intervention into the market of various governments and government regulation, the transition to low carbon and the impact of renewable generation has moved the market and will continue to move the market extremely quickly. Having spent a substantial amount of time, and Damien mentioned it, and Graeme, and I did as well. We've spent a lot of time studying how best to preserve and then grow value within the AGL context. The analysis of where we've got to today in terms of demerger, we genuinely believe is the best way forward for both organizations in that it separates carbon-heavy from carbon-light. It gives each organization greater levels of confidence about where it can go, what it can do and develop its own unique strategies for different parts of the business. Now clearly, the performance of AGL over the last 12 months or so, given its -- the nature of its business has been disappointing. And directors, I know, certainly are not walking away from that fact. I think part of the process of where we're going in the new structure is that I think there is a genuine, genuine view that we want to do whatever we can to turn the ship or ships around and hedge them into these forces. And we think with the Board that we have, the separation into 2 Boards and with the definition of strategies for those 2 entities in a more defined way will be appropriate to restructure the Boards accordingly with appropriate skill sets for each individual entity, reflecting the needs of those skills. Now I don't -- I'm not in any way deflecting criticism of our performance. What I can say, though, that we're all very committed to people that are there and are staying -- are very committed to turn the ship around. And we think the demerger is an appropriate way of doing that. And we're very committed to do that. And as you know, Mark, we go back a long way. I'm not somebody who [indiscernible] to challenge, and I genuinely feel we all have a responsibility to turn this around. I think the demerger process that we outlined today has the best opportunity to do it. And I'm looking forward to that challenge, albeit not an easy one.

If I might to do what everyone else has done and extend the question into -- I mean I've got a second question. I mean if we take what Damien said about the cost will be towards what more our complex demergers have been, I mean history sales from other listed businesses that more than dwarfs the $400 million to $500 million you're saving from scrapping and underwriting the dividend on the balance sheet probably [indiscernible] from the best case we're saying, but probably worse by the time we physically demerge. Is New AGL -- I guess one of the things that you're selling is that New AGL -- sorry, I'm not using the right name. AGL Australia has the ability to pursue growth opportunities that may be kind of the current structure. Do you think it's fair to say that in the current capital structure, you're painting a close to 4x net debt to EBITDA is still hamstrung, and therefore, it's not fair to say that we probably need an equity injection into whichever entity or entities we do it? But in the current capital structure, do we not think AGL Australia is hamstrung in its ability to invest?

Damien, are you going to take that one? Or do you want me to take it?

Yes. Look, what I will say -- again, I'm quite conscious of not giving you a number. It will not be $400 million to $500 million, I think, the number you quoted there, Mark, of separation costs. It will not be close to that. But I don't want to get drawn on what that cost will be. It will be -- I said it will be significant, but it would also be significantly lower than that. So I'm not sure if that helps you, Mark, but yes, we'll...

We'll get to that, just not complex. That's fine. That's good to hear. It's just complex [indiscernible].

Look, I don't want to get drawn on words. What I would say is it's not going to be $400 million to $500 million. It's not going to be $30 million I've also seen quoted in the press. So we will come back with an update once we finalize that really detailed IT plan that we need to finalize.

I think, Mark, the other thing that I'd add to that is what Damien said before, the debt commitments that we've got obviously have been from banks that have been through credit and through ASP, got approval, and they're firm commitments. And obviously, in giving us that, they've [indiscernible] the balance sheet structures of both entities are going to be. So that should give the market some confidence of the fact that the -- our lenders believe that the debt can be serviced.

Yes. I guess maybe I asked the question badly. I still haven't had an answer to the question on whether you think it gives AGL Australia a balance sheet will allow it to invest in growth.

Well, there'll be -- it obviously will be in a position to benefit from the way companies like that are looked at in the market. And the -- we believe the appropriate leverage is in the company. But obviously, if there are outstanding growth opportunities, then AGL Australia will pursue those and look at whatever the appropriate funding arrangements are to support that growth.

The next question comes from the line of Baden Moore.

I think we've layered balance sheet a little bit. Maybe something just around as we think about the revenue profiles for the businesses going forward. You've given some detail around the offtake contracts on Slide 7. So any more detail you can talk about? Just the way it's worded, it looks like the retail business is going to ultimately just take a quarterly mark-to-market on pricing. Is that how we think about it? Or is it going to be separate trading teams within each business that -- who wins the timing of when they can contract, et cetera, through the forward market? Is there any more detail you can add to that table?

There definitely will be separate trading teams. So this is not going to be a position where one company or the other is -- doesn't have the capability to manage risk appropriately. So that's one of the things that will take some time to set up both in terms of systems and obviously making sure we've got the appropriate capability for day 1 to have the trading capability in place. And obviously, there'll also be a carryover of appropriately what our hedge position is on day 1, minus 1, if you like, into the new offtake arrangement. And as you can see there, we've done a lot of work on what we need to have in different markets and to have a prudent risk management approach. But ultimately, the hedge policies of each entity will be determined by the Boards of each of those entities. So Damien, is there anything you want to add to that?

Yes. Look, I think the way we constructed this and thought about this, clearly very deeply as we've worked our way through this is to set up AGL Australia as the prudent retailer would ordinarily do. So that's what sits behind this. It will also, therefore, give the market between both entities clarity about how the pricing is being set. The pricing itself won't be set until the point of demerger. Obviously, looking backwards, it will be then what the traded price is at points in time before we demerge. And it will be, therefore, if you think about it, again, from AGL Australia's perspective, if we're managing that inherent risk, managing price and customer tariffs as it looks forward into the year ahead. So I think a huge amount of work has gone into that. We're also doing more work on the [ SA ] market as well as we work our way through this.

Yes. So to be clear, market-based pricing and an offtake volume profile that is appropriate given the rank down of coal-fired generation over time. But for a period there to make sure that AGL Australia has some certainty to underpin its market obligations, but it will have the freedom, obviously to buy elsewhere and hedge obviously its share, as well as Accel. It will obviously have strong industrial customers, but it will obviously be in a position to sell to others on the basis or whatever its uncommitted volumes are.

Right. Can I just add one more, just on thinking about that risk? Because it is also fairly fundamental to your capital structure. I mean we've seen reports of your loan receiving some support -- some government support. Are you in negotiations? Have you spoken to government about potentially financing support for the older assets? Or is that something you're not going to be doing?

No. You'll see in our press release that we talk about -- and I spoke in the opening comments about the need for Accel Energy. In fact, AGL Energy as we stand today, to appropriately advocate for a smooth and proper transition of the sector. And a key part of that obviously is the ordinary closure of coal-fired generation as part of the decarbonization direction. So as a result of that, we've been in conversations for a long period of time about that transition, and the stock being looked at by government in terms of how the NEM will operate post-2025. And there's a realization, obviously, that the services that coal-fired generation delivers to the NEM, they're important and need to be appropriately recompensed over time. So we will be, as AGL Energy, continuing. But certainly, beyond the demerger, a key part of what Accel Energy will be doing is advocating strongly for the shape of the market to make sure that those generating assets continue to have an orderly transition, but also that there is appropriate arrangements for incentive in new renewables capacity. So getting the balance right is important, but there needs to be a smooth transition out of coal.

[Operator Instructions] The next question does come from the line of [ Alex Watts ].

I know we've spoken on it a little bit already with respect to the remediation liability. I'm just interested in this bullet point on Slide 16, in particular with respect to the balance sheet and the criticality of reducing that remediation liability for your pro forma balance sheet at Accel. Just wondering how -- I think the last disclosure from FY '20 showed about $345 million of current and noncurrent provisioning there. With the upcoming review with the FY '21, is there a delta that we should be looking for there that could be seen as integral with that balance sheet capacity of Accel as a stand-alone?

Yes. Look, I'll take that one. We actually did an update to the market as part of the half year. You will see there's 2 adjustments: one, to looking deeply at what the remediation needs to be for each of our sites, and we had a number of consultants working with us over about 9 months; the second being the change to our discount rate. So close to $1 billion on the balance sheet. What I would say is, conservatively, we have the rehabilitation model as if it happens when the assets are closing. So we're not making any changes to assumptions around should we do anything with the hubs and therefore reshape that? It is the most conservative position that we could have today.

The next question comes from the line of Peter Wilson.

I'll withdraw this question in the interest of time.

Great. Thanks, Peter. Next question comes from Tom Allen.

Just recognizing plans for Accel to redevelop its thermal generation sites into these low carbon industrial hubs. And recognizing they're still in the concept and design phase, how confident are you that these projects can achieve the ROEs of up to 8% as targeted in the executive LTIs? And will those return hurdles still apply to the 2 entities?

Starting from the back end of that. Obviously, the Boards of both companies will determine what the appropriate incentive arrangements and targets will be. There'll be obviously some decisions that the Board will take at the time of separation as to how they've dealt with the respective existing arrangements on foot, I might ask Peter to talk about. But the hub concept, there's been a lot of work done on it. We've worked and analyzed in other parts of the world. The concept on Page 15 is built out of the reality of what happens in other places. But we've already taken steps, it is shown on Page 16, to move in the direction. So this is not a pipe dream. We've been working on this concept for some time, but the more work we've done on it, the more positive and excited we are about the opportunity there. Some of those commercial arrangements might be of the form where we're closer to a landlord than an investor. But there will be some things that will be on the other end of the scale, as we've done with batteries, as we've done with the [indiscernible] where we will be the prime investor. So it will be on a case-by-case basis, and we'll obviously build into -- our plans and our targets will drive whatever it is the incentive arrangements for executives moving forward. But I'd invite Peter to add anything to that answer.

And just, Graeme, just to -- our [ associated ] Board here about the remuneration structure that's on foot. I think the Board is absolutely of a mind to understand and recognize the performance over the last 12 months or so. And I think that will be recognized in remuneration outcomes that will be obviously finalized in the short term. For the new entities, clearly, it will be the responsibility of the new Boards of both organizations to set structures and targets for those entities. And obviously, that will be -- there'll be a lot more detail of that that will come through the scheme booklet and other documentation and communications through the first half of next year.

Okay. So I'm hearing that the new Boards will set new hurdle rates.

The next question comes from the line of Gordon Ramsay.

I've just got one question on the dividend policy for the Accel company. It's going to be a free cash flow-based dividend. Are you prepared to underwrite that at a base level? And I know you're talking about wholesale electricity prices being quite variable, but I think to attract investor attention in the stock, I just wanted to know if you'll be prepared to provide a base level of dividend for that company.

Thanks for the question, Gordon. Again, I think that's a decision that the Board of Accel will need to make. We're potentially the best part of 12 months away from this demerger taking effect. And so obviously, the Board will -- of Accel will look at what the -- also energy prices are because that's obviously a key driver of cash generation and free cash and determine what the dividend policy will be. But there's no assumptions in where we are at the moment about anything to do with an underlying of dividends going forward.

Okay. Just on same theme. So it's a free cash flow-based dividend. Can you confirm there's not going to be a debt metric overlying that like net debt to EBITDA or any other factors relating to the debt level in the company?

Well, again, there'll obviously be a decision for the new Board to determine what set of internal KPIs it wants to use to be confident about its dividend policy and quantum. And obviously, as you would expect, there will be another set of metrics and covenants that we like to -- to the debt position, which should just be [indiscernible]. This will be normal kind of governance processes, which would be undertaken at that point in time to determine what is the appropriate dividend position. Obviously also influenced by the growth potential and potentially also from any dividends that flow back out of the investment in AGL Australia will be another source of cash.

Thanks, Gordon. The next question comes from the line of Giles Parkinson.

I might have missed this. I was just wondering about the thinking behind the name Accel. Best I could think it was a shorthand for accelerate and it seems to be given to the company marked slow. And I'm just wondering, you seem to have accepted that baseload fossil fuels no longer has a place in AGL's structure. I'm just wondering if you're thinking that the same thing applies basically to the National Electricity Market.

Let me try to unpick that, and then I'll ask Peter perhaps if he wanted to add anything to that. Look, the concept of Accel, yes, it points to the fact that the change in the electricity market is much faster than was previously predicted. It also points to the fact that we want this company to excel in everything that it does. And the logo points to the key stakeholders in terms of our employees, our customers and our communities. So that's the background to that. In terms of the transition away from coal, we've talked about our -- in the documentation about the carbon statements of both entities. We've talked about the reduction in emissions that will occur, and we will publish targets on an annual basis in Accel, which will give an indication of what the decarbonization over time will be. So all of those things are a stronger realization and commitment to the direction that we recognize that the NEM will take over time. But as I said earlier, there's a lot of ongoing reliance on coal-fired assets to support the NEM currently, and that's not going to disappear overnight. What we need obviously is a transition of the NEM that protects the ability to keep the lights on and, at the same time, move through a proper transition of different forms of generation.

The next question comes from the line of Rob Koh.

Just a more ESG-focused question. As a result of this demerger, can you point to additionality in either greenhouse gas emission reduction or renewables investment? So I guess what I'm saying is, is there anything as a result of the demerger that is unlocked on those fronts? Or putting it negatively, could we not have done all of these things within the existing AGL structure?

Robert, I think that is an element of creating and protecting the [ interests ] of shareholders. This separation allows for a more focused approach to big optimization on both sides. And obviously, with all the focus that has been on the balance sheet and the questions today, there is not a do-nothing case here that's attractive to shareholders in our view. And so this separation is the best way forward for shareholders. And an element of that that we're giving consideration to is obviously the ability to invest in growth and value creation. And we think that results from the separation and the ability to appropriately manage ESG issues moving forward as 2 entities is viewed as more -- being able to take a more focused approach on that than we can today.

The next question comes from the line of Dan Butcher.

A couple of quick ones, if that's okay. Just wondering, you've got CEO and Chair for each company, how about CFO? And what's the market going to be in Accel?

Yes. Look, I'll take that. Those decisions about next layer of organization are in the pipeline. We've got a very strong management team, and we'll be finalizing the next layer of management over the -- probably within the next 6 weeks, and we'll announce that to the market. Christine and I will obviously work closer together in consultation with the Board on those activities. And I think it's fair to say that we will have the people you would expect to see in our organization will pop up in important places, no doubt supplemented by some additional talent that we may well bring into the business and some others.

Right. And maybe just a quick one, just on how you're going to report for next year. Are you going to show pro forma and AGL complete for FY '22? And are you going to give guidance for FY '22 for AGL as a whole, even if it might still fall into the year?

So let me take that one. So for FY '22, we are still AGL so we'll still be subject to Board approval. We will provide guidance at the August results for AGL. While -- what we will be doing, though, is you see in sort of like these summary pro formas, we'll do a split of that for the FY '21 year as well as part of the August results. And then through the accounts, we'll be looking to provide some more information about what those segments may look like as a lot going forward.

And obviously, there'll be a half year results for AGL Energy in the normal course, and you should also expect to see more details on pro forma there in the same [ mock up ].

We've come to the end of our time. I know there's a few more questions on the line, but we will follow up with those people individually. Thank you very much for everyone's time on the call, and we will chat soon. Thank you very much.

Thank you.

Thank you, all.

Yes. Thanks, everybody.

That does conclude the conference today. Thank you for participating. You may now disconnect.