Exelon

Exelon reported second-quarter operating earnings of $0.43 per share, up from $0.39 in the same period a year ago, putting the company on track to meet our and management's full-year expectations.

Why it matters: Management maintained 2026 EPS guidance of $2.81-$2.91, in line with our estimates. Exelon's 5%-7% earnings outlook is unchanged, and we expect the company to achieve the midpoint. 

The bottom line: We are maintaining our $45 fair value estimate. Our narrow moat rating remains unchanged. Exelon's stock trades in line with our fair value estimate as of July 30, compared with a 4% premium to the US utilities sector valuation. Exelon's stock trades at 15.7 times our 2026 earnings compared with the utility peer median of 19.5 times. We think this discount will persist given Exelon's increased regulatory risk across Exelon's service territories and uncertainty in the PJM market.

Long view: Management reaffirmed its $41.7 billion capital investment plan for 2026-29, which supports our earnings outlook. Management reduced its data center backlog to 36 gigawatts from 43 GW in the first quarter. We don't view this as a signal of concern for the data center buildout more broadly. We view this as unique to the mid-Atlantic market, where little new generation supply is being developed. This makes it more challenging for data centers to connect to the grid compared with markets that have and are building energy infrastructure to support data centers. Exelon filed for new customer rates at subsidiary BGE, requesting a 10.4% allowed return on equity, with rates effective January 2027. Customer affordability in Maryland has been a key stakeholder concern. We expect regulators to approve a 9.5% ROE.

Coming up: After Exelon withdrew its Pennsylvania rate case earlier this year, there is no time frame for the subsidiary to refile. Other utilities in the state have recently received constructive decisions, a positive sign for the state's regulatory environment.

Our fair value estimate is $45 per share after incorporating year-to-date financial results and regulatory updates.

We expect annual earnings growth at the midpoint of management's 5%-7% guidance range in 2026-30. We forecast $51 billion of capital expenditures from 2026-30 at the company's regulated operations. This is in line with management's capital investment plan.

In our discounted cash flow valuation, we use a 5.9% cost of capital based on a 7.0% cost of equity. This is lower than the rate of return we expect investors will demand for a diversified equity portfolio, reflecting Exelon's lower sensitivity to the economic cycle and lower degree of operating leverage.

Considering Exelon's suite of fully regulated businesses, we think the firm has a narrow economic moat.

Service territory monopolies and efficient scale advantages are the primary sources of an economic moat for regulated utilities such as Exelon. State and federal regulators typically grant regulated utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their distribution networks. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

This implicit contract between regulators and capital providers should, on balance, allow regulated utilities to outearn their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing.

Intuitively, utilities should have an economic moat based on efficient scale, but in some cases regulation offsets this advantage, preventing excess returns on capital. The risk of adverse regulatory decisions precludes regulated utilities from earning wide economic moat ratings. However, the threat of material value destruction is low, and normalized returns exceed the costs of capital in most cases, leaving us comfortable assigning narrow moat ratings to many regulated utilities.

Exelon is a fully regulated utility that should provide a more stable cash flow profile for income-seeking investors than when it owned wholesale generation.

Exelon has good regulated growth investment opportunities that should support earnings and dividend growth.

Nearly all of the company's growth capital is recovered through regulatory mechanisms that reduce regulatory lag.

Exelon's large investment plan increases regulatory risk.

Some of the company's regulated utilities operate in the Northeast and Illinois, which have a history less constructive regulatory outcomes than other jurisdictions and offer lower allowed returns on equity than other utilities.

A federal lobbying scandal hurt Exelon's reputation with policymakers in Illinois, which could cause adverse outcomes in future rate proceedings.