1. Douglas B. Sanders Baker & McKenzie LLP 130 E. Randolph Drive – Suite 3500 Chicago, IL 60601 (312) 861-8075 – Phone (312) 698-2375 – Fax douglas.b.sanders@bakernet.com Climate Change Regulation and Disclosure – U.S. Perspective Canadian Bar Association Climate Change Teleconference Series March 26, 2008

2. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Setting the Scene: Climate Change, Regulation and Litigation 2007 IPCC Fourth Assessment Report Lieberman-Warner Climate Security Act (S. 2191), reported from Senate Environment and Public Works Committee on December 5, 2007 California and other regional regulatory efforts Massachusetts v. EPA, 127 S. Ct. 1438 (2007) Native Village of Kivalina v. ExxonMobil Corporation, et al., No. 08-1138 (N.D. Cal. filed February 26, 2008)

3. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Setting the Scene ( cont.) IPCC Fourth Assessment Report (2007) –“Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.” –“Global GHG emissions due to human activities have grown since pre-industrial times, with an increase of 70% between 1970 and 2004.” –“There is very high confidence that the net effect of human activities since 1750 has been one of warming.”

4. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Setting the Scene ( cont.) Lieberman-Warner Climate Security Act (“CSA”) –Establishes emissions monitoring and tracking program –Cap on “emissions allowances” beginning in 2012; reducing allowances by 70% by 2050 (1.8%/year) –Covered facility: uses more than 5,000 tons of coal annually; processes or imports natural gas; processes or imports petroleum- or coal-based fuel, the combustion of which will emit GHGs (except HFCs); annual production or import of more than 10,000 CO 2 e of GHGs (except for HFCs) –Allowances allocated and auctioned on sliding scale over time; trading of allowances permitted –Meet the cap by reducing emissions, trading allowances with other sources and buying offsets or foreign allowances

5. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Setting the Scene ( cont.) Regional and State Efforts –Regional Greenhouse Gas Initiative (RGGI): agreement by Northeastern states to implement cap-and-trade program stabilizing CO2 emissions from power plants in initial period and reducing CO2 emissions 10% by 2019; trading to begin on January 1, 2009 –Midwest Greenhouse Gas Accord: signed on November 17, 2007; commitment to develop state targets for reductions and cap-and-trade program –Western Climate Initiative: includes several western states and Canadian Provinces with goal of establishing cap-and-trade system by fall 2008 –California (AB 32): requires reporting beginning in 2009; recommended early actions;1990 GHG target by 2020, currently considering regulations for caps and trading

6. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Setting the Scene ( cont.) Massachusetts v. EPA –Massachusetts has standing, redressable injury that federal court may consider because of EPA’s refusal to regulate CO 2 emissions from vehicles –Climate change (at least as alleged) is real –Determined that CO 2 is an “air pollutant” under the Clean Air Act –EPA must make a “judgment” whether increased emissions of CO 2 endanger public health or welfare

7. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Setting the Scene (cont.) Native Village of Kivalina v. ExxonMobil Corporation, et al. –Latest tort lawsuit filed against numerous oil, gas, electricity and coal companies –Seeks over $400 million to relocate village allegedly impacted by climate change –Alleges civil conspiracy by some of defendants –Suit based in part on defendants’ voluntary disclosure of emissions to U.S. EPA registry or Carbon Disclosure Project

8. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 SEC Disclosure Regulations No climate or carbon-specific regulations Highlight portions of Regulation S-K that set out most likely obligations impacted by climate change –Item 101: Narrative of Business/Disclosure of Capital Expenditures –Item 103: Disclosure of Legal Proceedings –Item 303: Management Discussion & Analysis (“MD&A”) Historical struggle to clarify and disclose environmental liabilities

9. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 SEC disclosure (cont.) Corporate description and capital expenditures: –Appropriate disclosure also shall be made as to the material effects that compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries. The registrant shall disclose any material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year and its succeeding fiscal year and for such further periods as the registrant may deem material. 17 C.F.R. 229.101(c)(xii).

10. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 SEC disclosure (cont.) Litigation to which the company is a party that relates to the environment : –An administrative or judicial proceeding arising under any Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primary for the purpose of protecting the environment shall not be deemed "ordinary routine litigation incidental to the business" and shall be described if: A. Such proceeding is material to the business or financial condition of the registrant; B. Such proceeding involves primarily a claim for damages, or involves potential monetary sanctions, capital expenditures, deferred charges or charges to income and the amount involved, exclusive of interest and costs, exceeds 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis; or C. A governmental authority is a party to such proceeding and such proceeding involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $ 100,000; provided, however, that such proceedings which are similar in nature may be grouped and described generically 29 C.F.R. 129.103 (Instruction 5).

11. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 SEC disclosure (cont.) MD&A – “known trends” –Liquidity. Identify any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way. If a material deficiency is identified, indicate the course of action that the registrant has taken or proposes to take to remedy the deficiency. Also identify and separately describe internal and external sources of liquidity, and briefly discuss any material unused sources of liquid assets. –Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed. 17 C.F.R. 229.303

12. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Materiality Disclosure and liability boil down to materiality - There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available. TSC Indus. V. Northway, Inc., 426 U.S. 439 (1976)

13. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Materiality in Environmental Context “If a corporation has a policy or approach toward compliance with environmental regulations which is reasonably likely to result in substantial fines, penalties, or other significant effects on the corporation, it may be necessary for the registrant to disclose the likelihood and magnitude of such fines, penalties and other material effects in order to prevent from being misleading...” Levine v. NL Indus., Inc., 926 F.2d 199, 202-203 (2d Cir. 1991) (quoting In re U.S. Steel Corp., Exchange Act Release No. 16,223, [1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) P 82,319, at 82,384 (Sept. 27, 1979).

14. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Known trends Disclosure more likely to be made (and material) in MD&A context of “known trends” Can climate change be considered a “known trend”? SEC Guidance suggests two inquiries if there is a “known trend” –Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required. –If management cannot make that determination, it must evaluate the consequence of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur. 54 Fed. Reg. 22427 (May 23, 1989)

15. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Shareholder resolutions 54 resolutions filed as of March 2008 relating to climate change/global warming –Coming from both sides: (1) address global warming as an environmental issue; (2) adequately evaluate risks and liabilities –SEC is increasingly allowing proposals to go forward, denying no-action letters based on ordinary business exception –Company’s only options may be to address issues raised, resulting in withdrawal of resolution or include resolution in proxy and have shareholders vote on issue

16. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Is climate change material? The short answer is... it depends –Nature and size of business –Location of operations and existing regulations –Existing efforts to calculate and quantify emissions –Existing voluntary or other disclosures/CSR efforts –Likelihood of future regulation (U.S. – Lieberman/Warner) –Impact of actual or potential regulation on operations, liquidity and finances –Pressure from shareholders –Assessment of both liabilities and opportunities

17. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Potential Guidance Petition filed before SEC on September 18, 2007 –Brought by NGOs, states and institutional investors –Clarification that current securities laws require disclosure –Guidance on form of disclosure –Not likely to be resolved in short term SEC task force considering financial reporting generally may shed some light, is trending toward providing investors more information External Guidance, e.g., Global Framework for Climate Risk Disclosure

18. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Companies are reporting Many companies already are reporting “climate change” or “carbon” risks and opportunities Difference of degree and depth Question of adequate foundation for assessment of liability or reporting Lack of quantification – similar to many environmental reporting obligations

19. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Summary Climate change/global warming is now, more than ever, a reality for businesses and investors alike Regulations in many jurisdictions, likely in others Shareholders increasingly care about it Companies are already making public statements in other contexts Litigation, while nascent, is ramping up More likely to factor into the “total mix” of information available to an investor Company-by-company assessment of tipping point for disclosure

20. Climate Change Disclosure and Regulatory Issues – CBA Teleconference March 26, 2008 Thank you Douglas B. Sanders Baker & McKenzie LLP 130 E. Randolph Drive – Suite 3500 Chicago, IL 60601 (312) 861-8075 – Phone (312) 698-2375 – Fax douglas.b.sanders@bakernet.com