UPDATE 3-Australia's AGL Energy pushes ahead with split, shares slump

* AGL to rebrand as Accel, spin off AGL Australia retail business

* AGL to stop paying special dividend to preserve A$500 mln cash

* AGL expects investment grade credit ratings for both companies

* AGL’s shares drop 10% (Adds CEO, chairman, analyst comments)

June 30 (Reuters) - Australia’s AGL Energy said on Wednesday it expects to split into a bulk power generator and a carbon-neutral energy retailer by June 2022 and would stop paying special dividends to shore up the two companies’ balance sheets.

Investors gave a thumbs down on the plan, sending AGL’s shares 10% lower by the end of the day, following an initial drop of 4% after the company announced the dividend cut and warned it still expected a “material step-down in earnings” next year.

“Historically demergers have been good for creating value. But I’m not sure this one’s going to pan out for AGL,” said Andy Forster, a portfolio manager with Argo Investments, AGL’s 11th biggest shareholder.

AGL, the country’s top power producer, said it would re-brand as Accel Energy Ltd and hold the company’s coal-fired power plants and wind farm contracts, and would spin off AGL Australia Ltd, the country’s biggest retailer of electricity and gas, into a separately listed company.

“The clarity of purpose created by this change will protect shareholder value, enabling each business to focus on their respective strategic opportunities and challenges presented by the accelerating energy transition,” AGL Energy Chairman Peter Botten said.

Accel will retain a stake of between 15% and 20% in the retail business, hoping to share in any gain in AGL Australia’s value. There are no restrictions on when it could sell that stake, executives said.

AGL, Australia’s biggest polluter, first announced plans to split the 180-year-old company in March after its share price more than halved over the previous two years due to sliding wholesale power prices, pressure from the government to cut retail prices and waning investor appetite for coal power.

AGL said interim Chief Executive Graeme Hunt would stay on as CEO of Accel, while Chief Customer Officer Christine Corbett would head AGL Australia.

Investors had feared AGL would have to raise at least A$500 million in new equity to shore up the balance sheets of the two companies to secure investment-grade credit ratings.

Instead, AGL said it would stop paying a special dividend through June 2022, and would underwrite its dividend reinvestment plan, which together would give it the capacity to preserve up to A$500 million in cash ahead of the demerger.

Hunt said the company was confident of achieving investment-grade credit ratings for both new businesses.

Accel is counting on turning its coal power plant sites into clean energy hubs as it retires those plants over the next few decades and expects to be able to attract other investors as partners.

“We think there’ll be lots of others that are interested in that opportunity,” Hunt told Reuters.

$1 = 1.3312 Australian dollars Reporting by Sonali Paul; Additional reporting by Sameer Manekar in Bengaluru; Editing by Sriraj Kalluvila and Jacqueline Wong