51 AGL Energy Limited Annual Report 2011 The maximum LTI notional allocation of SPRs varies between  approximately 10% and 100% of TFR for Senior Executives,  including the CEO. In the year ended 30 June 2011, 22 employees participated in  the LTI plan. AGL has chosen these hurdles because, in conjunction with the  ‘clawback’ mechanism: The calculation process is as follows: Example: Calculation of financial year 2011 (FY11) notional grant of  Share Performance Rights: The hurdles used to determine whether SPRs are banked are  selected on the basis that rewards correspond with returns that  shareholders receive. LTI is measured according to two hurdles: annual Total Shareholder  Return (TSR), and annual growth in EBIT/Funds Employed (i.e. EBIT  divided by Funds Employed). (c) Funds Employed associated with Upstream Gas assets  (currently these assets are intended for long-term value  creation through proving up gas reserves). This adjustment  will continue to be made until such time as the investments  have matured to the point where EBIT is the most  appropriate performance measure. (d) Growth capex in excess of $50 million until the completion  date of the project. (Removing these assets until they  commence EBIT production provides the correct driver for  investing in the future). > Participants are notionally granted SPRs at the start of the  financial year, that are banked at the end of the financial year if  applicable performance hurdles are met. > SPRs are banked in notional share bank accounts kept for each  participant – a separate notional share bank account is kept for  each performance hurdle. > If applicable performance hurdles are not met then a ‘clawback’  of previously banked SPRs occurs via a deduction of SPRs from  the participant’s relevant bank account. > TSR rewards consistent performance in the generation of  sustained shareholder value over the long term. It aligns the  interests of shareholders and Senior Executives with the  achievement of AGL’s strategic goals; > After each year’s banking (which may be positive or negative)  40% of any positive balance of SPRs in a participant’s relevant  bank account vest and are converted to fully paid AGL shares at  no cost to the participant. Any remaining positive balance of  SPRs in the participant’s bank accounts is carried forward to the  following year and may vest or be clawed back in future years. > EBIT/Funds Employed encourages the efficient use of capital in  a capital intensive industry. This hurdle correctly focuses Senior  Executives on improving AGL’s Return on Funds Employed. AGL  has a consistent accounting policy which controls adjustments to  EBIT, whereby we do not permit significant EBIT items (or indeed  adjustments in carrying values) to influence the outcome of  this calculation. > If the balance of a participant’s bank account is negative, this  negative balance rolls forward to the following year. > If a participant ceases employment before the expiry of the  vesting period as a result of total and permanent disablement,  redundancy, retirement, death or any other exceptional  circumstances determined by the Board from time to time, any  positive balance of SPRs in a participant’s bank account will vest  or any negative balance is eliminated. 1. At the commencement of the financial year, each participant  receives an initial notional grant of the number of SPRs  determined by multiplying their total fixed remuneration (TFR) by  their long-term incentive opportunity (which is expressed as a  percentage of TFR), and dividing the resulting number by the  Volume Weighted Average Price at which AGL’s shares traded on  the ASX during the 30 calendar days up to and including 30 June  of the preceding financial year (see example below). Fractional  entitlements are rounded up. > If a participant ceases employment before the expiry of the  vesting period in other circumstances, any positive balance is  forfeited or any negative balance is eliminated. > The Board has no discretion to waive performance hurdles for  the vesting of SPRs in the new LTIP. > TSR takes into account dividends, changes in share price and  capital returns. > EBIT/Funds Employed measures the return AGL is getting  from its funds invested. EBIT is calculated before the impact of  significant items and any contribution from Upstream Gas.  Funds Employed are defined as Average Total Funds Employed,  calculated on a monthly basis, adjusted to remove the impact of: (a) Derivatives balances (these balances are fair value  adjustments and do not represent Funds Employed in the  production of EBIT). (b) Tax balances (Funds Employed are pre-tax balances to make  the calculation consistent with EBIT). 3. The final number of SPRs to be banked in each relevant bank  account is then determined according to AGL’s performance  against the relevant hurdle as follows: 2. That notional grant is then split 50/50 between each  performance hurdle - that is, half of the SPRs in the total notional  grant are tested against the TSR hurdle and the other half are  tested against the EBIT/Funds Employed hurdle, at the end of the  fi n a n c i a l  y e a r . How LTI is measured How LTI works Total fi xed remuneration  (TFR) X LTI opportunity  (as a % of TFR) $14.58 (Volume Weighted Average Price at which AGL’s shares traded  on the ASX during the 30 calendar days up to and including  30 June 2010)