Mizuho Securities USA LLC on Jan. 3 downgraded American Electric Power Co. Inc.'s stock to "neutral" from "buy" and lowered its price target to $70 from $76.
The firm said it "does not believe that AEP merits a premium valuation."
Mizuho said it believes AEP should perform in-line with the utility group average based on projected earnings growth of 5.2% through 2021 off of a 2018 base, which is "roughly in line with the average earnings growth for stocks in our coverage universe."
"Our projected FFO/debt of 13.8% is below average and could add pressure to issue equity beyond the $1.2 billion identified by the company in its forecast," Mizuho analyst Paul Fremont wrote in a research report.
In addition, Mizuho said AEP faces regulatory risk in Oklahoma and challenges to planned renewable investments in other jurisdictions.
AEP has said it will focus on smaller, incremental renewable investments after the decision to cancel its highly touted 2,000-MW Wind Catcher Wind Farm in the Oklahoma panhandle.
"We believe AEP will likely have difficulty demonstrating economic benefits for renewable investment given low capacity utilization rates in the states in which its utilities operate," Fremont wrote. "We believe this could limit opportunities for upside rate base revisions."
Ohio Power Co., which does business as AEP Ohio, in September filed for regulatory approval to add at least 900 MW of wind and solar generation in the state. The AEP subsidiary committed to adding the wind and solar capacity in Ohio as part of a settlement agreement reached with the Sierra Club and joined by large businesses, hospitals and low-income consumer advocates.
The Office of the Ohio Consumers' Counsel and other large intervenors, such as the Ohio Coal Association and the Ohio Manufacturers' Association Energy Group, oppose AEP Ohio's request to charge "captive monopoly customers" for the generation instead of relying on the competitive retail market.
Mizuho notes the Public Utilities Commission of Ohio must rule on the need for the renewable capacity and could reduce the amount of generation requested. In addition, appeals of such a ruling are likely to result in construction delays.
"Given the sensitivity of new projects to federal tax benefits which are scheduled to be scaled back after 2020, the future of these projects remains very much in doubt," Fremont wrote.
AEP subsidiary Public Service Co. of Oklahoma, or PSO, also faces regulatory uncertainty. The utility has asked the Oklahoma Corporation Commission to approve an $88.5 million, or 6.5%, electric base rate increase, premised upon a 10.3% return on equity.
PSO said it aims to address "regulatory lag" and provide "stability and certainty" through implementation of a performance-based rate plan that would include "performance incentive measures" related to reliability, grid modernization, customer satisfaction, public safety and economic development.
The plan "ensures that earnings fall within an approved return on equity range by allowing adjustments to rates between rate cases," the utility said.
"[AEP] has indicated that if it is unsuccessful in earning a fair return in Oklahoma, it would consider selling the subsidiary," Fremont wrote.