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Sustainability in the Utility Industry: AEP’s Journey

Sandy Nessing

Managing Director, Sustainability

American Electric Power

June 20, 2012

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Who We Are – AEP

AEP Generation Capacity Portfolio

Coal/Lignite Gas/

Oil

Nuclear Other – (hydro,

wind, solar, energy

efficiency, demand

response etc. .)

63% 24% <6% >7%

Generation capacity reflects 2012 expectations

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AEP’s Footprint -- 2011

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“Putting off an easy thing makes it hard.

Putting off a hard thing makes it impossible.” -- George Claude Lorimer

AEP’s

Experience

The Business of

Sustainability

Lessons Learned

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AEP’s

Experience

The road traveled is not always a smooth one.

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AEP’s Journey to Integrated Reporting

2004 2006 2008

2011

2009

2010

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• Everyone is a stakeholder

• Expectations are high

– Profits and positive societal contributions

• Transparency reigns supreme

– Information is power and you control the story

– Eliminate misperceptions

– Build trust, credibility

• It becomes part of the way you do business

The Stakeholder Revolution….

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…Includes a Shareholder Revolution

• Record number of resolutions filed in 2011

• Governance expected to be a top issue in 2012

• Environmental, social resolutions increasing

• Corporate political spending a focus

– Advocacy, lobbying activities

• Commodity, construction, compliance

risks to dominate

• Shareholders want companies to be

more transparent, proactive on

broader range of issues to protect

shareholder value

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Why Should Companies Report?

There are many benefits to reporting – some quantifiable, some not.

• Allows you to tell your own story

• Engages skeptics and critics

• Drives change inside, outside of company

• Identifies risks, opportunities

• Attracts capital

• Increases shareholder value

• Demonstrates and drives leadership

• Drives internal capacity for continuous improvement

• Supports recruitment, retention of best talent

• Builds customer loyalty

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Shareholders have a valid interest and a stake

in a company’s total performance.

The Business of

Sustainability

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Sustainability is a Bottom-Line Issue That People Really Do Care About

• The CEO

• The Board of Directors

• Employees, retirees

• Customers

• Institutional investors, lenders, credit rating agencies

• Environmental groups and other advocates you may only encounter in a courtroom or hearing room

• Prospective employees

• The media

• Your ‘green’ customers

• Labor leaders

• Regulators, policy-makers, legislators

• (Your friends, family)

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It’s All About How You Act

• Top reasons for acting sustainably:

• Drives innovation

• Grows revenues

• Started as risk management platform; now a growth platform

• Avoid shareholder resolutions

• Improve business efficiency

• Capture bottom-line cost reductions

• Eliminate/reduce visits from regulators

• Focus on value chain – how you impact external environment

• Increased transparency up and down supply chain

• To sell something green, you have to sell something

of value to your customers

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What’s At Stake?

• Profits

• Customers

• Public support

• Competitiveness

• Reputation

• Trust and credibility

• Risk management

• License to operate

• Opportunities for innovation and growth

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Why Sustainability Belongs on the Balance Sheet

• Capital markets need information – at the right time –

that is clear and trustworthy

• The financial crisis raised fundamental questions

• Were companies and markets as transparent as they could have

– or should have – been?

• Was there systemic risk that was masked?

– What were the warning signs that were missed and why?

– Could more transparent and complete reporting have connected

the dots sooner?

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Investors Paying Attention More and More

• Proliferation of ratings and rankings

– DJSI, CDP, Goldman Sachs, Bloomberg, Maplecroft

• Analysts and investors seeking more ESG data, not less

• Lack of standardization of surveys, methodology

– Resource intensive, comparability challenging

• The birth of the GISR

– Understanding what is being measured and why

– Bring convergence around core principles, content

• How material is performance to financial results?

– The ROI of sustainability

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Nonfinancial Performance Tied to Financial Health

• Taking holistic view allows you to integrate risk,

corporate governance and sustainability into the

strategic & operational management of the organization.

• This alignment of priorities demonstrates how your

strategy has responded to material issues.

• Value creation doesn’t come just from within; it is

influenced by: – The external environment;

– The relationships that we have; and,

– The availability, quality and affordability of management

resources, such as financial and human capital.

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AEP’s Material Issues Defined

• Issues material to our sustainability are

those that:

– Have or may have significant impact on the

company’s finances or operations.

– Have or may have significant impact on the

environment or society, now or in the future.

– Can substantially influence the assessments,

decisions & actions of stakeholders and

shareholders.

We track material issues & sustainability performance with the material

risks monitored by the company.

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Lessons Learned

“If you can’t find a path with no obstacles, it probably

doesn’t lead anywhere.”

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Lessons Learned Along the Way

• Support from the top – CEO, Board of Directors – critical

• Transparency is painful at first

• Be honest and candid – don’t beat around the bush

• Don’t try to do it all at once – especially GRI – better to start small

• Define sustainability for your organization

• Communicate often to internal and external stakeholders

• Think about what is relevant for your stakeholders

• Stakeholder engagement vital

– Informs goal-setting and decision-making around business strategy

– Builds credibility, trust

– They know when you’re being forthcoming or evasive – you can’t hide

– Leads to collaboration, partnership

– Use a third party facilitator for stakeholder engagement

• Listen with positive intent

– Don’t assume anything – negative or positive

• Get an external sounding board

• Audits

• Show me, don’t tell me!

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You Need A Strong Foundation & Clear Expectations of Performance

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Questions?

Sandy Nessing – Managing Director, Sustainability

smnessing@aep.com

Twitter: @Watts4U

www.AEPsustainability.com