7 AGL Energy Limited 2012 Annual Report purchase of a baseload generator and large  coal mining operation would have on AGL’s  operational risk profile, and the effect  that investing in a large emitter of carbon  dioxide might have on AGL’s reputation  with investors, customers, employees and  regulators, particularly as many of our  recent investments have been in building  renewable generation assets. governments to work together to achieve  robust deregulated energy markets, and to  avoid the distortions from poor regulation of  retail electricity and gas prices. I am pleased to welcome Graeme Hunt as  a new non-executive Director. Graeme  brings to the Board extensive experience  in establishing and operating large capital  projects gained during a long and successful  executive career at BHP Billiton Group. This  is an important skill set as AGL increases  its operational risk profile following the  acquisition of Loy Yang A and commits to  building new energy assets in the future. Unfortunately, over the last 12 months,  we have seen a deterioration in public policy  development with no apparent overall  strategy or objective. Particularly concerning  has been the unpredictable determinations  of some State government regulators in the  setting of retail energy prices, especially  in relation to electricity. Some regulators  have responded to the large increases in  electricity prices observed over the last  three or four years by adopting short-term  populist policies rather than deal with the  real reasons for higher prices. This has  meant that energy retailers, such as AGL,  are unfairly bearing the brunt of regulatory  responses to high energy prices. In relation to operational risk, the Board  satisfied itself that the power station  had been well maintained and that AGL,  together with the Loy Yang workforce, could  assemble the skills and experience to run it  and the coal mine efficiently and safely. Max Ould has advised the Board that  he will be retiring as a Director following  the 2012 Annual General Meeting on  23 October 2012. Max joined the Board  of The Australian Gas Light Company in  2004. During his tenure on the Board, The  Australian Gas Light Company completed  a merger with Alinta Limited in 2006,  from which the current AGL was created.  He was one of the foundation directors  when AGL listed on ASX in October 2006,  and more recently has been Chair of AGL’s  People and Performance Committee of the  Board. Under his leadership, the People and  Performance Committee oversaw significant  improvements to AGL’s policies on  remuneration, diversity, and recruitment and  retention, as well as a substantial increase in  the level of employee engagement. The carbon tax and the renewable energy  target are often cited as the reasons for the  increases in electricity prices. While it is true  that both these items have added costs to  the industry, they are secondary to the main  drivers of higher costs – capital expenditure  on electricity networks (particularly in  New South Wales and Queensland). In relation to the reputational effect of  the transaction, the Board was satisfied  that none of AGL’s ongoing investment  in renewable energy assets would be  compromised by buying Loy Yang. In fact,  we expect that the strong cash flow from  Loy Yang will make it easier for AGL to fund  future renewable development projects. The Board also recognised that coal fired  generation would be required for decades  to come if the demand from Australian  households and businesses for electricity  was to continue to be satisfied. AGL is  better placed than most to maintain security  of energy supply while working to lower  the carbon emissions intensity of Australia’s  electricity generation assets. Capital expenditure on electricity networks  is now several times higher than it was in  the 1990s. This partly reflects the under- investment over many years by State  governments in energy transmission and  distribution infrastructure. It also reflects  the fact that peak demand for electricity  – the demand for electricity in the early  mornings and early evenings of the  hottest days of the year – has continued  to increase even though total demand for  electricity is falling as customers respond  to higher average electricity prices by  reducing consumption. This has led to  the construction of energy infrastructure  which is likely to be used only a few hours  each year. The cost of that investment is  recovered through higher prices charged  to consumers. On behalf of the Board, I thank Max for  his valuable service to AGL. His industrial  and consumer market experience has  been important in the development of  AGL’s strategy. We wish him a long and  enjoyable retirement. Finally, it was essential that the transaction be  prudently financed. Through a combination  of debt, hybrid securities, and a very well  supported issue of new shares we were  able to undertake this on good terms and  without compromising the Company’s credit  rating. In relation to the new shares, it was  important to the Board that we treated all  our shareholders equally. We were mindful  that some of our shareholders might not  want to subscribe for additional shares in  AGL. Offering all shareholders renounceable  rights to acquire new shares at a discount  was the fairest way to protect the interests  of those shareholders who chose not to  invest additional money in AGL. As part of the celebrations of the 175th  anniversary of the formation of The  Australian Gas Light Company, AGL has  been highlighting its long history of adapting  to changes in energy technologies and  customer needs. The outcomes that have  been achieved this year demonstrate that  AGL is continuing in that proud tradition.  The future promises more change. An alternative solution would be to fully  deregulate electricity prices and allow  energy retailers to offer competitive “time  of use” energy pricing. Research in Australia  and in several other countries has shown  that consumers respond to a combination  of flexible tariffs and demand management  technology, and will reduce peak demand  substantially with minimal impact on overall  consumption. We acknowledge that not  everybody will be able to modify their  consumption of energy so easily, and that  this might make energy less affordable for  some households. However, the overall  benefits will be substantial, and there  are other alternatives to deliver targeted  and effective financial support to those  households in real need, rather than using  the blunt instrument of price regulation. On behalf of the Board, I extend my thanks  to AGL’s Managing Director, Michael  Fraser, and all AGL employees for their  contributions to another successful year  for AGL. The Board would also like to thank  all our shareholders for their support this  year. We are confident that your continued  investment in AGL will be rewarding. Your Board is satisfied that AGL can look  forward with confidence to a prosperous  future. Our strategy is sound, we have a  strong balance sheet, and we have a skilled  and experienced work force. This has been a regular theme of the  Chairman’s Report for several years. A  feature of the energy industry is that  investment in energy infrastructure involves  high cost and very long investment time  horizons. AGL has long maintained that  State and Commonwealth government  energy policies have not provided the  private sector with the confidence needed  to encourage the investments required to  maintain Australia’s long-term security of  energy supply. We have also said that the  most effective way to provide consumers  with lowest cost energy and widest choice  of energy providers is for State and Federal  Energy Policy Conclusion Your Board