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## Financial Results 

The statutory net profit of your company was $114.9 million, compared with $558.7 million last year. This year’s result includes significant items totalling $155.1 million, most of which arise from the acquisition and funding of the Loy Yang A power station in Victoria’s Latrobe Valley. These items will not recur in future years. 

A more useful comparison for shareholders is AGL’s underlying net profit which increased to $482.0 million, an increase of 11.8% on the underlying net profit of $431.1 million reported in 2011. Underlying profit is the statutory profit adjusted to exclude significant items and the effect of marking to market certain electricity hedges AGL has in place to manage the wholesale cost of buying electricity in the National Electricity Market. 

## Returns to Shareholders 

The Board has declared a fully franked final dividend of 32 cents per share, an increase on the final dividend of 31 cents per share declared last year. Shareholders should also note that it will be paid on all issued shares, including those issued at a discount in June 2012. In other words, the new shares will participate fully in the final dividend even though the funds received by AGL from the share issue were only deployed in the business for a few days during the year. 

A fundamental indicator of financial success is the returns generated on funds employed. A pleasing feature of this year’s result is the improvement, from 8.9% to 9.3%, in the return on funds employed in the business. Although still below the level we would like it to be to fully reward shareholders for the risks of investing in the energy industry, the improvement shows that we are heading in the right direction. 

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. 

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## Strategy 

This has been a year of transformation for AGL as we continue our strategy of vertical integration. 

There are two core elements to AGL’s strategy. 

The first concerns the “demand” side of the business. This relates to the energy products and services we provide to our customers. If AGL is to continue to grow over the long term, it is crucial that we continue to expand this side of the business as it is this which underpins investment in our upstream supply assets. 

The other concerns the “supply” side of the business. Over the last few years, we have been investing substantial amounts of capital to increase our ownership of the assets that produce gas and electricity to meet our customers’ needs. This will allow us to better manage the wholesale costs of gas and electricity in the years ahead so that we can remain a competitive supplier of energy to our customers. 

In growing both the demand side and supply side of the business, it is also important that the investments we make earn a satisfactory return for our shareholders. This means we need to be disciplined in determining the price we are prepared to pay to acquire new assets. We need to form considered views on the range of factors that may affect investment returns over the long term. These scenarios involve financial considerations such as future wholesale electricity prices, and future demand for energy. They also include non-financial considerations including, for example, future State and Commonwealth government policies on energy, and the social and reputational effects of investing in certain types of assets. 

This Annual Report details the considerable progress made during 2012 in all these areas. I will highlight just two items that illustrate the disciplined approach AGL has taken in making investment decisions to improve shareholders’ returns. 

In our Retail business, the number of new customer accounts increased by approximately 180,000. Most of these were new electricity customers acquired in New South Wales as part of a three year organic growth strategy we commenced in January 2011. This followed AGL’s decision, in late 2010, not to buy one of the electricity retail businesses being offered for sale by the New South Wales government because the price that we would have been required to pay would not have represented value for shareholders. That decision has been vindicated. Since the launch of the organic growth strategy, AGL has acquired approximately 200,000 new electricity customers in New South Wales. The discounts and incentives we have offered to encourage customers to switch to AGL have been a small fraction of the average cost that would have been incurred had we purchased a retail business from the New South Wales government. AGL has also had the advantage of being able to fully manage the new customer accounts using our own SAP billing platform. 

On the supply side of the business, the most significant strategic development was the decision to buy the Loy Yang A power station. 

We expect the acquisition to be accretive to earnings from FY2013. Before the Board approved the largest transaction AGL has undertaken since the demerger from Alinta in 2006, it needed to be convinced about a number of matters other than just the immediate effect on earnings. These included consideration of the effect the 

