Regulated Utilities: 1Q26 Earnings Preview – Data Center Load Growth and Regulatory Improvement Drive Divergent Stock Picks

Core Thesis

Data center-driven load growth is reshaping the regulated utility sector. Pipelines are expanding faster than expected, and constructive regulatory developments (e.g., West Virginia ROE increase) are improving earnings visibility. However, affordability headwinds and one-off storm costs create near-term noise. We maintain an In-Line industry view, with pronounced divergence: Overweight names (AEP, DTE, PPL, SEI, SR, SRE) benefit from data center exposure and regulatory momentum; Equal-weight names (CMS, D, XEL) face storm or regulatory overhangs; Underweight EIX is avoided due to lingering wildfire risk.

What the Market May Be Underpricing

The market underestimates both the scale and speed of data center demand acceleration. AEP's 10 GW Ohio campus alone represents material upside to its $72bn base capex plan, and management has flagged an additional $5-8bn of incremental projects. DTE's second GW-scale data center deal (following the Google 1 GW agreement) could drive ~8% earnings accretion, yet is not fully reflected in consensus. SR's transformation to a pure-play regulated company—via divestiture of Storage and Marketing—should improve earnings quality and justify a higher multiple, even as 2026 guidance drops by ~$0.50.

Evidence Chain

Data center load growth is accelerating across multiple utilities

• AEP has secured 56 GW of contracted load through 2030 and is evaluating $5-8bn of incremental capex beyond its $72bn base plan, with a potential update ahead of the usual 3Q cadence.
• DTE announced a 1 GW data center agreement with Google; management previously indicated a second GW-scale deal could lift earnings 8% excluding Vantage tax credits. Regulatory approval is expected by September.
• CMS is close to signing its first large-load contract (announced in the 2Q25 call) and is in advanced discussions with a second customer.
• PPL is expected to update its large-load pipeline in Pennsylvania and Kentucky.

Regulatory environment is broadly supportive

• West Virginia's reconsideration order allowed a 50 bps increase in AEP's utility ROE, directly boosting its financial plan assumptions.
• DTE publicly stated it will not seek a rate increase for at least two years after the next rate case, contingent on its first data center ramping as planned—this affordability gesture may improve regulatory relations.
• CO gas rate case: a unanimous settlement at ATO yielded a 9.25%-9.45% ROE, higher than staff recommendations, signaling a constructive tone.

One-off weather costs create near-term earnings noise

• Michigan ice storms in 1Q26: CMS faces ~$60m in restoration costs (similar to 2Q25 storms), DTE ~$20m. CMS is expected to request deferred recovery from the PSC.
• SR experienced 14% below-normal HDDs in Missouri, creating a headwind partly offset by its weather mitigation mechanism.
• XEL faces a ~$0.05 weather headwind in 1Q26; flexibility remains to reaffirm full-year guidance.

Key Risks

1. Data center demand growth misses expectations, or conversion of pipeline to signed contracts slows.
2. Adverse regulatory outcomes—lower ROE in rate cases (e.g., SC electric case where staff recommended 9.6% ROE vs. utility request of 10.5%) or delayed capex approvals.
3. Rising interest rates increase financing costs for leveraged utilities, pressuring earnings and multiples.
4. Extreme weather events (storms, wildfires) lead to uninsured costs and stricter rate regulation.
5. Affordability concerns prompt political pressure to limit rate increases, capping earned ROEs.

Valuation & Trading Implications

The sector’s relative valuation is in line with historical averages, but stock-level divergence is widening. Key actionable views:

• Overweight (Buy): AEP (PT $136), DTE (PT $155), PPL (PT target NA), SEI (PT $81), SR (PT $100), SRE (PT target NA). These names offer above-average data center exposure, constructive regulatory backdrop, and attractive risk-reward.
• Equal-weight (Hold): CMS (PT $81), D (PT target NA), XEL (PT target NA). Near-term headwinds (storms, regulatory uncertainty) limit upside.
• Underweight (Sell): EIX (PT $70). Persistent wildfire risk in California and lack of positive catalysts versus peers.

Focus events during 1Q26 calls: AEP’s commentary on capex refresh timing and the 10 GW campus; DTE’s progress on the second GW-scale deal; SR’s detailed 2026 guidance after discontinuing Storage and Marketing; any new data center announcements from CMS or PPL. SEI’s next data center contract and capacity expansion timeline are also critical.

Appendix: Preview to Earnings Table (Selected)