52 Directors’  Report 2011 Hurdle 1: Annual TSR Annual TSR Number of SPRs banked for this hurdle Equal to or greater than 14% 2 times SPRs notionally granted Greater than 4% and  less than 14% Progressive on a straight-line basis  from zero to 2 times SPRs notionally  granted Between 4% and minus 4% Zero SPRs notionally granted Less than minus 4% and  greater than minus 14% Progressive deduction on a  straight-line basis from zero to minus  2 times SPRs notionally granted Equal to or less than minus  14% Minus 2 times SPRs notionally  granted The above table is presented in the chart below using actual FY11  outcomes as an example. The hurdle detailed in the above table and chart materially reward  management only when shareholders receive superior TSR.  Conversely, management is either not rewarded or financially  penalised, when TSR is insufficient or negative. Management receives no reward until TSR reaches 4%  (a reasonable dividend yield). Immaterial rewards commence at  this point and progressively grow until a cap is reached at 14% TSR.  If the cap is triggered, the following year’s opening share price is set  at a level that would have achieved a TSR of 14%. The financial penalty for management commences when TSR is less  than minus 4%. Similar to the upside potential, there is a floor on  the financial penalty at minus 14%. If the floor is triggered, the  following year’s opening share price is set at a level that would have  achieved a TSR of minus 14%. This cap and floor mechanism assists in controlling excessive reward  or penalty to management, in any given year, where the significant  increase or significant decrease in TSR was only temporary. Hurdle 2: Annual growth in EBIT/Funds Employed 0.0 x 0.5 x 1.0 x 1.5 x 2.0 x 2.5 x 1.00 4.00 7.00 10.00 13.00 15.00 -15.00 -14.00 -11.00 -8.00 -5.00 -2.00 -2.5 x -2.0 x -1.5 x -1.0 x -0.5 x Notional SPR Multiplier Annual TSR (%) Actual multiplier was 0x Actual TSR was 1.6% Annual growth in EBIT/Funds  Employed Number of SPRs banked for this hurdle Equal to or greater than 13% 2 times SPRs notionally granted Greater than 2% and less  than 13%  Progressive on a straight-line basis  from zero to 2 times SPRs notionally  granted Between 2% and minus 4%  Zero SPRs notionally granted Less than minus 4% and  greater than minus 15%  Progressive on a straight-line basis  from zero to minus 2 times SPRs  notionally granted Equal to or less than minus  15% Minus 2 times SPRs notionally  granted The above table is presented in the chart below using actual FY11  outcomes as an example. The Board believes that the current return on funds employed for AGL  is not sufficient. The hurdles detailed in the above table and chart  reward management when EBIT/Funds Employed grows. Conversely,  management is either not rewarded or financially penalised, when  growth in EBIT/Funds Employed is insufficient or negative. The hurdles also recognise that the industry structure is such that,  all things being equal, additional working capital is required every  year because AGL must pay increased network charges monthly,  but cannot recoup these increased charges for up to three months.  This structure is beyond management’s control and that is why  rewards commence when growth reaches 2%, but the financial  penalty does not commence until there is a 4% deterioration in  EBIT/Funds Employed. As with TSR, there is the same cap and floor mechanism for EBIT/ Funds Employed that assists in controlling excessive reward or  penalty to management, in any given year, where the significant  increase or significant decrease in EBIT/Funds Employed was only  temporary. The cap and floor have been set at different rates to  reflect the working capital issue highlighted above. Note: SPRs banked under the LTIP can be both positive and  negative. SPRs can only vest if there is a predetermined  improvement on the previous year. Importantly however, if  performance falls below a predetermined level in any year,  previously banked SPRs will be clawed back to the extent  calculated under the performance hurdles. This feature provides  the opportunity to assess performance over multiple years and  therefore supports the intent of the LTIP to align shareholder  and Senior Executive interests over the long term.  4. After testing any notionally granted SPRs against the relevant  performance hurdle the SPRs are deposited into (or deducted  from) the relevant share bank account for each participant. At  the end of every financial year 40% of any positive bank account  balance is distributed to participants as AGL shares. The balance  (if any) of each bank account is carried forward and may vest or  be clawed back in future years. Any negative balance is also  carried forward. The below example shows how the LTIP worked in July 2011 for  the CEO (using actual figures). 0.0 x 0.5 x 1.0 x 1.5 x 2.0 x 2.5 x 3.00 6.00 9.00 12.00 15.00 -16.00 -12.00 -15.00 -9.00 -6.00 -3.00 0.00 -2.5 x -2.0 x -1.5 x -1.0 x -0.5 x Notional SPR Multiplier Growth in EBIT/Funds Employed (%) Actual growth was minus 7.3% Actual multiplier was minus 0.60x Calculation of SPR award to CEO Michael Fraser Total Fixed Remuneration 2,000,000 Notional LTI allocation (100% of TFR) 2,000,000 VWAP of share price to 30 June 2010  to calculate notional grant of SPRs $14.58 Number of SPRs notionally granted 137,175