Integrated Reporting:

The (R)evolution of Corporate Reporting

Sandy Nessing – Managing Director, Sustainability

The Ohio State University – Feb. 29, 2012

Who We Are - AEP

• 5.3 million customers in 11 states

• 18,710 employees

• One of largest U.S. electricity generators

• Approx. 63 million tons coal delivered 2011

• A leading consumer of natural gas (approx. 167 billion cubic feet in 2011)

• 1 nuclear plant (2 units)

• Renewable energy portfolio

– 364 MW hydro

– 586 MW pumped storage

– 1,994 MW renewables (wind, solar)

• Coal & transportation assets

– Control +9,000 railcars

– 2nd largest full service, dry bulk carrier in U.S. on inland waterways

– Operate 1 active coal handling terminal with 18 million tons of capacity

• 39,000 miles of transmission lines

– Includes 2,116 miles of 765kV lines – the backbone of the electric interconnection grid in the Eastern U.S.

• 223,000 miles of distribution lines (overhead and underground)

AEP Generation Capacity Portfolio

Coal/Lignite Gas/

Oil

Nuclear Other – (hydro,

wind, etc.)

65% 23% 5% 7%

3

AEP’s Footprint -- 2011

The New “Normal” for Business

“Putting off an easy thing makes it hard.

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

The Business of Sustainability

AEP’s Experience

What’s Next in Reporting

THE BUSINESS OF SUSTAINABILITY

Shareholders have a valid interest and a stake

in a company’s total performance.

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)

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

What’s At Stake?

• Profits

• Customers

• Public support

• Competitiveness

• Opportunities for innovation and growth

• Reputation

• Trust and credibility

• License to operate

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?

Nonfinancial Performance Tied to Financial Health

• Taking holistic view allows you to integrate risk,

corporate governance and sustainability into the

strategic and 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.

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 and actions of our stakeholders and

shareholders.

The Stakeholder Revolution…

• 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

…Includes a Shareholder Revolution

• Record number of resolutions filed in 2011

• Governance expected to be top issue in 2012

• Environmental, social resolutions increase

• 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

You Need A Strong Foundation & Clear Expectations of Performance

AEP’s Experience

The road traveled is not always a smooth one.

How We Began

• Environmental Report vs. Sustainability Report?

• Had to make the business case

• 2007 – 1st sustainability report; 1st stakeholder

meeting

• Painful at first – transparency very new

• Never reported publicly on some issues

• Followed Global Reporting Initiative (G3)

framework

• Piloted Electric Utility Sector Supplement

Stakeholder Engagement: A New Way of Doing Business

• Commitment from the top

• Sat across from NGOs we never had before

– First face-to-face

• We didn’t know all we thought we did

– Misperceptions on both sides

• Realized we had an opportunity

• Now, it’s how we do business

• “Voice” of stakeholder in our reporting

Engaging Coal Suppliers

• Coal always a top stakeholder issue

• Ongoing discussions led to commitment for survey

– Environmental, safety and health performance

• Followed up with stakeholder meetings

• Brought suppliers face-to-face with NGOs for the first time

– Passionate but respectful engagement

• Surprised at what we learned – as were NGOs

– Dispelled commonly-held misperceptions of coal industry

– Clearer picture of the performance of our suppliers

– Allowed AEP to begin laying the groundwork with stakeholders for a transformation of its fuel portfolio

– Sparked exploration of voluntary standards for improving conservation outcomes on reclaimed mining land

What’s Next in Reporting?

“If you are a company committed to the long term, and one of your ambitions

is to be trusted, you have no choice – integrated reporting is the way to communicate.” --Jim Singh, CFO, Nestle

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

Reporting and Performance

• Transparency drives accountability

• Top-level support indicates seriousness of

commitment

• Stakeholder engagement and how it’s used is

important

• GRI is preferred framework – focus on

materiality

• Qualitative AND quantitative results needed

– Don’t just throw data out there without context

Investors Paying Attention More and More

• Proliferation of ratings and rankings

– DJSI, CDP, Goldman Sachs, Bloomberg

• 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

AEP’s Journey to Integrated Reporting

2004 2006 2008

2010

2009

Integrated Reporting Will Be The Norm

• International Integrated Reporting Committee (IIRC)

• Lots of disagreement over what it looks like

– Concern progress of sustainability reporting at risk

• GRI developing G4 as a bridge to integrated reporting

– Companies on their own for now

• Social metrics important but hard to quantify

– Should be developed in conjunction with affected communities

Questions?

Sandy Nessing – Managing Director, Sustainability smnessing@aep.com Twitter: @Watts4U

www.AEPsustainability.com