AGL Energy’s slow energy transition leads to board exodus, should ring alarm bells for companies

AGL’s board exodus and the abandonment of its planned demerger should be a warning to all companies that are going slow on energy transition. Picture: Brendan Beckett/NCA NewsWire

The AGL Energy board must be feeling a little bit like the Liberal party. What just happened? It has been out of touch and now it is out of time.

The resignation of the chairman, chief executive and two of the longest standing independent directors of AGL announced on Monday and the abandonment of the planned demerger should be a warning to all companies that are going slow on energy transition.

In its press release the board said that it “continues to believe that the demerger proposal offers the best way forward for AGL and its shareholders” falling back on the Independent Export Report.

The board also believes that the demerger would have been supported by a majority of shareholders. We shall never know. The proxy adviser’s reports were due this week. But in any event the board needed 75 per cent of those voting.

$160m of the total $260m in demerger costs already spent are one of the prices of this U-turn. There are more costs coming. For months now the corporate mindset has been two separate businesses, one clean retail company with renewables, and the other holding coal fired power stations and some wind, connected by an energy supply contract.

Realignment is a priority and whoever takes on the role of CEO has a huge people challenge ahead. Put bluntly AGL is light on energy generation experience – and that is something its major shareholder Mike Cannon-Brookes must ponder.

Both directors with the daunting task of running yet another strategic review (the last one led to the demerger idea) come from a retail electricity, not a traditional generation background. Vanessa Sullivan had a career at EY before turning to largely renewables driven boards, and New Zealander Graham Cockcroft spent almost a decade at New Zealand retailer Contact Energy.

Generation experience is going to be required to push AGL through the transition if there is any hope of success for shareholder returns.

The tone of the board’s statement was conciliatory. It now believes closure of coal fired power stations will continue to be accelerated, a shift from its 2045 date for Loy Yang A. Interestingly Cannon-Brookes demand for closure has slipped back this year from 2030 to 2035.

One a lesson to come out of all of this is on engagement. From the first approach by Cannon-Brookes as part of the Brookfield takeover and later as its major shareholder, the board’s response has been remarkably hostile.

This is surprising because it was another toxic engagement that led to the shock ‘retirement’ of former AGL CEO Andy Vesey.

Ironically, in 2018 Vesey wanted to shut down Liddell Power Station and refused the then government demands to look at a sale to Alinta which would have extended the life. The prime minister then was Malcolm Turnbull, probably the most progressive PM Australia has had on climate change.

Ironically too, Graeme Hunt was the chairman of AGL at the time.

Among the chatter of likely candidates in the market for the new AGL CEO is Alinta boss Jeff Dimery. But would he look at it? Dimery is understood to be sitting on a good whack of Alinta shares that might be hard to leave given the risks around AGL.

Another name is Greg Jarvis, executive general manager at Origin. The job would be a significant step up but possible and Origin CEO Frank Calabria does not look to be moving on any time soon.

Brett Redman who also stepped down as AGL CEO in a surprise move in April last year must be counting his blessings. Now running infrastructure business Transgrid he would be rather long odds to take back the role: first there is a feeling of unfinished business between Redmond and Hunt who moved into the CEO role from chairman. But secondly, it was Redmond who pitched the demerger in the first place.

Whether Redmond’s conciliatory approach, which allowed him to repair AGL’s relationship with government after Vesey left, would have changed today’s outcome for AGL, we simply do not know.

This month, Andy Vesey was hired back to Australia to run Andrew Forrest’s FFI energy transition projects. The world turns.

It is unlikely the top job at AGL will be filled internally, although chief operating officer Markus Brokhof is highly regarded.

Whoever takes the job will need to be a good manager of people. Roles have been duplicated for the demerger and not doubt attractive packages struck.

The headquarters has moved from Sydney to Melbourne. Will Christine Corbett, the chief customer officer and incoming CEO of AGL Australia with acknowledged skills in retail, be happy to stay as COO?

And will this new CEO decide to keep on chief financial officer Damien Nicks, one of the few executives with any tenure at the company?

There is still the prospect of a takeover of AGL. The new strategic review will review “any approaches from third parties regarding alternative transactions.”

When contacted Brookfield declined to comment.

Yet even since Brookfield’s last bid, the market has moved dramatically and risk has increased.

In one way, the rising wholesale prices which have caused the energy regulator to raise retail prices will favour AGL.

That is because it has its own coal mines in Victoria and coal contracts in NSW. Its renewable energy is also at a fixed price.

There is risk though around both Loy Yang and Bayswater power station if there is any down time because AGL will need to go into the market and buy at spot prices.

The biggest risk now is with the politicians. MST Marquee’s Mark Samter warns that retail electricity prices will only go up. If the government moved in to force retail electricity prices lower, it could see a number of smaller retail players go to the wall as they have done in the UK.

Government has the capacity to intervene in the gas market, but it is unclear how else it could intervene in the wholesale electricity market if prices continue to rise. If it did, this would cruel AGL’s cash flow needed to help drive its transition.

Without a full takeover from a backer with deep pockets, Samter believes, as he has consistently that AGL will need to raise capital, especially given the ambition to accelerate the exit of coal.

“AGL spent the last few months telling us how hard it would be to raise capital as one entity, have higher wholesale prices made that much of a difference?

The business is still sub-investment grade for the majority of institutional investors, let alone before overlaying the increasing likelihood of political intervention,” he says.

The tragedy of all of this is that AGL is such an important part of the energy transition story for Australia. The company operates the country’s largest private electricity generation portfolio in the grid and supplies 4.5 million energy customers.

Can Cannon-Brookes make this a more investable business? At the moment, most in the market are enjoying the theatre and watching from the sidelines.