Executive Summary / Key Takeaways

• Regulatory Rehabilitation Complete: FirstEnergy's July 2024 completion of its Deferred Prosecution Agreement and achievement of investment-grade status across all three rating agencies removed a decade-long overhang, cutting the cost of capital and clearing the path for a $28 billion capital investment program through 2029 that will drive 6-8% core earnings growth.

• Transmission Moat Captures Data Center Boom: With 24,000+ miles of transmission lines in PJM territory and a projected 15 GW (50%) increase in system peak load by 2035 driven by data centers, FirstEnergy's infrastructure positioning creates a once-in-a-generation rate base growth opportunity, with transmission investments expected to increase 30% in the next five-year plan.

• Financial Transformation Through Discipline: The company's shift to core earnings reporting reveals a cleaner story—Q3 2025 core EPS up 9% YoY, O&M expenses running 4% below plan, and ROE improving to 10.1%—demonstrating that management's de-risking efforts and cost control are translating into predictable earnings power.

• Critical Execution Phase Ahead: While the investment thesis is compelling, success hinges on three variables: flawless execution of a massive capital program (from $5.5B in 2025 to potentially $7B+ annually), constructive regulatory outcomes in Ohio's evolving framework, and realization of contracted data center demand that has already grown 30% since February to 2.7 GW.

• Attractive Risk-Adjusted Returns: Trading at 20x earnings with a 3.8% dividend yield and 11.2% ROE, FirstEnergy offers a 10-12% total shareholder return opportunity that compares favorably to peers, though elevated debt levels (1.94x debt-to-equity) and past regulatory baggage create higher execution risk than utility pure-plays.

Setting the Scene: From Scandal to Supercycle

FirstEnergy Corp., incorporated in Ohio in 1996, operates as a fully regulated electric utility serving over 6 million customers across the Midwest and Mid-Atlantic through 24,000+ miles of transmission lines. The company makes money through a straightforward regulated utility model: invest in transmission and distribution infrastructure, earn a state-approved return on that rate base (targeting 9.5-10% ROE), and recover costs through customer rates. This model, while seemingly mundane, becomes extraordinarily valuable when three forces converge: completed regulatory rehabilitation, massive load growth from data centers, and a transmission network that acts as a natural monopoly.

The company's recent history explains why this moment is pivotal. FirstEnergy spent three years under a Deferred Prosecution Agreement related to the House Bill 6 scandal, paying a $230 million criminal penalty and overhauling its compliance programs. This period, while painful, forced strategic de-risking that strengthened the balance sheet—pension lift-outs removed $1.4 billion in obligations, rate reviews in four states de-risked 83% of the rate base, and the sale of a 30% stake in FirstEnergy Transmission (FET) in March 2024 helped secure investment-grade status. The July 2024 DPA completion marked the end of this chapter, triggering 40 credit rating upgrades across the enterprise and fundamentally lowering the cost of capital.

Industry structure favors FirstEnergy's positioning. The PJM Interconnection territory, where FirstEnergy operates, faces a projected 48 GW increase in peak load by 2035—30% of current capacity—driven almost entirely by data center development. FirstEnergy's system peak is expected to grow 15 GW, or nearly 50%, from 33.5 GW to 48.5 GW. This isn't speculative; contracted data center demand has already increased 30% since February 2025 to 2.7 GW, with the total pipeline doubling to 11.1 GW. Unlike the solar and wind booms of the past decade, data centers require firm, dispatchable power delivered through robust transmission networks, playing directly to FirstEnergy's core competency.

Technology, Infrastructure, and Strategic Differentiation

FirstEnergy's competitive moat isn't software or patents—it's 24,000 miles of transmission infrastructure that cannot be replicated without a decade of permitting, billions in capital, and regulatory approval that may never come. This physical network creates a natural monopoly in its service territory, but the strategic value lies in how management is leveraging it for the data center era. The company's transmission rate base grew 9% year-over-year to $5.3 billion, while integrated transmission within the utility operating companies grew 16%, demonstrating accelerating investment in the highest-return assets.

Grid modernization investments create tangible differentiation. The $1.6 billion Pennsylvania LTIP 3 program, approved in December 2024, will track grid modernization capital over five years with immediate recovery mechanisms. Ohio's Grid Mod II settlement, a $400 million smart meter program approved in December 2024, deploys advanced metering infrastructure that improves outage detection and enables dynamic pricing—critical for managing data center load profiles. New Jersey's $817 million Energy Efficiency and Conservation Plan, with a 9.6% authorized return, transforms regulatory relationships from adversarial to collaborative.

The Valley Link joint venture with AEP and Dominion , awarded $3 billion in PJM transmission projects in February 2025, illustrates FirstEnergy's strategic positioning. FirstEnergy's estimated $800 million share (later revised to $1 billion) of these projects will earn forward-looking formula rates with a requested 10.90% base ROE plus 50 basis point incentives. This matters because it demonstrates FirstEnergy's ability to partner with larger peers to capture regional transmission opportunities that individual utilities couldn't pursue alone, effectively punching above its weight in the competitive transmission landscape.

Financial Performance: Evidence of Strategic Execution

FirstEnergy's Q3 2025 results provide compelling evidence that the rehabilitation thesis is working. Core earnings of $0.83 per share rose 9% year-over-year, while nine-month core earnings of $2.02 per share jumped 15%. More importantly, the composition of earnings reveals a strategic shift toward higher-quality, transmission-driven growth.

The Distribution segment's 11.17% revenue growth and 19.17% earnings growth in Q3 reflects the $225 million Pennsylvania base rate case effective January 2025. This matters because it demonstrates regulatory recovery in FirstEnergy's largest state, with new rates supporting infrastructure investment while maintaining customer bills 19% below in-state peers. The absence of a $62 million Akron office impairment charge from Q3 2024 further cleans up the earnings picture, showing that legacy cost structures are being rationalized.

The Integrated segment's 13.84% revenue growth but 7.09% earnings decline in Q3 appears concerning until you examine the drivers. Higher revenues from regulated investment programs and base rate cases in New Jersey and West Virginia were offset by the absence of a 2024 tax benefit and higher planned operating expenses from organizational changes. The year-to-date picture is clearer: 12.40% earnings growth driven by formula rate investments and higher customer demand. This segment's 3,610 MW of regulated generation, including 50 MW of new solar, positions FirstEnergy to capture the $2.5 billion West Virginia gas plant opportunity if approved.

The Stand-Alone Transmission segment tells the most compelling story. While revenue grew only 2.74% in Q3, earnings surged 69.44% due to a discrete tax benefit from excess deferred income tax remeasurement and higher revenues from regulated capital investments. Year-to-date earnings grew 17.30% despite the elimination of ATSI's 50 basis point ROE adder and dilution from the FET minority interest sale. This earnings leverage—low revenue growth translating to high profit growth—demonstrates the operating leverage inherent in transmission assets once rate base crosses critical thresholds.

Corporate/Other losses increased to $94 million in Q3 from $43 million in 2024, but this reflects strategic cleanup: $16 million in lower Signal Peak earnings (sold July 2025 for $47.5 million), $7 million in higher interest expense from convertible notes, and $6 million in investigation-related expenses. The year-to-date improvement from $333 million to $253 million in losses is more meaningful, driven by the absence of $100 million SEC penalties and $207 million ARO charges from 2024. This segment's volatility explains management's shift to core earnings, which excludes these non-operating items to reveal the true utility earnings power.

Cash flow generation validates the investment strategy. Nine-month operating cash flow of $2.6 billion increased over $700 million versus 2024, funding $4 billion in utility investments—a 30% increase. Transmission capital alone reached $1.9 billion, up 35%, demonstrating the company's ability to deploy capital at accelerating rates while maintaining liquidity of $6.2 billion. The 5.10x interest coverage ratio provides substantial covenant headroom, allowing up to $1.2 billion in incremental interest expense before breaching limits.

Outlook, Guidance, and Execution Risk

Management's guidance tells a story of accelerating confidence. The 2025 core earnings range was raised to $2.50-$2.56 per share, narrowing toward the upper half of the original $2.40-$2.60 range. This 6-8% CAGR target through 2029 is underpinned by the $28 billion Energize365 capital program, but the real upside lies in the 30% increase in transmission investments planned for 2026-2030. As CEO Brian Tierney noted, this "firms up the ability for us to be in that 6% to 8% earnings per share range," with data center growth providing "real confidence that we'll solidly be in that range."

The capital plan's magnitude is striking. The 2025 program increased 10% to $5.5 billion, with transmission CapEx growing from $2.4 billion to $3.4 billion annually through 2029. This represents a 15% CAGR in transmission rate base, potentially doubling total transmission rate base by 2030. For context, this implies FirstEnergy will invest more in transmission in the next five years than in the previous decade, creating a compounding earnings stream as these assets enter rate base.

Data center demand assumptions appear robust but require monitoring. The 2.7 GW of contracted demand through 2029 represents only 24% of the 11.1 GW pipeline, meaning execution risk is substantial. Management's forecast of 5% industrial sales CAGR through 2029 and 8.5% through 2027 is based solely on contracted demand, providing downside protection if speculative projects fail to materialize. However, the timeline is aggressive—industrial load growth is expected to reach mid-single digits by Q2 2026 and "significantly higher" by Q4 2026, requiring immediate capital deployment.

Regulatory execution in Ohio represents the critical swing factor. The anticipated November 2025 base rate case order will determine recovery mechanisms for distribution investments, while potential legislation in May/June 2026 could establish multi-year rate plans with forward test years. This matters because Ohio represents FirstEnergy's largest operating company, and the current ESP-4 framework (after withdrawing ESP-5) lacks distribution capital recovery riders, creating regulatory lag. A constructive outcome would unlock billions in additional investment; an adverse ruling could constrain growth.

The West Virginia IRP, filed October 2025, proposes 70 MW of solar by 2028 and 1.2 GW of natural gas combined cycle generation by 2031—a $2.5 billion investment representing a 35% increase to the regulated generation portfolio. This is incremental to the current capital plan and would require separate regulatory approval in Q1 2026. Success here would diversify FirstEnergy's generation mix while capturing economic development from data center load, but failure would limit growth options in a key state.

Risks and Asymmetries: What Could Break the Thesis

Three material risks threaten the investment narrative, each with distinct mechanisms and implications.

Regulatory Reversal Risk: While FirstEnergy has achieved constructive outcomes in four of five states, Ohio remains uncertain. The withdrawal of ESP-5 and reversion to ESP-4 froze distribution capital recovery at May 2024 levels, creating a $50-100 million annual revenue shortfall that pressures margins. If the November 2025 rate case or subsequent legislation fails to provide timely recovery mechanisms, the 6-8% earnings CAGR could compress to 3-4%, as transmission growth alone cannot offset distribution under-recovery. This risk is amplified by FirstEnergy's historical regulatory baggage; any hint of political interference could trigger credit rating pressure despite recent upgrades.

Data Center Demand Realization Risk: The 11.1 GW pipeline includes speculative interconnection requests that may never convert to contracts. While management rigorously assesses customer commitment, a macroeconomic slowdown or shift in AI investment could cause demand to fall short of projections. If actual data center load growth is 50% lower than forecast, the 30% increase in transmission CapEx would create overcapacity, depressing returns and potentially requiring write-downs. The asymmetry is severe: meeting projections drives 18% transmission rate base CAGR, while missing them could strand billions in assets.

Interest Rate and Execution Risk: FirstEnergy's $6 billion debt financing program in 2025, while oversubscribed at 4.4% weighted average rates, occurred before the recent rate volatility. With $28 billion in planned investments through 2029 and potential for $7B+ annually, each 100 basis point increase in financing costs could reduce EPS by $0.15-0.20. More concerning is execution capacity—deploying $5.5 billion annually requires supply chain management, workforce scaling, and regulatory coordination that FirstEnergy's streamlined organization (post-2025 workforce reduction) may struggle to deliver. A 10% cost overrun on transmission projects would reduce ROE by 50-75 basis points, threatening the 9.5-10% target.

Mitigating factors exist. The company's $6.2 billion liquidity provides cushion against financing shocks. The Valley Link joint venture shares execution risk with AEP (AEP) and Dominion (D). Most importantly, the regulated model allows cost overruns to be recovered in future rate cases, albeit with lag. As CFO Jon Taylor noted, the shift to core earnings reporting was designed to exclude pension and Signal Peak volatility—non-core items that comprised 10% of 2024 operating earnings but are now eliminated, creating a more stable earnings foundation.

Competitive Context: Transmission Focus Versus Diversified Peers

FirstEnergy's strategic positioning differs materially from its large-cap utility peers, creating both advantages and vulnerabilities. American Electric Power (AEP), with 40,000+ transmission miles and $110.7 billion enterprise value, operates at a scale that enables greater economies in joint projects like the $6.7 billion PJM RTEP expansion. AEP's 25.89% operating margin and 12.92% ROE exceed FirstEnergy's 21.26% and 11.19%, reflecting superior operational efficiency. However, AEP's broader footprint across 11 states creates regulatory complexity that FirstEnergy's concentrated Midwest/Mid-Atlantic presence avoids. FirstEnergy's ability to secure $4 billion in PJM open window awards over recent years demonstrates it can compete effectively despite smaller scale, but AEP's 15-20% market share in the Southeast provides diversification that FirstEnergy lacks.

Duke Energy's (DUK) 8.4 million customers and $182 billion enterprise value dwarf FirstEnergy, with a balanced generation portfolio including nuclear that provides cleaner energy credentials. Duke's 27.12% operating margin and 15.97% profit margin reflect best-in-class cost management, while its 3.53% dividend yield with 66% payout ratio offers more sustainable income than FirstEnergy's 75.65% payout. FirstEnergy's transmission focus provides better exposure to data center growth than Duke's Southeast concentration, but Duke's scale and diversification create lower execution risk and better interest coverage.

Exelon (EXC) serves 10+ million customers in dense urban markets with a pure-play distribution model that generates 22.18% operating margins. Its 10.31% ROE and $93.95 billion enterprise value reflect strong execution in overlapping Pennsylvania and Maryland territories. FirstEnergy's transmission orientation creates a different growth vector—while EXC focuses on distribution efficiency, FirstEnergy captures regional transmission economics that EXC cannot access. However, EXC's lower debt-to-equity (1.78 vs 1.94) and higher current ratio (0.94 vs 0.75) indicate superior financial flexibility.

PPL Corporation (PPL), with 3.6 million customers and $44 billion enterprise value, operates at a similar scale to FirstEnergy but focuses on distribution reliability. Its 26.62% operating margin exceeds FirstEnergy's, but its 7.66% ROE reflects lower transmission exposure. FirstEnergy's transmission moat provides a growth premium—PPL's 5-10% market share in the Northeast limits its ability to capture data center-driven transmission investment, while FirstEnergy's PJM positioning and Valley Link participation create superior long-term earnings potential.

The competitive synthesis reveals FirstEnergy's unique bet: concentrate capital in transmission infrastructure to capture data center growth, accepting higher execution risk and regulatory concentration for superior rate base expansion. This contrasts with peers' diversified strategies, creating a higher-beta utility play that could outperform if data center demand materializes but underperform if execution falters.

Valuation Context: Pricing the Transmission Supercycle

At $46.03 per share, FirstEnergy trades at 20.0x trailing earnings, 7.37x operating cash flow, and 11.76x EV/EBITDA. These multiples sit modestly above the utility sector average but below historical levels for companies undergoing regulatory rehabilitation. The 3.83% dividend yield, while attractive, is supported by a 75.65% payout ratio that leaves limited cushion—management's target of 60-70% of core earnings suggests future dividend growth must align with earnings growth rather than exceed it.

Relative to peers, FirstEnergy's valuation appears reasonable but not compelling. AEP trades at 17.52x earnings with superior margins and ROE (12.92% vs 11.19%), while Duke commands 18.87x earnings with better interest coverage. Exelon's 16.17x P/E reflects its urban distribution focus, and PPL's 24.10x multiple prices its distribution reliability premium. FirstEnergy's 20.0x multiple fairly reflects its transmission growth optionality but doesn't account for elevated execution risk.

The key valuation driver is rate base growth. FirstEnergy's $5.3 billion transmission rate base growing at 15% CAGR implies $10.7 billion by 2030, supporting an additional $500 million in annual earnings at the 9.5-10% ROE target. If data center demand drives the 30% CapEx increase and West Virginia's $2.5 billion gas plant is approved, rate base could grow 18-20% annually, justifying a premium multiple. However, if regulatory lag limits recovery or financing costs rise, the 6-8% earnings CAGR could compress to 4-5%, making the current multiple appear stretched.

The balance sheet provides both support and constraint. Debt-to-equity of 1.94x is elevated versus AEP's 1.52x and PPL's 1.32x, reflecting the capital-intensive nature of transmission investment.

However, the 5.10x interest coverage ratio and $6.2 billion liquidity provide substantial cushion. The $300 million pension contribution expected in 2027 is manageable, and the Signal Peak exit eliminates a volatile earnings drag. The convertible debt issued in 2025, while increasing interest expense, was priced attractively and provides equity optionality.

Conclusion: A Utility at an Inflection Point

FirstEnergy has completed its transformation from a scandal-plagued utility to a focused transmission and distribution company positioned to capture the data center supercycle. The July 2024 DPA completion and 40 credit rating upgrades fundamentally lowered the cost of capital, while the $28 billion Energize365 capital program provides visible earnings growth through 2029. The company's transmission moat—24,000 miles of irreplaceable infrastructure in PJM territory—creates a natural monopoly on delivering the 15 GW of new load that data centers will require by 2035.

The investment thesis hinges on execution. FirstEnergy must deploy $5.5 billion in 2025 and potentially $7 billion annually thereafter while maintaining the O&M discipline that has kept expenses 4% below plan. Regulatory outcomes in Ohio and West Virginia will determine whether the company can earn its 9.5-10% ROE target on these investments or face the lag that has historically constrained earnings. The 2.7 GW of contracted data center demand provides a solid foundation, but the 11.1 GW pipeline must convert to sustain the 30% transmission CapEx increase.

For investors, FirstEnergy offers a unique utility proposition: higher growth potential (6-8% core EPS CAGR) than its large-cap peers, driven by transmission infrastructure that benefits directly from AI and data center trends. The 20x P/E and 3.8% dividend yield provide reasonable entry valuation, though the 75% payout ratio and 1.94x debt-to-equity create less margin for error than AEP or Duke. The stock's performance will be determined by two variables: the pace of data center interconnections and FirstEnergy's ability to maintain regulatory momentum across its five-state footprint. If both align, the company could deliver 12-15% total returns; if either falters, the transmission supercycle thesis could face a multi-year delay.