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The details of actual STI received for the year ended 30 June 2012 for KMP are set out in the remuneration table in section 6 on page 56. 

## Long-Term Incentive (LTI) A LTI is designed to drive performance over longer time frames to create sustainable shareholder value. 

AGL has both an ‘Old’ or legacy LTI Plan and, since 2009, a ‘New’ LTI Plan. 

Both LTIs consist of Share Performance Rights (SPRs), which vest (ie convert into AGL shares owned by the relevant Executive) over time if specific applicable performance hurdles are met. (2012 is the last calendar year in which SPRs from the Old Plan may vest). 

A SPR: 

> is an entitlement to one fully-paid ordinary share in AGL; 

> does not carry dividend or voting rights; and 

> is adjusted for the effect of any bonus issues, rights issues, and reconstructions and reorganisations of the capital of AGL. 

Participants are restricted from entering into any derivative or other financial product in relation to the SPRs to protect against an economic exposure to price movements in AGL shares. 

LTI allocations are determined based on market practice, so that AGL remains competitive in remuneration against its comparator group. 

The maximum LTI notional allocation of SPRs varies between approximately 30% and 100% of TFR for Executives including the CEO. 

In the year ended 30 June 2012, 22 employees participated in the LTI plan. 

## How the New LTI plan works 

> 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. 

> 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. 

> 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. 

> 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. 

## How LTI performance hurdles are set and performance is measured 

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 (ie EBIT divided by Funds Employed) calculated as set out below. 

> 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). 

(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). 

AGL has chosen these hurdles because, in conjunction with the “clawback” mechanism: 

> TSR rewards consistent performance in the generation of sustained shareholder value over the long term. It aligns the interests of shareholders and Executives with the achievement of AGL’s strategic goals; 

> EBIT/Funds Employed encourages the efficient use of capital in a capital intensive industry. This hurdle correctly focuses 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. 

