A comparison of American electric power company annual reports from the 1980s to 2017 concerning disclosure of any and all matters about the physical environment or climate change

91 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam A Comparison of American Electric Power Company Annual Reports from the 1980s to 2017 Concerning Disclosure of Any and All Matters about the Physical Environment or Climate Change R.H.S. Sarikasa, A.M. Djateja, Vu Dinh Hienb aEastern Washington University, Spokane WA; bNational Economics University Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract Companies in many nations such as England, Germany, The United States and Vietnam issue public documents in addition to annual reports with the audited annual financial statements. These are often discussed as sustainability reports or corporate responsibility reports. In most countries nowadays, these documents are voluntary and are prepared without legally required standards. Researchers, Investors and others interested in the environmental information of a company typically refer to these documents. However, this research chooses to explore what information concerning the physical environment is presented in the required annual reports (with audited financial statements) of five electrical power companies in the United States. The annual reports of these companies are examined both in the late 1980s and for the year 2017. The conclusion is that the reports form the late 1980s have less information on the physical environment and do not discuss climate change at all. The reports from 2017 have relatively more information concerning the physical environment and do occasionally mention climate change. We conclude that it is appropriate that companies consider issuing sustainability reports in addition to their annual reports wit financial information given the modest amount of environmental and climate change information current presented in annual reports. Keywords: Physical environment, Annual report, Environmental Issues JEL codes: M40, M41 1. Introduction This paper will examine annual reports (and/or the nearly identical SEC 10-Ks) of certain investor owned electric power companies. Such annual filings required by the 1934 Securities Exchange Act. This legislation also created the Securities and Exchange 92 Commission (Spiceland et al., 2018). The Securities Exchange Commission on its web site observes the following concerning company annual reports. “The annual report to shareholders is a document used by most public companies to disclose corporate information to their shareholders. It is usually a state-of-the-company report, including an opening letter from the Chief Executive Officer, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs. Reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites. The annual report on Form 10-K, which must be filed with the SEC, may contain more detailed information about the company’s financial condition than the annual report and will include the annual financial statements of the company. Companies sometimes elect to send their annual report on Form 10-K to their shareholders in lieu of, or in addition to, providing shareholders with a separate annual report to shareholders (Securities and Exchange Commission, 2018). Investor-owned electric companies are subject to extensive government regulation by the Federal Energy Regulatory Commission FERC), and the state utility commissions of each state they operate in. This regulation involves obtaining prior approval for all major investments in operating assets, and it includes accepting prices determined by the state regulatory board in a formal process that includes opportunities for customer groups (e.g. an association of major local industrial customers), and even individual customers to argue why the electricity price should be required to be lower. This makes the board of directors and the management team of all investor-owned electric power companies exceptionally concerned about what consumers, investors, investment bankers, legislators, the press, and almost everyone thinks about the electric companies conduct and what it thinks about the issues of the day. However, in the end the annual report is for investors and potential investors and they always have a continuing focus on profitability and dividends. As it happens we choose the 1980s as the start date for accessing investor-owned electric power companies concerns about climate change just because it represented a long enough time that some change might be observed. On August 1 “Losing Earth: The Decade We Almost Stopped Climate Change.” By Nathaniel Rich. It was published in the New York Times Magazine. The article made the case that expert community in Washington did not find a way to implement change, in large part because some scientists in the government and other government leaders were unconvinced things were all that serious for certain, and in any event climate change prevention could be put off for a while anyhow. We argue that if we look at the reports form the 1980s we see limited concern with the environment and no mention of climate change at all. No notion of Nathaniel Rich’s idea that we knew in the 1980s what the score was. We saw in company reports opposition to 93 acid rain legislation because of high cost and unguaranteed results. Nothing like the guaranteed climate change promised by scientists in the 1980s can be seen anywhere. In current (2017) we see climate change featured in the California utilities, but not in all the reports. Except in the California-based utilities no urgency is detectable. Managers know, perhaps but they cannot get organizational clearance to talk about something they do not just now want to spend money on and make hard choices. 2. Results and discussion ITEM 1 of 10 (American Electric Power, 1985) The Overview on page 1 included what is troubling information for any investor- owned electric power company – a decline in both earnings and the earning per share and dividends per share. The Letter to the Shareholders on pages 2 and 3 stressed first that residential and commercial sales grew. When mentioning the bad news about a loss on the Zimmer plant, the letter stated “this chapter is now behind us.” Later in the shareholder letter the subject of acid rain surfaced, and the letter stated the issue of acid rain “is an environmental, economic and political problem.” Concluding later, “we believe we have an obligation to ensure that our customers are not exposed to unnecessary costs that may not result in environmental improvements.” Unsaid is that AEP is also likely hopeful of not exposing its investors to such costs. The shareholder letter also references a position statement of position on page 20 (presumably on the costs of acid rain), but unhappily this page is unreadable. Financial Statement Note 1 on page 37 discusses corporate responsibility to pay “Black-Lung Benefits” because of coal miner employees. No mention of climate change concerns exist in the annual report and seemingly the thrust of environmental concerns seem to be in the nature of cost control only. ITEM 2 of 10 (American Electric Power, 2017) The 2017 Annual Report of American Electric Power (AEP) now has a category labeled “Environmental Issues” that begins on page 14 and continues until the end of page 21. The first sentence in the category “Environmental Issues’ on page 14 states “AEP has a substantial capital investment program and is incurring additional operating costs to comply with environmental control requirements.” Costs mentioned include disposal of coal combustion by-products, clean water rules, and water discharge issues. The second paragraph indicates AEP is challenging some Federal EPA requirements in court. Management, we are told, believes that there exist cheaper but equally effective alternatives than those mandated by the EPA. The third paragraph promises that AEP will seek recovery of expenditures for pollution control through rates in regulated jurisdictions. This is reasonable, right, and proper. However, words indicating a commitment toward a better environment for all would be proper also. 94 On page 19 Climate Change is explicitly mentioned, however the coverage is limited to carbon dioxide rules and proposed regulations and the ongoing challenges in various courts. This portion of the document concludes with a brief discussion of the economic and accounting consequences to AEP if it is forced to close some coal-fired generation facilities. ITEM 3 of 10 (Commonwealth Edison, 1986) On page 1 Commonwealth Edison spent most of the page celebrating its early corporate history in that 1987 was its centennial in that its ancestor corporation, the Chicago Edison Company began in 1887. The letter to the shareholders opened with a commitment to remaining a competitive energy supplier. This means competitive electric prices, especially for those large customers with a choice – industrial customers who site plants with an eye on electric rates. Of course, in a cost-of-service rate regulated industry, this must mean cost control. So, it is no surprise that on page 7 the shareholder letter mentions the intensified cost containment program in place. Much of the document mentions the challenges faced by the company in getting utility commission approval for approving the costs of new nuclear generation as rate base assets. If actual costs of such assets are approved for rate base treatment the company will earn a return on these assets. If such approval is denied the company and its investors will suffer an economic loss. There was no mention of climate change or the environment except for a sentence on page 11, where company management states, “The construction program, coupled with additional costs imposed by environmental compliance regulations, regulatory delays and difficulties encountered in meeting design and construction schedules, has required the Company to seek large amounts of new capital” So, the only mention of anything environmental is cost related. ITEM 4 of 10 (Commonwealth Edison, 2017) On page 1 Exelon reveals that Commonwealth Edison is now but a part of a large multi-jurisdictional electric holding company similar in many ways to American Electric Power and The Southern Company. It boasts that it has more utility customers than any other U.S. company. On page 22 begins a four-page coverage of Environmental Regulation. It is clearly set out that those individuals with primary responsibilities in the environmental area have their performance reviewed annually. It is stated that, “The Exelon Board of Directors has delegated to its Generation Oversight committee and the Corporate Governance Committee the authority to oversee Exelon’s compliance with health, environmental and safety laws and regulations and its strategies and efforts to protect and improve the quality of the environment, including Exelon’s internal climate change and sustainability policies and programs.” Under the headline “Global Climate Change,” on page 24 we are told that, “Exelon, as a producer of electricity from predominantly low and zero carbon generating facilities 95 (such as nuclear, hydroelectric, natural gas, wind and solar photovoltaic), has a relatively small greenhouse emission profile, or carbon footprint compared to other domestic generators of electricity (Exelon neither owns or operates any coal-fueled generating assets. Nuclear is a big reason. Nuclear plants are low carbon in operation, but the building of any new nuclear plants would have a serious carbon footprint. ITEM 5 of 10 (Pacific Gas & Electric, 1989) On page 1 PG&E discussed the challenges it faced during the October 17, 7.1 magnitude earthquake. The company noted its efforts were praised by many. We can guess that this was in large measure do its efforts to restore power to everyone as quickly as possible. On page 6 of the report the shareholder concludes with its attempt to use compressed natural gas powered vehicles in order “help reduce the amount of pollution in California’s skies.” The environment is also covered on page 37, where we learn that concerning the topic “Environmental clean-up matters”, “The Company is currently assessing measures that may need to be taken principally at retired manufactured gas plant sites, to comply with environmental laws and regulations.” The Company frequently mentioned the regulatory approval of its new Diablo Canyon Nuclear Power Plant, and of how (page 4) it is recognized, “as one of the nation’s premier nuclear power plants.” On page 22 on the Balance Sheet we can see its capitalized cost is almost six billion dollars, more than all other electric generating power plants combined.” ITEM 6 of 10 (Pacific Gas & Electric, 2017) This document includes company annual report features on pages i to vi, and then the PG&E 10-K document constitutes the remaining 182 pages. On page iii PG&E discussed the challenges it faces from California wildfires. Also, it proudly mentions on page iii that due to PG&E’s leadership in clean energy and corporate responsibility, the company has been honored by its inclusion in the prestigious Dow Jones Sustainability Index. The Diablo Canyon Power Plant is mentioned on page iv in first half of the shareholder letter, in that the Company reveals it will close it at the expiration of its current operating license. The date is not stated. The intent is to replace the Diablo Canyon generation, “with a combination of renewables and energy efficiency.” The shareholder letter concludes with such statements as, “We look forward to decarbonize the transportation sector by providing clean fuels.” So the new Diablo Canyon plant mentioned in the 1989 report is now unloved even though it is now low carbon in that it is nuclear. In the 10-K portion of the document, pages 22 – 26 are details of “Environmental Regulation,” including “Air Quality and Climate Change.” Some coverage is provided of conflicts ongoing between the Trump Administration and the State of California. On page 27 a long discussion of wildfires reveals the fact that, “If the Utility’s facilities, such as its electric distribution and transmission lines, are determined to be the cause of one or 96 more fires and the doctrine of inverse condemnation applies, the Utility could be liable for property damage, interest, and attorney’s fees without having been found negligent” This could mean substantial economic damage to PG&E and its investors. ITEM 7 of 10 (Southern California Edison, 1985) On page 7 Southern California Edison note, that it “uses nine different basic energy resources to generate electricity – more than any other utility in the world. They are uranium, solar, wind, geothermal, biomass, water, coal, oil and natural gas”. Page 16 reports a tragic accident at the coal-fired Mohave Generating Station in Laughlin, Nevada where the bursting of a high-pressure steam line resulted in six employee fatalities and multiple injured employees. The last paragraph on the last page of the report (page 58) the company acknowledges it is subject to many rules and regulations, including those for, “environmental protection.” Not much of an obvious commitment to the environment is observed in this report. ITEM 8 of 10 (Southern California Edison, 2017) On page 1 in the Letter to Shareholders, Pedro Pizarro, President and Chief Executive Officer of Southern California Edison noted, “Toward the end of 2017 we faced new challenges from massive wildfires statewide” In the next paragraph on page 1 he continues, “In December, we experienced in our service territory the largest wildfire by acreage ever recorded in California history.” On page 3 the shareholder letter concludes with this short paragraph, “There are challenges ahead, but the solutions are within our reach. Our core values will guide our actions as our team drives our strategy forward. We will meet our customer’s needs, play a critical role in ensuring that California achieves its climate objectives and create value for shareholders.” Wow! Maybe a little caution about overpromising is in order. Maybe caution about climate promises is not the Southern California Edison way, as on page 4, the company boldly states “We are charting a path to help curb climate change and cleanse our air of smog-forming pollutants. It’s the reason we are building a grid that delivers more and more carbonfree energy.” Now Southern California Edison has climate change in its sights, but maybe success will be harder than it seems to tell us. ITEM 9 of 10 (The Southern Company, 1986) On page 9 the Southern Company seems most concerned with operating efficiency as it observes, For the fifth consecutive year, our coal-fired and nuclear units surpassed industry averages for operating availability – the percentage of time units are available for service. Revenue generation is also to be celebrated (page 13), “Across our service area, energy sales increased in every major category during 1986 - reflecting the continued growth of the region and an unusually hot summer. In July 30, 1986 at the height of a prolonged heat wave, demand for electricity broke all previous records - exceeding peak demands which had been projected through the early 1990s” Disappointedly no thought that this heat 97 wave might be more than a one-off thing with the possibility of structural change in climate an unhappy possibility. The Southern Company was celebrating that the Vogtle nuclear power plant (units 1 and 2 were near commercial operation, and that they represented, (page 18) “the Southern electric system’s largest project”. Acid rain legislation concerns Southern Management (page 21), “because they offer no assurance of achieving environmental benefits and they would be very expensive to implement.” ITEM 10 of 10 (The Southern Company, 2017) On page 8 the Southern Company seems enchanted with “environmentally unrivaled venues.” This mostly about the Georgia Dome and the Sun Trust park in Atlanta. On page 23 the company brags about research money it has donated to help a species recovery of the local bat population. Discussing its business activities on page 41, Sothern Management states, “Many factors affect the opportunities, challenges, and risks of the Southern Company system’s electricity and natural gas businesses. These factors include the ability to maintain constructive regulatory environments, to maintain and grow, sales and customers, and to effectively manage and secure timely recovery of costs. These costs include those related to long-term growth, stringent environmental standards, reliability, fuel. Restoration following major storms, and capital expenditures, including constructing new electric generating plants, expanding the electric transmission and distribution systems, and updating and expanding the natural and distribution systems.” Sadly, here the environment is seen only as a cost driver, like bad storms. 3. Conclusion Our detailed survey of five electric power company annual reports from the late 1980s and 2017 show little information concerning the physical environment in the 1980s and no discussion of climate change in the 1980s. We choose electric power companies as their industry is more often involved in discussions of climate change and the physical environment. On the other hand, we found relatively more information on the physical environment in 2017 and occasional discussion of climate change. We therefore believe that it is valuable that many electric power companies issue sustainability reports or release other documents related to climate change and the physical environment. We suggest that more research be conducted on other industries and other time periods. 98 4. References American Electric Power (1985), Annual Report, University of California Haas Business Library. American Electric Power (2017), Annual Report, Company website. Commonwealth Edison (1986), Annual Report, University of California Haas Business Library. Commonwealth Edison (2017), Annual Report, Company website. Pacific Gas & Electric (1989), Annual Report, University of California Haas Business Library. Pacific Gas & Electric (2017), Annual Report, Company website. Securities and Exchange Commission (2018), Annual Report, accessed on August 1, 2018 <https://secsearch.sec.gov/search?utf8=%E2%9C%93&affiliate=secsearch&sort_by=&que ry=annual+report >. Southern California Edison (1985), Annual Report, University of California Haas Business Library. Southern California Edison (2017), Annual Report, University of California Haas Business Library. Spiceland, D. J., Nelson, M. W. & Thomas, W. B. (2018), Intermediate Accounting, 9th edition, McGraw-Hill Education, New York, NY. The Southern Company (1986), Annual Report, University of California Haas Business Library. The Southern Company (2017), Annual Report, Company website.