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Florida Public Utilities Company 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-31
  4. Ex-32
  5. Ex-32
UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q


(Mark One)


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2008


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ____________  to ______________


Commission File Number:  001-10608


FLORIDA PUBLIC UTILITIES COMPANY

(Exact name of registrant as specified in its charter)


Florida

59-0539080

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


401 South Dixie Highway,

West Palm Beach, Fl.  33401

 (Address of principal executive offices)


(561) 832-0872

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [ X ]     No  [  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer  [  ]

  Accelerated filer [  ]

Non-accelerated filer [X]

Smaller reporting company [  ]

(Do not check if a smaller reporting company)


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  [  ]      No [X]


On November 3, 2008, there were 6,199,070 shares of $1.50 par value common stock outstanding.


INDEX


Part I.

Financial Information


Item 1.

Financial Statements


Condensed Consolidated Statements of Income

Condensed Consolidated Statements of Comprehensive Income

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements


Item 2.

Management’s Discussion and Analysis of Financial Condition

 

and Results of Operations


Item 3.

Quantitative and Qualitative Disclosures about Market Risk


Item 4T.

Controls and Procedures


Part II.

Other Information


Item 1A.

Risk Factors  


Item 6.

Exhibits


Signatures






PART I.  

FINANCIAL INFORMATION


Item 1.

Financial Statements

FLORIDA PUBLIC UTILITIES COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except share data)

 

 

Three Months Ended

 

Nine Months Ended

 

 September 30,

       

 

 September 30,

      

 

2008


2007

 

2008

 

2007

Revenues

 

 

 

 

 

 

 

Natural gas

$14,642 

 

$12,018 

 

 $55,752 

 

 $48,093 

Electric

23,501 

 

16,251 

 

59,238 

 

42,744 

Propane gas

3,791 

 

     3,372

 

 

13,350 

 

11,884 

Total revenues

41,934 

 

31,641 

 

128,340 

 

102,721 

Cost of Fuel and Other Pass Through Costs

30,071 

 

20,579 

 

90,334 

 

66,047 

Gross Profit

11,863 

 

11,062 

 

38,006 

 

36,674 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

Operation and maintenance

          7,205 

 

       6,854 

 

          22,099 

 

21,470 

Depreciation and amortization

2,189 

 

2,025 

 

6,648 

 

6,128 

Taxes other than income taxes

903 

 

769 

 

2,540 

 

2,328 

Total operating expenses

         10,297 

 

       9,648 

 

         31,287 

 

     29,926 

Operating Income

          1,566 

 

       1,414 

 

           6,719 

 

       6,748 

 

 

 

 

 

 

 

 

Other Income and (Deductions)

 

 

 

 

 

 

 

Merchandise and service revenue

   540 

 

   682 

 

1,796 

 

2,349 

Merchandise and service expenses

(517)

 

(601)

 

(1,732)

 

(2,081)

Other income

    268 

 

    233 

 

568 

 

529 

Interest expense

(1,213)

 

(1,209)

 

(3,631)

 

(3,592)

Total other deductions – net

(922)

 

(895)

 

(2,999)

 

(2,795)

Earnings Before Income Taxes

644 

 

519 

 

3,720 

 

3,953 

Income tax expense

(220)

 

(164)

 

(1,266)

 

(1,390)

Net Income

424 

 

355 

 

2,454 

 

2,563 

Preferred Stock Dividends

    7 

 

    7 

 

21 

 

21 

Earnings For Common Stock

$417 

 

$348 

 

 $2,433 

 

 $2,542 

 

 

 

 

 

 

 

 

(Basic and Diluted):

 

 

 

 

 

 

 

Earnings Per Common Share

   $0.07 

 

   $0.06 

 

 $0.40 

 

 $0.42 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

  $0.1175 

 

  $0.1125 

 

 $0.3475 

 

 $0.3325 

  

 

 

 

 

 

 

 

Average Shares Outstanding

6,098,034 

 

6,049,644 

 

6,082,681 

 

6,035,103 

These financial statements should be read with the accompanying Notes to Condensed Consolidated Financial Statements.




 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

 

Three months ended September 30,

Nine months ended September 30,

 

2008 

2007 

2008 

2007 

Net income

$424 

$355 

$2,454 

$2,563 

   Other comprehensive income

 

 

 

 

       Pension and post retirement costs

34 

40 

107 

120 

       Income tax expense on other

       comprehensive income

(12)

(15)

(40)

(45)

Comprehensive income

$446 

$380 

$2,521 

$2,638 

These financial statements should be read with the accompanying Notes to Condensed Consolidated Financial Statements.


FLORIDA PUBLIC UTILITIES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

September 30,

 

December 31,

 

2008

 

2007

ASSETS

 

 

 

Utility Plant

 

 

 

    Utility Plant

$208,653 

 

       $202,384 

Less Accumulated depreciation

67,462 

 

           64,012 

Net utility plant

141,191 

 

          138,372 

 

 

 

 

Current Assets

 

 

 

Cash

2,130 

 

              3,478 

Accounts receivable

14,301 

 

            12,269 

Allowance for uncollectible accounts

 (443)

 

 (326)

Unbilled receivables

1,787 

 

              1,879 

Notes receivable

                 295 

 

                 298 

Inventories (at average unit cost)

              4,530 

 

                4,251 

Prepaid expenses

                1,183 

 

                 861 

Deferred income taxes-current

               398 

 

               949 

    Income tax prepayment

                1,482 

 

                     - 

    Other regulatory assets-environmental

               456 

 

               456 

    Deferred charges-current

                331 

 

399 

    Investments held for environmental costs-current

             3,487 

 

3,444 

Total current assets

              29,937 

 

              27,958 

 

              

 

              

Other Assets

 

 

 

Other regulatory assets-environmental

6,769 

 

               7,197 

Long-term receivables and other investments

5,514 

 

 5,622 

Deferred charges

6,331 

 

6,360 

Goodwill

2,405 

 

2,405 

Intangible assets (net)

                4,153 

 

4,430 

Total other assets

 25,172 

 

26,014 

Total Assets

          $196,300 

 

$192,344 

 

 

 

 

These financial statements should be read with the accompanying Notes to Condensed Consolidated Financial Statements.


 


FLORIDA PUBLIC UTILITIES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

  

 

 

 

 

 

September 30,

 

December 31,

 

2008

 

2007

CAPITALIZATION AND LIABILITIES

 

 

 

Capitalization

 

 

 

Common shareholders' equity

$49,859 

 

$48,946 

Preferred stock

 600 

 

 600 

Long-term debt

 47,975 

 

49,363 

Total capitalization

 98,434 

 

98,909 

 

 

 

 

Current Liabilities 

 

 

 

Line of credit

11,133 

 

11,122 

Accounts payable

11,166 

 

9,901 

Current portion of long-term debt

1,409 

 

1,409 

Insurance accrued

190 

 

 218 

Interest accrued

1,667 

 

 1,163 

Other accruals and payables

 3,171 

 

2,729 

Environmental Liability – current

675 

 

1,379 

Taxes accrued

3,129 

 

              2,168 

Over-earnings liability

                            - 

 

26 

Over-recovery of fuel costs and other

2,764 

 

                3,207 

Customer deposits

              10,982 

 

10,547 

 Total current liabilities

46,286 

 

43,869 

 

 

 

 

Other Liabilities

 

 

 

Deferred income taxes

 16,767 

 

16,896 

Environmental liability

12,782 

 

12,250 

Regulatory liability-storm reserve

                  2,360 

 

2,387 

Regulatory liabilities-other

11,935 

 

         10,719 

Other liabilities

 7,736 

 

7,314 

Total other liabilities

51,580 

 

49,566 

Total Capitalization and Liabilities

             $196,300

 

         $192,344 

 

 

 

 

These financial statements should be read with the accompanying Notes to Condensed Consolidated Financial Statements.


 




FLORIDA PUBLIC UTILITIES COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2008

 

2007

 

 

 

 

Net cash provided by operating activities

$8,128 

 

$12,428 

 

 

 

 

Investing Activities

 

 

 

Construction expenditures

(8,159)

 

(13,446)

Proceeds received on notes receivable

283 

 

371 

Other

(20)

 

(404)

Net cash used in investing activities

(7,896)

 

(13,479)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

Net increase in short-term borrowings

11 

 

 5,782 

Dividends paid

 (2,064)

 

 (1,993)

Other increases

473 

 

453 

Net cash (used in) provided by financing activities

 (1,580)

 

 4,242 

 

 

 

 

Net (decrease) increase in cash

 (1,348)

 

3,191 

 

 

 

 

Cash at beginning of period

3,478 

 

 84 

 

 

 

 

Cash at end of period

 $2,130 

 

 $3,275 

These financial statements should be read with the accompanying Notes to Condensed Consolidated Financial Statements.





FLORIDA PUBLIC UTILITIES COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2008


1.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the generally accepted accounting principles in the United States (GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for fair presentation have been included. The operating results for the period are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.


2.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances, accruals for pensions, environmental liabilities, liability reserves, regulatory deferred tax liabilities, unbilled revenue and over-earnings liability. Actual results may differ from these estimates.


3.

Regulation

The financial statements are prepared in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 – "Accounting for the Effects of Certain Types of Regulation".  SFAS No. 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. A regulated utility may defer recognition of a cost (a regulatory asset) or show recognition of an obligation (a regulatory liability) if it is probable that, through the ratemaking process, there will be a corresponding increase or decrease in revenues. The Company has recognized certain regulatory assets and liabilities in the condensed consolidated balance sheets.


As a result, Florida Public Service Commission (FPSC) regulation has a significant effect on the Company’s results of operations. The FPSC approves rates that are intended to permit a specified rate of return on investment. Rate tariffs allow the flexibility of automatically passing through the cost of natural gas and electricity to customers. Increases in the operating expenses of the regulated segments may require a request for increases in the rates charged to customers.


In November 2007, the Company’s electric segment received interim rate relief for partial recovery of increased expenditures. These interim rates would produce additional annual revenues of approximately $800,000 and went into effect for meter readings on and after November 22, 2007.


In April 2008, the FPSC approved the final annual electric rate increase of approximately $3.9 million with the new rates beginning May 22, 2008.  These revenues should provide an increase to the Company’s overall profitability for the electric segment and recovery of increased expenditures including depreciation, storm readiness mandates and initiatives and other expenses beginning in 2008.


4.

Pledged Assets

Substantially all of the Company’s utility plant and the shares of its wholly owned subsidiary, Flo-Gas Corporation, collateralize the Company’s First Mortgage Bonds (long-term debt).  Cash, accounts receivable and inventory are collateral for the line of credit.


5.

Restriction on Dividends

The Company’s Fifteenth Supplemental Indenture of Mortgage and Deed of Trust restricts the amount that is available for cash dividends. At September 30, 2008, approximately $9.9 million of retained earnings were free of such restriction and available for the payment of dividends. The Company’s line of credit agreement contains covenants that, if violated, could restrict or prevent the payment of dividends. The Company is not in violation of these covenants.


6.

Allowance for Uncollectible Accounts

The Company records an allowance for uncollectible accounts based on historical information and current economic conditions.  The following is a summary of bad debt activity for the third quarter as of September 30:


Allowance for Doubtful Accounts

(Dollars in thousands)

 

2008

2007

Bad Debt Write-offs

$241

$145

Bad Debt Accrual Provision

$321

$123

 

Our natural gas operations had a significant write off in the third quarter of 2008 for a commercial customer who declared bankruptcy. The write-off and provision was increased by $164,000 to account for this customer.


7.

Storm Reserves

As of September 30, 2008, the Company had a storm reserve of approximately $1.6 million for the electric segment and approximately $789,000 for the natural gas segment. The Company does not have a storm reserve for the propane gas segment.


On September 29, 2008 the Commission finalized the 2006 over-earnings for the natural gas segment. The total over-earnings was determined to be $160,000, plus interest of $17,000. The Commission ordered disposition of 2006 over-earnings to fund our natural gas storm reserve for any future storm costs.


The electric segment had $295,000 in storm costs relating to Hurricane Fay in the third quarter of 2008. These costs were funded by our storm reserve.


8.

Goodwill and Other Intangible Assets

The Company does not amortize goodwill or intangibles with indefinite lives. The Company periodically tests the applicable reporting segments, natural gas and propane gas, for impairment. In the event goodwill or intangible assets related to a segment are determined to be impaired, the Company would write down such assets to fair value. The impairment tests performed effective January 1, 2008 showed no impairment for either reporting segment.


Goodwill associated with the Company’s acquisitions consists of $550,000 in the natural gas segment and $1.9 million in the propane gas segment. The summary of intangible assets at September 30, 2008 and December 31, 2007, is as follows:


Intangible Assets

(Dollars in thousands)

 

 

September 30,

 2008 

December 31,

 2007 

Customer distribution rights

(Indefinite life)

$ 1,900 

$ 1,900 

Customer relationships

(Indefinite life)

900 

900 

Software

(Five to nine year life)

3,539 

3,499 

Accumulated amortization

(2,186)

(1,869)

Total intangible assets, net of amortization

$ 4,153 

 $ 4,430 


The amortization expense of intangible assets was approximately $107,000 and $89,000 for the three months ended September 30, 2008 and 2007, respectively, and $317,000 and $263,000 for the nine months ended September 30, 2008 and 2007, respectively.


9.

Common Shareholders’ Equity

Items impacting common shareholders’ equity other than comprehensive income and dividends are the dividend reinvestment program, employee stock purchase program, stock compensation plans and treasury stock. The net impact of these additional items increased common shareholders’ equity approximately$211,000 and $527,000 for the three and nine months ended September 30, 2008, respectively.  The impact to shares outstanding for these additional items was 18,200 and 44,274 for the three and nine months ending September 30, 2008, respectively.  Accumulated other comprehensive income, comprised of the deferred cost of employee benefit plans, totaled approximately $155,000 and $88,000 as of September 30, 2008 and December 31, 2007, respectively. The change to other comprehensive income for the quarter ending September 30, 2008 was a net gain of approximately $22,000.


10.

Over-earnings – Natural Gas Segment

The FPSC approves rates that are intended to permit a specified rate of return on investment and limits the maximum amount of earnings of regulated operations. The Company has agreed with the FPSC staff to limit the earned return on equity for regulated natural gas and electric operations.


Management does not anticipate any natural gas over-earnings for 2007 or 2008.


On September 29, 2008 the Commission finalized the 2006 over-earnings for the natural gas segment. Total over-earnings was determined to be $160,000, plus interest. Interest on the over-earnings through September 30, 2008 was $17,000.


The Commission ordered disposition of 2006 over-earnings to fund a storm reserve for any future storm costs.


11.

Environmental Contingencies

The Company is subject to federal and state legislation with respect to soil, groundwater and employee health and safety matters and to environmental regulations issued by the Florida Department of Environmental Protection (FDEP), the United States Environmental Protection Agency (EPA) and other federal and state agencies. Except as discussed below, the Company does not expect to incur material future expenditures for compliance with existing environmental laws and regulations.


(Dollars in thousands)

Site

Range From

Range To

West Palm Beach

$      4,900 

$   18,126 

Sanford

604 

604 

Pensacola and Key West

121 

121 

Total

$      5,625 

 $   18,851 


The Company currently has $13.5 million recorded as our best estimate of the environmental liability. The FPSC approved up to $14 million for total recovery from insurance and rates based on the original 2005 projections as a basis for rate recovery.  On October 18, 2004 the FPSC approved recovery of $9.1 million for environmental liabilities from rates.  The Company has recovered a total of $6.3 million from insurance and rate recovery, net of costs incurred to date.  The remaining balance of $7.2 million is recorded as a regulatory asset.  The amortization of this recovery and reduction to the regulatory asset began on January 1, 2005. The majority of environmental cash expenditures is expected to be incurred before 2010, but may continue for another 10 years.


West Palm Beach Site

The Company completed field investigations for the contamination assessment task in October 2006.  Thereafter, we retained The RETEC Group, Inc. to perform a feasibility study to evaluate appropriate remedies for the site to respond to the reported soil and groundwater impacts.  On November 30, 2006, RETEC transmitted a feasibility study to us and to FDEP.  The feasibility study evaluated a wide range of remedial alternatives. The total costs for the remedies evaluated in the feasibility study ranged from a low of $2.8 million to a high of $54.6 million.  Based on the likely acceptability of proven remedial technologies described in the feasibility study and implemented at similar sites, consulting/remediation costs are projected to range from $4.6 million to $17.9 million. This range of costs covers such remedies as in situ solidification for the deeper impacts, excavation of surficial soils, installation of a barrier wall with a permeable biotreatment zone, or some combination of these remedies.


By letter dated May 7, 2007, FDEP provided its comments to the feasibility study, the substance of which were discussed at a meeting between the Company and FDEP on September 14, 2007.  A revised feasibility study was submitted to FDEP on June 30, 2008.  We are currently awaiting FDEP's comments to the response. 

 

Based on the information provided in the feasibility study, remaining legal fees are currently projected to be approximately $269,000. Consulting and remediation costs are projected to range from $4.6 million to $17.9 million. Thus, the Company's total probable legal and cleanup costs for the West Palm Beach MGP site are currently projected to range from $4.9 million to $18.1 million.


Sanford Site

In late September 2006, EPA sent a Special Notice Letter to the Company, notifying us, and the other responsible parties at the site (Florida Power Corporation, Florida Power & Light Company, Atlanta Gas Light Company, and the City of Sanford, Florida, collectively with the Company, "the Sanford Group"), of EPA's selection of a final remedy for OU1 (soils), OU2 (groundwater), and OU3 (sediments) for the site.  The total estimated remediation costs for the Sanford Gasification Plant Site were projected by EPA to be approximately $12.9 million.   

In January 2007, the Company along with other members of the Sanford Group signed a Third Participation Agreement, which provides for funding the final remedy approved by EPA for the site. Our share of remediation costs under the Third Participation Agreement is set at five percent (5%) of a maximum of $13 million, or $650,000, providing the total cost of the final remedy does not exceed $13 million.  If the cost of the final remedy does exceed $13 million, the Sanford Group members agreed to negotiate in good faith at such time that it appears that the total cost will exceed $13 million for the allocation of the additional cost.  

An initial call for funds under the Third Participation Agreement was sent to all members of the Sanford Group on May 16, 2008, seeking funds totaling $2 million.  Our share of the initial call for funds was $100,000, or 5% of $2 million, which was paid by the Company to the Sanford Group Escrow Account in June 2008. 

The Sanford Group, EPA and the United States Department of Justice entered into a Consent Decree in March 2008 that was lodged with the federal court in Orlando on March 28, 2008.  The Consent Decree provides for the implementation by the Sanford Group of the remedy selected by EPA for the site.  It is anticipated that the federal court will enter the Consent Decree later in 2008.  The Sanford Group will then be obligated to implement the remedy approved by EPA for the site.  It is currently anticipated that the total cost of the final remedy will exceed $13 million. We have advised the other members of the Sanford Group that we are unwilling at this time to agree to pay any sum in excess of the $650,000 committed by us in the Third Participation Agreement.

Several members of the Sanford Group recently concluded negotiations with an adjacent property owner, Christian Prison Ministries ("CPM"), for access to CPM's property for the purpose of implementing a portion of the EPA-approved remedy.  In the negotiations, CPM asserted that it will incur damages as a result of the remedy and demanded that the Sanford Group compensate CPM for such damages.  The Settlement Agreement with CPM requires the select members of the Sanford Group to purchase the CPM property for approximately $2 million.  CPM then has an option to buy back the CPM property after completion of the remedy for approximately the same amount.  The Company has refused to participate in the funding of the CPM Settlement Agreement based on its contention that we did not contribute to the release of hazardous substances at the site.  

Remaining legal fees/costs are currently projected to be approximately $54,000. Our remaining obligation under the Third Participation Agreement is $550,000. Thus, our total probable legal and cleanup costs for the Sanford MGP site are currently projected to be approximately $604,000.


Pensacola Site

We are the prior owner/operator of the former Pensacola gasification plant, located in Pensacola, Florida. Following notification on October 5, 1990 that FDEP had determined that we were one of several responsible parties for any environmental impacts associated with the former gasification plant site, we entered into cost sharing agreements with three other responsible parties providing for the funding of certain contamination assessment activities at the site.


Following field investigations performed on behalf of the responsible parties, on July 16, 1997, FDEP approved a final remedy for the site that provides for annual sampling of selected monitoring wells.  Such annual sampling has been undertaken at the site since 1998.  The Company’s share of these costs is less than $2,000 annually.


In March 1999, EPA requested site access in order to undertake an Expanded Site Inspection.  The Expanded Site Inspection was completed by EPA’s contractor in 1999 and an Expanded Site Inspection Report was transmitted to the Company in January 2000.  The Expanded Site Inspection Report recommends additional work at the site.  The responsible parties met with FDEP on February 7, 2000 to discuss EPA’s plans for the site.  In February 2000, EPA indicated preliminarily that it will defer management of the site to FDEP; as of early November 2008, the Company has not received any written confirmation from EPA or FDEP regarding this matter.  Prior to receipt of EPA’s written determination regarding this site management, we are unable to determine whether additional field work or site remediation will be required by EPA and, if so, the scope or costs of such work.

Consulting and remediation costs are projected to be $25,000; legal fees are projected to be $3,000, for total probable costs for the Pensacola MGP site of $28,000.

Key West Site

From 1927-1938, we owned and operated a gasification plant in Key West, Florida. The plant discontinued operations in the late 1940s; the property on which the plant was located is currently used for a propane gas distribution business. In March 1993, a Preliminary Contamination Assessment Report was prepared by a consultant jointly retained by the current site owner and the Company and was delivered to FDEP. The Preliminary Contamination Assessment Report reported that very limited soil and groundwater impacts were present at the site. By letter dated December 20, 1993, FDEP notified us that the site did not warrant further "CERCLA consideration and a Site Evaluation Accomplished disposition is recommended." FDEP then referred the matter to its Marathon office for consideration of whether additional work would be required by FDEP's district office under Florida law. As of September 30, 2008, the Company has received no further communication from FDEP with respect to the site.  At this time we are unable to determine whether additional field work will be required by FDEP and, if so, the scope or costs of such work.  In 1999, the Company received an estimate from its consultant that additional costs to assess and remediate the reported impacts would be approximately $166,000.  Assuming the current owner shared in such costs according to the allocation agreed upon by the parties for the Preliminary Contamination Assessment Report, the Company’s share of remediation expenses, plus attorney’s fees and costs, is projected to be $93,000 for this site.


12.

IRS Examination

In February 2008, the IRS completed its examination of our 2003 and 2004 federal income tax returns.   We reclassified the tax liability recognized in 2007 as it related to this audit, and classified it as a current tax payable.  We paid this tax liability and the interest on this liability of approximately $195,000 and $48,000 respectively in July 2008. 


The Company amended its 2004 federal and Florida corporate income tax returns to reflect the 2004 IRS audit adjustments.


In July 2008, the IRS began their examination of our 2005 and 2006 tax years.  The Company anticipates the 2005 and 2006 IRS examinations to be completed in the fourth quarter of 2008.  Based on the progress of the examination to date, we have estimated and recorded a net reduction of our tax liability in the amount of $341,000 for the 2005 and 2006 tax years.  In addition, we estimate and recorded the net interest on these adjustments to approximate $30,000 for the 2005 and 2006 tax years.


These adjustments are not anticipated to affect our annual effective income tax rate, and should not result in a material change in our financial position.  


The Company intends to amend its 2005, 2006, and 2007 federal and Florida corporate income tax returns to reflect the IRS audit adjustments later in 2008.


13.

Employee Benefit Plans

The Company sponsors a qualified defined benefit pension plan for non-union employees hired before January 1, 2005 and for unionized employees that work under one of the six Company union contracts and were hired before their respective contract dates in 2005 or in 2006 depending on the specific contract. Employees hired after December 31, 2004 and union employees hired after the above time frames are not eligible for the defined benefit pension plan and are in a 401k match plan. The Company also sponsors a post-retirement medical plan.


The following table provides the components of the net periodic benefit cost for our pension plan and postretirement benefit plan for the three months and nine months ended September 30, 2007 and 2008.



FLORIDA PUBLIC UTILITIES COMPANY

Net Periodic Benefit Costs

 (Dollars in thousands) 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

Pension Plan:

 

 

 

 

 

 

 

Service Cost

$     239 

 

$   224 

 

$      761 

 

$     790 

Interest Cost

583 

 

 588 

 

1,937 

 

1,720 

Expected Return on Plan Assets

 (635)

 

(609)

 

(1,936)

 

(1,829)

Amortization of Prior Service Cost

180 

 

 185 

 

540 

 

553 

Net Periodic Pension Cost

$    367 

 

$   388 

 

$1,302 

 

$   1,234

 

 

 

 

 

 

 

 

Postretirement Benefit Plan:

 

 

 

 

 

 

 

Service Cost

$      11

 

$     16 

 

$     39

 

$      48 

Interest Cost

19

 

          27

 

78

 

79 

Amortization of Transition Obligation Obligation/(Asset)

10

 

          10

 

32

 

32 

Amortization of Net Gain

(25)

 

(5)

 

(37)

 

(15)

      Net Periodic Postretirement Benefit Cost

$    15

 

$     48 

 

$   112

 

      $   144

 

 

 

 

 


These components affect our pension and postretirement medical liability reserves with current balances of approximately $3,642,000 and $1,685,000 respectively. For additional information related to our employee benefit plans, please see Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year ended December 31, 2007. Approximately 80% of the net deferred and unrecognized gains and losses relate to the regulated segment of the business and are recoverable through regulatory assets.


FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, that requires the Company to show the funded status of its pension and retiree health care plan as a prepaid asset or accrued liability, and to show the net deferred and unrecognized gains and losses related to the retirement plans, net of tax, as part of accumulated other comprehensive income (loss) (AOCI) in shareholders’ equity. The accumulated other comprehensive income is a gain of $155,000, net of income tax effect of $93,000, at September 30, 2008 compared to a gain of $88,000, net of income tax effect of $53,000, for December 31, 2007. Previously, the net deferred and unrecognized gains and losses were included in the prepaid asset or accrued liability recorded for the retirement plans.


14.

Impact of Recent Accounting Standards

Financial Accounting Standard No. 161

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”.

This standard requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.   The Company expects to adopt SFAS No. 161 effective January 1, 2009. The Company does not anticipate the adoption of this standard will have a material effect on our financial position or results of operation.


Financial Accounting Standard No. 162

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  This standard offers guidance on the principles used to prepare financial statements in accordance with GAAP.  FASB Statements of Financial Accounting Concepts now supersede industry practice. The Company does not anticipate the adoption of this standard will have a material effect on our financial position or results of operation.


15.

Fair Value of Financial Instruments

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, we adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year. The adoption of SFAS 157 did not have a material effect on our financial position or results of operations.


On January 1, 2008, we adopted the provisions of SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, with a few exceptions, such as investments accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. We did not elect to record any additional assets or liabilities at fair value and accordingly, the adoption of SFAS 159 did not have a material effect on our financial position or results of operations.


16.

Segment Information

The Company is organized into two regulated business segments, natural gas and electric, and one non-regulated business segment, propane gas. There are no material inter-segment sales or transfers.


Identifiable assets are those assets used in the Company’s operations in each business segment.  Common assets are principally cash and overnight investments, deferred tax assets and common plant.


Business segment information at September 30, 2008, and December 31, 2007 is summarized as follows:


(Dollars in thousands)

 

2008

 

2007

 

Identifiable assets

 

 

 

 

 

Natural gas

$

99,275 

99,295 

 

Electric

 

59,007 

 

54,202 

 

Propane gas

 

19,008 

 

19,371 

 

Common

 

19,010 

 

19,476 

 

Consolidated

$

196,300 

192,344 

 


Business segment information for the quarter ending and nine months ending September 30, 2008, and September 30, 2007 are summarized as follows:



 

 

Three Months Ended   September 30,

 

Nine Months Ended   September 30,

 

 

(Dollars in thousands)

 

2008

 

2007

 

2008

 

 

2007

 

Revenues

 

 

 

 

 

 

 

 

 

 

Natural gas

$

14,642 

12,018 

55,752 

 

48,093 

 

Electric

 

23,501 

 

16,251 

 

59,238 

 

 

42,744 

 

Propane gas

 

3,791 

 

3,372 

 

13,350 

 

 

11,884 

 

Consolidated

$

41,934 

31,641

128,340 

 

102,721 

 

Operating income, excluding income tax

 

 

 

 

 

 

 

 

 

 

Natural gas

$

(331) 

86 

2,286 

 

3,359 

 

Electric

 

1,740 

 

1,188 

 

3,341 

 

 

2,185 

 

Propane gas

 

157 

 

140 

 

1,092 

 

 

1,204 

 

Consolidated

$

1,566 

1,414 

6,719 

 

6,748 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

Natural gas

$

1,099 

1,062 

3,416 

 

3,270 

 

Electric

 

807 

 

682 

 

2,390 

 

 

2,025 

 

Propane gas

 

203 

 

204 

 

607 

 

 

610 

 

Common

 

80 

 

77 

 

235 

 

 

223 

 

Consolidated

$

2,189 

2,025 

6,648 

 

6,128 

 

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

Natural gas

$

(383)

(179)

24 

 

527 

 

Electric

 

 511 

 

286 

 

824 

 

 

427 

 

Propane gas

 

53 

 

(2)

 

283 

 

 

239 

 

Common

 

 39 

 

59 

 

135 

 

 

197 

 

Consolidated

$

 220 

$

164 

1,266 

 

1,390 

 

Construction expenditures

 

 

 

 

 

 

 

 

 

 

Natural gas

$

1,207 

5,145 

4,152 

 

8,717 

 

Electric

 

732 

 

1,032 

 

3,063 

 

 

3,006 

 

Propane gas

 

340 

 

632 

 

806 

 

 

1,334 

 

Common

 

131 

 

100 

 

138 

 

 

389 

 

Consolidated

$

2,410 

6,909 

8,159 

 

13,446 

 


17.

Accrued Insurance

The Company finalized and settled a general liability claim in September 2008. The Company utilized a self insurance reserve to cover the Company’s maximum exposure relating to this claim for a total of $200,000.  The insurance company will cover the remaining liability on this claim, and $657,000 has been recorded as a receivable due from the insurance company at September 30, 2008.  


18.

Reclassification

Certain amounts in the 2007 financial statements have been reclassified to conform to the 2008 presentation.



Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 


Overview

We have three primary business segments: natural gas, electric and propane gas. The Florida Public Service Commission (FPSC) regulates the natural gas and electric segments. The effects of seasonal weather conditions, timing of rate increases, economic conditions, fluctuations in demand due to the cost of fuel passed on to customers, and the migration of winter residents and tourists to Florida during the winter season have a significant impact on income.


Earnings for the quarter are slightly higher than the prior year, primarily due the effects of the recent base rate increases in our electric divisions.  Despite the reduction in units sold this year, electric gross profit increased due to interim and final rate relief.  Interim rate relief of approximately $800,000, annually, was approved beginning in November 2007. Final electric base rate relief of approximately $3.9 million per year was approved in April 2008 with new rates beginning May 22, 2008.


The slump in the economy and higher prices for fuel have contributed to conservation measures taken by our customers and the reduction in units sold in 2008 compared to 2007. The new fuel contracts, effective January 1, 2007 in our Northeast division, and effective January 1, 2008 in our Northwest division, significantly increased our electricity fuel costs and revenues. We expect our electric customers will continue to take conservation measures to help offset the recent large fuel cost increases. We are unable to precisely estimate what impact the higher rates could have on electric consumption, but we expect there could be as much as a reduction of 10% in unit sales. Management does not expect a significant impact to electric gross profit from this expected reduction in sales units since this reduction was considered in our recent electric base rate increase approved in April 2008 and the rates were changed to compensate for this reduction in electric operations consumption.

 

Further negative impacts from the continued decline in economic conditions, slowdown in the housing industry and increased number of home foreclosures are expected to further impact our units sold and customer counts over the remainder of 2008 and into the following calendar year.  Management continues to look for ways to help offset the negative impacts of the current economic condition. The Company also expects to file a natural gas rate proceeding late 2008 to request base rate relief in this operating segment.


Results of Operations


Revenues and Gross Profit Summary

Revenues include cost recovery revenues. The FPSC allows cost recovery revenues to directly recover costs of fuel, conservation and revenue-based taxes in our natural gas and electric segments. Revenues collected for these costs and expenses have no effect on results of operations and fluctuations could distort the relationship of revenues between periods. Gross profit is defined as gross operating revenues less fuel, conservation and revenue-based taxes that are passed directly through to customers. Because gross profit eliminates these cost recovery revenues, we believe it provides a more meaningful basis for evaluating utility revenues. We believe data regarding units sold and number of customers provides additional information helpful in comparing periods.  The following summary compares gross profit between periods and units sold in one thousand Dekatherm (MDth) (gas) and Megawatt Hour (MWH) (electric).



 Revenues and Gross Profit

(Dollars and units in thousands)

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

2008

 

2007

 

2008

 

2007

Natural Gas

 

 

 

 

 

 

 

Revenues

$14,642 

 

  $12,018 

 

$55,752 

 

$48,093 

Cost of fuel and other pass through costs

 9,315 

 

      6,587 

 

36,243 

 

28,277 

Gross Profit

$ 5,327 

 

$  5,431 

 

$19,509 

 

$19,816 

Units sold:  (MDth)

1,164 

 

1,207 

 

4,343 

 

4,494 

Customers (average for the period)

51,768 

 

  50,987 

 

52,021 

 

51,492 

Electric

 

 

 

 

 

 

 

Revenues

$23,501 

 

$16,251 

 

$59,238 

 

$42,744 

Cost of fuel and other pass through costs

18,567 

 

   12,231 

 

46,420 

 

31,720 

Gross Profit

$ 4,934 

 

$ 4,020 

 

$12,818 

 

$11,024 

Units sold: (MWH)

213,396 

 

245,000 

 

575,093 

 

631,000 

Customers (average for the period)

31,361 

 

31,153 

 

31,295 

 

  31,055 

Propane Gas

 

 

 

 

 

 

 

Revenues

$  3,791 

 

$  3,372 

 

 $13,350 

 

 $11,884 

Cost of fuel

2,189 

 

1,761 

 

7,671 

 

6,050 

Gross Profit

$  1,602 

 

$  1,611 

 

$ 5,679 

 

$ 5,834 

Units sold:  (MDth)

108 

 

119 

 

 406 

 

454 

Customers (average for the period)

12,337 

 

13,144 

 

12,513 

 

13,265 

Consolidated

 

 

 

 

 

 

 

Revenues

$41,934 

 

$31,641 

 

$128,340 

 

$102,721 

Cost of fuel

30,071 

 

20,579 

 

90,334 

 

66,047 

Gross Profit

$11,863 

 

$11,062 

 

$38,006 

 

$36,674 

Customers (average for the period)

95,466 

 

95,284 

 

95,829 

 

95,812 

 

 

 

 

 

 

 

 


Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007.


Revenues and Gross Profit


Natural Gas

Natural gas service revenues increased $2.6 million, or 22%, in the third quarter of 2008 from the same period in 2007 due to increased revenues to recover our cost of fuel and other costs passed through to customers.


Units sold and gross profit remained stable, both showing only marginal declines.  The small declines in unit sales and decreased usage per customer is most likely due to conservation measures taken by customers as a result of the overall downturn in the economy.


We recorded additional 2006 over-earnings of $135,000 which reduced revenues and gross profit in the third quarter of 2008. The Commission approved finalization of the 2006 over-earnings on September 29, 2008 and ordered the Company fund its natural gas storm reserve to offset any future storm costs.


Electric

Electric revenues increased $7.3 million in the third quarter of 2008 over the same period in 2007. Higher cost of fuel and other costs that were passed through to customers accounted for $6.3 million of this increase. A new fuel contract in our Northwest division effective January 1, 2008, significantly increased the cost of fuel to market rates.  


Gross profit this quarter increased by $914,000 or 23% compared to the third quarter of 2007 primarily due to the interim base rate increase effective November 2007 and the final base rate increase effective May 22, 2008. Other factors impacting gross profit were a 1% increase in customer growth offset by an 11% decrease in usage per customer, excluding our two large industrial customers.


Management believes the decrease in usage per customer relates to conservation measures taken by our customers as a result of the recent increases in fuel and base rates and the downturn in the economy.  Gross profit was not impacted by the reduction in sales units as this was considered in our recent electric base rate increase approved in April 2008.


Propane Gas

Propane revenues increased $419,000 in the third quarter of 2008 compared to the same period in 2007.   Increases to our propane rates covered the $428,000 increase to cost of gas sold and offset the 6% decrease in customers and 9% decrease in units sold.


This decrease in customers is primarily due to the recent conversion of approximately 500 customers in our Central Florida division from the use of propane to natural gas. This conversion, warmer weather, and possibly conservation measures taken by our customers reduced the number of units sold.


Operating Expenses

Operating expenses increased $649,000 in the third quarter of 2008 as compared to the same period in 2007.  In addition to the inflationary impact to operating expenses, maintenance expenses increased $188,000 primarily as a result of our increased tree trimming efforts in our electric segments.


Bad debt expense increased $194,000 in the third quarter of 2008 compared to the prior year as we continue to feel the impact of the declining economy on our operating results. We experienced a large write off and accrual of $164,000 for bad debt for a commercial customer bankruptcy in our natural gas segment.


Sales expense for the third quarter of 2008 was lower than this same period in 2007 as we reduced the number of sales staff and other related sales expense as a primary result of the slow-down in the construction industry.


Depreciation and amortization expense increased by $164,000 in the third quarter of 2008 compared to the same period in 2007 primarily due to new plant additions in our operating segments, along with increased electric depreciation rates that were effective January 1, 2008.


Other Income and Deductions

Merchandise and service revenues and expense decreased by $142,000 and $84,000, respectively, in the third quarter of 2008 compared to the same period last year. We continue to experience a decrease in merchandise sales and expenses as the effects of the slowdown of new construction and housing projects continue.


Total interest expense remained relatively flat in the third quarter of 2008 compared to the same period last year.


Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007.


Revenue and Gross Profit

Natural Gas

Natural gas service revenues increased $7.7 million in the nine months ended September 30, 2008 over the same period in 2007. Higher cost of fuel in the nine months ended September 2008 compared to this same period in 2007 increased revenues to recover our cost of fuel and other costs passed through to customers by $8.0 million.  


Our gross profit decreased by $307,000 in 2008 compared to 2007. Although customers increased primarily due to the recent conversion of customers located in our Central Florida division from the use of propane to natural gas, units decreased 3% and usage per customers decreased 4% compared to the prior year. This unit decrease is most likely due to weather and possibly conservation measures taken by our customers due to higher fuel costs and the down-turn in the housing market and economy as a whole.


We recorded additional 2006 over-earnings of $135,000 which reduced revenues and gross profit in the third quarter of 2008. The Commission approved finalization of the 2006 over-earnings on September 29, 2008 and ordered the Company fund its natural gas storm reserve to offset any future storm costs.


Electric

Electric service revenues increased by $16.5 million in the nine months ended September 30, 2008 over the same period in 2007.  Most of the increase was attributable to the cost of fuel and other costs of $14.7 million that were passed through to customers. A new fuel contract in our Northwest division was effective January 1, 2008 and this increased the cost of fuel that was passed through to our customers.


Gross profit increased by $1.8 million in the nine months ended September 30, 2008 compared to the same period in 2007 due to the interim base rate increase effective November 2007 and the final base rate increase effective May 2008.  Although the number of customers increased by 1%, there was a 6% decrease in units sold, excluding two industrial customers, as a result of possible conservation measures taken by our customers and the overall down-turn in the economy. Gross profit was not materially impacted from the reduced consumption as this was considered in our recent electric base rate increase approved in April 2008.  Rates were set to compensate for the anticipated reduction in units sold.


Propane Gas

Propane revenues increased by $1.5 million in the nine months ended September 30, 2008 compared to the same period in 2007. The cost of fuel that was passed through to our customers accounted for the increase in revenues.


Gross profit decreased by 3% due to lower profit margins on commercial bulk accounts, warmer weather, and possibly customer conservation due to the down-turn in the economy. The conversion of approximately 500 customers from propane to natural gas in September 2007 also reduced customers and units sold in this segment.   In addition, an inventory loss adjustment resulted in increased cost of sales expense of $108,000 over the prior period.         


Operating Expenses

Operating expenses were higher by $1,361,000 in the nine months ended September 30, 2008 compared to the same period in 2007. Administrative and general expenses increased by $492,000 primarily due to an increase of approximately $500,000 in nonrecurring professional fees and expenses incurred in the second quarter of 2008 related to strategic development activity no longer ongoing. The impact to net income for the effects of these nonrecurring administrative and general expenses is $308,000 after income taxes or $.05 per share for the year to date ending September 30, 2008. Outside of the normal inflationary impacts on our expenses, maintenance expenses increased in 2008 primarily as a result of increased tree trimming efforts in our electric segments. The cost for pension and medical benefits continues to rise and negatively impacted 2008 compared to the prior year.


Bad debt expense increased $257,000 in the nine months ended September of 2008 compared to the prior year as we continue to feel the impact of the declining economy on our operating results. We experienced a large write off and accrual for bad debt of $164,000 for a commercial bankruptcy in our natural gas segment during the third quarter of 2008.


As a partial offset to increases in operating expenses, our general liability reserve expense in 2008 was lower compared to the prior year by $391,000. In 2007 we had unusually high general liability related claims and expenses. Sales expense also decreased $301,000 in 2008 compared to the prior year due to a reduction in sales staff and other related sales expense resulting from the slow-down in the construction industry and the overall economy.  


As the divisions continue to grow, capital additions and new electric depreciation rates contributed to a $520,000 increase in depreciation expense. The new electric depreciation rates are expected to increase annual depreciation expense by approximately $280,000 in 2008.  A portion of the 2008 depreciation rate increase was not recovered in 2008 through the increased electric base rates due to the timing of final rate recovery.


Other Income and Deductions

Merchandise and service revenue decreased by $553,000 in the nine months ended September 30, 2008 compared to the same period last year. This was offset by a decrease in cost of merchandise and services of $349,000. The decrease in revenue was a result of the slowdown of new construction projects during the current down-turn in the housing market.     


The total interest expense remained flat compared to the prior year to date.  


Income Taxes

Income tax expense decreased in the nine months ended September 30, 2008 by $124,000 over the same period last year primarily due to lower book income.


Liquidity and Capital Resources


Cash Flows

Operating Activities

Net cash flow provided by operating activities for the nine months ended September 30, 2008 decreased by approximately $4.3 million over the same period in 2007.  The timing of the receipt of increased customer accounts receivables due to the recent fuel price increases significantly contributed to this decrease. Prepaid taxes increased $1.1 million and over-recovered fuel costs collected in 2007 and subsequently refunded in 2008 were $445,000, both contributing to the decrease in the current year’s net cash flow as compared to the prior year.


Investing Activities

Construction expenditures in the nine months ended September 30, 2008 decreased by $5.3 million compared to the same period last year.  This decrease is due primarily to the purchase of land for $3.5 million in July 2007 for the future construction of the South Florida operations facility.  In addition there has been a significant reduction in expenditures for distribution facilities and installations this year as a result of the slowdown in the construction industry and economy.  


Financing Activities

The cash provided by short-term loan borrowings decreased by $5.8 million in the nine months ended September 30, 2008.  In the prior year, we borrowed on our line of credit while in the current year our short term debt has remained relatively unchanged for the past nine months.    


Capital Resources

We have a line of credit with Bank of America which expires July 1, 2010.  In March 2008, we amended our line of credit to allow us, upon 30 days notice, to increase our available credit line to a maximum of $26 million, from the previous maximum of $20 million. The amendment also reduces the interest rate paid on borrowings by 0.10% or 10 basis points.  Effective April 29, 2008, we increased the available line of credit from $12 million to $15 million. The line of credit contains affirmative and negative covenants that, if violated, would give the bank the right to accelerate the due date of the loan to be immediately payable. The covenants include certain financial ratios.  All ratios are currently met. Management believes we are in full compliance with all covenants and anticipates continued compliance.


We reserve $1 million of the line of credit to cover expenses for any major storm repairs in our electric segment and an additional $250,000 for a letter of credit insuring propane gas facilities. As of September 30, 2008, the amount borrowed on the line of credit was $11.1 million. The line of credit, long-term debt and preferred stock as of September 30, 2008 comprised 55% of total debt and equity capitalization.


Historically we have periodically paid off short-term borrowings under lines of credit using the net proceeds from the sale of long-term debt or equity securities.  We continue to review our financing options including increasing our short-term line of credit, issuing equity or issuing debt. The choice of financing will be dependent on prevailing market conditions, the impact to our financial covenants and the effect on income. The timing of additional funding needs will be dependent on projected environmental expenditures, building of the South Florida operations facility, pension contributions and other capital expenditures.


Our 1942 Indenture of Mortgage and Deed of Trust, which is a mortgage on all real and personal property, permits the issuance of additional bonds based upon a calculation of unencumbered net real and personal property.  At September 30, 2008, such calculation would permit the issuance of approximately $49 million of additional bonds.


On October 14, 2008 we received approval from the FPSC to issue and sell or exchange an additional amount of $45 million in any combination of long-term debt, short-term notes and equity securities and/or to assume liabilities or obligations as guarantor, endorser or surety during calendar year 2009.


We have $3.5 million in invested funds for payment of future environmental costs.  


There is approximately $6.1 million in receivables from the 2003 sale of our water assets, of which an estimated installment of $300,000 is anticipated to be received in 2009.  The remaining balance of $5.8 million will be collected in 2010.  The present value of this receivable is $5.8 million.


We also received a $244,000 legal claim reimbursement in April 2008 from our insurance company to reimburse us on a liability claim.  The Company has recorded a receivable of $657,000 due to an unrelated insurance claim which we anticipate will be received in November, 2008.


Capital Requirements

Portions of our business are seasonal and dependent upon weather conditions in Florida. This factor affects the sale of electricity and gas and impacts the cash provided by operations. Construction costs also impact cash requirements throughout the year.  Cash needs for operations and construction are met partially through short-term borrowings from our line of credit.


Capital expenditures are expected to be higher for the remainder of 2008 compared to the same period in 2007 by approximately $200,000, primarily as a result of a land purchase for additional parking in our Central Florida division.


We currently have approximately $600,000 in commitments for capital expenditures for the remainder of 2008. These commitments include vehicles for approximately $400,000 and land in our Central Florida division for approximately $200,000.


Cash requirements will increase significantly in the future due to environmental cleanup costs, sinking fund payments on long-term debt and pension contributions. Environmental cleanup is forecast to require payments of approximately $210,000 in 2008, with remaining payments, which could total approximately $13.2 million, beginning in 2009. Annual long-term debt sinking fund payments of approximately $1.4 million began in May 2008 and will continue for eleven years. The Company made a voluntary contribution in our defined benefit pension plan of $400,000 in 2008 for the 2007 plan and we will continue in future years to make contributions as required by the Pension Protection Act funding rules. As a result of the current economic climate and the impact to the stock market investments held within our pension plan, future contributions to our defined benefit pension plan are expected to increase. Annually contribution payments are expected to range between approximately $2.0 million and $6.5 million in each of the next five years beginning in 2009, averaging about $4.0 million.


Based on our current expectations, management believes that additional financing may be necessary within the next twelve months.  The timing will be dependent on operational requirements, environmental expenditures, pension contributions and construction expenditures.  If we experience significant environmental or construction expenditures we may need to raise additional funds by mid 2009.   Equity financing may be considered as we strive to maintain a balanced capital structure between debt and equity over the long term. There can be no assurance, however, that equity financing will be available on favorable terms or at all when we make the decision to proceed with a financing transaction.  


Outlook


Medical Insurance

Insurance costs are expected to increase in 2009 over 2008 by approximately 6%.  To arrive at the 6% figure, management did need to make subtle plan structure changes to mitigate expected claims expense.  In future years we expect to experience medical claims above the industry average and forecast the increases to be slightly above the industry average.  The Company will continue to be more proactive and will continue to identify healthcare options that will help control our overall medical costs and strive to improve our employees’ health.


Pension Reserve

The pension liability reserve included in Other Liabilities on our balance sheet increased approximately $362,000 in the first nine months of 2008.  In partial response to the current economic climate and the impact to the stock market investments held within our pension plan, our pension liability reserve may increase even further in 2009.


Land Purchases

We purchased land for $3.5 million in July 2007 for a new South Florida operations facility.  We are in the process of preparing plans for a building on this property and expect to complete construction within the next one to three years.  


We have a commitment to purchase additional land for approximately $200,000 adjacent to our Central Florida operations facility for additional parking. We expect to close on this land purchase during the fourth quarter of 2008.


Storm Related Expenditures

Regulators continue to focus on hurricane preparedness and storm recovery issues for utility companies. Newly mandated storm preparedness initiatives will impact our operating expenses and capital expenditures in 2008.  Storm hardening initiatives, recently mandated by the FPSC, will increase other electric operating expenses for the remainder of 2008. However, we received recovery of these storm related expenses in our recent electric base rate proceeding, and management does not expect a negative impact to our 2008 earnings as a result of these mandates. It is possible that additional regulation and rules will be mandated regarding storm related expenditures over the next several years.


Electric Base Rate Proceeding

Interim rate relief for partial recovery of the increased expenditures was approved by the FPSC on October 23, 2007. Interim rates which will produce additional annual revenues of approximately $800,000 went into effect for meter readings on and after November 22, 2007.


A final annual electric rate increase of approximately $3,900,000 a year was approved in April 2008, with the new rates beginning May 22, 2008.  These revenues should provide an increase to our overall profitability for the electric segment and recovery of increased expenditures including depreciation, storm readiness mandates and initiatives and other expenses beginning in 2008.


Natural Gas Base Rate Proceeding

We plan to file a request with the FPSC in the fourth quarter of 2008 for a base rate increase in our natural gas segment. This request will include recovery of increased expenses and some capital expenditures since our last rate proceeding in 2004. Finalization of this request and approval, if any, of a natural gas base rate increase would not occur until mid 2009. Possible interim rate relief for partial recovery of the increased expenditures may occur in early 2009.

 

Energy Efficiency Legislation

Regulators are focusing on several legislative issues involving the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 and related issues.  One major provision is the implementation of a renewable portfolio standard.   Since the Company is a non-generating utility with existing ten year all-requirements wholesale energy contracts, there is significant concern over the additional purchased power cost that may be required to comply with the standard.  Although this cost may be passed on to the customers through a rate increase, continued decrease in customer usage will have an impact on operations.  “Smart Grid Technology” is another item being considered that would require significant capital investment to develop, install and manage.  The Company understands the overall benefits from the legislation but the burden imposed on a small utility like ours is of particular concern.  The Company is continuing to communicate with the FPSC to find solutions that will work for the Company, while maintaining manageable electric rates for customers.  


Forward-Looking Statements (Cautionary Statement)

This report contains forward-looking statements including those relating to the following:


·

Based on our current expectations for cash needs, including cash needs relating to construction of the South Florida operations building, we may choose to consider an equity or debt financing.

·

Our anticipation of continued compliance in the foreseeable future with our line of credit covenants.

·

Our expectation that cash requirements will increase significantly in the future due to environmental clean-up costs, sinking fund payment on long-term debt and pension contributions.

·

Our belief that cash from operations, coupled with short-term borrowings on our line of credit, will be sufficient to satisfy our operating expenses, normal construction expenditure and dividend payments through 2008.

·

Realization of actual additional revenues from the May 2008 electric base rate increase will occur as expected.

·

Earnings continue to be impacted by the overall economic conditions and management expects the slow-down to continue through 2008 and into 2009 with ongoing impact to our customer growth rates, unit sales and sales expense.

·

Storm hardening initiatives recently mandated by the FPSC will increase other electric operating expenses for the remainder of 2008 and management does not expect a negative impact to our 2008 earnings as a result of these mandates due to the recent base rate proceeding.

·

We do not expect any material adverse findings as a result of the IRS audit of 2005 and 2006 tax years.

·

The Natural Gas Rate Proceeding will be filed by the end of 2008 and finalization of this request and approval, if any, of a natural gas base rate increase would not occur until mid 2009.

·

Possible interim rate relief for partial recovery of the increased expenditures may occur in early 2009.

·

The new electric depreciation rates are expected to increase annual depreciation expense by approximately $280,000 in 2008.

·

Capital expenditures are expected to be higher for the remainder of 2008 compared to the same period in 2007 by approximately $200,000.

·

The South Florida operations facility will begin construction as anticipated.

·

Medical insurance costs are expected to increase 10% to 15% in 2009 over 2008.

·

The pension liability reserve and contributions to our defined benefit pension plan are expected to increase in 2009 and beyond as expected as a result of the economic climate and stock market investments.

·

Energy Efficiency Legislation could impact our Company and our operating results.



These statements involve certain risks and uncertainties. Actual results may differ materially from what is expressed in such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed by the forward-looking statements include, but are not limited to, those set forth in “Risk Factors” in our Form 10-K for the year ended December 31, 2007 and in this Form 10-Q.


Item 3.

Quantitative and Qualitative Disclosures about Market Risk


All financial instruments held by us were entered into for purposes other than for trading.  We have market risk exposure only from the potential loss in fair value resulting from changes in interest rates. We have no material exposure relating to commodity prices because under our regulatory jurisdictions, we are fully compensated for the actual costs of commodities (natural gas and electricity) used in our operations. Any commodity price increases for propane gas are normally passed through monthly to propane gas customers as the fuel charge portion of their rate.


None of our gas or electric contracts are accounted for using the fair value method of accounting. While some of our contracts meet the definition of a derivative, we have designated these contracts as "normal purchases and sales" under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".


We have decided to suspend our previous plan of hedging through a combination of purchasing caps and swaps.  We had decided to use a plan that, on a rolling four-quarter basis, would have purchased a “cap” on approximately one-third of our forecast propane volume purchases, performed a pre-buy or hedge with a swap for one-third of our forecast anticipated propane purchases, and bought one-third at market.  We are now fluctuating with the market or utilizing pre-purchased propane gas. As of September 30, 2008, we had not entered into any hedging activities or pre-purchased gas supplies.


We have no exposure to equity risk, as we do not hold any equity instruments. Our exposure to interest rate risk is limited to investments held for environmental costs, the long-term notes receivable from the sale of our water division and short-term borrowings on the line of credit. The investments held for environmental costs are short-term fixed income debt securities whose carrying amounts are not materially different than fair value. The short-term borrowings were approximately $11.1 million at the end of September 30, 2008. We do not believe we have material market risk exposure related to these instruments. The indentures governing our two first mortgage bond series outstanding contain "make-whole" provisions (pre-payment penalties that charge for lost interest), which render refinancing impracticable until sometime after 2010.


Item 4T.

Controls and Procedures


Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures as of September 30, 2008. Based on that evaluation, our CEO and CFO have concluded that, as of September 30, 2008, our disclosure controls and procedures were effective.


Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II.

OTHER INFORMATION


Item 1A.

Risk Factors


The risk factors should be read in conjunction with those included in our most recent Form 10-K for the year ending December 31, 2007.


The financial performance of Florida Public Utilities Company may be adversely affected if its divisions are unable to successfully operate their facilities.


Florida Public Utilities Company’s financial performance depends on the successful operation of its electric, natural gas and propane facilities. Operating these facilities involves many risks, including:


operator error or failure of equipment or processes;


operating limitations that may be imposed by environmental or other regulatory requirements;


labor disputes;


fuel or material supply interruptions;


compliance with mandatory reliability standards; and


catastrophic events such as fires, earthquakes, explosions, floods, droughts, hurricanes, terrorist attacks, pandemic health events such as an avian influenza, or other similar occurrences.


A decrease or elimination of revenues from any one of our facilities or an increase in the cost of operating the facilities would reduce the net income and cash flows and could adversely impact the financial condition.


We are vulnerable to interest rate changes and may not have access to capital at favorable rates, if at all.


Changes in interest rates can affect our cost of borrowing on our line of credit, on refinancing of debt maturities and on incremental borrowing to fund new investments. Current market conditions could severely limit our future ability to have access to capital. Because our stock is not widely held and has a low trading volume, we may not be able to access the equity market or may be limited in the amount of equity financing. If we are unable to obtain equity or debt financing on satisfactory terms, our ability to fund capital expenditures and other commitments will be impaired. Moreover, even if available, the capital may not be available on favorable terms and the cost of such financing could reduce our margins and materially adversely affect our results of operations.


General economic conditions may adversely affect our unit sales.


Our segments are affected by general economic conditions. The consumption of the energy we supply is directly tied to the economy. Consumers conserve energy consumption as costs go up and the economy worsens.  This adversely affects our unit sales.  A downturn in the economy in our local areas of operations, as well as on the state, national and international levels, could adversely affect the performance of our segments. As the down-turn in the economy affects consumer spending, tourism in Florida may be adversely affected. If tourism is down, then the demand for the energy we supply is reduced.



Item 6.

Exhibits


3.1

Restated Articles of Incorporation (incorporated herein by reference as Exhibit 3.2 on Form 8-K filed November 10, 2008).


3.2

Restated By-Laws (incorporated herein by reference as 3.1 on Form 8-K filed November 10, 2008).


4.1

Indenture of Mortgage and Deed of Trust of FPU dated as of September 1, 1942 (incorporated by reference herein to Exhibit 7-A to Registration No. 2-6087).


4.2

Fourteenth Supplemental Indenture dated September 1, 2001 (incorporated by reference to exhibit 4.2 on our annual report on Form 10-K for the year ended December 31, 2001).


4.3

Fifteenth Supplemental Indenture dated November 1, 2001 (incorporated by reference to exhibit 4.3 on our annual report on Form 10-K for the year ended December 31, 2001).


10.1 #

Employment Agreement between the Company and John T. English dated August 21, 2008 (incorporated by reference to Exhibit 10.1 to our Form 8-K, filed on August 21, 2008).


10.2 #

Employment Agreement between the Company and Charles L. Stein dated August 21, 2008 (incorporated by reference to Exhibit 10.2 to our Form 8-K, filed on August 21, 2008).


10.3 #

Employment Agreement between the Company and George M. Bachman dated August 21, 2008 (incorporated by reference to Exhibit 10.3 to our Form 8-K, filed on August 21, 2008).


10.4

Amended and restated Electric Service Contract by and between the Company and JEA dated November 6, 2008 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 12, 2008).


31.1

Certification of Chief Executive Officer (CEO) per Section 302 of the Sarbanes-Oxley Act of 2002.


31.2

Certification of Chief Financial Officer (CFO) per Section 302 of the Sarbanes-Oxley Act of 2002.

 

32

Certification of Principal Executive Officer and Principal Financial Officer per Section 906 of the Sarbanes-Oxley Act of 2002.


#

Denotes management contract or compensatory plan or arrangement


 

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


FLORIDA PUBLIC UTILITIES COMPANY

(Registrant)



Date: November 12, 2008

By:  /s/ George M. Bachman

George M. Bachman

Chief Financial Officer

(Principal Accounting Officer)





FLORIDA PUBLIC UTILITIES COMPANY

EXHIBIT INDEX

Item Number


31.1

Certification of Chief Executive Officer (CEO) per Section 302 of the Sarbanes-Oxley Act of 2002.


31.2

Certification of Chief Financial Officer (CFO) per Section 302 of the Sarbanes-Oxley Act of 2002.


32

Certification of Principal Executive Officer and Principal Financial Officer per Section 906 of the Sarbanes-Oxley Act of 2002.






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