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. 

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. 

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. 

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. 

## Energy Policy 

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 

governments to work together to achieve robust deregulated energy markets, and to avoid the distortions from poor regulation of retail electricity and gas prices. 

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. 

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). 

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. 

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. 

## Your Board 

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. 

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. 

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. 

## Conclusion 

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. 

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. 

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. 

