Executive Summary / Key Takeaways

• FCG Acquisition as Transformational Inflection: The November 2023 Florida City Gas acquisition expanded Chesapeake Utilities' asset base by nearly 50%, but 2025 earnings guidance of $6.15-$6.35 per share critically depends on a successful outcome of the pending FCG depreciation study—a binary event that could shift results by millions in amortization timing and amount.

• Regulated Infrastructure Engine Drives Predictable Growth: Chesapeake's GUARD, SAFE, and SPP programs operate under approved regulatory mechanisms providing immediate cost recovery, generating nearly $9 million in 2024 adjusted gross margin and positioning the company to deliver $27 million in 2025, creating a compounding, low-risk growth foundation that competitors cannot easily replicate.

• Unregulated CNG/RNG Business Offers Differentiated Upside: The virtual pipeline segment grew adjusted gross margin 13-14% in 2025, delivering approximately $25.5 million annually with minimal regulatory friction, providing higher-return growth that pure-regulated peers like Atmos Energy (ATO) and ONE Gas (OGS) lack.

• Geographic Concentration in High-Growth Markets: Delmarva Peninsula and Florida residential customer growth of 4.3% and 3.9% respectively—driven by Sussex County, Delaware being one of America's fastest-growing counties—provides organic tailwinds that reduce customer acquisition costs and support rate base expansion.

• Execution Risks Threaten 8% CAGR Target: The $20 million WRU project cost overrun and delay to mid-2026, combined with a complex ERP transformation and the binary FCG depreciation study outcome, create multiple execution levers that could derail management's 8% EPS CAGR commitment through 2028.

Setting the Scene: A Regional Utility at Scale Inflection

Chesapeake Utilities Corporation, formed as a Delaware corporation in 1947 with operational roots dating to 1859, operates a hybrid energy delivery model that defies simple categorization. The company generates approximately 70% of its adjusted gross margin from regulated natural gas and electric distribution across the Delmarva Peninsula and Florida, while its unregulated segment—encompassing propane, mobile CNG/RNG/LNG transportation, and Aspire Energy—contributes the remaining 30%. This integrated structure allows Chesapeake to capture value across the energy supply chain, from pipeline transmission to last-mile delivery and alternative fuel solutions.

The November 30, 2023 acquisition of Florida City Gas (FCG) from Florida Power & Light marked a strategic inflection point, expanding the asset base by nearly 50% and adding approximately 110,000 customers in high-growth Florida markets. FCG operations contributed $89 million in adjusted gross margin during 2024, validating the acquisition thesis. However, the integration's final milestone—transitioning FCG teammates onto Chesapeake's SAP customer billing system—only completed in April 2025, with the transition services agreement with NextEra Energy (NEE) concluding in July 2025. This timeline reveals the complexity of merging operations while maintaining service quality.

Chesapeake operates in three primary geographic clusters: the Delmarva Peninsula (where it holds dominant market shares), Florida (now its largest market post-FCG), and Ohio (where its Aspire Energy unregulated business serves industrial customers). The company benefits from macro tailwinds that many utilities lack: Florida's status as the nation's leader in net in-migration and new resident income growth, Delaware's Sussex County ranking among America's fastest-growing counties, and Ohio's emergence as a top-five data center market. These demographic and economic drivers translate directly to 4%+ annual customer growth without aggressive marketing spend.

Business Model and Strategic Pillars

Chesapeake's strategy rests on three articulated pillars: prudently deploying capital, proactively managing its regulatory agenda, and continually transforming business operations. The capital deployment pillar manifests in a record $356 million invested in 2024, primarily in regulated businesses, with 2025 guidance increased to $425-$450 million. Approximately 70% of the $1.5-1.8 billion five-year capital plan requires no additional regulatory approval, providing unusual visibility into growth investments.

The regulatory management pillar represents Chesapeake's most durable competitive advantage. Programs like GUARD (Gas Utility Asset Replacement and Development), SAFE (Safety and Facility Enhancement), and SPP (Storm Protection Plan) operate under pre-approved mechanisms that allow immediate recovery of investments through rider mechanisms. This bypasses the traditional rate case cycle, reducing regulatory lag from 12-18 months to zero. In 2024, these programs contributed nearly $9 million in adjusted gross margin; by 2026, they are projected to generate $38 million annually. This mechanism creates a compounding growth engine that peers without such regulatory constructs cannot replicate.

The business transformation pillar involves a multi-year ERP implementation expected to cost $15 million in 2025 alone. While necessary for scaling operations across a 50% larger asset base, ERP transitions in utilities have historically caused billing errors, customer satisfaction issues, and operational disruptions. Chesapeake completed the FCG SAP integration in April 2025, but the broader enterprise-wide rollout carries execution risk that could temporarily impair margins.

Technology and Operational Differentiation

Chesapeake's technology moat isn't software-driven but rather operational excellence in virtual pipeline logistics and regulatory innovation. The Marlin Gas Services virtual pipeline business—transporting CNG, RNG, and LNG via mobile units—grew adjusted gross margin 13% in Q3 2025 to approximately $22.5 million. This business serves customers beyond pipeline reach, including data centers, industrial facilities, and renewable energy projects, with margins that exceed traditional regulated returns.

The Duncan Plains pipeline project in Ohio exemplifies this differentiation. Announced in July 2025, this intrastate natural gas pipeline will serve an American Electric Power (AEP) fuel cell facility for a data center, positioning Chesapeake to capture demand from Ohio's data center boom. Unlike pure-regulated peers, Chesapeake can build unregulated infrastructure without filing rate cases, capturing higher returns and faster payback periods.

On the regulated side, the Worcester Resiliency Upgrade (WRU) LNG storage project received FERC approval in January 2025 but faces a $20 million cost increase and delay to mid-2026 due to skilled labor availability constraints. While management expresses confidence in managing the margin loss through temporary peaking services, the delay pushes $10.2 million in projected 2026 gross margin into 2027, creating a timing headwind for the 8% CAGR target.

Financial Performance: Evidence of Strategy Execution

Chesapeake's Q3 2025 results demonstrate the strategy's effectiveness but also reveal pressure points. Regulated Energy segment adjusted gross margin grew 12% to $114.7 million, driven by infrastructure programs, pipeline expansions, and 4.3% customer growth in Delmarva. Operating income increased 11.1% to $48.9 million, though excluding FCG transaction costs, the growth was 9.6%—solid but decelerating.

The Unregulated Energy segment delivered 13% margin growth to $22.4 million, with CNG/RNG/LNG services offsetting weaker propane margins. This segment's 30% operating margin contribution provides earnings diversification that pure-regulated peers lack. For the nine months ended September 2025, unregulated adjusted gross margin grew 14.2% versus 11.3% for regulated, showing the growth tilt.

Consolidated operating expenses were 34% of adjusted gross margin in Q3 2025, down from 37% in Q3 2024, indicating operational leverage. However, this improvement masks the absence of an $8.9 million FCG RSAM (Revenue Stabilization Adjustment Mechanism) benefit that boosted 2024 results. The year-over-year comparison is cleaner when adjusting for this one-time item, revealing underlying expense growth in line with inflation.

Interest expense increased $1.1 million in Q3 2025 due to $200 million in Senior Notes issued in November 2024 and August 2025, though the weighted-average interest rate declined to 4.96% from 5.06%. Chesapeake's debt-to-equity ratio of 1.04 sits at the high end of its 50-60% target equity capitalization range, reflecting acquisition financing. The company issued $92 million in equity via DRIP and ATM programs in the last twelve months to rebalance capital structure.

Competitive Positioning and Moats

Chesapeake competes with regional utilities including Atmos Energy (ATO), New Jersey Resources (NJR), ONE Gas (OGS), and Southwest Gas (SWX). Unlike these primarily regulated peers, Chesapeake's integrated model—combining regulated distribution with unregulated propane and virtual pipeline services—creates cross-selling opportunities and revenue diversification. While ATO generates $4.7 billion in revenue with superior scale economies, its unregulated exposure is minimal, limiting growth optionality.

Chesapeake's primary moat is its regulatory franchise combined with immediate recovery mechanisms. The GUARD, SAFE, and SPP programs operate under pre-approved riders that competitors in other jurisdictions lack. This creates a compounding advantage: every dollar invested in safety or reliability immediately flows to the bottom line, whereas peers must wait for rate case approvals. In Florida, the FCG SAFE program projects $255 million in capital expenditures over ten years with immediate recovery, a structure that OGS and SWX cannot replicate in their jurisdictions.

Geographic concentration in high-growth markets represents a double-edged sword. While 4.3% customer growth in Delmarva and 3.9% in Florida exceed industry averages, weather-related demand volatility and regulatory concentration risk remain. Hurricane exposure in Florida and policy shifts in Delaware or Maryland could disproportionately impact earnings compared to geographically diversified peers like ATO.

The unregulated virtual pipeline business provides a unique growth vector. While NJR has clean energy initiatives and ATO has modest unregulated exposure, neither operates a material CNG/RNG/LNG transportation network. This positions Chesapeake to capture data center demand, renewable energy projects, and industrial customers seeking alternatives to pipeline constraints, with margins that exceed regulated returns.

Risks and Asymmetries: Execution at Scale

The FCG depreciation study represents the most immediate risk to the 2025 guidance. Filed in February 2025, the study requests a two-year amortization of a $19 million excess reserve, though the standard period is five years. Management explicitly states that achieving the $6.15-$6.35 guidance range assumes a successful outcome. If the Florida Public Service Commission approves a longer amortization period or lower amount, Chesapeake would likely need to file a rate case in 2026 to recover the shortfall, creating earnings volatility and regulatory uncertainty.

The WRU project delay and $20 million cost increase exemplify infrastructure execution risk. Originally scheduled for service in October 2025, the project now targets mid-2026 due to skilled labor availability and economic uncertainty. While management can provide temporary peaking services for winter 2025-26, the delay pushes $10.2 million in 2026 gross margin into 2027 and increases capital requirements. This strains the 8% CAGR target and highlights the challenge of executing large projects in an inflationary environment.

The enterprise-wide ERP transformation, with $15 million in 2025 spending, carries implementation risk. Utility ERP rollouts have historically caused billing errors, customer service disruptions, and temporary margin compression. While the FCG SAP integration completed successfully, the broader project could distract management and impair operational metrics if not executed flawlessly.

Interest rate sensitivity remains a concern. Chesapeake's weighted-average revolver rate declined to 5.10% for the nine months ended September 2025 from 5.80% in the prior period, but $200 million in new Senior Notes at 5.04% and 5.20% rates locks in higher long-term costs. With debt-to-equity at 1.04 and a target equity ratio of 50-60%, further rate increases could pressure earnings and limit financial flexibility.

Valuation Context

At $129.14 per share, Chesapeake trades at 22.9 times trailing earnings and 13.3 times EV/EBITDA, with a 2.13% dividend yield and 47% payout ratio. These multiples sit modestly below Atmos Energy (22.99 P/E, 15.85 EV/EBITDA) but above ONE Gas (18.36 P/E, 10.71 EV/EBITDA), reflecting Chesapeake's higher growth profile and unregulated diversification.

The company's $4.63 billion enterprise value and $3.05 billion market cap imply a 5.23 times EV/Revenue multiple, premium to OGS (3.43) and SWX (2.11) but justified by superior growth. Chesapeake's 9.13% ROE trails NJR's 14.62% but exceeds OGS's 8.51%, while its 42.11% gross margin outpaces all peers except ATO's 58.13%.

Free cash flow remains negative at -$115.9 million TTM due to elevated capex, but operating cash flow of $239.4 million provides coverage.

The 8% EPS CAGR target through 2028, supported by $1.5-1.8 billion in identified capital investments, implies a forward P/E compression that could attract growth-at-reasonable-price investors. However, execution on the FCG study and WRU timeline will determine whether the market assigns a premium or discount relative to the peer group.

Conclusion

Chesapeake Utilities stands at an inflection point where the Florida City Gas acquisition's scale benefits must be converted into consistent earnings growth. The company's regulated infrastructure programs provide a predictable, compounding margin engine that few peers can match, while the unregulated virtual pipeline business offers differentiated growth in data center and renewable markets. Achieving the 8% EPS CAGR target through 2028 hinges on three execution variables: the FCG depreciation study outcome, the WRU project's mid-2026 completion, and the ERP transformation's success.

The investment case is attractive if Chesapeake can navigate these execution challenges, as geographic concentration in high-growth markets provides organic tailwinds and regulatory mechanisms reduce policy risk. However, the binary nature of the FCG study and the $20 million WRU cost overrun create near-term earnings volatility that could pressure the stock. For long-term investors, the critical monitorables are the December 2025 FCG hearing result and Q1 2026 WRU construction progress—success on both fronts would validate the premium valuation, while setbacks could compress multiples toward slower-growth peers.