AGL plans to split, loses CEO: what next?

AGL CEO Brett Redman has resigned “suddenly” in a turbulent week for Australia’s biggest energy company. He was immediately replaced by Chair Graeme Hunt who will manage the business until it reaches its as yet unspecified demerger date some time in 2022.

That’s when AGL plans to split into two separate businesses: a retailer with supporting technology portfolio looking low-carbon and very 21st century, and a generation business running down the clock on coal generators as well as gas and large scale solar and wind.

The plan was announced by Redman last month was an attempted circuit breaker in the declining commercial fortunes of the company.

AGL has hit strong headwinds over the last five years on two fronts. Its profits and share prices have declined since 2017 as renewable generation has surged, bringing down wholesale electricity prices. Its relationships with governments have soured, starting with former CEO Andy Vesey who got bogged down in a heated feud with the Federal Government over the future of the Liddell power station.

More recently they have found themselves on the wrong side of the NSW Government after AGL reconsidered investment plans after a major regulatory intervention in that market.

Reputations with governments are now so important because governments are underwriting almost all new electricity investment. The only two exceptions have been the Barkers Inlet power station and a new 250 megawatt battery in South Australia, both built by AGL.

The shock departure of Redman is unhelpful for AGL on multiple fronts. First of all the demerger plan was Redman’s baby. As Redman said: he created it, sponsored it, presented it and championed it. Now three weeks after announcing it he is leaving when much of the work to complete, implement and complete the process is yet to be done. So that doesn’t make much sense.

The company line was that Redman decided he didn’t want to take either of the more junior CEO roles in the demerged businesses and so decided to step down. Redman’s future surely would have been a conversation that would have taken place before the demerger announcement, and Redman’s perfectly credible decision to not continue with either of the new businesses would have not stopped him holding the ship steady unto the split next year.

As it is, there is no apparent successor inside AGL and while Chairman Graeme Hunt will now take over for the next year, he doesn’t have experience with the hands-on operation of a complex vertically-integrated electricity business.

Hunt’s decision to pay himself a $1.65 million salary and an up front $600,000 bonus hasn’t gone down well with analysts either.

As it is, analysts are starting to pick some possibly big holes in the demerger plan, not the least of which is how the two smaller businesses carve up and manage AGL’s debt of $2.8 billion. It might be much harder for the emissions intense generator business to borrow much, leaving a lot of heavy lifting for the greener retail business.

The two new companies risk having higher overheads, less flexibility to hedge risk and split investor appetite.

While mistakes are part of business, the deeper challenges faced by AGL reflect the eventual impact of a decade of chronic government interference in Australia’s national electricity market. The next year looks like being a hard road for AGL as it tries to re-organise itself to meet the immense challenges of the 21st century.