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Our final assessment was that we could not see value at the prices eventually bid for these assets given the attendant risk profile, and decided instead to adopt an organic growth strategy. Although the early signs are encouraging, it will be several years before the value of this option can be assessed. However, we are satisfied our decision was made on a well researched and fully considered basis. 

## Risk Management 

As we were reminded early this year, risk is a constant feature of the energy industry. The Board regularly considers whether there are any risks which might affect achievement of AGL’s strategic objectives. This year, two risks have become more prominent than they were in previous years. 

## Energy Policy 

The first risk area could broadly be referred to as sovereign risk. 

AGL has consistently maintained that State and Commonwealth government energy policies have not provided the private sector with the consistency necessary to make the substantial investments required to maintain Australia’s long-term security of energy supply. That continues to be the case. Although the Commonwealth government’s proposal to legislate a price on carbon emissions provides some direction, the circumstances in which the new law was announced and the absence of a bipartisan political approach to reducing the carbon intensity of Australia’s economy means that there still remains considerable risk about the economic viability of investment in new energy infrastructure. In addition, poorly designed and overlapping State and Commonwealth government policies to promote greater household installation of solar energy systems has created a massive oversupply of renewable energy certificates, the effect of which has been to cause a temporary suspension of investment in new large scale renewable energy assets. 

Energy consumers have faced a period of rapid increases in energy prices. Although the main reason for this is the substantial costs of maintaining and upgrading the gas and electricity distribution networks, which are owned by unrelated third parties, it is energy retailers such as AGL which bear the brunt of customer dissatisfaction and hostile media coverage. In our view, the most effective way to provide consumers with lowest cost energy and widest choice of energy providers is for State governments to promote open and competitive energy markets and to resist the artificial setting of retail prices. State governments other than Victoria have been reluctant to deregulate energy markets. 

Continued government intervention in price setting makes no sense in such a competitive market, and puts at risk future private sector investment in an industry vital to Australia’s continued economic prosperity. 

## Community Relations 

The second area of higher risk management focus concerns the development of our own upstream gas reserves and our own renewable and low carbon intensity electricity generation assets which are key elements of AGL’s vertical integration strategy. Many of the projects AGL has in place to pursue these objectives are situated in close proximity to regional communities. Over the past 12 months, community opposition to some of these projects has increased, particularly in respect of activities to explore for coal seam gas reserves in the Hunter Valley in New South Wales. 

Australia can only have a ‘clean energy future’ if its abundant renewable and gas resources can physically be developed. Local communities are right to expect that, in pursuing development projects, companies such as AGL will take every care to protect the health and wellbeing of local residents and the environment. I would like to assure all our shareholders, and all our other stakeholders, that the Board and management at AGL have the same expectations. 

We have every intention of continuing AGL’s long history of safely constructing and operating energy infrastructure assets. 

## Executive Remuneration 

This is always a sensitive issue for shareholders who, rightly, expect that the remuneration of senior managers should be linked to producing results that increase the wealth of all shareholders. 

At last year’s Annual General Meeting, a substantial number of AGL shareholders voted against adoption of the Remuneration Report. Detailed feedback from shareholders indicated that last year’s Remuneration Report did not adequately demonstrate how changes in executive remuneration were linked to improvements in shareholder wealth. Whilst our policies have not changed, we have tried hard to explain them more clearly in this year’s report. 

All our senior managers, including the Managing Director, have a very substantial portion of their remuneration at risk. Short-term incentives are assessed on a ‘balanced’ scorecard basis (which includes annual profit growth), whereas our long-term incentive plan is driven by measures corresponding to growth in the underlying value of your company. 

As a result, short-term incentives paid this year are substantially lower than payments made last year, due mainly to our growth in profit being lower than target. The number of shares potentially available to executives under our long-term incentive plan is also notably lower than last year, as we did not sustain growth in total shareholder returns or improvements in the return on funds employed in the business. This means that no new share rights were credited in favour of senior managers under the long-term incentive plan, and in fact all participants lost some unvested benefits this year. 

The Board is disappointed with this outcome, both for shareholders, because it reflects a shortfall in our desired financial performance, and also for our executives who are extremely competent, professional and committed to AGL. Nevertheless this is what alignment means, and we are confident that we have in place appropriate equitable measures to make sure that the remuneration interests of AGL employees, particularly its senior managers, accord with the interests of our shareholders. 

## Conclusion 

This was a challenging year for AGL. However, the Board is confident that AGL’s strategy is right and that we will regain performance momentum and deliver improved returns for shareholders in the years to come. 

More challenges lie ahead as Australia’s energy markets continue to evolve. In Michael Fraser, AGL has a Managing Director with the skills and experience to lead AGL through these challenges. He is ably supported by a highly skilled and engaged workforce. On behalf of the Board, I would like to thank Michael and all AGL employees for all their efforts in steering AGL through a difficult year. I would also like to thank my fellow directors for putting their faith in me to Chair the Board, and for their diligence, guidance and support. 

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