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The calculation process is as follows: 

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. 

Example: Calculation of financial year 2012 (FY2012) notional grant of Share Performance Rights: 

<img src='content_image/178442.jpg'>

$14.23 (Volume Weighted Average Price at which AGL’s shares traded on the ASX during the 30 calendar days up to and including 30 June 2011) 

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 allocated to be tested against the TSR hurdle and the other half are allocated to be tested against the EBIT/ Funds Employed hurdle, at the end of the financial year. 

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: 

## Hurdle 1: Annual TSR 

<img src='content_image/178447.jpg'>

The above table is presented in the chart below using actual FY2012 outcomes as an example. 

<img src='content_image/178453.jpg'>

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 is 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 

<img src='content_image/178448.jpg'>

The above table is presented in the chart below using actual FY2012 outcomes as an example. 

<img src='content_image/178452.jpg'>

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 is financially penalised, when growth in EBIT/Funds employed is insufficient or negative. 

The hurdle also recognises 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. 

