Chesapeake Utilities - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered strong top-line and operating performance: Operating revenues rose 22% YoY to $298.7M and operating income increased 9% to $86.8M, with adjusted EPS at $2.22 (GAAP EPS $2.21).
• Versus Wall Street consensus, revenue was a significant beat while EPS was a slight miss: actual revenue $298.7M vs $248.4M consensus*, actual EPS $2.22 vs $2.246 consensus*; management reaffirmed FY25 adjusted EPS guidance of $6.15–$6.35.
• Key positive drivers: colder weather-driven consumption, regulatory initiatives, infrastructure programs, natural gas growth, and demand for Marlin virtual pipeline services; O&M and depreciation rose with growth and the absence of RSAM benefits.
• Strategic updates: dividend raised 7% to $2.74 annualized; back-half weighted 2025 earnings cadence expected given rate case timing and in-service dates for major projects.
• WRU LNG project costs rose ~$20M and in-service shifted to Q2 2026; management plans recovery filings and expects to manage the ~$3M 2025 margin deferral operationally.

What Went Well and What Went Wrong

What Went Well

• Adjusted gross margin up $17.9M (+10.9% YoY) to $182.4M; operating income up $7.2M (+9.0% YoY), driven by weather, regulatory initiatives, infrastructure, natural gas growth, and transmission expansions.
• Unregulated segment strength: adjusted gross margin +18.5% YoY to $54.5M and operating income +22.9% YoY, with Marlin virtual pipeline contributing +$3.6M of margin and propane consumption +$4.2M.
• Management reaffirmed FY25 and FY28 EPS and CapEx guidance, highlighting progress on three growth pillars and ~$113M invested in Q1; “in line with our expectations” and “reach new heights in 2025”.

What Went Wrong

• Elevated O&M and depreciation: depreciation, amortization and property taxes +$5.2M YoY; other operating expenses +$6.1M YoY; absence of RSAM adjustment at FCG magnified D&A headwinds.
• WRU LNG project bids came in higher with labor constraints and tariff uncertainty; total capex now ~$100M and margin shifts from Q4 2025 to 2026.
• Financing headwinds: interest charges increased and share count dilution reduced adjusted EPS; management cited roughly $0.11 per-share drag from financing activity.

Transcript

Operator (participant)

Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero. Welcome to Chesapeake Utilities Corporation's first quarter 2025 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Lucia Dempsey, Head of Investor Relations.

Lucia Dempsey (Head of Investor Relations)

Thank you, and good morning, everyone. Today's presentation can be accessed on our website under the investors page and events and presentation subsection. After our prepared remarks, we will open up the call for questions. On slide two, we show our typical disclaimers while I remind you that matters discussed on this conference call may include forward-looking statements that involve risks and uncertainties. Forward-looking statements and projections could differ materially from our actual results. The safe harbor for forward-looking statements section of our 2024 annual report on Form 10-K and on our first quarter Form 10-Q provides information on the factors that could cause such statements to differ from our actual results. Additionally, the company evaluates its performance based on certain non-GAAP measures, including adjusted gross margins, adjusted net income, and adjusted earnings per share.

The information presented today includes the appropriate disclosures in accordance with the SEC's regulation G. A reconciliation of these non-GAAP measures to the related GAAP measures has been provided in the appendix of this presentation, our earnings release, and our first quarter Form 10-Q. Here at Chesapeake Utilities, safety is our first priority. We start all meetings with a safety moment, and we'll do so here with a moment on bicycle safety, as highlighted on slide three. Increasingly, warmer temperatures bring more cyclists on the road, whether for commuting or for fun. Bicycling is great for physical and mental health, but we must increase our awareness to ensure safety for all on the road. Cyclists should always wear a helmet, remain highly visible during the day and at night, and stay aware of traffic patterns.

Drivers also need to remain alert and watch for cyclists, particularly at intersections and when turning or parking. Sharing the road will ensure we all get to our destination safely. I'll now introduce our presenters. Jeff Householder, Chair of the Board, President, and Chief Executive Officer, will provide an update on our quarterly performance, our growing service areas, and our capital investment plan. Jim Moriarty, Executive Vice President, General Counsel, Corporate Secretary, and Chief Policy and Risk Officer, will review our active regulatory agenda, business transformation initiatives, and stakeholder engagement efforts. Beth Cooper, Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Corporate Secretary, will discuss our financial results, strong balance sheet, and dividend and earnings growth trajectory. With that, it is my pleasure to turn the call over to Jeff.

Jeff Householder (Chair, President and CEO)

Thank you, Lucia. Good morning, and thank you for joining our call today. I'll begin with slide five. Following our strong performance in 2024, we are pleased to announce continued growth in the first quarter of 2025, with adjusted earnings per share of $2.22, up 6% from the first quarter of 2024. This performance is in line with our expectations, enabling us to reaffirm our full year 2025 adjusted earnings per share guidance of $6.15-$6.35. As I'll discuss in more detail shortly, our 2025 capital growth plan of $325-$375 million is off to an excellent start with $113 million already invested in the first three months of this year. As shown on slide six, for the first quarter of 2025, we continued to see strong growth and increasing demand for natural gas across our service areas.

We operate in some of the fastest growing regions of the country and recorded another quarter of above-average customer growth. Delmarva customer growth was up nearly 4%, and Florida increased by 3% relative to the same period last year. This growth is driven by a number of factors, including population and migration to our service areas, construction of new residential communities, and system expansions to serve growing commercial and industrial demand. Customers continue to seek natural gas service to fuel their lives and businesses and will continue to provide them the safe, reliable, and cost-effective service they expect. The opportunity to serve increasing customer demand is the basis for our overall growth strategy, which in turn drives sustainable earnings. To deliver consistent returns, we remain focused on the three pillars of our growth strategy, as shown on slide seven.

First, we work hard to identify and prudently deploy capital for projects that meet our increasing customer demand. Second, we proactively manage our regulatory agenda to support cost recovery of our capital projects and growing operations. Third, we continually transform our business operations, which includes technology and organizational improvements that enable us to maintain operational excellence as we become a larger organization. Slide eight highlights our fortunate position of having multiple channels of capital investment to drive overall long-term earnings growth. The first is reliability infrastructure, which includes upgrades and replacements to improve system resiliency and safety. These infrastructure growth investments are supported by regulatory programs such as the Florida Guard and SAFE programs that provide effective and timely recovery of our capital investments.

Reliability infrastructure investments generated $5.8 million of gross margin in the first quarter of 2025 and are expected to generate a total of $27 million of gross margin throughout the full year. The second category of significant growth is occurring in our gas transmission businesses in Delaware and Florida. Many of our major capital projects are designed to extend transmission service in support of distribution expansion that serves new customers. In the first quarter of this year, these projects generated $2.5 million of gross margin and are expected to contribute $22 million of gross margin for the full year, primarily in the third and fourth quarters of 2025. Slide nine provides additional detail on these transmission projects.

The Eastern Shore Natural Gas Warwick Extension in Maryland and the Peninsula Pipeline Company Plant City project in Florida were placed in service in the fourth quarter of 2024 and have driven over $3 million of gross margin in 2025. In addition, our Peninsula Pipeline in Boynton Beach project was placed in service in the first quarter of this year, driving an additional $3 million of 2025 gross margin. Construction continues for our remaining capital projects, many of which are expected to be in service in the second half of this year. The majority of our 2025 margins resulting from these projects will occur in the third and fourth quarters of 2025. I'll now provide an update on our Worcester Resiliency Upgrade, or WRU, project as shown on slide 10.

In January of this year, we received FERC approval for WRU, a liquefied natural gas storage facility critical to support seasonal peaking services for interconnected gas distribution systems. The LNG peaking service provides reliable and affordable system peaking capacity service that ensures that we can meet the growing demand for natural gas in our Delaware and Maryland distribution systems. Following FERC approval, we received final updated general contractor bids for site-related construction work. The bids were significantly higher than the indicative pricing, and the timing of construction was longer than the indicative project timing we had received from contractors at the end of last year. Two factors are principally contributing to the cost increases in the project timing.

Reviews of the bids and discussions with the participating contractors indicated availability constraints for certain skilled and licensed labor, and the cost estimates were also being impacted by uncertainty around the current economic climate. These factors have led to a $20 million increase in capital investment, resulting in a total expected project cost of approximately $100 million. We will be making the necessary filings to ensure rate recovery of this additional capital. The expected in-service date of the project has shifted from October 2025 to the second quarter of 2026, which means that the WRU margin that was originally expected in the fourth quarter will begin in 2026. This project remains critical to support increasing demand in this area and is still the lowest-cost project to address peak weather loads and protect against weather-related disruption.

We're executing contracts this week and anticipate starting full-site construction upon receiving the notice to proceed from FERC. WRU is just one of many projects that supports our five-year capital investment plan, as shown on slide 11. We've made significant progress to date with $356 million invested in 2024 and $113 million already invested through the first quarter of 2025. Cumulatively, we've also already identified and initiated at least $1.4 billion of our five-year capital investment plan of $1.5 billion-$1.8 billion, of which approximately 70% requires no additional regulatory approval or support. With that, I'll turn to Jim to discuss our regulatory strategy and business transformation initiative.

Jim Moriarty (EVP, General Counsel, Corporate Secretary and Chief Policy, and Risk Officer)

Thank you, Jeff, and good morning, everyone. As Jeff discussed earlier, a proactive regulatory agenda is the second pillar of our growth strategy. To start, I'll share several updates on our active rate cases, as shown on slide 12. For our Maryland jurisdiction, in March 2025, a base rate increase of $3.5 million was approved, which reflects a phase one revenue increase of $2.6 million and a subsequent phase two revenue increase of $0.9 million. We then received a final order last month with rates effective April 19, 2025. We are pleased to have come to a final resolution on this case and are excited that we will now serve all of our Maryland communities under one consolidated entity, Chesapeake Utilities of Maryland. On to our Delaware rate case, which was initially filed in August of 2024.

In March of this year, we reached a settlement agreement in principle with an approved cumulative interim rate increase of $6.1 million effective May 1, 2025. We expect to reach a final order on the settlement agreement in the second quarter of this year. Our Florida rate case was also filed in August 2024. Following an initial revenue increase voted on by commissioners in March of this year, we worked with interested parties and yesterday reached a settlement agreement for $8.6 million of a revenue requirement increase. We anticipate this agreement to be on the Florida PSC hearing agenda in June. Slide 13 summarizes our other key active regulatory filing: an updated depreciation study for Florida City Gas.

In February of this year, we requested a reduction in annual depreciation expense of approximately $1 million in the form of revised annual depreciation rates and a two-year amortization of an excess depreciation reserve of $27.3 million. This filing reflects a return to our standard way of recovering excess depreciation going forward. The procedural schedule set by the Florida PSC projects a staff recommendation in August 2025 and an order in September 2025, leading to updated annual depreciation rates being implemented no earlier than the third or fourth quarter of this year, effective back to January 1, 2025. I'll now turn to slide 14, which provides an update on our business transformation initiatives, which is the third pillar of our fundamental growth strategy.

In April 2025, we fully completed the implementation of our one CX project by transitioning our Florida City Gas operations to the SAP system that we rolled out to our Delmarva and FTU operations in August of last year. The team capitalized on their experience with the initial system launch and refined processes around training and implementation, which led to a highly successful rollout and seamless transition thus far. We are also in initial stages of launching a company-wide multi-year enterprise resource plan, or ERP, to coordinate and improve functions across the organization, including human resources, supply chain, asset management, and finance, among others. These technology transformations, alongside additional operational and security upgrades within our technology roadmap, will create a strong foundation to support our overall growth trajectory.

Turning to slide 15, I would like to highlight a couple of ways we've been highly engaged with our stakeholders, including our investors and our broader communities. In March, we published our 2024 annual report, which highlights many of our accomplishments throughout last year. This report, alongside our 2025 Investor Day held at Cape Canaveral in March, launched our theme for this year, "Delivering with Purpose: Reaching New Heights." We were excited to host over 35 financial community members at our Investor Day, where we highlighted our growth opportunities across the enterprise, the key accomplishments and objectives related to our regulatory and business transformation pillars, and the depth and breadth of leaders from across the company.

Yesterday, we were gratified that our investors supported all six proposals on the ballot this year at our annual meeting, including the declassification amendment and an increase in the authorized shares from $50 million to $75 million. We also continue to invest in our communities and support local organizations based on our four focus areas of giving: safety and health, community development, education, and environmental stewardship. We understand that active engagement with all of our stakeholders is a core responsibility as we grow, and we look forward to publishing the third installment of our sustainability micro-reports, which will focus on engagement with our employees, communities, and customers. With that, I will turn the call to Beth for a more detailed discussion of.

Beth Cooper (EVP and CFO)

Thanks, Jim, and good morning, everyone. Our financial results, as shown on slide 16, demonstrate strong growth in the first quarter of 2025, with adjusted gross margin of approximately $182 million, up 11% from the first quarter of 2024, driven by higher consumption and margin growth from investments in transmission, distribution, and infrastructure. Our margin growth, coupled with operational efficiencies, drove significant improvements in adjusted net income, up 9% to approximately $51 million for the quarter. We also reported strong growth in adjusted earnings per share this quarter, up $0.12 to $2.22, a 6% increase over the first quarter of 2024. We are proud of this continued growth, particularly as this quarter did not benefit from a $3.4 million depreciation expense that was recognized under the Florida City Gas RSAM mechanism in the first quarter of last year.

I'll now turn to slide 17 and highlight some of the key drivers of our first quarter 2025 adjusted EPS. Colder weather across our service areas contributed an $0.18 increase in adjusted EPS, particularly driven by increased consumption in Delaware and across our propane operations. Continued demand for natural gas drove $0.14 of incremental adjusted EPS, including $0.07 related to transmission capital projects and $0.07 of distribution growth across our service areas. Our unregulated business generated an additional $0.12 of adjusted EPS this quarter, driven by increased margins in our propane operations and incremental demand for our Marlin virtual pipeline services relative to the first quarter of last year. Regulatory initiatives also drove additional adjusted EPS growth this quarter.

Infrastructure reliability investments through our approved regulatory programs contributed $0.11 this quarter, and interim rates related to our in-process rate cases added $0.05 in the first quarter of 2025. These gains were partially offset by a few factors, including $0.17 per share of increased depreciation and amortization expense, as this quarter had no RSAM depreciation expense reduction, compared with an $0.11 benefit in the first quarter of last year. We also incurred additional operations and maintenance expense of $0.20 per share this quarter, as a combination of business growth and higher prices led to increases in expenses associated with employees, customers, facilities, and insurance. Lastly, financing activity, including our debt issuance in November 2024 and additional equity issuances in the first quarter of 2025, reduced adjusted EPS by $0.11 per share.

Moving to slide 18, adjusted gross margin for our regulated segment was approximately $128 million this quarter, up 8% from the first quarter of last year. As just discussed, this improvement was driven by increased consumption due to colder weather, organic transmission and distribution growth in our natural gas distribution operations, and growth in regulatory-related initiatives. As shown on slide 19, our unregulated energy segment demonstrated substantial growth relative to the first quarter of last year, with adjusted gross margin up 18% to approximately $54 million in the first quarter of 2025. Even amidst an elevated demand environment, which typically compresses margin due to higher-cost propane purchases in the spot market, our propane operations and gas supply teams did a fantastic job managing supply, enabling us to avoid costly spot market purchases and sustain our margins during high demand periods in January and February of this year.

Our Marlin Gas Services business continued to grow as incremental demand for virtual pipeline deliveries drove $3.6 million of additional gross margin in the first quarter of 2025. In addition to R&G, we have seen increased C&G demand, particularly from manufacturing businesses in North Carolina and Ohio. I'll now shift to slide 20 to review our capital structure and financing activities. Maintaining a strong balance sheet and implementing a strategic financing plan is becoming even more critical as we accelerate our growth strategy amidst a volatile market backdrop. In March, Fitch Ratings issued our inaugural investment-grade credit rating, including a long-term issuer default rating of BBB plus, an A-minus instrument rating for our senior unsecured debt, and a stable outlook.

We are proud of this assessment as it reflects our long-standing commitment to prudent investment and disciplined balance sheet management, and we'll continue to implement a strategy consistent with maintaining an investment-grade credit profile. We ended the first quarter of 2025 with an equity-to-total capitalization ratio of 49%, up from 48% at the end of 2024, and on the cusp of our target equity-to-total capitalization ratio range of 50%. We were able to take advantage of market performance during the last few months, issuing approximately $22 million within the first quarter of 2025 via our ATM program and the waiver component of our direct stock purchase and dividend reinvestment plan, and issuing nearly an additional 238,000 shares subsequent to the quarter, bringing our total shares outstanding to 23.3 million as of May 2, 2025. This puts us ahead of our equity issuance plan for the full year.

On the debt side, minimum maturities in 2025 reduce our interest rate exposure and provide optionality for any issuances this year. In addition, our liquidity remains strong, with 68% of our revolving credit facility and private placement shelf facilities available at the end of March 2025. Alongside our equity and debt plans, our dividend policy continues to be a key component of our capital allocation strategy as we fund growth capital investment to drive earnings growth and overall shareholder return. Yesterday, our board of directors approved an $0.18 increase in our annualized dividend, reflecting 7% growth. We're moving from $2.56 per share to $2.74 per share. As shown on slide 21, we continue to maintain a 10-year dividend CAGR of 9%. Since the Florida City Gas acquisition, we have strived to align our dividend growth with our earnings growth.

Both of these metrics are expected to generate a compounded annual growth rate just under 8% over the two-year period from 2023 to 2025. This dividend strategy is not an either/or, but a both/and proposition. We support continued dividend growth while reinvesting significant earnings back into the company, enabling our investors to benefit from both long-term top quartile earnings and dividend growth. Turning now to that earnings growth, slide 22 demonstrates not only our consistent track record of earnings per share growth, but also our 2025 adjusted EPS guidance, which reflects an increase of 14%-18% over full year 2024, or growth rates twice as high as the overall utility industry. Our first quarter 2025 performance is in line with our expectations, enabling us to reaffirm our full year 2025 adjusted EPS guidance of $6.15-$6.35 per share, even without WRU's margin this year.

Given the continuously evolving macroeconomic environment, we will continue to monitor any potential impacts to our investment plans and operations as we proceed through the year. As shown on slide 23, our first quarter EPS represents 35%-36% of our 2025 EPS guidance. There are a couple of factors that will shift a higher-than-normal percentage of our 2025 incremental gross margin to the third and fourth quarters of the year, which alters the cadence we have typically seen over the last approximate five years. The first factor is the timing of our interim and final revenue rate increases that Jim just highlighted, which primarily begin in the second quarter of this year. Second, as Jeff mentioned earlier, most of our major capital projects are expected to come into service in the third and fourth quarters of 2025, leading to back-end-weighted incremental margins.

The third factor is depreciation expense, as each quarter throughout 2024 benefited from an RSAM adjustment, while the full-year result of the Florida City Gas depreciation study may not be recognized until the third and/or fourth quarters of 2025, based on the current procedural schedule for that filing. Before we shift to Q&A, I'd like to highlight a couple of differentiators on slide 24 that will enable us to drive shareholder value in 2025 and for years to come. As Jim mentioned earlier, our theme for this year is "Delivering with Purpose: Reaching New Heights." This starts with our mission to deliver energy that makes life better for the people and communities we serve, and is reinforced by our track record of delivering consistent financial results and ttop-quartilereturn over the last 20 years or more.

We are uniquely positioned in two regions that benefit from above-average customer growth and infrastructure expansion opportunities, enabling us to implement a growth strategy supported by our three pillars: prudent capital deployment, proactive regulatory strategy, and continuous business transformation. This growth plan is made possible through our relentless focus on financial discipline, balance sheet strength, and our three-pronged financing strategy. We remain intent on maintaining an investment-grade profile and returning to our target capital structure so that we are well-positioned to fund our long-term capital growth plan. All of these elements drive our ability to reach new heights, both in 2025 and beyond. We're not only targeting significantly above-average adjusted earnings per share growth this year, but reaching new heights with capital investment projects, regulatory activity, and large-scale technological transformations, enabling us to become a much larger organization over the next few years.

Staying committed to our goals and excelling at these differentiators will enable us to continue to drive industry-leading growth, total shareholder return, and long-term value for all our stakeholders. With that, we'll take your questions. Operator?

Operator (participant)

The floor is now open for questions at this time. If you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your question to provide optimal sound quality. Thank you. Our first question is coming from Tate Sullivan with Maxim Group. Please go ahead.

Tate Sullivan (Managing Director and Senior Research Analyst)

Hi. Thank you. And I'm Jeff. You held your most recent analyst event in Cape Canaveral, Florida. Can you talk about the natural gas infrastructure there on the regulatory side first for the space industry?

Or has there been any regulatory developments since then or upcoming in terms of regulatory natural gas infrastructure in that area, please?

Jeff Householder (Chair, President and CEO)

Hi. Good morning, Tate. Nothing substantive to report in that particular area, although I think, as we mentioned, we have had some good news in Virginia thinking about moving down to the launch facility there on Wallops Island with a $6.5 million grant that the state of Virginia has provided to look at infrastructure expansion there. We continue to work with a number of parties on the Florida space launch effort. There are continuing meetings that indicate substantial interest both at the state level and at NASA and the other launch companies that are active there. I think that before this is over with, as I have said many times, there is certainly a need for liquefied natural gas to supplement the fuels that are used to launch those rockets.

We will find a way to participate in that as that area is now in our service territory with the FCG acquisition. We will keep poking at that. I think we will find a way to serve those facilities at some point.

Tate Sullivan (Managing Director and Senior Research Analyst)

Thank you. The unregulated margin, at least unregulated operating income, rather, another good quarter there, both from Marlin and from Propane as well. Is Marlin, are you still expanding Marlin? You commented a couple of years ago about building more trailers, I believe, and such. Can you talk on Marlin's footprint and if you have disclosed any expansion on?

Jeff Householder (Chair, President and CEO)

I do not believe that we have talked specifically about Marlin expansion. We continue to capitalize that business appropriately.

As we find additional opportunities for growth, we're looking at a couple of things out in Ohio right now, as a matter of fact, where we will need to position additional equipment. We've made the appropriate capital advances there. As you indicate, mostly in cabs and trailers and mobile compressors and those sorts of things. We'll continue to do that. There's no big announcement of a large capital expansion program there. This is kind of business as usual as we continue to execute agreements for longer-term service contracts with entities across the Mid-Atlantic and the Southeast.

Tate Sullivan (Managing Director and Senior Research Analyst)

Thank you very much. Have a good day all. Thanks.

Operator (participant)

We'll take our next question from Chris Ellinghaus with Siebert Williams Shank. Please go ahead.

Chris Ellinghaus (Managing Director)

Hey, everybody. Good morning.

Jeff, have you got any thoughts on tariffs and how you think about how it might affect your business or what you might be doing with supply chains?

Jeff Householder (Chair, President and CEO)

Sure. We've been, as has everyone else in this industry, been looking pretty hard at that. We have experienced very few issues related to those tariffs at this point. Across our supply chain, we're in pretty good shape. We've been communicating expansively with vendors and suppliers of various parts and pieces of our business. Just haven't seen anything yet. There is a general view that the price of everything is going to continue to go up. We'll see if that holds true as the federal government continues to try to negotiate its way through these tariff issues.

We saw and we reported here on the WRU project that there is an impact, I think, that's at least partially directed toward the uncertainty in the marketplace that the tariffs are creating. With fixed-price contracts, you can see, and we did see with WRU, the indicative pricing we were getting before the tariffs went into effect, followed by the final pricing we got after the tariffs went into effect. The vendors that were going to construct that facility began to think about what their pricing might look like. We're seeing, at least in that particular project, an increase in the cost. Some of that, I might add, was also related to the fact that it's pretty tricky to hire an electrical contractor in the state of Maryland. Maryland requires that every electrician on a job of that type hold a Maryland electrician's license.

Many of those folks. As the data centers have blossomed around the country, there is a lot of work for electrical contractors on the industrial side. I think we're seeing that kind of impact in the general marketplace. If you look at our other projects, I can't think of any in the many, many, many millions of dollars of projects that we have underway that are being impacted by those tariffs at this point.

Chris Ellinghaus (Managing Director)

Okay. That's helpful. Vis-à-vis the WRU, given the delay there, what have you done to adjust to sort of make up for that margin late in the year for this year?

Jeff Householder (Chair, President and CEO)

Sure. Yeah. As we indicated, about a $3 million margin drop in this year. That converts—Beth could probably spit this number out directly—but probably a little over $2 million, I would imagine, in operating income impact. We can certainly manage that.

We have a large enough company at this point that we can maneuver some things, especially on the expense side. I would remind you, as I've reminded many of our folks, we've overcome many times greater impacts with simply weather adjustments that we've had over the last few years, been able to move fairly effectively through those impacts. I think it's unfortunate that WRU has delayed, but we have the operational capabilities to certainly provide the peaking service on a temporary basis that we were contemplating for this coming winter out of WRU, and we'll shift that into next year and the next winter. I think operationally we're in good shape. I think that we will be able, without too much difficulty, to manage through the margin loss at WRU this year. Lots of projects underway.

There's a lot going on in this company that are generating decent income for us. I would also mention that it's not particularly unusual for a FERC-regulated company to request a rate adjustment based on cost increases in projects. I mean, it's just the way that FERC has typically worked. You end up, before you finalize even the contractor selection, going to FERC with an estimated cost. Those change over time. I think it would not be surprising to FERC that we would come back in and request an adjustment on the margin. What you'll end up with, I believe, is an increase in our capital program, followed by our ability, I believe, to find full recovery on those costs. There is a delay. It does have an impact, but we'll be able to manage through that.

Chris Ellinghaus (Managing Director)

Okay. Great.

There's a lot of sort of trickle-down related to the tariff regime and the economic outlook in general. Have you got any concerns for, say, foreign travel or foreign tourism or maybe housing starts in the second half of the year? Do you have any general thoughts on those things? Because they could certainly affect Delmarva and Florida.

Jeff Householder (Chair, President and CEO)

They certainly can. We have actually been looking at a number of the projections offered by theme parks and others, restaurant associations, and a variety of folks that kind of track that sort of projected data. There probably are some impacts there. We have not seen anything on the tourism side that specifically impacts our business at this point. We also continue to see homebuilders on the single-family residential side of the business continuing to develop very large communities.

We have a fairly substantial backlog of contracted housing starts over the next three or four years. I do not see anything there that is particularly concerning. The multifamily market, certainly in Florida, has undergone some issues with building failures and a couple of other things, insurance costs that are, I think, affecting and impacting that market. We do not serve a lot of those. It just has not moved down to us at this point at all.

Chris Ellinghaus (Managing Director)

Okay. One last question for Beth. Obviously, with some of the capital and WRU delays, things like that, there is going to be some movement in the seasonality. When you look at slide 23 in that five-year average, do you think that, say, 2027, you revert more to that normal pattern? Because the next 2025 and 2026, there will be some funky periods there.

Do you sort of think you revert to that pattern?

Beth Cooper (EVP and CFO)

That's a great question, Chris. I definitely think you move back towards that in that direction. What that does not contemplate, though, right, is our steady stream of capital projects and how the implementation of future projects might weigh into that. Next year, as you indicated, in 2026, like this year, will look different. Really, that seasonality in 2027 and really in any year is going to be driven by whatever regulatory activity and any large, substantial, incremental capital projects that come on that will come about in the future. I think for now, that's the best path to look at when you look at our longer-term plan.

Chris Ellinghaus (Managing Director)

That all makes sense. Thanks. Appreciate the details.

Beth Cooper (EVP and CFO)

Thank you, Chris.

Operator (participant)

Thank you. We'll take our next question from Paul Fremont with Ladenburg. Please go ahead.

Thanks.

Paul Fremont (Managing Director)

Good morning.

Jeff Householder (Chair, President and CEO)

Good morning.

Paul Fremont (Managing Director)

Congratulations on a good quarter.

Jeff Householder (Chair, President and CEO)

Thanks, Paul.

Paul Fremont (Managing Director)

I guess my first question is, if you were to settle in the FGC gas depreciation case, what would be sort of the optimal time? Would it be after staff testimony, or would it be after the staff issues its report?

Jeff Householder (Chair, President and CEO)

It's likely to be the former. I mean, I think this is probably going to run out into the late third quarter or early fourth quarter, as kind of indicated by that schedule. One of the things that I think all of us are still looking toward—it doesn't have a direct bearing per se on the depreciation study that we filed—but everyone's still looking at that RSAM Supreme Court decision as at least an indicator of what the court's view might be of the original RSAM.

This is not that, but I think it all plays in that general context. I think it'll probably be a summer where we work with staff and work with the Office of Public Council as we work through the data requests that have already started on the depreciation study, likely heading toward the schedule that you referred to. I would imagine we would get pretty close to that before we begin significant settlement discussions.

Paul Fremont (Managing Director)

Great. With Fitch initiating ratings, did they indicate a downgrade threshold for FFO to debt?

Beth Cooper (EVP and CFO)

They have the FFO leverage calculation as the predominant calculation that they're looking at. Paul, from their perspective, they start to view a downgrade when you're thinking about a 4.8 is when there's consideration of a potential downgrade. Similarly, on the other side, an upgrade has been indicated around the 3.8.

Paul Fremont (Managing Director)

Do you have sort of your own target relative to their thresholds?

Beth Cooper (EVP and CFO)

We do. Actually, great question. We have actually spent time with our board, and we have constructed a framework that actually looks at seven different metrics along kind of the credit spectrum, including that one and two others that they actually monitor as well, but to a lesser degree. We have this dashboard in place. We have established internal targets that our board has reviewed and that we monitor, and we will be showing them on a quarterly basis. That is pretty front and center and something that we are looking at on a regular basis.

Paul Fremont (Managing Director)

Right. Do you plan on sort of sharing any of those metrics with investors, or are those purely?

Beth Cooper (EVP and CFO)

We are still looking at that. Mike, Noah, myself, we are looking at that and evaluating whether or not we will come out with that.

Stay tuned. Right now, we have not. We feel comfortable with our forecasts and what we have shown them. Certainly, we are looking to sustain the ratings that we have out there.

Paul Fremont (Managing Director)

Great. Thank you so much.

Beth Cooper (EVP and CFO)

Thank you.

Operator (participant)

Thanks, Paul. Once again, if you do have a question, you may press star one on your telephone keypad. We will go next to Nicholas Campanella with Barclays. Please go ahead.

Michael Baron (Company Representative)

Hello. Hello, Jeff. This is Michael Baron for Nicholas Campanella. Hi. Do you think Chesapeake can hit the midpoint of guidance without the WRU project margin for 2020?

Jeff Householder (Chair, President and CEO)

I think certainly we intend to be in the guidance range. I mean, I think that is what we have reaffirmed today. Where we fall within that range, I think, is yet to be seen. It is hard to predict the future in some ways in an economic climate like this.

As I've indicated, we haven't seen, other than WRU, any substantive impacts to us or our business relative to what's going on in the economy at this point. In fact, we're pretty bullish on our capital program. You've seen that from, I think, a number of companies reporting here lately. There's a lot to do out there, and there's a significant demand for gas. The WRU margins, it's unfortunate to see them move. I hate to even say that it's only $3 million. $3 million is $3 million, but it's a number that we, I think, can manage pretty effectively. Now, whether that takes us to the midpoint of the range or the end of the range or the beginning of the range, I think, is something we'll continue to look at. Beth, have you got anything to add there? Sure.

Beth Cooper (EVP and CFO)

I mean, another thing I would do—thank you, Jeff—there are a couple of other things I would add. The first one is I think you've seen us have a pretty robust first quarter as it relates to capital. There is a lot that we're investing in the company. We have a lot going on from a capital perspective. I think we'll come back later in the year and revisit whether or not we need to consider any change in our capital guidance in the future. Second, I would just add a lot of those dollars are being spent on projects. As you can see in our major project table, that will have more of a full-year impact in 2026. That's number one. The second thing is, I would say you've seen us also commit to getting back to that target capital structure.

Our decision to do that can weigh into where you actually land within that EPS guidance range. I think those couple of things would just be the additional comments that I would have. I think we're pleased, as Jeff said when he started off the call and I ended it with the first quarter. I think it was a strong quarter. I think you saw that in our results across our businesses. Again, we're reaffirming for the year despite WRU. Maybe, Jeff, I'm not sure we have any more questions, so maybe we can turn it to you for some closing remarks.

Jeff Householder (Chair, President and CEO)

Operator, are there any other questions?

Operator (participant)

We have no further questions at this time.

Jeff Householder (Chair, President and CEO)

Thank you guys very much for connecting with us this morning. We appreciate your continued interest in the business.

We're pretty happy with the first quarter results. As Beth and I indicated, I think WRU is not ultimately going to be a significant impact to us this year. We can manage through that. We look forward to reporting on how that's going next quarter. With that, goodbye.

Operator (participant)

Thank you. This concludes Chesapeake Utilities Corporation's first quarter 2025 earnings conference call. Please disconnect your line at this time and have a wonderful day.