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Florida Public Utilities Company 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10
  3. Ex-31
  4. Ex-31
  5. Ex-32
  6. 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 March 31, 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 May 2, 2008, there were 6,191,279 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 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

 

 March 31,

Revenues

2008

 

2007

Natural gas

 $22,137 

 

 $20,573 

Electric

17,523 

 

13,358 

Propane gas

5,370 

 

4,681 

Total revenues

45,030 

 

38,612 

Cost of Fuel and Other Pass Through Costs

30,912 

 

24,769 

Gross Profit

14,118 

 

13,843 

 

 

 

 

Operating Expenses

 

 

 

Operation and maintenance

6,981 

 

7,173 

Depreciation and amortization

2,253 

 

2,072 

Taxes other than income taxes

873 

 

860 

Total operating expenses

10,107 

 

10,105 

Operating Income

4,011 

 

3,738 

 

 

 

 

Other Income and (Deductions)

 

 

 

Merchandise and service revenue

722 

 

915 

Merchandise and service expenses

(624)

 

(810)

Other income

130 

 

151 

Interest expense

(1,223)

 

(1,167)

Total other deductions – net

(995)

 

(911)

Earnings Before Income Taxes

3,016 

 

2,827 

Income Taxes

(1,066)

 

(1,029)

Net Income

1,950 

 

1,798 

Preferred Stock Dividends

 

Earnings for Common Stock

$1,943 

 

$1,791 

 

 

 

 

(Basic and Diluted):

 

 

 

Earnings Per Common Share

$0.32 

 

$0.30 

 

 

 

 

Dividends Declared Per Common Share

$0.1125 

 

$0.1075 

  

 

 

 

Average Shares Outstanding

6,071,565 

 

6,024,739 

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)

 

 

 

 

ASSETS

March 31,

 

December 31,

 

2008

 

2007

Utility Plant

 

 

 

    Utility Plant

$204,725 

 

$202,384 

Less Accumulated depreciation

64,984 

 

64,012 

Net utility plant

139,741 

 

138,372 

 

 

 

 

Current Assets

 

 

 

Cash

2,521 

 

3,478 

Accounts receivable

15,425 

 

12,269 

Allowance for uncollectible accounts

(399)

 

(326)

Unbilled receivables

1,937 

 

1,879 

Notes receivable

289 

 

298 

Inventories (at average unit cost)

4,315 

 

4,251 

Prepaid expenses

709 

 

861 

Deferred income taxes-current

1,362 

 

949 

    Other regulatory assets-environmental

456 

 

456 

    Deferred charges-current

682 

 

399 

    Investments held for environmental costs-current

3,491 

 

3,444 

Total current assets

30,788 

 

27,958 

 

 

 

 

Other Assets

 

 

 

Other regulatory assets-environmental

7,036 

 

7,197 

Long-term receivables and other investments

5,408 

 

 5,622 

Deferred charges

6,304 

 

6,360 

Goodwill

2,405 

 

2,405 

Intangible assets (net)

4,346 

 

4,430 

Total other assets

25,499 

 

26,014 

Total Assets

$196,028 

 

$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)

  

 

 

 

 

CAPITALIZATION AND LIABILITIES

March 31,

 

December 31,

 

2008

 

2007

Capitalization

 

 

 

Common shareholders' equity

$50,435 

 

$48,946 

Preferred stock

600 

 

 600 

Long-term debt

49,383 

 

49,363 

Total capitalization

100,418 

 

98,909 

 

 

 

 

Current Liabilities 

 

 

 

Line of credit

                  9,680 

 

11,122 

Accounts payable

                 11,419 

 

9,901 

Current portion of long-term debt

                  1,409 

 

1,409 

Insurance accrued

                     209 

 

218 

Interest accrued

                  1,529 

 

1,163 

Other accruals and payables

2,888 

 

2,729 

Environmental Liability – current

335 

 

1,379 

Taxes accrued

                  3,672 

 

2,168 

Over-earnings liability

                       27 

 

26 

Over-recovery of fuel costs and other

                  2,542 

 

3,207 

Customer deposits

                 10,576 

 

10,547 

 Total current liabilities

44,286 

 

43,869 

 

 

 

 

Other Liabilities

 

 

 

Deferred income taxes

16,823 

 

16,896 

Environmental liability

13,264 

 

12,250 

Regulatory liability-storm reserve

2,418 

 

2,387 

Regulatory liabilities-other

11,295 

 

10,719 

Other liabilities

7,524 

 

7,314 

Total other liabilities

51,324 

 

49,566 

Total Capitalization and Liabilities

$196,028 

 

$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)

 

 

 

 

 

Three Months Ended

 

March 31,

 

2008

 

2007

 

 

 

 

Net cash provided by operating activities

$3,785 

 

$6,416 

 

 

 

 

Investing Activities

 

 

 

Construction expenditures

(2,969)

 

(3,087)

Proceeds received on notes receivable

283 

 

346 

Other

(120)

 

87 

Net cash used in investing activities

(2,806)

 

(2,654)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

Net decrease in short-term borrowings

 (1,442)

 

 (1,251)

Dividends paid

 (688)

 

 (653)

Other increases

 194 

 

131 

Net cash used in financing activities

 (1,936)

 

 (1,773)

 

 

 

 

Net (decrease) increase in cash

 (957)

 

1,989 

 

 

 

 

Cash at beginning of period

3,478 

 

 84 

 

 

 

 

Cash at end of period

 $2,521 

 

 $2,073 

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)

March 31, 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.


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


As a subsequent event in April 2008, the FPSC approved a final annual electric rate increase of approximately $3,900,000 a year, 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 March 31, 2008, approximately $10.8 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 trended current economic conditions.  The following is a summary of bad debt activity for the first quarter as of March 31:


Allowance for Doubtful Accounts

(Dollars in thousands)

 

2008

2007

Bad Debt Write-offs

$114

$177

Bad Debt Accrual Provision

$187

$174


7.

Storm Reserves

As of March 31, 2008, the Company had a storm reserve of approximately $1.8 million for the electric segment and approximately $613,000 for the natural gas segment. The Company does not have a storm reserve for the propane gas segment. For additional information on the Company’s storm reserve, see Note 10, Over-earnings – Natural Gas Segment.


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 in 2007 showed no impairment for either reporting segment. The Company does not believe the 2008 impairment test will indicate impairment for either reporting segment. Final results are expected in the second or third quarter of 2008.


Goodwill associated with the Company’s acquisitions consists of $500,000 in the natural gas segment and $1.9 million in the propane gas segment. The summary of intangible assets at March 31, 2008 and December 31, 2007, is as follows:


Intangible Assets

(Dollars in thousands)

 

 

March 31,

 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)

3,519 

3,499 

Accumulated amortization

(1,973)

(1,869)

Total intangible assets, net of amortization

$ 4,346 

 $ 4,430 


The amortization expense of intangible assets was approximately $104,000 and $86,000 for the three months ended March 31, 2008 and 2007, respectively.


9.

Common Shareholders’ Equity

Items impacting common shareholders’ equity other than income and dividends are the dividend reinvestment program, employee stock purchase program, stock compensation plans, treasury stock and accumulated other comprehensive income (AOCI). The net impact of these additional items increased common shareholders’ equity approximately $228,000 for the three months ended March 31, 2008.


CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY

(dollars in thousands)

 

Common Stock

 

 

 

Treasury

 

Common

 

Shares

Aggregate

Paid-in

Retained

Treasury

Shares

 

Shareholders'

 

Issued

Par Value

Capital

Earnings

Shares

Cost

AOCI

Equity

Balances as of December 31, 2007

6,182,983

$9,275 

$6,076 

$35,797 

129,223 

$(2,290)

$88 

$48,946 

Net income

 

 

 

1,950 

 

 

 

1,950 

Dividends

 

 

 

 (689)

 

 

 

 (689)

AOCI

 

 

 

 

 

 

22 

 22 

Stock plans

4,192 

 6 

 (41)

 

(13,613)

241 

 

206 

Balances as of March 31, 2008

6,187,175 

$9,281 

$6,035 

$37,058 

115,610 

$(2,049)

$110 

$50,435 

 

 


Accumulated other comprehensive income, comprised of the deferred cost of employee benefit plans net of deferred tax, totaled approximately $110,000 and $88,000 as of March 31, 2008 and December 31, 2007, respectively. The change to other comprehensive income was a gain, net of deferred tax, of approximately $22,000, for the quarter ending March 31, 2008 compared to a gain, net of deferred tax, of approximately $24,000 for the quarter ending March 31, 2007.


Statement of Accumulated Other Comprehensive Income

(Dollars in thousands)

Balance at December 31, 2007

$88

  Adjustments-retirement plan gain:

22

Balance at March 31, 2008

$110


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 2008.


The Company recorded estimated 2006 over-earnings for regulated natural gas operations and subsequent interest accruals of $26,544. This over-earnings liability is included in the over-earnings liability on the Company’s consolidated balance sheet as of March 31, 2008 and December 31, 2007. The calculations supporting these liabilities are complex and involve a variety of projections and estimates before the ultimate settlement of such obligations. Estimates may be revised as expectations change and factors become known and determinable.


The 2006 over-earnings liability and the estimate that there is no 2007 overearnings liability is based on the Company’s best estimate, but the amount could change upon the FPSC finalization expected later this year. The FPSC determines the disposition of over-earnings with alternatives that include refunding to customers, increasing storm damage or environmental reserves or reducing any depreciation reserve deficiency.


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

$      4,906 

$   18,132 

Sanford

720 

720 

Pensacola and Key West

123 

123 

Total

$      5,749 

 $   18,975 


The Company currently has $13.6 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. The Company has recovered a total of $6 million from insurance and rate recovery, net of costs incurred to date.  The remaining balance of $7.6 million is recorded as a regulatory asset.  On October 18, 2004 the FPSC approved recovery of $9.1 million for environmental liabilities.  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 is currently evaluating remedial options to respond to environmental impacts to soil and groundwater at and in the immediate vicinity of a parcel of property owned by it in West Palm Beach, Florida upon which the Company previously operated a gasification plant.  Pursuant to a Consent Order between the Company and the FDEP effective April 8, 1991, the Company recently completed the delineation of soil and groundwater impacts at the site.  On November 30, 2006, the Company transmitted a feasibility study evaluating appropriate remedies for the site, to FDEP.


The feasibility study evaluated a wide range of remedial alternatives based on criteria provided by applicable laws and regulations.  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 to address the impacts now characterized at the West Palm Beach site are projected to range from $4.6 million to $17.9 million. This range of costs covers such remedies as in situ solidification for deeper soil impacts, excavation of surficial soils impacts, installation of a barrier wall with a permeable biotreatment zone, monitored natural attenuation of dissolved impacts in groundwater, or some combination of these remedies.  The feasibility study proposed a remedy of surficial soil excavation, installation of a hanging barrier wall with PBZ, and MNA, the cost of which is projected to range from $4.6 million to $9.9 million.


On September 14, 2007 the Company met with FDEP to discuss FDEP’s comments to the feasibility study.  Negotiations between the Company and FDEP on a final remedy for the site continue.  Prior to the conclusion of those negotiations, we are unable to determine, to a reasonable degree of certainty, the complete extent or cost of remedial action that may be required.  As of March 30, 2008, and subject to the limitations described above, the Company’s remediation expenses, plus attorney’s fees and costs, are projected to range from approximately $4.9 million to $18.1 million for this site.


Sanford Site

The Company owns a parcel of property located in Sanford, Florida, upon which a gasification plant was operated prior to the Company’s acquisition of the property. On March 25, 1998, the Company executed an Administrative Order on Consent (AOC) with the four former owners and operators (collectively, the Group) and the EPA that obligated the Group to implement a Remedial Investigation/Feasibility Study (RI/FS) and to pay EPA's past and future oversight costs. The Group also entered into a Participation Agreement and an Escrow Agreement on or about April 13, 1998 (RI/FS Participation Agreement). Work under the RI/FS AOC and RI/FS Participation Agreement is now complete and the Company has no further obligations under either document.


In late September 2006, the EPA sent a Special Notice Letter to the Company, notifying it of EPA's selection of a final remedy for OU1 (soils), OU2 (groundwater), and OU3 (sediments), and giving the Company and the other Group members sixty (60) days within which to submit a “good faith offer” to EPA to provide for implementation of the selected remedies. The Special Notice Letter included an Amended Record of Decision (ROD) for OU1 (the ROD for OU1 was amended to account for a significant increase in the volume of off-site soil impacts and a change in the selected remedy), the original ROD for OU2, and a ROD for OU3.  The total estimated remediation costs for the Sanford gasification plant site are now projected to be $12.9 million.  A revised Consent Decree was signed by all Group Members in February 2008, providing for the implementation by the Group of the approved remedies as set forth in the RODs for OU1-OU3, and the payment of EPA’s past and future oversight costs. The Consent Decree is projected to be lodged with the Court later in 2008.


In January 2007, the Company and other members of the Group signed a Third Participation Agreement, which provides for funding the remediation work specified in the RODs for OU1-OU3 and supersedes and replaces the Second Participation Agreement.  The Company's share of remediation costs under the Third Participation Agreement is set at 5% of a maximum of $13 million or $650,000. If the total cost of remediation exceeds $13 million, the Group members have agreed to negotiate in good faith to allocate the excess costs at such time that it reasonably appears that the total remediation cost will exceed $13 million.  In any such event, we do not expect the Company’s share of such additional costs to be greater than 5%; its share of such additional costs may be less than 5%.


As of March 30, 2008, the Company’s share of remediation expenses, plus attorney’s fees and costs, are currently projected to be approximately $720,000 for this site.


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 million annually.


In March 1999, EPA requested site access in order to undertake an Expanded Site Inspection (ESI).  The ESI was completed by EPA’s contractor in 1999 and an ESI Report was transmitted to the Company in January 2000.  The ESI 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 April 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.


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 (PCAR) was prepared by a consultant jointly retained by the current site owner and the Company and was delivered to FDEP. The PCAR 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, 2007, 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 PCAR, 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 of 2007, the IRS completed our 2003 and 2004 tax year’s examination.   We reclassified the tax liability recognized in 2007 as it relates to this audit, and classified it as a current tax payable. We expect to pay this tax liability and the interest on this liability of approximately $195,000 and $48,000 respectively in the second quarter of 2008.  This adjustment does not affect our annual effective income tax rate, and did not result in a material change in our financial position.


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


In the second quarter of 2008, the IRS informed us that it has selected our 2005 and 2006 tax years for examination.  As our tax positions have remained consistent with those from the previously audited tax years, we do not expect any material adverse findings as the result of the current IRS audit that have not been included in our current tax payable or a tax liability. Due to the forthcoming IRS examination, we anticipate that it is reasonably possible that our unrecognized tax benefits may increase or decrease, but we are unable to estimate the range.


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, our Northwest division was in 2006. 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 ended March 31, 2007 and 2008.



FLORIDA PUBLIC UTILITIES COMPANY

Net Periodic Benefit Costs

 (Dollars in thousands) 

 

 

 

 

 

Three Months Ended

 

March 31,

 

2008 

 

2007 

 

 

 

 

Pension Plan:

 

 

 

Service Cost

$273 

 

            $283 

Interest Cost

642 

 

               566 

Expected Return on Plan Assets

(648)

 

               (610)

Amortization of Prior Service Cost

184 

 

              184 

Net Periodic Pension Cost

$451 

 

           $423 

 

 

 

 

Postretirement Benefit Plan:

 

 

 

Service Cost

$14 

 

            $16 

Interest Cost

25 

 

               26 

Amortization of Transition Obligation

11 

 

               11 

Amortization of Net Gain

(13)

 

                (5)

      Net Periodic Postretirement Benefit Cost

$37 

 

           $48 

 



 

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.


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. This resulted in a gain in AOCI, net of deferred tax, of approximately $22,000 and $24,000 as of March 31, 2008 and March 31, 2007, respectively. 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. 160

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”.  This standard requires noncontrolling ownership interests be disclosed separately in equity, separate disclosure of income contributable to each party, changes in controlling interests be reported consistently, and deconsolidation be measured at fair value. As the company does not currently have any noncontrolling interests this standard will not have an impact on our financial condition or results of operations until the Company acquires a noncontrolling interest.


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 is assessing the potential impact that the adoption of SFAS No. 161 may have on its financial statements and the required disclosures.


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.


The carrying amounts reported in the balance sheet for investments held in escrow for environmental costs, notes payable, taxes accrued and other accrued liabilities approximate fair value.  The fair value of long-term debt excluding the unamortized debt discount is estimated by discounting the future cash flows of each issuance at rates currently offered to the Company for similar debt instruments of comparable maturities. The indentures governing our two first mortgage bond series outstanding contain "make-whole" provisions (pre-payment penalties that charge for lost interest). The values at March 31, 2008 and December 31, 2007 are shown below.


(Dollars in thousands)

March 31, 2008

December 31, 2007


Carrying

Amounts

Approximate Fair Value

Carrying

Amounts

Approximate Fair Value

Long-term debt

$52,490

$57,770

$52,490

$ 60,000


 

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 March 31, 2008, and December 31, 2007 is summarized as follows:


(Dollars in thousands)

 

2008

 

2007

 

Identifiable assets

 

 

 

 

 

Natural gas

$

101,895 

99,295 

 

Electric

 

56,053 

 

54,202 

 

Propane gas

 

19,223 

 

19,371 

 

Common

 

18,857 

 

19,476 

 

Consolidated

$

196,028 

192,344 

 



Business segment information for the quarter ending March 31, 2008, and March 31, 2007 is summarized as follows:


(Dollars in thousands)

 

2008

 

2007

Revenues

 

 

 

 

Natural gas

$

22,137 

20,573 

Electric

 

17,523 

 

13,358 

Propane gas

 

5,370 

 

4,681 

Consolidated

$

45,030 

38,612 

Operating income, excluding income tax

 

 

 

 

Natural gas

$

2,392 

2,439 

Electric

 

735 

 

575 

Propane gas

 

884 

 

724 

Consolidated

$

4,011 

3,738 

Depreciation and amortization

 

 

 

 

Natural gas

$

1,188 

1,126 

Electric

 

787 

 

669 

Propane gas

 

201 

 

206 

Common

 

77 

 

71 

Consolidated

$

2,253 

2,072 

Income tax expense

 

 

 

 

Natural gas

$

579 

635 

Electric

 

142 

 

123 

Propane gas

 

276 

 

194 

Common

 

69 

 

77 

Consolidated

$

1,066 

1,029 

Construction expenditures

 

 

 

 

Natural gas

$

1,255 

1,678 

Electric

 

1,492 

 

915 

Propane gas

 

186 

 

375 

Common

 

36 

 

119 

Consolidated

$

2,969 

3,087 


17.

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 2008 are higher for the quarter compared to 2007 primarily because of the interim rate relief in our electric operations.  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 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 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.


Earnings continue to be impacted by the overall economic slow-down and management expects current conditions to continue through 2008 with an ongoing impact to our customer growth rates, unit sales and sales expense. Management continues to look for ways to help offset the negative impacts of the current economic condition.


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 in thousands)

 

Three Months Ended

 

March 31,

 

2008

 

2007

Natural Gas

 

 

 

Revenues

$22,137 

 

$20,573 

Cost of fuel and other pass through costs

14,082 

 

12,522 

Gross Profit

$ 8,055 

 

$ 8,051 

Units sold:  (MDth)

1,861 

 

1,840 

Customers (average for the period)

52,166 

 

51,754 

Electric

 

 

 

Revenues

$17,523 

 

$13,358 

Cost of fuel and other pass through costs

13,859 

 

9,899 

Gross Profit

$ 3,664 

 

$ 3,459 

Units sold: (MWH)

173,276 

 

185,636 

Customers(average for the period)

31,221 

 

30,936 

Propane Gas

 

 

 

Revenues

$5,370 

 

$4,681 

Cost of fuel

2,971 

 

2,348 

Gross Profit

$2,399 

 

$2,333 

Units sold:  (MDth)

170 

 

192 

Customers (average for the period)

12,666 

 

13,378 

Consolidated

 

 

 

Revenues

$45,030 

 

$38,612 

Cost of fuel

30,912 

 

24,769 

Gross Profit

$14,118 

 

$13,843 

Customers(average for the period)

96,053 

 

96,068 

 

 

 

 



 

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007.


Revenues and Gross Profit

Natural Gas

Natural gas service revenues increased $1.6 million in the first 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.  These costs do not impact our gross profit, which remained flat between the two periods. Although we had a marginal increase in customers from the conversion of approximately 500 customers in our Central Florida division from propane to natural gas, gross profit remained relatively unchanged due to a prior year over-earnings estimate that increased the prior year’s gross profit by $46,000.  Excluding this prior year adjustment, units sold and gross profit increased slightly.


Electric

Electric service revenues increased $4.2 million in the first quarter of 2008 over the same period in 2007. Higher cost of fuel and other costs that were passed through to customers accounted for $4.0 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 $205,000 or 6% compared to the first quarter of 2007 primarily due to the interim base rate increase effective November 2007. Other factors slightly impacting gross profit were a 1% increase in customer growth, offset by a 1% decrease in usage per customer, excluding two large industrial customers. The decrease in usage per customers possibly relates to conservation measures taken by our customers as a result of the recent fuel cost increases.


Propane Gas

Propane revenues increased $689,000 in the first quarter of 2008 compared to the same period in 2007.  The cost of fuel contributed to most of the revenue increase as gross profit only slightly increased by $66,000.


Increases to our propane rates, which increased profit margins, offset the 5% decrease in customers and 11% decrease in units sold. This decrease in customers is primarily due to the recent conversion of approximately 500 customers in the Summer Glen development located 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 remained flat overall in the first quarter of 2008 as compared to the same period in 2007.


There were increases in depreciation expense from new plant additions in our operating segments, along with increased electric depreciation rates that were effective January 1, 2008. Overall depreciation expense increased $188,000 in the first quarter of 2008 compared to the prior quarter ending March 31, 2007.


The new electric depreciation rates are expected to increase annual depreciation expense by approximately $280,000 in 2008.  A portion of the 2008 depreciation increase was not recovered in 2008 through the increased electric base rates due to the timing of final rate recovery.


Sales and other operating expenses were lower this quarter by approximately $200,000 compared to the prior year.  We reduced the number of sales staff and other related sales expense due to the slow-down in the construction industry and the overall economy.


Other Income and Deductions

Merchandise and service revenue and expense decreased by $193,000 and $186,000 respectively in the first 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 increased $56,000 in the first quarter of 2008 compared to the same period last year. This is primarily due to the interest on additional funding used to purchase the Water Tower Business Park for the relocation of our South Florida operations.


Liquidity and Capital Resources


Cash Flows

Operating Activities

Net cash flow provided by operating activities for the three months ended March 31, 2008 decreased by approximately $2.6 million over the same period in 2007.  The timing of the receipt of customer accounts receivable which increased due to the recent fuel price increases, offset by the accounts payable increase from the fuel price increase contributed to this decrease. The over-recovered fuel costs collected in 2007 and subsequently refunded in 2008 accounted for approximately $700,000 of the decrease in the current year’s net cash flow as compared to the prior year.


Investing Activities

Construction expenditures in the three months ended March 31, 2008 remained consistent with the same period last year. First quarter 2008 expenditures included approximately $700,000 for a replacement 40MVA transformer at the Northeast Florida electric division. This was offset by lower requirements of $100,000 related to office equipment in our propane divisions and a reduction for distribution facilities and installations of approximately $600,000 as a result of the slow-down in the construction industry and economy.


Financing Activities

Cash used for short-term loan payments decreased cash flow.  As of March 31, 2008, our line of credit was $9.7 million as compared to $11.1 million as of December 31, 2007.


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 maximum credit line to $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. The new interest rate terms, if effective for 2007, would have reduced our overall average interest rate for 2007 to approximately 5.7% from 5.8% as of December 31, 2007. Effective April 29, 2008, we increased the LOC 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 and 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 March 31, 2008, the amount borrowed on the line of credit was $9.7 million. The line of credit, long-term debt and preferred stock as of March 31, 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 March 31, 2008, such calculation would permit the issuance of approximately $46.1 million of additional bonds.


On October 25, 2007 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 2008. In the event we choose not to proceed in 2008 with such a financing, we may seek approval from the FPSC in 2008 for any possible financing in 2009.


We have $3.5 million in invested funds for payment of future environmental costs. We expect to use some of these funds in 2008.


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 $5.7 million.


We also received a $244,000 legal claim reimbursement in April 2008 from our insurance company to reimburse us on a liability claim.


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 lower for the remainder of 2008 compared to 2007 by approximately $1.7 million. The anticipated expenditures of $2.0 million for the construction of the building for the new South Florida operations facility in 2008 is lower than the $3.5 million related to the purchase of land for the  facility that occurred in 2007. Also in 2007 we also had a $200,000 purchase of a mapping system.  


We currently have approximately $500,000 in commitments for capital expenditures for the remainder of 2008. These commitments include vehicles for approximately $340,000 and land in our Central Florida division for $174,000. We expect these expenditures will occur over the remainder of 2008.


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 $335,000 in 2008, with remaining payments, which could total approximately $13.3 million, beginning in 2009. Annual long-term debt sinking fund payments of approximately $1.4 million will begin in May 2008 and will continue for eleven years. Based on current projections, we will make a voluntary contribution in our defined benefit pension plan between $278,000 and $1.9 million 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.


Based on our current expectations for 2008 cash needs, including the construction of our South Florida operations facility, we may rely on the increased line of credit or may choose to consider equity or debt financing. The need and timing will depend upon operational requirements, the timing of environmental expenditures, pension contributions and construction expenditures.  In addition, if we experience significant environmental expenditures in the next two or three years it is possible we may need to raise additional funds after 2008.   There can be no assurance, however, that equity or debt transaction financing will be available on favorable terms or at all when we make the decision to proceed with a financing transaction.


Outlook


Over-earnings-Natural Gas Segment

We recorded estimated 2006 over-earnings for the natural gas segment of $25,000. Interest accrued on this estimated over-earnings as of March 31, 2008 is $1,544. This liability is included in the over-earnings liability on our balance sheet. The calculations supporting these liabilities are complex and involve a variety of projections and estimates before the ultimate settlement of such obligations. Estimates may be revised as expectations change and factors become known and determinable.


Our 2006 estimates of our over-earnings liabilities could change upon the FPSC finalization of our earnings expected during 2008. The FPSC determines the disposition of over-earnings with alternatives that include refunds to customers, funding storm or environmental reserves, or reducing any depreciation reserve deficiency.


Medical Insurance

Insurance costs increased $49,000 in the first quarter of 2008 as compared to 2007.

We continue to experience medical claims which are significantly above average over the last several years. These high claims resulted in a significant increase to our plan cost which has increased our medical premiums each year. In an effort to better control these cost increases, the Company will be more proactive in identifying healthcare options that will help control our overall medical costs and strive to improve our employees’ health. We will be exploring various wellness programs that could meet these goals of reduced costs and improved employee health.


Land Purchases

We purchased land for $3.4 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 begin construction within the next 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 third 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

We filed a request with the FPSC in the third quarter of 2007 for a base rate increase in our electric segment. This request included recovery of increased expenses and capital expenditures since our last rate proceeding in 2004, as well as additional storm-related expenditures. Finalization of this request and FPSC approval of final permanent rates occurred on April 22, 2008.


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.


Electric Depreciation Study

On January 29, 2008, the FPSC approved new electric depreciation rates effective January 1, 2008 that are expected to increase annual depreciation expense by approximately $280,000 in 2008. The FPSC also recently approved recovery of this increased depreciation expense in our 2008 electric rate proceeding beginning May 22, 2008. Since the new final permanent base rates are not effective until May 22, 2008, a portion of the 2008 depreciation increase will not be recovered in 2008.


Asphalt Plant

A new commercial customer in our natural gas segment in the South Florida division is expected to be in service during the second quarter of 2008. The increase to annual gross profit from this new customer is expected to be approximately $86,000.


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 LOC 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 LOC, will be sufficient to satisfy our operating expenses, normal construction expenditure and dividend payments through 2008.

·

Our 2006 over-earnings liability in natural gas will materialize as estimated.

·

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 with ongoing impact to our customer growth rates, unit sales and sales expense.

·

We are unable to precisely estimate what impact the higher fuel rates could have on electric consumption but we expect there could be as much as a reduction of 10% in 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.

·

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 Asphalt customer will be in service by the expected date, and gross profit will increase as estimated.


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.


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 1/3 at market.  We are now fluctuating with the market or utilizing pre-purchased propane gas. As of March 31, 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 $9.7 million at the end of March 31, 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 March 31, 2008. Based on evaluation, our CEO and CFO have concluded that, as of March 31, 2008, our disclosure controls and procedures were effective in that they provide reasonable assurance that information required to be disclosed by us in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.


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 March 31, 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.



Item 6.

Exhibits


3.1

Amended Articles of Incorporation (incorporated herein by reference as Exhibit 3(i) to our quarterly report on Form 10-Q for the period ended June 30, 2002).


3.2

Amended By-Laws (incorporated herein by reference as Exhibit 3(ii) to our quarterly report on Form 10-Q for the period ended June 30, 2002).


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

Amended Security Agreement and Promissory Note between FPU and Bank of America dated March 21, 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.




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: May 14, 2008

By:  /s/ George M. Bachman

George M. Bachman

Chief Financial Officer

(Principal Accounting Officer)









FLORIDA PUBLIC UTILITIES COMPANY

EXHIBIT INDEX

Item Number


10.1

Amended Security Agreement and Promissory Note between FPU and Bank of America dated March 21, 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.







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