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Hugh Wynne (Senior Analyst) • hugh.wynne@bernstein.com • +1-212-823-2692

Francois D. Broquin • francois.broquin@bernstein.com • +1-212-756-4051

Saurabh Singh • saurabh.singh@bernstein.com • +1-212-756-4113

See Disclosure Appendix of this report for important disclosures and analyst certifications.

U.S. Utilities: Can Texas Comply With The Cross-State Air 

Pollution Rule? Yes, If Existing Scrubbers Are Turned On

Ticker Rating CUR

19 Jul 2011

Closing

Price

Target

Price

TTM

Rel.

Perf.

EPS P/E

2010A 2011E 2012E 2010A 2011E 2012E Yield

AEP M USD 37.39 39.00 -18.2% 3.03 3.26 3.19 12.3 11.5 11.7 4.9%

SPX 1326.73 85.28 99.75 113.11 15.6 13.3 11.7 1.9%

O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated

Highlights

 On July 7th, 2011, the EPA published the final version of its Cross-State Air Pollution Rule (CSAPR), a 

regulation that will cap the annual emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) from 

power plants in 23 eastern states, and set limits on summer emissions of NOx in an additional five states. 

The states covered by CSAPR account for over three quarters of U.S. coal fired generation. 

 The Cross-State Air Pollution Rule finalizes regulations issued in draft form on July 6, 2010. The EPA's 

draft regulation was entitled the Clean Air Transport Rule (CATR). While CSAPR imposes annual SO2 

and NOx emissions limits on Texas, CATR did not.

 After the release of the rule, Texas' utilities, regulator and politicians, as well as sell-side analysts on 

Wall Street, claimed that the rule could potentially cause widespread retirements and costly upgrades.

 Energy Future Holdings warned investors that due to CSAPR it would "likely incur material capital 

expenditures and operating costs and experience material revenue decreases due to reduced 

generation."

 Bryan Shaw, Chairman of the Texas Commission on Environmental Quality, argued that, "This rule 

will impose great costs on coal-fired power plants, causing some to shut down or curtail operations, 

threatening the state's electrical capacity reserve margins needed to avoid power disruption during 

times of peak demand."

 On Wall Street, sell-side analysts calculated that CSAPR puts 4.6 GW of lignite coal-fired capacity in 

Texas at risk of retirement.

 The EPA, by contrast, contends that in formulating CSAPR it set the 2012 SO2 budget for Texas at a 

level that can be achieved simply through the continuous use of existing flue gas desulfurization 

equipment. 

 In this research note, we analyze the potential for the state of Texas to comply with CSAPR without 

costly upgrades or plant closures. 

 We have analyzed the hourly SO2 emissions rate for each coal fired unit in Texas that is equipped with 

an SO2 scrubber. By plotting the distribution of these hourly emissions rates, we have determined the 

number of hours that each scrubber is in operation. We then assessed the impact on SO2 emissions of

running these existing scrubbers continuously.
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 We also assessed the emissions reductions potentially achievable by coal fired units that currently lack 

SO2 scrubbers. Specifically, we determine the level of SO2 emissions these units have historically 

achieved when burning lower sulfur coal.

 We find that if coal fired generating units in Texas were to run their existing scrubbers continuously, and 

if unscrubbed units were to achieve the SO2 emissions rates they have historically when burning lower 

sulfur coal, the state of Texas could likely comply with its SO2 budget under CSAPR in 2012. 

Investment Conclusion

In this research note, we analyze the potential for the state of Texas to comply with CSAPR without costly 

upgrades or plant closures. We find that if Texas utilities were simply to run their existing scrubbers 

continuously, and switch unscrubbed units to lower sulfur coal, Texas could likely comply with its SO2 

budget under CSAPR in 2012.

Individual Texas utilities, however, may find that under these circumstances their 2012 emissions of SO2 

may exceed their allocation under CSAPR of SO2 allowances. We have therefore analyzed the impact on 

individual utilities of the need to purchase (or the opportunity to sell) SO2 emission allowances, assuming a 

price per ton of $700, as per the EPA's modeling.

Our analysis suggests that Energy Future Holdings would be required to buy SO2 allowances to cover its 

emissions, resulting in an incremental annual cost of $15 million. We calculate that Xcel Energy (XEL) 

would be required to spend $7 million to buy the required allowances.

We note that Xcel Energy (XEL), as a regulated utility, could pass through this cost to its customers, while 

Energy Future Holdings, as a competitive generator, would see its after-tax earnings reduced by an 

estimated $10 million annually.

On the other hand, NRG Energy (NRG) would likely benefit from the sale of excess SO2 allowances, 

potentially adding $5 million to annual revenues. We calculate that American Electric Power (AEP) might 

also have an excess of allowances, worth $1 million annually to the company. 

Details

The Controversy

On July 7th, 2011, the EPA published the final version of its Cross-State Air Pollution Rule (CSAPR), a 

regulation that will cap the annual emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) from 

power plants in 23 eastern states, and set limits on summer emissions of NOx in an additional five states. 

The states covered by CSAPR account for over three quarters of U.S. coal fired generation. 

The Cross-State Air Pollution Rule finalizes regulations issued in draft form on July 6, 2010. The EPA's 

draft regulation was entitled the Clean Air Transport Rule (CATR). While CSAPR imposes annual SO2 and 

NOx emissions limits on Texas, CATR did not.

After the release of the rule, Texas' utilities, regulators and politicians complained that the rule could 

potentially cause retirements and costly upgrades. On Wall Street, sell-side analysts calculated that CSAPR 

puts 4.6 GW of lignite coal-fired capacity in Texas at risk of retirement.

Texas Gov. Rick Perry blasted the rule as "another example of heavy-handed and misguided action from 

Washington, D.C., that threatens Texas jobs and families and puts at risk the reliable and affordable 

electricity our state needs to succeed." Writing in the El Paso Times, Bryan Shaw, Chairman of the Texas 

Commission on Environmental Quality, argued that:

This rule will impose great costs on coal-fired power plants, causing some to shut down or curtail operations, 

threatening the state's electrical capacity reserve margins needed to avoid power disruption during times of 
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peak demand. Such a scenario could lead to blackouts, which create serious health risks to Texans dependent 

upon reliable energy.

Corroborating these assessments, Energy Future Holdings, formerly TXU, wrote in an 8-K

published on July 13th, 2011:

" In order to ensure near-term compliance with the CSAPR, the primary options we have identified are 

(i) reducing the operating levels at certain of our legacy lignite/coal-fueled generation facilities (potentially 

in conjunction with fuel switching and the mothballing or closure of related mining operations), 

(ii) conducting seasonal or temporary shut-downs of certain of our legacy lignite/coal-fueled generation 

facilities and related mining operations, (iii) installing and operating dry sorbent injection systems for sulfur 

dioxide emission reductions at certain of our legacy lignite/coal-fueled generation facilities (potentially in 

conjunction with reducing operating levels and/or fuel switching and mothballing or closure of related 

mining operations) and (iv) mothballing certain of our legacy lignite/coal-fueled generation facilities and 

related mining operations. We expect to apply one or more of these options at certain of our legacy 

lignite/coal-fueled generation facilities and related mining operations. In connection with these actions, we 

will likely incur material capital expenditures and operating costs and experience material revenue decreases 

due to reduced generation and wholesale power sales volumes, and we may incur other material asset 

(including goodwill) impairment charges."

The EPA, by contrast, contends that in formulating CSAPR it set the 2012 SO2 budget for Texas at a level 

that can be achieved simply through the continuous use of existing flue gas desulfurization equipment (SO2 

scrubbers). 

In this research note, therefore, we compare the validity of the two claims, and test the potential for the state 

of Texas to comply with CSAPR without costly upgrades or plant closures. 

Analysis

Exhibit 1 compares Texas' 2010 emissions of SO2 with the state's 2012 emissions budget under 

CSAPR. As can be seen there, CSAPR would require the state's annual SO2 emissions to be cut

from some 410,000 tons in 2010 to 244,000 tons by 2012 – a reduction of more than 40%.
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Exhibit 1

Texas SO2 Emissions Vs. CSAPR State Budget

Source: Ventyx, EPA and Bernstein analysis

Exhibit 2 presents the 2010 SO2 emissions of the large coal-fired utilities in Texas and compares these 

with the SO2 allowances that will be granted them under CSAPR in 2012. As can be seen there, Energy 

Future Holdings would need to reduce SO2 emissions at its coal-fired facilities by 60%, Xcel Energy (XEL) 

by 43%, PNM Resources (PNM) by 26%, NRG Energy (NRG) by 12% and American Electric Power

(AEP) by 10%.

410 

244 

-

50 

100 

150 

200 

250 

300 

350 

400 

450 

SO2 Emissions in 2010 (th tons) SO2 Emissions Budget Under CSAPR (th tons)

S

O2 Emissions in Thousand Tons
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Exhibit 2

Annual SO2 Emissions of Large Coal-fired Utilities in Texas vs. SO2 Budget Allocated Under CSAPR

Source: Ventyx, EPA and Bernstein analysis

Given the apparently draconian of these cuts, how credible is the EPA's contention that it set the 2012 SO2 

budget for Texas at a level that can be achieved simply through the continuous use of existing SO2 

scrubbers? 

To test this assertion, we have analyzed the hourly SO2 emissions rate for each coal fired unit in Texas that 

is equipped with an SO2 scrubber. By plotting the distribution of these hourly emissions rates, we have 

determined the number of hours that each scrubber is in operation. Exhibit 3 presents an example by 

analyzing the distribution of hourly SO2 emission rates at Unit 1 of NRG's Limestone coal-fired power 

plant. This unit is equipped with an SO2 scrubber installed in 1985. As we can seen in the exhibit, the 

lowest level of SO2 emissions achieved by Limestone Unit 1 was 0.13 lbs/MMBtu (the left hand column of 

the chart), and during 10% of hours the unit achieved an SO2 emissions level below 0.20 lbs/MMBtu (the 

three columns at the left of the chart). On the other hand, the highest level of SO2 emissions from this unit 

was 0.63 lbs/MMBtu (the right hand column of the chart), and during 10% of hours, the emission rate of the 

unit exceeded 0.44 lbs/MMBtu (the three columns at the right of the chart). SO2 missions rates two to three 

times as high as the lowest levels achievable at the unit suggest that Limestone Unit 1's scrubber was 

simply turned off during these hours. The same conclusion is indicated by the absolute level of SO2 

emissions during the hours when emissions are highest. The design SO2 removal rate of the scrubbers 

installed on coal fired power plants in Texas ranges between 90% and 97%, while the SO2 emissions from 

burning Texas lignite in an uncontrolled boiler range from 1.6 to 3.9 lbs/MMBtu. At a maximum, 

therefore, a plant operating its SO2 scrubber and burning Texas lignite should have SO2 emissions no 

higher than 0.39 lbs/MMBtu (3.9 lbs/MMBtu maximum sulfur content less 90% minimum SO2 removal).

29 

51 

5 

42 

195 

26 

45 

4 

24 

78 

-

50 

100 

150 

200 

250 

AEP NRG PNM XEL TXU

S

O2 Emissions in ThousandTons

SO2 Emissions in 2010 (th tons) SO2 Emissions Budget Under CSAPR (th tons)
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Exhibit 3

Variation in the Hourly SO2 Emission Rate at NRG's Limestone Coal-Fired Plant Unit 1 in 2010 (1)

1. Horizontal axis breaks down hourly emissions rates into percentiles across the hours of the year. Thus during 1% of hours, the hourly SO2 emission rate of the unit 

is at or below 0.13 lbs/MMBtu (left hand column), and during 99% of hours, it is below 0.63 lbs/MMBtu (right hand column).

Source: Ventyx, EPA and Bernstein analysis

When the hourly emissions rates of generators such as Limestone Unit 1are analyzed across the 8760 hours 

of the year, it becomes apparent that the highest rates of SO2 emissions generally occur during hours of 

peak demand, while the lowest rates of SO2 emissions occur during off-peak hours. This pattern suggests 

that generators have sought to avoid the reduction in net generation that results from operating the scrubbers 

(reflecting the parasitic load of the emissions control equipment) during hours when power prices are 

highest. Conversations with the investor relations departments of Energy Future Holdings and NRG 

Energy confirmed that, as long as continuous operation of SO2 scrubbers is not required to comply with 

currently prevailing SO2 emissions limits, generators will avoid operating the scrubbers so as to maximize 

net power output and revenues, and minimize variable operation and maintenance expense, including the 

cost of sorbents and water required for the operation of the SO2 scrubbers.

Could the EPA be right, then, that the continuous operation of existing scrubbers would allow Texas to 

comply with its 2012 SO2 emissions budget? To assess the potential of Texas' coal-fired generating fleet to 

reduce its aggregate SO2 emissions to the level required by the state's 2012 SO2 budget, we have modeled 

the impact of:

(i) running the fleet's existing SO2 scrubbers continuously, and 

(ii) reducing the SO2 emissions rate of the coal-fired units that lack SO2 scrubbers to the level 

these units achieved during the best 10% of hours in 2010 (i.e., during those hours when 

they switched to burning lower sulfur coals).

0.13 

0.16 

0.20 

0.23 

0.25 0.26 0.28 0.29 0.30 0.31 0.32 0.33 0.34 0.35 0.36 0.38 0.39 0.41 

0.44 

0.49 

0.63 

-

0.10 

0.20 

0.30 

0.40 

0.50 

0.60 

0.70 

1% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 99%

S

O2 Emission Rate in lbs/M

M

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U.S. Utilities

7

Exhibit 4

Texas Coal Fleet and SO2 Scrubbers Installed

Source: Ventyx, EPA and Bernstein analysis

Holding Company Name Plant Name Unit Percent Owned %

Nameplate 

Capacity MW

SO2 Annual 

Rate 

lbs/mmBtu

SO2 Control 

Equipment 

(Y/N)

SO2 Control 

Installation 

Date

Best Emission 

Rate 

lbs/mmBtu (10 

Th Percentile)

Worst 

Emission Rate 

lbs/mmBtu (90 

Th Percentile)

Scrubber 

Design 

Removal Rate

AES Corp (The) AES Deepwater GEN1 100 184 0.64Y Jun-86 0.05 0.76 93%

American Electric Power Co Inc Oklaunion1 55 394 0.18Y Dec-86 0.14 0.23 93%

American Electric Power Co Inc Oklaunion1 16 112 0.18Y Dec-86 0.14 0.23 93%

American Electric Power Co Inc Pirkey1 86 620 0.11Y Jul-07 0.04 0.21 93%

American Electric Power Co Inc Welsh Station1 100 558 0.46N 0.41 0.51

American Electric Power Co Inc Welsh Station2 100 558 0.45N 0.40 0.51

American Electric Power Co Inc Welsh Station3 100 558 0.47N 0.41 0.52

Austin Energy Fayette Power Project1 50 308 0.64Y Dec-10 0.58 0.69 97%

Austin Energy Fayette Power Project2 50 308 0.62Y Mar-11 0.53 0.68 97%

Brownsville Public Utility Board Oklaunion1 18 129 0.18Y Dec-86 0.14 0.23 93%

CPS Energy J K Spruce1 100 566 0.05Y Dec-92 0.02 0.07 93%

CPS Energy J K Spruce2 100 820 0.01Y May-10 0.01 0.02 90%

CPS Energy J T Deely1 100 486 0.68N 0.64 0.72

CPS Energy J T Deely2 100 446 0.68N 0.64 0.72

Energy Future Holdings Corp Big Brown1 100 593 1.32N 1.10 1.55

Energy Future Holdings Corp Big Brown2 100 593 1.33N 1.11 1.59

Energy Future Holdings Corp Martin Lake1 100 793 0.79Y May-77 0.53 1.05 93%

Energy Future Holdings Corp Martin Lake2 100 793 0.76Y May-78 0.52 1.05 93%

Energy Future Holdings Corp Martin Lake3 100 793 0.82Y Apr-79 0.57 1.05 93%

Energy Future Holdings Corp Monticello (TX)1 100 593 0.95N 0.75 1.17

Energy Future Holdings Corp Monticello (TX)2 100 593 0.93N 0.73 1.15

Energy Future Holdings Corp Monticello (TX)3 100 793 0.66Y Aug-78 0.49 0.86 93%

Energy Future Holdings Corp Oak Grove Steam Electric Station ST1 100 917 0.06Y Dec-09 0.03 0.10 95%

Energy Future Holdings Corp Oak Grove Steam Electric Station ST2 100 879 0.06Y Apr-10 0.02 0.08 95%

Energy Future Holdings Corp Sandow 55 100 662 0.09Y Sep-09 0.02 0.18 95%

Energy Future Holdings Corp Sandow No 44 100 591 0.99Y May-81 0.85 1.14 93%

International Power plc Coleto Creek1 100 600 0.80N 0.60 0.96

Lower Colorado River Authority Fayette Power Project1 50 308 0.64Y Dec-10 0.58 0.69 97%

Lower Colorado River Authority Fayette Power Project2 50 308 0.62Y Mar-11 0.53 0.68 97%

Lower Colorado River Authority Fayette Power Project3 100 460 0.10Y Apr-88 0.05 0.19 80%

Northeast Texas Electric Coop Inc Pirkey1 12 85 0.11Y Jul-07 0.04 0.21 93%

NRG Energy Inc Limestone (NRG)1 100 893 0.32Y Dec-85 0.20 0.44 93%

NRG Energy Inc Limestone (NRG)2 100 957 0.34Y Dec-86 0.24 0.45 93%

NRG Energy Inc W A Parish5 100 734 0.68N 0.56 0.82

NRG Energy Inc W A Parish6 100 734 0.75N 0.62 0.90

NRG Energy Inc W A Parish7 100 615 0.72N 0.57 0.86

NRG Energy Inc W A Parish8 100 615 0.13Y Dec-82 0.10 0.16 93%

Oklahoma Municipal Power Authority Oklaunion1 12 84 0.18Y Dec-86 0.14 0.23 93%

Oklahoma Municipal Power Authority Pirkey1 2 17 0.11Y Jul-07 0.04 0.21 93%

PNM Resources Inc Twin Oaks Power1 100 175 0.46Y Sep-90 0.39 0.55 95%

PNM Resources Inc Twin Oaks Power2 100 175 0.44Y Oct-91 0.29 0.57 95%

San Miguel Electric Coop Inc San Miguel1 100 410 0.63Y Jan-82 0.38 0.85 93%

Texas Municipal Power Agency Gibbons Creek1 100 454 0.67Y Oct-83 0.55 0.78 93%

Xcel Energy Inc Harrington1 100 360 0.61N 0.48 0.73

Xcel Energy Inc Harrington2 100 360 0.56N 0.42 0.69

Xcel Energy Inc Harrington3 100 360 0.61N 0.47 0.78

Xcel Energy Inc Tolk1 100 568 0.62N 0.52 0.72

Xcel Energy Inc Tolk2 100 568 0.60N 0.50 0.67
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Exhibit 4 lists each coal-fired generating unit in Texas, the SO2 control equipment installed on each, the 

average annual SO2 emission rate of each unit, the best and worst SO2 emission rate of each unit (the 

average emissions rate during the 10% of hours with the lowest and highest SO2 emissions, respectively), 

and the design SO2 removal rate for each SO2 scrubber.

To estimate the SO2 emissions rate that can be achieved by those coal-fired units already equipped with 

SO2 scrubbers, we have used the hourly rate of emissions achieved by each coal-fired unit in 2010 during 

the 10% of hours when its hourly emissions rate was lowest. 

At certain units, however, the hourly emissions rate during the best 10% of hours exceeded 0.39 

lbs/MMBtu – a level that almost any Texas boiler equipped with a scrubber should be able to reach. (Recall 

that 0.39 lbs/MMBtu is the theoretical emissions rate of boiler burning the highest sulfur Texas lignite --

with an SO2 content of 0.39 lbs/MMBtu – while operating a scrubber that achieves only the lowest rate of 

SO2 removal -- 90%). In these cases, we have assumed that if the unit were to turn its scrubber on, it could 

achieve a rate equivalent to (i) the highest level of SO2 emissions from this unit during the worst 10% of 

hours (ii) reduced by the design removal rate of the SO2 scrubber installed at the unit, (iii) adjusted down 

by a degradation factor (10%) to reflect the gradual loss of scrubbing efficiency with time.

At coal-fired units that lack SO2 scrubbers, we have assumed SO2 emissions rates can be reduced to the 

level achieved by the unit during the best 10% of hours on 2010 – hours when, we presume, the unit was 

burning lower sulfur coal. The lower sulfur grades of Powder River Basin coal, for example, have an SO2 

content of 0.6 to 1.9 lbs/MMBtu, vs. 3.0 to 3.9 lbs/MMBtu for the highest sulfur grades of Texas lignite.

Given these assumptions, we calculate that the state of Texas could reduce its annual SO2 emissions to 

some 245,000 tons annually, effectively complying with its 2012 SO2 emissions budget under the Cross 

State Air Pollution Rule (see Exhibit 5).

Exhibit 5

Potential SO2 Emission In Texas if Existing Scrubbers are Turned On vs. CSAPR State Budget

Source: Ventyx, EPA and Bernstein analysis

245 244 

-

50 

100 

150 

200 

250 

300 

Potential SO2 Emissions With Scrubbers Running (th 

tons)

SO2 Emissions Budget Under CSAPR (th tons)

S

O2 Emissions in Thousand Tons
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Individual Texas utilities, however, may find that even under these circumstances their individual 2012 

emissions of SO2 differ materially from their allocations of SO2 allowances under the Cross State Air 

Pollution Rule. We have therefore analyzed the impact on individual utilities of the need to purchase (or 

the opportunity to sell) SO2 emission allowances, assuming a price per ton of $700, as per the EPA's 

modeling.

Exhibit 6 presents the result of our modeling for the large coal-fired utilities in Texas. As we can be seen 

there, if all existing scrubbers were to operate continuously, we estimate that the SO2 emissions of PNM 

Resources (PNM), NRG Energy (NRG) and American Electric Power (AEP) would be less than their 

individual allocation of SO2 allowances under CSAPR. The estimated SO2 emissions of Xcel Energy and 

Energy Future Holdings, however, would exceed their respective allowance allocations.

Exhibit 6

Potential Annual SO2 Emissions of Large Coal-fired Utilities in Texas vs. SO2 Budget Allocated Under CSAPR

Source: Ventyx, EPA and Bernstein analysis

This analysis suggests that Energy Future Holdings would be required to buy some 20 million tons of SO2 

allowances annually to cover its emissions, resulting in an incremental annual cost of $15 million (see 

Exhibit 7). We calculate that Xcel Energy (XEL) would be required to purchase 10 million tons of 

allowances annually, at an annual cost of $7 million.

We note that Xcel Energy (XEL), as a regulated utility, could pass through this cost to its customers, while 

Energy Future Holdings, as a competitive generator, would see its after-tax earnings reduced by an 

estimated $10 million annually.

On the other hand, NRG Energy (NRG) would likely benefit from the sale of some 7 million tons annually 

of excess SO2 allowances, potentially adding $5 million to annual revenues. We calculate that American 

Electric Power (AEP) might also have an excess of allowances, worth $1 million annually to the company. 

24 

38 

4 

34 

98 

26 

45 

4 

24 

78 

-

20 

40 

60 

80 

100 

120 

AEP NRG PNM XEL TXU

S

O2 Emissions in Thoursand Tons

Potential SO2 Emissions With Scrubbers Running (th tons) SO2 Emissions Budget Under CSAPR (th tons)
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Exhibit 7

Benefit from/(Cost of) SO2 Allowances Due to Intra-state Trading, Assuming Allowance Price at $700/ton (in $ million)

Source: Ventyx, EPA and Bernstein analysis

In addition to the cost of purchasing SO2 allowances, coal-fired Texas utilities will likely face a 

combination of (i) lower revenues, as the net power output of their plants is reduced due to the continuous 

operation of their scrubbers (reflecting the parasitic load of the flue gas desulfurization equipment), and (ii) 

higher variable operation and maintenance expense, reflecting the cost of sorbents and water required for 

the operation of the scrubbers.

1 

5 

(0)

(7)

(15)

(20)

(15)

(10)

(5)

-

5 

10 

AEP NRG PNM XEL TXU

Benefit from/(Cost of) SO2 Allow ances in $ million
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Disclosure Appendix

Valuation Methodology

Our target prices reflects the results of three alternative valuation methodologies: (i) a multiple-based 

valuation calculated by applying the median valuation multiples of a group of comparable companies to our 

estimates of a utility’s future earnings, dividends and EBITDA; (ii) a discounted cash flow model over the 

forecast period of 2011-2015, and a terminal value in 2016 discounted back to present value at the weighted 

average cost of capital; and (iii) a discounted dividend model over the forecast period of 2011-2015, and a 

terminal value in 2016, discounted back to present value at the cost of equity.

Risks

AEP:

Our earnings and cash flow forecasts for AEP are driven primarily by our projections of load growth, future 

rate relief and the volume and profitability of AEP's off-system sales. If our assumptions in these critical 

areas prove overly optimistic, our earnings and cash flow forecast may need to be adjusted downwards and 

with it our target price. Similarly, increases in operation and maintenance expense that exceed our forecast, 

or increases in the price of steam coal that further erode AEP's gross margin on off-system sales, could 

likewise force a reduction in our earnings forecast and target price.
 References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of 

AllianceBernstein Hong Kong Limited, collectively.

 Bernstein analysts are compensated based on aggregate contributions to the 

productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, g

investment banking revenues.

 Bernstein rates stocks based on forecasts of relative performance for the next 6

U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian

companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside 

of the Asia Pacific region, and versus the MSCI Asia Pacific ex

otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

 As of 07/05/2011, Bernstein's ratings were distributed as follows: Outperform 

(0.5% banking clients); Underperform - 8.8% (0.0% banking clients); Not Rated 

represent the percentage of companies in each category to whom Bernste

(12) months.

 Hugh Wynne maintains a long position in Duke Energy Corp. (DUK).

 The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non

securities related services and received compensation for such services AEP / American Electric Power Co Inc.

 An affiliate of Bernstein received compensation for non

American Electric Power Co Inc.

12-Month Rating History as of 07/19/2011

Ticker Rating Changes

AEP M (IC) 01/15/03

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N 

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC 

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will ad

when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its 

coverage policies. Although the definition and application of these methods are based on generally accepted industry practice

please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a 

range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and 

subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts 

valuation.

This document may not be passed on to any person in the United Kingdom (i) who is a retail c

authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "A

SRO REQUIRED DISCLOSURES

to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of 

AllianceBernstein Hong Kong Limited, collectively.

Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, 

productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, g

asts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the 

U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian

ging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside 

of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges 

e have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

As of 07/05/2011, Bernstein's ratings were distributed as follows: Outperform - 45.2% (1.5% banking clients) ; Market

8.8% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses 

represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve 

Hugh Wynne maintains a long position in Duke Energy Corp. (DUK).

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non

securities related services and received compensation for such services AEP / American Electric Power Co Inc.

An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companie

Underperform, N - Not Rated

Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will ad

ses. Bernstein has no policy or standard as to the frequency of any updates or changes to its 

coverage policies. Although the definition and application of these methods are based on generally accepted industry practice

is a range of reasonable variations within these models. The application of models typically depends on forecasts of a 

range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and 

subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts 

This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an 

authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "A

to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of 

research franchise as measured by account penetration, 

productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating 

12 months versus the S&P 500 for stocks listed on the 

U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian

ging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside 

Japan) exchanges - unless 

% (1.5% banking clients) ; Market-Perform - 46.1% 

0.0% (0.0% banking clients). The numbers in parentheses 

in provided investment banking services within the last twelve 

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment bankingsecurities related services and received compensation for such services AEP / American Electric Power Co Inc.

securities related services from the following companies AEP / 

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and 

ses. Bernstein has no policy or standard as to the frequency of any updates or changes to its 

coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, 

is a range of reasonable variations within these models. The application of models typically depends on forecasts of a 

range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are 

subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this 

lient (ii) unless that person or entity qualifies as an 

authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies 
as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 

2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of 

the Financial Services Authority.

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CERTIFICATIONS

 I/(we), Hugh Wynne, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) 

personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or 

indirectly, related to the specific recommendations or views in this publication.
Approved By: NK

Copyright 2011, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and AllianceBernstein Hong Kong Limited, subsidiaries of AllianceBernstein L.P. ~ 1345 Avenue of the 

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This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, 

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This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax 

advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of 

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necessarily a guide to, indicator of, or assurance of, future performance.