Florida Public Utilities Company (FPU)

Pension and Insurance Expenses

Insurance costs have been increasing and are expected to continue to increase while we expect pension costs to decrease.  Pension expenses increased $203,000 in 2006 and our actuarial estimates show pension expense increasing by an additional $90,000 in 2007.  Insurance expenses including Medical, Liability and Workers’ Compensation increased $70,000 in 2006 and are expected to increase further in 2007.

The regulated segments received rate relief for some of the historical pension and insurance increases in 2003 and 2004.  Increases beyond those experienced through 2005, which are allocated to the regulated segments, may require requesting future rate relief.  The propane gas segment may recover these expenses by increasing rates, depending on market conditions in the propane gas industry and the ability to remain competitive.

In an effort to keep pension expenses low, we discontinued eligibility to our pension plan for all new hires.

For new hires not eligible for the defined benefit pension plan, we established an employer match to the employee’s contribution to their 401K plans. It provided for a company match of 50% for each dollar contributed by the employee, up to 6% of their salary, for a company contribution of up to 3%. Beginning in 2007, for non-union employees the plan was enhanced to provide a company match of 100% for the first 2% of an employee’s contribution, and a match of 50% for the next 4% of an employee’s contribution, for a total company match of up to 4%. This new enhanced match will be negotiated with our six union contracts during 2007, to be effective on their respective contract date within 2007. The employees are eligible for the company match after six months of continuous service, with vesting of 100% after three years of continuous service.

Pension and Insurance Expenses

Pension and Insurance costs have been and are expected to continue to increase.  Pension expenses increased in 2005 by $274,000 and current actuarial estimates show pension expense will increase an additional $203,000 in 2006.  Pension expenses are projected to continue increasing in 2007.  Insurance expenses including Medical, Liability and Workers’ Compensation, increased by $130,000 in 2005 and are expected to increase further in 2006.

The regulated segments have received rate relief for some of the expected pension and insurance increases.  Increases beyond those experienced through 2004 and 2005, which are allocated to the regulated segments, may require requesting future rate relief.  The propane segment may recover these expenses by increasing rates depending on market conditions in the propane industry and the ability to remain competitive.

Due to significant cost increases for our defined benefit pension plan over the past three years and with expectations that these cost increases will continue in the years ahead, we discontinued eligibility to our pension plan for all new non-union hires effective January 1,

2005 and are phasing out the plan for new union members. Five of our six union contracts have accepted this change for their new union members, and we intend to negotiate this issue in the remaining union contract in June of 2006.

For those new hires no longer eligible for the defined benefit pension plan, we have established a 401K plan with match contributions. The 401K provides a company match of 50 cents for every dollar contributed by an employee on the first 6% of their salary, for a total annual company contribution of up to 3%.  The employees are eligible for the company match after six months of continuous service, with vesting of 100% after three years of continuous service.