Public

AGL Energy Limited 2017 Voting Intentions

Company/ASX Code : AGL Energy Limited (AGL)
Registry : Link Market Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
10:30am Melbourne Recital Centre
31 Sturt Street
Southbank, Melbourne, Victoria
Monitor : Mr Ian Graves
AGM Details / NoM : Wednesday 27th September, 2017

Ian Graves was assisted by David Jackson and Helen Manning. The monitors had a pre-AGM telephone conference with Chairman Jerry Maycock.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

AGL reported a Statutory Profit after tax of $539m compared with the prior financial year of a loss of ($408m). The increase was as a result of non-recurrence of significant items that impacted FY16 statutory result and a decrease in the movement in the fair value of financial instruments.  Underlying Profit which excluded significant items and movements in fair value of financial instruments, was $802m, up 14% and above expectations. This increase was as a result of favourable conditions in the wholesale electricity market, which more than offset higher commodity prices and a reduction in wholesale gas margins. 

Financial performance 

A final dividend of 50 cents per share, 80 per cent franked was declared, taking the total dividends declared for FY17 to 91 cents. 

Key events 

On 26 September AGL announced that it would undertake an on-market buyback of up to 5% of its issued share capital representing 33,735,619 AGL shares. During the 2017 financial year 18,887,335 shares were purchased for a total consideration of $473,016,911, at an average price of $25.04. The buyback program is scheduled to cease no later than 12 October 2017. During the 2016-17 financial year AGL made a number of announcements regarding a number of initiatives for power generation - the establishment of PARF with other equity partners, a reciprocating engine for Torrens Island in South Australia and Wind and Solar renewable energy in sides in NSW. 

In 2015 AGL announced that it would be closing Liddell Coal fired Generating Plant at the end of its useful life in 2022. Recently there have been complaints about high energy prices and the AGL’s 2016-17 results profit announcements coincided with the release of a report by the Australian Electricity Market Operating Authority which forecast that, without replacement baseload power generation to replace those plants that were closing, there would be a significant a shortage of base load power. This report, along with Government's proposed responses, has created a lot of negative publicity for AGL. In discussions with the chairman of AGL he emphasised the new investments that they had announced and foresaw further announcements in the intervening years, which would add to power supply. He also stated that one of the reasons that coal-fired generation was so costly was that it was used as standby without recompense, whilst preference was given to renewal energy generation. He was hopeful that the current policy would change to that in the UK, where plants on standby received reimbursement of costs for providing standby facilities by the Energy Marketing Authority, in Australia’s case AEMO (the Australian Energy Marketing Authority).



Key Board change

On 21 June, Mr Jerry Maycock announced that after 11 years on the Board and 7 years as chairman he will not be seeking re-election and that Mr Graeme Hunt would succeed him. This is to take effect after the conclusion of the AGM on 27 September.  

ASA focus issues

ASA's discussions with the chairman have focused on: 

- Remuneration disclosure: although there has been an attempt to improve transparency, there are still a number of issues relating to the balanced scorecard and the performance measures used for assessing the achievement of the non-financial measures for STI.

- Board alignment with shareholders: this is know as 'skin in the game.' In August, AGL released a Governance Report which included an item on this. Unfortunately, it is not as rigorous as the accepted standard used by ASA. Even so, there are three directors who do not comply with AGL's minimum.

Summary 

For the 2017 financial year, the CEO’s total actual remuneration was 82.5 times the Australian Fulltime Adult Average Weekly Total Earnings (based on May 2017 data from the Australian Bureau of Statistics).



 



 



 


ASA Position
Against
Item 2: Adoption of Remuneration Report

In both 2015, and 2016 ASA voted against the remuneration report, mainly because of:

- the STI measurement for payment for executive performance;

- CEO's remuneration being excessive, especially when measured against average weekly earnings (AWE), being 82.5 times AWE;

- vesting of LTI occuring after three years and not four years.​Last year a number of other shareholders also voted against the report with a total of 37.2% of shareholders voting against the Remuneration Report. This meant that AGL received its first strike. Because of the serious implications arising from this, ASA would have thought that a full review would have been undertaken by the board. Unfortunately, this did not occur, although limited consultations did occur.

(Click here to see ASA's AGL 2016 voting intentions, and here to see the ASA Report on the AGL's 2016 AGM)

ASA still has concerns about:

- Executive performance payments, because results this year were heavily influenced by advantageous market conditions, brought about by failure of government policy and not by the impact of executive performance. The board did not take this into their consideration when measuring executive performance.

- ​Remuneration being excessive - in 2017 the CEO and other Key Management Personnel receiving increases well in excess of CPI. The CEO receiving 9.5%, the CFO 8.3% and the Executive General Manger Group Operations 10.7%. AGL maintains that these increases were approved prior to last year’s AGM, but as they didn’t take effect until after the meeting, ASA is of the view that more cognisance should have been taken of shareholders' views and at the very least the board should have either deferred or moderated the amounts.

- ​Still no consideration to increasing the LTI vesting period from 3 to 4 years.

- ​​STI - although there has been improved presentation for the performance measures, the non-financial measures used appear to be very soft, with performance appearing to be awarded for completing a 'to do' list, rather than achieving an outcome.

Examples of this are:

- Transformation performance measure, where customer experience transformation is stated to be on target. Yet customer numbers have fallen by a further 28,000 since 2016.

- ​Growth measure, establish the Powering Australian Renewables Fund and build growth pipelines, with the outcome measurable only being the establishment and achieving an outperformance outcome.

- ​Likewise, for the MD/CEO to facilitate a strategic review - by its very nature the impact of strategy can’t be evaluated after 12 months.

- ​As well, if the performance measures were more stretching, it would be expected that some executives would only have met target and not outperformance.

- ​LTI - the TSR (total shareholder return) element has straight line vesting from commencing at 50th percentile with 100% at the 75th percentile. ASA requires that vesting not start until the 51st percentile with a maximum at the 85th. Further the minimum as the comparison with the peer group should be over four years and not three years. 

As ASA’s repeated concerns have not been considered in the review of this report, we are unable to support this motion and will be voting undirected proxies against this motion.


ASA Position
Against
Item 3a: Re-election of Leslie Hosking as a Director

Mr Hosking was appointed as a Non-Executive Director in November 2008. Mr Hosking has over 30 years' experience in trading, broking and management in metals and soft commodities, energy and financial derivatives in the global futures industry. He has also been a director of various industry bodies including the Australian Energy Market Operator Limited (AEMO).  He is Chair of the People and Performance Committee, member of the Audit and Risk Management and Nominations Committees. He is chairman of Adelaide Brighton Limited and also an Adjunct Professor at the University of Sydney, John Grill Centre for Project Leadership. During his time on the board he has not demonstrated alignment with shareholders, having served nine years on the board and only meeting 52% of ASA's expectations. Also as Chairman of the People and Performance Committee he has been responsible for the preparation and presentation of the remuneration report, which last year caused AGL to have a first strike registered against it. Although Mr Hosking is well credentialed and the chairman speaks highly of his contribution as director, ASA is dissatisfied with his lack of alignment with shareholders as well as the remuneration reports for which, as Chairman of the People and Performance Committee, he is responsible. This year although some improvements were made to the report, ASA does not consider that Mr Hosking has taken sufficient notice of the concerns of ourselves and other shareholders. For these reasons, we are unable to support his re-election.


ASA Position
Undecided
Item 3b: Re-election of Peter Botten as a Director

Mr Botten was appointed to the board in October 2016. He is Managing Director of Oil Search Limited. He also holds a number of positions with not for profit organisations being Chairman of Oil Search Foundation, Business for Development Australia, Hela Provincial Health Authority, The National Football Trust in Papua New Guinea and Council member of the Australian PNG Business Council. Although Mr Botten is a quality candidate ASA is opposed to CEO’s holding directorships, unless they are transitioning away from full-time employment as a CEO. In Mr Botten’s case, he also holds a number of not-for-profit roles and concern is held that his workload is too heavy. Therefore, ASA’s vote will be decided at the meeting, depending on what assurances he can provide in relation to his heavy workload, being his full-time employment as a CEO of Oil Search and heavy commitments in the not-for-profit sector.


ASA Position
Against
Item 4: Approval of LTI grant ot CEO/Managing Director Andrew Vesey

Though ASA acknowledges the contribution that Mr Vesey has made, ASA is opposed to the proposed issue of these performance rights as these rights will be based on the remuneration report. ASA is therefore unable to support this motion and will be voting undirected proxies against this motion. 


ASA Position
For
Item 5: Approval of termination benefits

This item is to provide renewal of previous approval of the payment of termination of benefits. This motion is seeking to refresh approvals previously approved by shareholders at the 2011 and 2014 Annual General Meetings. As this item meets ASA’s guideline, ASA will be voting all undirected proxies in favour of this motion 


ASA Position
For
Item 6: Renewal of proportional takeover provisions

The renewal of AGL’s proportional takeover provisions contained in Clause 12 of AGL’s constitution is a normal renewal of its constitutional provisions which doesn’t allow a predator to only bid for a proportion of a shareholder's interest. As ASA prefers full takeovers, we support the resolution. 


ASA Position
Against
Item 7: Conditional Spill motion

ASA generally opposes spills as it is a dramatic step to take. Therefore, although, we are again opposing the remuneration report and AGL is facing a second strike, we are against the motion because of the disruption it would cause to business. ASA will be voting all undirected proxies against the motion.



The individuals involved in the preparation of this voting intention have shareholdings in this company.


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