AGL Energy: Downgrading to No Moat to Reflect Diminishing Duration of Cost Advantage

We downgrade AGL Energy’s Morningstar Economic Moat Rating to none, from narrow. The firm’s narrow moat was underpinned by the cost advantage enjoyed by its coal power stations. While this cost advantage is unchallenged for now, Morningstar requires competitive advantages to persist for more than 10 years to award a narrow moat rating. With its coal power stations scheduled to close in the early to mid-2030s and replacement generation assets unlikely to be competitively advantaged, it is time to remove AGL’s moat. Weak Victorian electricity futures prices also detract from expected returns in the medium term.