AGL Energy Limited 2011 Annual Report 7 Our final assessment was that we could not see value at the prices  eventually bid for these assets given the attendant risk profile, and  decided instead to adopt an organic growth strategy. Although  the early signs are encouraging, it will be several years before the  value of this option can be assessed. However, we are satisfied our  decision was made on a well researched and fully considered basis. As we were reminded early this year, risk is a constant feature of  the energy industry. The Board regularly considers whether there  are any risks which might affect achievement of AGL’s strategic  objectives. This year, two risks have become more prominent than  they were in previous years. The first risk area could broadly be referred to as sovereign risk.  AGL has consistently maintained that State and Commonwealth  government energy policies have not provided the private sector  with the consistency necessary to make the substantial investments  required to maintain Australia’s long-term security of energy  supply. That continues to be the case. Although the Commonwealth  government’s proposal to legislate a price on carbon emissions  provides some direction, the circumstances in which the new law  was announced and the absence of a bipartisan political approach  to reducing the carbon intensity of Australia’s economy means that  there still remains considerable risk about the economic viability  of investment in new energy infrastructure. In addition, poorly  designed and overlapping State and Commonwealth government  policies to promote greater household installation of solar energy  systems has created a massive oversupply of renewable energy  certificates, the effect of which has been to cause a temporary  suspension of investment in new large scale renewable energy assets. Energy consumers have faced a period of rapid increases in energy  prices. Although the main reason for this is the substantial costs  of maintaining and upgrading the gas and electricity distribution  networks, which are owned by unrelated third parties, it is  energy retailers such as AGL which bear the brunt of customer  dissatisfaction and hostile media coverage. In our view, the most  effective way to provide consumers with lowest cost energy  and widest choice of energy providers is for State governments  to promote open and competitive energy markets and to resist  the artificial setting of retail prices. State governments other  than Victoria have been reluctant to deregulate energy markets.  Continued government intervention in price setting makes no  sense in such a competitive market, and puts at risk future private  sector investment in an industry vital to Australia’s continued  economic prosperity. The second area of higher risk management focus concerns the  development of our own upstream gas reserves and our own  renewable and low carbon intensity electricity generation assets  which are key elements of AGL’s vertical integration strategy. Many  of the projects AGL has in place to pursue these objectives are  situated in close proximity to regional communities. Over the past  12 months, community opposition to some of these projects has  increased, particularly in respect of activities to explore for coal  seam gas reserves in the Hunter Valley in New South Wales. Australia can only have a ‘clean energy future’ if its abundant  renewable and gas resources can physically be developed. Local  communities are right to expect that, in pursuing development  projects, companies such as AGL will take every care to protect the  health and wellbeing of local residents and the environment. I would  like to assure all our shareholders, and all our other stakeholders,  that the Board and management at AGL have the same expectations.  We have every intention of continuing AGL’s long history of safely  constructing and operating energy infrastructure assets. More challenges lie ahead as Australia’s energy markets continue  to evolve. In Michael Fraser, AGL has a Managing Director with the  skills and experience to lead AGL through these challenges. He is  ably supported by a highly skilled and engaged workforce. On behalf  of the Board, I would like to thank Michael and all AGL employees for  all their efforts in steering AGL through a difficult year. I would also  like to thank my fellow directors for putting their faith in me to Chair  the Board, and for their diligence, guidance and support. This was a challenging year for AGL. However, the Board is confident  that AGL’s strategy is right and that we will regain performance  momentum and deliver improved returns for shareholders in the  years to come. The Board is disappointed with this outcome, both for shareholders,  because it reflects a shortfall in our desired financial performance,  and also for our executives who are extremely competent,  professional and committed to AGL. Nevertheless this is what  alignment means, and we are confident that we have in place  appropriate equitable measures to make sure that the remuneration  interests of AGL employees, particularly its senior managers, accord  with the interests of our shareholders. As a result, short-term incentives paid this year are substantially  lower than payments made last year, due mainly to our growth in  profit being lower than target. The number of shares potentially  available to executives under our long-term incentive plan is  also notably lower than last year, as we did not sustain growth in  total shareholder returns or improvements in the return on funds  employed in the business. This means that no new share rights were  credited in favour of senior managers under the long-term incentive  plan, and in fact all participants lost some unvested benefits this year. All our senior managers, including the Managing Director, have a  very substantial portion of their remuneration at risk. Short-term  incentives are assessed on a ‘balanced’ scorecard basis (which  includes annual profit growth), whereas our long-term incentive plan  is driven by measures corresponding to growth in the underlying  value of your company. This is always a sensitive issue for shareholders who, rightly,  expect that the remuneration of senior managers should be linked  to producing results that increase the wealth of all shareholders.  At last year’s Annual General Meeting, a substantial number of  AGL shareholders voted against adoption of the Remuneration  Report. Detailed feedback from shareholders indicated that last  year’s Remuneration Report did not adequately demonstrate how  changes in executive remuneration were linked to improvements in  shareholder wealth. Whilst our policies have not changed, we have  tried hard to explain them more clearly in this year’s report. Executive Remuneration Risk Management Energy Policy Community Relations Jeremy Maycock, Chairman Conclusion