Earnings wipeout possible for some under carbon program

American Electric Power Co., Allegheny Energy and Ameren Corp’s future earnings potentially could be more than wiped out by costs under a cap-and-trade program requiring purchase of carbon emission credits, according to a report released Tuesday by the Investor Responsibility Research Center Institute and Trucost, a provider of data and analysis on corporate environmental impact.

American Electric Power’s costs under such a program would be 117% of earnings beginning in 2012, making it the most affected of the S&P 500 companies. Allegheny and Ameren would be the second and third most affected of the S&P 500 companies with costs more than 100% of earnings, although figures for the two companies were not in the report.

The study assumes the cost of the spot price of carbon emissions under a cap-and-trade program in 2012 when it could begin would be a Trucost-estimated $28.24. It also assumes companies have the same earnings per share as they had in the study’s 2007 base year and that companies pay those costs rather than reduce carbon emissions or pass them costs onto customers, said Jon Lukomnik, IRRC Institute program director.

The study calculated the carbon exposure of 497 of the S&P 500 companies; data on three companies was unavailable. Among a variety of analyses, the study compared companies on the potential carbon costs relative to earnings before interest, tax, depreciation and amortization.

For 203 of the companies, carbon costs would equate to less than 1% of EBITDA, the report said.

Pat D. Hemlepp, director of corporate media relations at American Electric Power, said a bill in Congress — revised after the study was conducted in March — reduces some of the cost of compliance.

“The scenario looked at in the study may not be in touch with what’s coming out of Congress,” Mr. Hemlepp said. In addition, the “cost of environmental compliance is something regulators have allowed utilities to pass onto customers,” he said. “Instead of wiping out earnings, it would increase cost to customers.”

Company officials have been working with congressional members “to accomplish what they want to accomplish on climate but do it in a way that has the lowest potential cost impact to customers,” since such costs are allowed by regulators to be passed on to them rather than taken from earnings, Mr. Hemlepp added.

In a statement, Ameren officials said: “Any cost increases as a result of compliance would generally be passed on to these customers and would not be expected to have a significant negative impact to Ameren. Increased costs associated with climate legislation for non-rate-regulated generation would be recovered through market prices or allowance allocations.

“The current version of the Waxman-Markey bill provides a free allocation of allowances for a transition period (through 2030). This provision would mitigate a portion of these costs for both the non-rate-regulated generators and the retail-rate-regulated businesses. In the case of the non-rate-regulated generation, the allocations are expected to offset much of the compliance costs that are not recovered via the increased wholesale market price.”

Allegheny Energy officials couldn’t be reached.

The report identifies the costs and emissions for only a few of the companies; otherwise Trucost “would be giving away what it is paid to do,” said Mr. Lukomnik.

The IRRC Institute provides research on corporate responsibility for investors.