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FirstEnergy reported second-quarter core operating earnings per share of $0.50, down from $0.52 in the same year-ago period, putting the company on track to meet our and management's full-year expectations.

Why it matters: FirstEnergy reaffirmed 2026 EPS guidance of $2.62 to $2.82, in line with our estimates. Earnings growth was driven by new rates and continued investment, offset by unfavorable weather and higher operating costs.

The bottom line: We are maintaining our $48 per share fair value estimate and narrow moat rating. FirstEnergy trades at a slight premium to our fair value in a sector that we view 5% overvalued on a median basis as of July 29. Management reaffirmed its 6%-8% annual EPS growth target range. We think FirstEnergy can reach the high end of that range.

Long view: FirstEnergy's $36 billion capital investment plan for 2026-30 supports our earnings growth outlook. The utility is on track to invest $6 billion this year. FirstEnergy's data center pipeline increased to 25 gigawatts, up 30% from the first quarter. Contracted demand increased 50% to 6.5 GW. West Virginia represents roughly one-quarter of the data center demand, with opportunities for significant additional investment in generation, transmission, and distribution most likely beyond our five-year forecast.

Coming up: Higher regulatory risk for FirstEnergy will continue to be a focus for investors, the main reason we think the utility will continue to trade at a discount to peers. However, we think management's focus on customer affordability and stakeholder involvement will help mitigate regulatory risk. Given a recent outcome of a peer utility in Ohio, we expect a constructive outcome in FirstEnergy's three-year rate filing. We expect West Virginia regulators to approve in the coming months a request to build 1.2 GW of new natural gas generation. Upcoming rate filings in New Jersey and Maryland will be challenging, in our view, but we ultimately expect constructive outcomes.

Our fair value estimate is $48 per share after incorporating year-to-date financial results and regulatory updates. We also lowered our expectations for returns in Pennsylvania.

We estimate FirstEnergy will achieve the high end of management's 6%-8% annual core earnings growth target, supported by our expectations that the company will invest $36 billion through our five-year forecast, in line with management's investment plan.

We assume constructive regulatory outcomes for most of FirstEnergy's subsidiaries' pending planned and ongoing rate reviews. We expect allowed returns used to set rates in Pennsylvania to be lower than current allowed returns, given regulatory uncertainty in the state.

In our discounted cash flow valuation, we use a 6.0% cost of capital.

We assign FirstEnergy a Narrow Morningstar Economic Moat Rating. Its earnings come from the narrow-moat Federal Energy Regulatory Commission-regulated electric transmission businesses and narrow-moat state-regulated utilities.

Electric transmission also has a favorable regulatory framework under the FERC. Rates are based on a formula that allows transmission companies to recover expenses and earn a return on investment. The formula rate mechanism considers forecast expenses, investment base, revenue, and network load each year, then adjusts annually to true up returns. The FERC’s formula-based rate-setting framework is more investor-friendly than typical state regulation, which often requires a utility to invest capital before adjusting customer rates to collect a return on that capital.

The company's state-regulated utilities benefit from mostly constructive rate regulation. Service territory monopolies and economies of scale are the primary sources of advantage for the seven narrow-moat utilities in these three states. Regulated rates are the foundation for FirstEnergy to earn a fair return on and return of the capital it invests to build, operate, and maintain its infrastructure. Based on past regulatory decisions and the current framework, we have confidence that these utilities will earn above our estimate of their cost of capital for the next 15 years.

FirstEnergy's narrow-moat businesses support earnings growth and $36 billion of planned investment.

FirstEnergy is aggressively investing in electric transmission with most projects eligible to receive premium FERC-regulated returns.

Management is moving past missteps, allowing it to focus on investing and earning fair returns at its regulated utilities.

Relationships with Ohio regulators may take years to mend and could pressure returns in that jurisdiction.

The company has had a long history of operational problems and at times a lack of cost controls at its regulated utilities.

As with all regulated utilities, rising interest rates will raise financing costs and could make the dividend less attractive for investors.