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
June 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)
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Florida
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59-0539080
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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401 South Dixie Highway,
West Palm Beach, Fl. 33401
(Address of principal executive offices)
(561) 832-0872
(Registrants 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
August 8, 2008, there were 6,195,384 shares of $1.50 par value common stock
outstanding.
IN
DEX
Part
I.
Financial
Information
Item 1.
Financial
Statements
Condensed Consolidated
Statem
ents of Income
Condensed Consolidated Sta
tements of Comprehensive Income
Condensed Consoli
da
ted
Balance Sheets
Condensed Consolidated Statements of
Cash Flows
Notes to Condensed
Consolidated Financial Statements
Item 2.
Managements 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 F
actors
Item 4.
Submission of Matters to
a Vote of Security Holders
Item 6.
Exhibits
Signatures
PART
I.
FINANCIAL
INFORMATION
Item
1.
Financial
Statements
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FLORIDA PUBLIC UTILITIES COMPANY
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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(Dollars in thousands, except share data)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Revenues
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Natural
gas
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$18,973
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$15,502
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$41,110
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$36,075
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Electric
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18,214
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13,135
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35,737
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26,493
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Propane
gas
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4,189
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3,831
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9,559
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8,512
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Total
revenues
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41,376
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32,468
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86,406
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71,080
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Cost of Fuel and
Other Pass Through Costs
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29,351
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20,699
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60,263
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45,468
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Gross
Profit
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12,025
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11,769
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26,143
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25,612
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Operating
Expenses
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Operation
and maintenance
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7,913
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7,443
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14,894
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14,616
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Depreciation
and amortization
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2,206
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2,031
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4,459
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4,103
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Taxes
other than income taxes
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764
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699
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1,637
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1,559
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Total
operating expenses
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10,883
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10,173
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20,990
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20,278
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Operating Income
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1,142
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1,596
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5,153
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5,334
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Other Income
and (Deductions)
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Merchandise
and service revenue
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534
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752
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1,256
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1,667
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Merchandise
and service expenses
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(591)
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(670)
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(1,215)
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(1,480)
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Other
income
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170
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145
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300
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296
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Interest
expense
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(1,195)
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(1,216)
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(2,418)
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(2,383)
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Total
other deductions net
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(1,082)
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(989)
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(2,077)
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(1,900)
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Earnings Before
Income Taxes
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60
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607
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3,076
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3,434
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Income tax
(expense) benefit
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21
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(197)
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(1,045)
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(1,226)
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Net Income
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81
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410
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2,031
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2,208
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Preferred Stock
Dividends
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7
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7
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14
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14
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Earnings For
Common Stock
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$74
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$403
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$2,017
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$2,194
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(Basic and
Diluted):
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Earnings
Per Common Share
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$0.01
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$0.07
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$0.33
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$0.36
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Dividends
Declared Per Common Share
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$0.1175
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$0.1125
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$0.2300
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$0.2200
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Average
Shares Outstanding
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6,078,446
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6,030,928
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6,075,005
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6,027,833
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These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.
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CONDENSED CONSOLIDATED S
TATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
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Three months ended June 30,
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Six months ended June 30,
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2008
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2007
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2008
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2007
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Net
income
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$81
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$410
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$2,031
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$2,208
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Other
comprehensive income
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Pension
and post retirement costs
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36
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41
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73
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80
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Income
tax expense on other
comprehensive
income
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(14)
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(15)
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(28)
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(30)
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Comprehensive
income
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$103
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$436
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$2,076
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$2,258
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These
financial statements should be read with the accompanying Notes to
Condensed Consolidated Financial Statements.
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FLORIDA PUBLIC UTILITIES COMPANY
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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
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(Dollars in thousands)
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June 30,
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December 31,
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2008
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2007
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ASSETS
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Utility
Plant
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Utility
Plant
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$206,693
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$202,384
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Less
Accumulated depreciation
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66,053
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64,012
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Net
utility plant
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140,640
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138,372
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Current
Assets
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Cash
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2,492
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3,478
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Accounts
receivable
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14,851
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12,269
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Allowance
for uncollectible accounts
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(363)
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(326)
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Unbilled
receivables
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1,923
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1,879
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Notes
receivable
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292
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298
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Inventories
(at average unit cost)
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4,476
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4,251
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Prepaid
expenses
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475
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861
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Under-recovery
of fuel
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9
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-
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Deferred
income taxes-current
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421
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949
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Income
tax prepayment
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505
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-
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Other
regulatory assets-environmental
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456
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456
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Deferred
charges-current
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356
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399
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Investments
held for environmental costs-current
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3,509
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3,444
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Total
current assets
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29,402
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27,958
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Other
Assets
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Other
regulatory assets-environmental
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6,903
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7,197
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Long-term
receivables and other investments
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5,466
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5,622
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Deferred
charges
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6,079
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6,360
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Goodwill
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2,405
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2,405
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Intangible
assets (net)
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4,253
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4,430
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Total
other assets
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25,106
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26,014
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Total
Assets
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$195,148
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$192,344
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These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.
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FLORIDA PUBLIC UTILITIES COMPANY
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(Dollars in thousands)
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June 30,
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December 31,
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2008
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2007
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CAPITALIZATION
AND LIABILITIES
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Capitalization
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Common
shareholders' equity
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$49,926
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$48,946
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Preferred
stock
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600
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600
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Long-term
debt
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47,995
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49,363
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Total
capitalization
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98,521
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98,909
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Current
Liabilities
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Line
of credit
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12,529
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11,122
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Accounts
payable
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11,941
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9,901
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Current
portion of long-term debt
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1,409
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1,409
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Insurance
accrued
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230
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218
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Interest
accrued
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629
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1,163
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Other
accruals and payables
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3,077
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2,729
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Environmental
Liability current
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588
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1,379
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Taxes
accrued
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2,693
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2,168
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Over-earnings
liability
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27
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26
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Over-recovery
of fuel costs and other
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1,839
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3,207
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Customer
deposits
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10,857
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10,547
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Total
current liabilities
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45,819
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43,869
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Other
Liabilities
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Deferred
income taxes
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15,766
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16,896
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Environmental
liability
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12,891
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12,250
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Regulatory
liability-storm reserve
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2,448
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2,387
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Regulatory
liabilities-other
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11,600
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10,719
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Other
liabilities
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8,103
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7,314
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Total
other liabilities
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50,808
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49,566
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Total
Capitalization and Liabilities
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$195,148
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$192,344
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These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.
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FLORIDA PUBLIC UTILITIES COMPANY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(Dollars in thousands)
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Six Months Ended
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June 30,
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2008
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2007
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Net cash provided
by operating activities
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$4,043
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$10,980
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Investing
Activities
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Construction
expenditures
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(5,749)
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(6,537)
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Proceeds
received on notes receivable
|
283
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|
371
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Other
|
92
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(150)
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Net
cash used in investing activities
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(5,374)
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(6,316)
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Financing
Activities
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Net
increase (decrease) in short-term borrowings
|
1,407
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(2,361)
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Dividends
paid
|
(1,345)
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(1,307)
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Other
increases
|
283
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|
235
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Net
cash provided by (used in) financing activities
|
345
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(3,433)
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Net (decrease)
increase in cash
|
(986)
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|
1,231
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Cash at beginning
of period
|
3,478
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|
84
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Cash at end of
period
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$2,492
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$1,315
|
These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.
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FLORIDA PUBLIC UTILITIES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 Companys 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 Companys 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 Companys electric segment received interim rate relief for
partial recovery of increased expenditures. These interim rates would produce
additional annual revenues of approximately $800,000 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 $3,900,000, with the new rates beginning May 22, 2008. These
revenues should provide an increase to the Companys 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 Companys utility plant and the shares of its wholly owned
subsidiary, Flo-Gas Corporation, collateralize the Companys First Mortgage
Bonds (long-term debt). Cash, accounts receivable and inventory are
collateral for the line of credit.
5.
Restriction
on Dividends
The
Companys Fifteenth Supplemental Indenture of Mortgage and Deed of Trust
restricts the amount that is available for cash dividends. At June 30, 2008,
approximately $10.2 million of retained earnings were free of such restriction
and available for the payment of dividends. The Companys 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 second quarter as of June 30:
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Allowance for Doubtful Accounts
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(Dollars in thousands)
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2008
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2007
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Bad
Debt Write-offs
|
$200
|
$135
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Bad
Debt Accrual Provision
|
$164
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$115
|
7.
Storm
Reserves
As
of June 30, 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 Companys 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 effective January 1, 2008
showed no impairment for either reporting segment.
Goodwill
associated with the Companys 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 June 30, 2008 and December 31, 2007, is as follows:
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Intangible Assets
(Dollars in thousands)
|
|
|
June 30,
2008
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December 31,
2007
|
Customer
distribution rights
|
(Indefinite
life)
|
$
1,900
|
$
1,900
|
Customer
relationships
|
(Indefinite
life)
|
900
|
900
|
Software
|
(Five to nine year
life)
|
3,532
|
3,499
|
Accumulated
amortization
|
(2,079)
|
(1,869)
|
Total
intangible assets, net of amortization
|
$
4,253
|
$ 4,430
|
The
amortization expense of intangible assets was approximately $106,000 and $88,000
for the three months ended June 30, 2008 and 2007, respectively, and $210,000
and $174,000 for the six months ended June 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 $315,000
for the six months ended June 30, 2008. Accumulated other comprehensive
income, comprised of the deferred cost of employee benefit plans, totaled
approximately $133,000 and $88,000 as of June 30, 2008 and December 31, 2007,
respectively. The change to other comprehensive income for the quarter ending
June 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 2008.
The
Company recorded estimated 2006 over-earnings for regulated natural gas
operations and subsequent interest accruals of $26,717. This over-earnings
liability is included in the over-earnings liability on the Companys
consolidated balance sheet as of June 30, 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 and 2008
overearnings liability is based on the Companys 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
|
$ 4,903
|
$ 18,130
|
Sanford
|
609
|
609
|
Pensacola
and Key West
|
121
|
121
|
Total
|
$ 5,633
|
$ 18,860
|
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.
The Company has recovered a total of
$6.1 million from insurance and rate recovery, net of costs incurred to date.
The remaining balance of $7.4 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
FPUC
completed field investigations for the contamination assessment task in October
2006. Thereafter, FPUC 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 FPUC and 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 was discussed at a meeting between FPUC and FDEP on
September 14, 2007. A revised feasibility study was submitted to FDEP
on June 30, 2008. FPUC is currently awaiting FDEP's comments to the
response.
Based
on the information provided in the feasibility study, remaining legal fees/costs
are currently projected to be approximately $272,700. Consulting/remediation
costs are projected to range from $4.6 million to $17.9 million. Thus,
FPUC'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 FPUC,
notifying FPUC, 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 FPUC, "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, FPUC and other members of the
Sanford Group signed a Third Participation Agreement, which
provides for funding the final remedy approved by EPA for the site.
FPUC's share of remediation costs under the Third Participation
Agreement is set at five percent (5%) of a maximum of $13 million ($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. FPUC has advised the other members of the
Sanford Group that FPUC is unwilling at this time to agree to pay any sum in
excess of the $650,000 committed by FPUC in the Third Participation
Agreement.
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. FPUC's share of the initial call for funds was $100,000 (5% of $2
million), which was paid by FPUC 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.
The
Sanford Group is currently negotiating 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. CPM has
advised the Sanford Group that CPM will incur damages as a result of the remedy
and has demanded that the Sanford Group compensate CPM for such damages.
The Sanford Group has offered a settlement package to CPM that would require the
Sanford Group to purchase the CPM property for approximately $2 million.
FPUC contends that it should not be required to participate in the funding of
this settlement based on the absence of any contribution by FPUC of contaminants
to the site. At present, FPUC does not plan on participating financially
in the settlement with CPM.
Remaining
legal fees/costs are currently projected to be approximately
$59,000. FPUC's remaining obligation under the Third Participation
Agreement is $550,000. Thus, FPUC's total probable legal and cleanup
costs for the Sanford MGP site are currently projected to
be approximately $609,000.
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 Companys 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 (ESI). The ESI was completed by EPAs 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 EPAs 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 EPAs 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/remediation
costs are projected to be $24,600, legal fees/costs are projected to be $3,700,
for total probable costs for the Pensacola MGP site of $28,300.
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 June 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 PCAR, the
Companys share of remediation expenses, plus attorneys 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 examinations.
We reclassified the tax liability recognized in 2007 as it relates
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. 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 has amended its 2004 federal and Florida corporate income tax returns to
reflect the IRS audit adjustments.
In
July 2008, the IRS began their examination of our 2005 and 2006 tax years.
We anticipate our unrecognized tax benefits may increase or decrease; however,
since 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.
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 six months
ended June 30, 2007 and 2008.
|
|
|
|
|
|
|
|
|
FLORIDA PUBLIC UTILITIES COMPANY
|
Net Periodic Benefit Costs
|
(Dollars in
thousands)
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
Pension Plan:
|
|
|
|
|
|
|
|
Service
Cost
|
$
249
|
|
$
283
|
|
$
522
|
|
$
566
|
Interest
Cost
|
712
|
|
566
|
|
1,354
|
|
1,132
|
Expected Return on
Plan Assets
|
(653)
|
|
(610)
|
|
(1,301)
|
|
(1,220)
|
Amortization of
Prior Service Cost
|
176
|
|
184
|
|
360
|
|
368
|
Net
Periodic Pension Cost
|
$
484
|
|
$
423
|
|
$
935
|
|
$
846
|
|
|
|
|
|
|
|
|
Postretirement
Benefit Plan:
|
|
|
|
|
|
|
|
Service
Cost
|
$
14
|
|
$
16
|
|
$
28
|
|
$
32
|
Interest
Cost
|
34
|
|
26
|
|
59
|
|
52
|
Amortization of
Transition Obligation/(Asset) Obligation/(Asset)
|
11
|
|
11
|
|
22
|
|
22
|
Amortization of
Net (Gain) or Loss
|
1
|
|
(5)
|
|
(12)
|
|
(10)
|
Net
Periodic Postretirement Benefit Cost
|
$
60
|
|
$
48
|
|
$
97
|
|
$
96
|
|
|
|
|
|
For
additional information related to our employee benefit plans, please see Notes
to Consolidated Financial Statements in the Companys Form 10-K for the year
ended December 31, 2007. Approximately 79% 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 $132,982, net of
income tax effect of $80,229, at June 30, 2008 compared to a gain of $87,528,
net of income tax effect of $52,806, 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 entitys 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.
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 Companys operations in each business
segment. Common assets are principally cash and overnight investments,
deferred tax assets and common plant.
Business
segment information at June 30, 2008, and December 31, 2007 is summarized as
follows:
|
|
|
|
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
Identifiable
assets
|
|
|
|
|
|
Natural
gas
|
$
|
100,515
|
$
|
99,295
|
|
Electric
|
|
58,015
|
|
54,202
|
|
Propane
gas
|
|
19,052
|
|
19,371
|
|
Common
|
|
17,566
|
|
19,476
|
|
Consolidated
|
$
|
195,148
|
$
|
192,344
|
|
Business
segment information for the quarter ending and six months ending June 30, 2008,
and June 30, 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
$
|
18,973
|
$
|
15,502
|
$
|
41,110
|
|
$
|
36,075
|
|
Electric
|
|
18,214
|
|
13,135
|
|
35,737
|
|
|
26,493
|
|
Propane
gas
|
|
4,189
|
|
3,831
|
|
9,559
|
|
|
8,512
|
|
Consolidated
|
$
|
41,376
|
$
|
32,468
|
$
|
86,406
|
|
$
|
71,080
|
|
Operating
income, excluding income tax
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
$
|
225
|
$
|
834
|
$
|
2,617
|
|
$
|
3,273
|
|
Electric
|
|
866
|
|
422
|
|
1,601
|
|
|
997
|
|
Propane
gas
|
|
51
|
|
340
|
|
935
|
|
|
1,064
|
|
Consolidated
|
$
|
1,142
|
$
|
1,596
|
$
|
5,153
|
|
$
|
5,334
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
$
|
1,129
|
$
|
1,082
|
$
|
2,317
|
|
$
|
2,208
|
|
Electric
|
|
796
|
|
674
|
|
1,583
|
|
|
1,343
|
|
Propane
gas
|
|
203
|
|
200
|
|
404
|
|
|
406
|
|
Common
|
|
78
|
|
75
|
|
155
|
|
|
146
|
|
Consolidated
|
$
|
2,206
|
$
|
2,031
|
$
|
4,459
|
|
$
|
4,103
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
$
|
(172)
|
$
|
71
|
$
|
407
|
|
$
|
706
|
|
Electric
|
|
171
|
|
18
|
|
313
|
|
|
141
|
|
Propane
gas
|
|
(46)
|
|
47
|
|
230
|
|
|
241
|
|
Common
|
|
26
|
|
61
|
|
95
|
|
|
138
|
|
Consolidated
|
$
|
(21)
|
$
|
197
|
$
|
1,045
|
|
$
|
1,226
|
|
Construction
expenditures
|
|
|
|
|
|
|
|
|
|
|
Natural
gas
|
$
|
1,599
|
$
|
1,894
|
$
|
2,854
|
|
$
|
3,572
|
|
Electric
|
|
839
|
|
1,059
|
|
2,331
|
|
|
1,974
|
|
Propane
gas
|
|
280
|
|
327
|
|
466
|
|
|
702
|
|
Common
|
|
62
|
|
170
|
|
98
|
|
|
289
|
|
Consolidated
|
$
|
2,780
|
$
|
3,450
|
$
|
5,749
|
|
$
|
6,537
|
|
17.
Reclassification
Certain
amounts in the 2007 financial statements have been reclassified to conform to
the 2008 presentation.
Item
2. Managements 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.
The
slump in the economy and higher prices for fuel and other commodities have
contributed to conservation measures taken by our customers and the reduction in
units sold in 2008 compared to 2007.
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
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 slowdown and management expects
current conditions to continue through 2008 with an ongoing impact to our
customer growth rates, unit sales and sales expense. In addition,
earnings for 2008 are lower for the quarter and year to date ending June 30,
2008 compared to these same periods in 2007 primarily because of nonrecurring
professional fees and expenses incurred in the second quarter 2008 of
approximately $500,000 related to strategic development activity no longer
ongoing. The impact to net income for the effects of these nonrecurring
administrative and general expenses is $304,000 after income taxes or $.05 per
share for the quarter and year to date ending June 30, 2008. 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
and units in thousands)
|
Three
Months Ended
June
30,
|
|
Six Months Ended
June
30,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Natural
Gas
|
|
|
|
|
|
|
|
Revenues
|
$18,973
|
|
$15,502
|
|
$41,110
|
|
$36,075
|
Cost
of fuel and other pass through costs
|
12,846
|
|
9,168
|
|
26,928
|
|
21,690
|
Gross
Profit
|
$
6,127
|
|
$
6,334
|
|
$14,182
|
|
$14,385
|
Units sold:
(MDth)
|
1,318
|
|
1,447
|
|
3,179
|
|
3,287
|
Customers (average
for the period)
|
52,130
|
|
51,737
|
|
52,148
|
|
51,747
|
Electric
|
|
|
|
|
|
|
|
Revenues
|
$18,214
|
|
$13,135
|
|
$35,737
|
|
$26,493
|
Cost
of fuel and other pass through costs
|
13,994
|
|
9,590
|
|
27,853
|
|
19,489
|
Gross
Profit
|
$
4,220
|
|
$
3,545
|
|
$7,884
|
|
$7,004
|
Units sold:
(MWH)
|
188,421
|
|
200,298
|
|
361,697
|
|
385,934
|
Customers (average
for the period)
|
31,294
|
|
31,066
|
|
31,258
|
|
31,004
|
Propane
Gas
|
|
|
|
|
|
|
|
Revenues
|
$
4,189
|
|
$
3,831
|
|
$9,559
|
|
$8,512
|
Cost of
fuel
|
2,511
|
|
1,941
|
|
5,482
|
|
4,289
|
Gross
Profit
|
$
1,678
|
|
$
1,890
|
|
$
4,077
|
|
$
4,223
|
Units sold:
(MDth)
|
128
|
|
143
|
|
298
|
|
335
|
Customers (average
for the period)
|
12,536
|
|
13,274
|
|
12,602
|
|
13,327
|
Consolidated
|
|
|
|
|
|
|
|
Revenues
|
$41,376
|
|
$32,468
|
|
$86,406
|
|
$71,080
|
Cost of
fuel
|
29,351
|
|
20,699
|
|
60,263
|
|
45,468
|
Gross
Profit
|
$12,025
|
|
$11,769
|
|
$26,143
|
|
$25,612
|
Customers (average
for the period)
|
95,960
|
|
96,077
|
|
96,008
|
|
96,078
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 Compared with Three Months
Ended June 30, 2007.
Revenues
and Gross Profit
Natural
Gas
Natural
gas service revenues increased $3.5 million, or 22%, in the second 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.
Although
customers increased marginally due to the conversion of approximately 500
customers in our Central Florida division from propane to natural gas, gross
profit declined by 3% primarily due to reduced unit sales per customer.
Management believes the 9% decline in unit sales and decrease in usage per
customer possibly relates to conservation measures taken by our customers as a
result of the recent 40% fuel cost increases and overall downturn in the
economy.
Electric
Electric
revenues increased $5.1 million in the second quarter of 2008 over the same
period in 2007.
Higher cost of fuel and other costs
that were passed through to customers accounted for $4.4 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 $675,000 or 19% compared to the second 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 slightly
impacting gross profit were a 1% increase in customer growth, offset by a 3%
decrease in usage per customer, excluding two large industrial customers.
Management believes the decrease in usage per customer possibly relates to
conservation measures taken by our customers as a result of the recent increases
in fuel and base rates.
Propane
Gas
Propane
revenues increased $358,000 in the second quarter of 2008 compared to the same
period in 2007. Cost of gas sold increased by $570,000 and
contributed to the increase in revenue; however, units sold decreased by 10% and
gross profit declined by $212,000.
The
decrease in units sold is due in part to the recent conversion of approximately
500 customers in our Central Florida division from propane to natural gas.
This decrease in customers and units sold along with increased fuel costs,
a $108,000 inventory loss adjustment, lower profit margins on commercial bulk
accounts, and possible conservation measures taken by our customers contributed
to the decrease in gross profit.
Operating
Expenses
Operating
expenses increased $710,000 in the second quarter of 2008 as compared to the
same period in 2007. Administrative and general expenses increased by
$528,000, 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.
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. Sales expense
for the quarter was lower than this same period in 2007.
New
plant additions in our operating segments, along with increased electric
depreciation rates that were effective January 1, 2008 increased depreciation
expense by $175,000 in the second quarter of 2008 compared to the same period in
2007.
Other
Income and Deductions
Merchandise
and service revenues and expense decreased by $218,000 and $79,000 respectively
in the second 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 second quarter of 2008 compared
to the same period last year.
Six
Months Ended June 30, 2008 Compared with Six Months Ended June 30,
2007.
Revenue
and Gross Profit
Natural
Gas
Natural
gas service revenues increased $5.0 million in the six months ended June 30,
2008 over the same period in 2007. As the cost of natural gas continues to
increase, revenues to recover our cost of fuel and other costs passed through to
customers increased by $5.2 million.
Our
gross profit decreased by $203,000 or 1%. The decrease in gross profit is
attributable to a 3% decrease in units sold in 2008 due primarily to warmer
weather and lower usage per customer, possibly due to increased fuel costs
passed through to our customers and the down-turn in the housing market and
economy as a whole.
Customers
increased by 1% due to the recent conversion of approximately 500 customers in
our Central Florida division from propane to natural gas.
Electric
Electric
service revenues increased by $9.2 million in the six months ended June 30, 2008
over the same period in 2007. Primarily all of the increase was
attributable to the cost of fuel and other costs of $8.4 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 $880,000 compared to the six months ending June 30, 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 1% decrease in units sold as a result of warmer
weather and possible conservation measures taken by our customers due to the
recent fuel and base rate increases.
Propane
Gas
Propane
revenues increased by $1.0 million in the six months ended June 30, 2008
compared to the same period in 2007. The cost of fuel that was passed through to
our customers accounted for the revenue increase as gross profit actually
decreased by 3% and unit sold decreased by 11%.
Lower
profit margins on commercial bulk accounts, warmer weather, and possible
customer conservation due to the downturn in the economy contributed
significantly to this gross profit reduction. 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 $712,000 in the six months ended June 30, 2008 compared
to the same period in 2007. Administrative and general expenses increased by
$575,000 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.
Sales
expense decreased $253,000 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 $356,000 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 $411,000 in the six months ended June 30, 2008
compared to the same period last year. This was offset by a decrease in cost of
merchandise and services of $265,000. The decrease in revenue was a result of
the slowdown of new construction projects during the current downturn 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 six months ended June 30, 2008 by $181,000 over the
same period last year primarily due to lower taxable book income.
Liquidity
and Capital Resources
Cash
Flows
Operating
Activities
Net
cash flow provided by operating activities for the six months ended June 30,
2008 decreased by approximately $6.9 million over the same period in 2007.
The timing of the receipt of increased customer
accounts receivables due to the recent fuel price increases, offset by the
increased accounts payables from the fuel price increases significantly
contributed to this decrease. The over-recovered fuel costs collected in 2007
and subsequently refunded in 2008 accounted for approximately $1.4 million of
the decrease in the current years net cash flow as compared to the prior
year.
Investing
Activities
Construction
expenditures in the six months ended June 30, 2008 decreased by $788,000
compared to the same period last year. This decrease is due primarily to
reduced expenditures for distribution facilities and installations of
approximately $1.1 million as a result of the slowdown in the construction
industry and economy.
Additionally, decreases of $545,000 for transportation
equipment, computer, and the mapping system contributed to this change from the
prior year. Offsetting these decreases, expenditures for the six months
ending June 30, 2008 included approximately $826,000 for a 2008 replacement
transformer at the Northeast Florida electric division.
Financing
Activities
Short-term
loan borrowings increased by $1.4 million during the six months ended June 30,
2008. Cash increases from additional draws under the line of credit for
operations were offset by a cash payment for dividends in the amount of $1.3
million. As of June 30, 2008, our line of credit was $12.5 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. Effective April 29, 2008, we increased the 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 June 30, 2008, the amount borrowed
on the line of credit was $12.5 million. The line of credit, long-term debt and
preferred stock as of June 30, 2008 comprised 56% 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 June 30,
2008, such calculation would permit the issuance of approximately $49 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.
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 the
same period in 2007 by approximately $3.7 million. 2007 included a non-recurring
expenditure of $3.5 million to purchase land for a new South Florida
operations facility.
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 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 $226,000 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 began 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 of $278,000 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.
Based
on our current expectations management believes that the cash available, the
line of credit and cash from operations will be sufficient for the next twelve
months. In the future we may choose to consider equity or debt financing and 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 it is
possible we may need to raise additional funds in the second half of 2009.
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 June 30, 2008 is $1,717.
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 approximately $76,000 in the first six months 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
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.
Asphalt
Plant
A
new commercial customer in our natural gas segment in the South Florida division
is expected to be in service during the fourth quarter of 2008. The increase to
annual gross profit from this new customer is expected to be approximately
$86,000.
Propane
Company Asset Purchase
We
expect to purchase most of the assets and materials of a propane company located
in Central Florida for approximately $140,000 in the third or fourth quarter of
2008. This purchase is expected to increase our annual gross profit by
approximately $65,000 and our customers by approximately 400.
Bankruptcy
and Bad Debt
A
large commercial customer in our natural gas segment located in South Florida
has filed for Chapter 11 bankruptcy in August 2008. We expect to accrue for this
bad debt on their accounts receivable for approximately $170,000 as of June 30,
2008 in the third quarter of 2008. We may receive partial recovery from the
bankruptcy courts on this receivable. The estimated annual base revenue for this
customer is approximately $31,000.
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 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.
·
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.
·
The
Propane Asset purchase in Central Florida will occur as expected.
·
The
Natural Gas Rate Proceeding will be filed by the end of 2008. 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
purchase of land will occur as expected in Central Florida in the third quarter
of 2008.
·
The
new electric depreciation rates are expected to increase annual depreciation
expense by approximately $280,000 in 2008.
·
Capital
expenditures are expected to be lower for the remainder of 2008 compared to the
same period in 2007 by approximately $3.7 million.
·
The
South Florida operations facility will begin construction as anticipated.
·
The
bankruptcy will result in additional write-offs and bad debt expense as
anticipated.
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
one-third at market. We are now fluctuating with the market or utilizing
pre-purchased propane gas. As of June 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 $12.5 million at the end of June 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 June 30, 2008. Based on that evaluation, our CEO and CFO have
concluded that, as of June 30, 2008, our disclosure controls and procedures were
effective.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in the Companys internal control over financial
reporting during the fiscal quarter ended June 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the Companys 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 Companys 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
4.
Submission of Matters to a Vote of Security Holders
The
Company held its annual meeting of stockholders on May 13, 2008. At that
meeting, the stockholders were asked to consider and act on the following:
·
Election
of two 2 directors
·
Approve
an amendment to the Companys Employee Stock Purchase Plan to increase the
number of shares of common stock available in this Plan by 125,000 shares
·
Ratification
of the appointment of BDO Seidman, LLP, as the Companys independent registered
certified public accounting firm
Each
of the following directors was reelected for a term expiring in 2010 and
received the number of votes set forth opposite his name:
|
|
|
|
|
Nominee
|
For
|
Against/Withheld
|
Broker Non-votes
|
Abstentions
|
Paul
L. Maddock, Jr.
|
5,033,708
|
428,507
|
0
|
0
|
Dennis
S. Hudson III
|
5,040,936
|
421,278
|
0
|
0
|
The
following votes were cast in respect of the amendment to the Companys Employee
Stock Purchase Plan and the appointment of the Companys independent registered
certified public accounting firm, BDO Seidman, LLP:
|
|
|
|
|
|
For
|
Against/Withheld
|
Broker Non-votes
|
Abstentions
|
Amendment to ESPP
|
3,247,079
|
609,398
|
1,569,191
|
36,547
|
Ratification of BDO Seidman, LLP
|
5,403,767
|
35,440
|
0
|
23,027
|
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).
3.3
Amendment
to Articles of Incorporation increasing the number of authorized shares of
common stock, $1.50 par value per share, from 6,000,000 to 10,000,000
shares.
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).
10.2
Physical
Sale Agreement between FPU and Inergy Propane, LLC dated May 1, 2008. *
10.3
Network
Operating Agreement between FPU and Southern Company Services, Inc. for the
transmission of power purchased from Gulf Power Company, dated June 9, 2008.
10.4
Network
Integration Transmission Service Agreement between FPU and Southern Company
Services, Inc. for the transmission of power purchased from Gulf Power Company,
dated June 9, 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.
*Confidential
treatment requested for portions of this agreement.
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:
August14, 2008
By:
/s/ George M. Bachman
George
M. Bachman
Chief
Financial Officer
(Principal
Accounting Officer)
FLORIDA PUBLIC UTILITIES COMPANY
EXHIBIT INDEX
Item
Number
3.3
Amendment
to Articles of Incorporation increasing the number of authorized shares of
common stock, $1.50 par value per share, from 6,000,000 to 10,000,000
shares.
10.2
Physical
Sale Agreement between FPU and Inergy Propane, LLC dated May 1, 2008. *
10.3
Network
Operating Agreement between FPU and Southern Company Services, Inc. for the
transmission of power purchased from Gulf Power Company, dated June 9, 2008.
10.4
Network
Integration Transmission Service Agreement between FPU and Southern Company
Services, Inc. for the transmission of power purchased from Gulf Power Company,
dated June 9, 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.
*Confidential
treatment request for portions of this agreement.
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