Back to GetFilings.com

For the transition period from                                  to                                 

Commission file Number 1-1055

Florida Public Utilities Company

(Exact name of registrant as specified in its charter)

PART I

Item 1.  

Business

General

Florida Public Utilities Company ("FPU") was incorporated on March 6, 1924 and reincorporated on April 29, 1925 under the 1925 Florida Corporation Law.  FPU provides natural gas, electricity and propane gas to retail and commercial customers in Florida.  FPU’s regulated segment sells natural gas and electricity to 74,582 customers in Central, Northeast, Northwest and Southern Florida.  FPU’s unregulated segment operates through its wholly owned subsidiary, Flo-Gas Corporation, which sells propane gas to 12,413 customers throughout the State of Florida.  FPU formerly provided water to customers in Fernandina Beach, Florida; however, the water assets were sold in 2003 to the City of Fernandina Beach, Florida.

In 2001, FPU started a proactive process to look for opportunities to purchase small energy related companies, particularly propane gas companies, to assist in its growth.  In 2001, two acquisitions added approximately 7,300 customers and in 2002, one acquisition added approximately 1,200 customers.  The cost of each of these acquisitions was less than 10% of FPU's assets and they provide less than 10% of FPU's revenues and operating income, excluding income taxes.  There were no acquisitions in 2003.

Information about Segments

FPU is organized in three operating and reporting segments: natural gas; electric; and propane gas.  FPU believes that this operating structure is a natural division of its business segments and allows it to maximize synergies within existing operating units.  The following is a brief description of each of FPU's operating segments:

•

Natural Gas- FPU purchases natural gas from the Florida Gas Transmission (FGT) pipeline system and provides natural gas services to customers in Central and South Florida.

•

Electric- FPU purchases electricity from Southern Company and JEA (formerly Jacksonville Electric Authority) and provides electric services to customers in Northwest and Northeast Florida.

•

Propane Gas- FPU purchases propane gas from multiple wholesale suppliers and provides propane gas services to customers in South, Central, West Central and Northeast Florida.

The following table sets forth certain selected financial information for each of FPU's three operating segments:

(1)  Prior periods have been restated to conform to SFAS No. 143 (for additional information, see "Impact of     Recent Accounting Standards" in the Notes to Consolidated Financial Statements).

Description of Business

FPU provides electric, natural gas and propane gas distribution services to Florida consumers.  The natural gas and electric operations are regulated by the Florida Public Service Commission (FPSC); the propane gas operations are not regulated.  FPU operates through five divisions which served the following number of customers as of December 31, 2003: (1) the South Florida division, which provided natural gas to 30,654 customers and propane gas to 6,172 customers in Palm Beach, Martin and Broward Counties; (2) the Central Florida division, which provided natural gas to 16,886 customers and propane gas to 2,617 customers in Lake, Seminole, Orange and Volusia Counties; (3) the Northwest Florida division, which provided electricity to 12,598 customers in Jackson, Calhoun and Liberty Counties; (4) the Northeast Florida division, which  provided electricity to 14,444 customers and propane gas to 1,394 customers in Duval and Nassau Counties; and (5) the Nature Coast division, which provided propane gas to 2,230 customers in Levy, Citrus, Hernando, Marion and Pasco Counties.

FPU formerly also provided water to customers in Nassau County.  On March 27, 2003, FPU sold the assets of its water utility system to the City of Fernandina Beach.  For additional information on this disposition, see "Discontinued Operations" in the Notes to Consolidated Financial Statements.

The economy in which the South Florida division operates relies somewhat on the migration of seasonal residents and tourists during the winter season.  However, small, year-round commercial and residential customers provide some degree of stability, lessening the impact of seasonality in the area.

Seasonal residents and tourists also play a role in the results of the Central Florida division.  However, the I-4 corridor, particularly in Seminole County’s Lake Mary/Heathrow area, is producing a growing number of large business parks, individual corporate buildings and call centers, which may help stabilize results in the Central Florida division.  Volusia County’s economy is dominated by small and privately owned businesses, with the major employers being Progress Energy and Florida Power & Light which own and operate three power plants in the area.

The Northwest division’s growth relies on the economies in Jackson, Calhoun and Liberty Counties.  All three of those counties are dependent upon a variety of agricultural industries mainly involved with timber, peanuts, cotton and beef production.  However, the largest employers within the three counties are the Federal, State and County governments’ correction and rehabilitation centers.  A new 907,000 square foot Family Dollar distribution center will be constructed in 2004.  The construction is scheduled to be complete in late fall with merchandise distribution beginning in January 2005.  There are also a number of smaller industries in the division’s territory.

In the Northeast division, the economy is centered around two large paper mills, Rayonier, Inc. and Jefferson Smurfit Corp.  In 2003, the two large paper mills accounted for 8.9% of the electric segment's total operating revenues and 3.4% of FPU's total operating revenues, as well as 3.9% of the electric segment's total gross profit and 1.2% of FPU's total gross profit.

FPU does not produce energy and is therefore not a generating utility.  As a result, FPU's operations are not currently subject to the extensive environmental regulations applicable to energy producers.  However, FPU is involved in several environmental proceedings related to properties owned by FPU.  See "Contingencies" in the Notes to Consolidated Financial Statements.

Natural Gas

FPU receives all of its supply of natural gas at 13 City Gate Stations connected to Florida Gas Transmission Company's (FGT) pipeline system.  Enron Corporation’s former interest in FGT has been disposed of.  Natural gas is primarily composed of methane, which is a colorless, odorless fuel that burns cleaner than many other traditional fossil fuels.  Odorant, which enables one to readily detect a gas leak, is added by the Interstate Transmission Company and FPU.  Natural gas is one of the most popular forms of energy today.  It is used for heating, cooling, cooking, production of electricity and in many other ways by various industries.  Increasingly, natural gas is being used in combination with other fuels to improve their environmental performance and decrease pollution. 

FPU has adequate gate stations in each distribution system to ensure high levels of continuous service to its customers.  The vast majority of the natural gas FPU distributes is purchased in the Gulf Coast region both on-shore and offshore.  FPU has not experienced any supply availability issues or shortages of natural gas in recent history, nor does it expect any shortages in the foreseeable future.  In fact, the U.S. Department of Energy estimates that there is more than a 60-year supply of natural gas reserves (for more information, see web site:http://www.faircount.com/web04/energy/pdfs/power.pdf -page 5).  

FGT is the sole natural gas pipeline serving FPU in peninsular Florida and is under the jurisdiction of the Federal Energy Regulatory Commission (FERC).  FPU uses FGT solely as a carrier of natural gas.  All gas supplies for FPU's traditional sales markets are independently procured by FPU using gas marketers and producers.  FPU also transports natural gas for customers who purchase their own gas supplies and arrange for pipeline transportation. 

FPU has continued to be in full compliance with the North American Energy Standard Board’s (NAESB) standards.  The NAESB was formed to develop uniform standards for the procurement, scheduling, transmission, invoicing, etc. of energy (natural gas and electricity) throughout the United States.  

FPU has gained experience directly contracting for gas supplies with marketers and producers while contracting for transportation services from FGT.  This experience has positioned FPU to be most effective in operating within an unbundled industry environment.  FPU passes all fuel costs and associated savings on to its traditional sales customers.  Additionally, FPU has actively reduced demand charges it pays for the pipeline capacity by "subletting" unused capacity, for short terms, to other shippers on FGT’s system.  FPU believes it is among Florida’s lowest cost suppliers of natural gas.

During 2003, FPU made "off-system sales" of natural gas to customers in areas of Florida not in FPU’s service territory.  The tariff for these sales permits for profit sharing between FPU and its customers.  FPU has ceased its activity in off-system sales due to the risk associated with servicing these customers. Specifically, the natural gas market is in a period of increased price volatility, thus causing general price level increases above what has been historically experienced.  As a result, the return on these off-system sales transactions did not justify the risk associated with carrying significantly higher customer account balances and the potential for bad debt.  FPU continues to maintain the off-system sales service rate schedule in its tariff and may explore opportunities for future sales if they arise.  

Factors that affect FPU's natural gas revenues include the rates charged to customers, FPU’s supply cost for natural gas purchased for resale, economic conditions in FPU’s service areas and weather.  The weather can result in higher gas sales per day during the winter period, when gas is  used for heating, as opposed to the summer season.  Although the rules of the FPSC permit FPU to pass through to customers the price incurred for its gas supply, increases in FPU’s rates may cause customers to conserve or to use alternative energy sources.  FPU's current portfolio of customers is reasonably diverse, with the largest customers using natural gas for the generation of electricity.   FPU is not dependent on any single natural gas customer for over ten percent of its total revenue. 

FPU provides unbundled gas service to its commercial natural gas customers, providing such customers with the option to purchase their natural gas supplies directly from FPU or from third parties while contracting for transportation services from FPU.   FPU’s operating results are not adversely affected if the customer purchases its gas from FPU or from third parties because actual fuel costs are passed directly to customers and FPU does not profit on fuel sales. FPU officially first offered unbundled services to commercial customers on August 1, 2001.  The FPSC approved various mechanisms that will allow FPU to be reimbursed for the incremental cost of providing unbundled services.

Electric

FPU provides electricity in the Northwest and Northeast divisions to customers in Jackson, Calhoun, Liberty and Nassau Counties in Florida.  Wholesale electricity is purchased from two suppliers, Southern Company and JEA, formerly the Jacksonville Electric Authority.  In 1996, long term fixed price purchased power contracts were executed with both suppliers that will continue through 2007.  Southern Company provides electric power to the Northwest division and JEA provides electric power to the Northeast division.  Less than 1% of FPU's power supply is purchased on an as available basis from a self-generating paper mill located in Fernandina Beach.  These long-term contracts allow FPU to offer customers what it believes are among the lowest consumer electric rates in the State of Florida.

Both the Northwest and Northeast divisions are located in Northern Florida and experience a variety of weather patterns.  Hot summers and cold winters produce electric sales that are not highly seasonal in nature.

No customer of the electric segment represents more than ten percent of FPU’s revenues.

The electric utility industry has not been deregulated in the State of Florida.  All customers within a given service or franchise area purchase from the single electricity provider in that area.

Propane Gas

FPU purchases its supply of propane gas from several different wholesale companies, including Dynegy- Gas Liquids Division, Inergy Propane LLC, Propane Resources, Sea3 of Tampa and Harper Industries.  Propane gas is delivered to Florida by ocean-going barges to seaport terminals in Tampa and Ft. Lauderdale, by railcars and through the Dixie Pipeline terminus at Alma and Albany, Ga. FPU believes that the propane gas supply infrastructure is adequate to meet the needs of the industry in Florida for the foreseeable future.

Propane gas is a non-pollutant and is therefore not as affected by environmental regulations as other petroleum products are.  Propane gas is a hazardous material and as such is subject to strict code enforcement and safety requirements as outlined in the National Fire Protection Association (NFPA) Code 58, Florida Model Building Code, NFPA 54 and various other state and local codes.

As with natural gas, the sales volume of propane gas is affected by the season and the weather.  Florida typically has a tourist season that coincides with the winter months; propane gas sold during that period is affected by tourism and the weather. The propane gas segment's sales volumes and revenues are closely balanced between residential and commercial customers.  Two of the strategies FPU is employing to become less weather dependant are concentrating on the burgeoning forklift propane gas cylinder exchange market and the marketing for propane gas using appliances that are not used for heating air.  FPU believes that water heaters and forklift cylinder exchange accounts are good ways to strive toward becoming less weather reliant.  No customer of the propane gas segment represents more than ten percent of FPU’s sales volume or revenues.

Competition in the propane gas business helps FPU provide its customers with low rates.  The propane gas division competes directly with other propane gas and natural gas suppliers and electric companies.  Major consolidation in the propane gas industry has and will continue to provide FPU with opportunities to expand its market share.  FPU competes on the basis of competitive pricing and customer service.

Regulation

The natural gas and electric segments are highly regulated by the FPSC.  Increases in the operating expenses of the regulated segments may require FPU to request increases in the rates charged to customers.  The FPSC has granted FPU the flexibility of automatically increasing expenses passed on to customers for certain fuel costs.  Other operational expenses, such as pension and medical expenses, require FPU to petition the FPSC for rate increases.  The FPSC is likely to grant rate increases to off-set increased expenditures necessary for business operations.  FPU successfully petitioned for electric rate increases which will become effective March 17, 2004, and anticipates petitioning for natural gas rate increases in 2004.

The FPSC has the authority to regulate FPU's rates, conditions of service, issuance of securities and certain other matters affecting FPU’s natural gas and electric operations.  As a result, FPSC regulation has a significant effect on FPU's results of operations.  The FPSC approves rates that are intended to permit a specified rate of return on investment. FPU’s rate tariffs allow the cost of natural gas and electricity to be passed through to customers.  

Franchises

FPU holds franchises in each of the incorporated municipalities where it provides natural gas and electricity.  These franchises generally have terms ranging from 15 to 30 years and terminate on varying dates.  FPU is currently in negotiations with some of the municipalities in which its franchises have lapsed.  FPU continues to provide services to these municipalities and does not anticipate any interruption in its service.

Employees

As of December 31, 2003 FPU had 337 total employees, of which 6 were part time.  Of these employees, 101 were covered under union contracts with two labor unions, the International Brotherhood of Electrical Workers and the International Chemical Workers Union.   FPU believes that its labor relations with its employees are good.

Research Expenditures and Environmental Regulations

Because FPU does not produce energy and is therefore not a generating utility, FPU's operations are not currently subject to the extensive environmental regulations applicable to energy producers.   However, FPU is affected by environmental regulations relating to the cleaning-up of soil contamination on land owned by FPU.  See "Contingen­cies" in the Notes to Consolidated Financial Statements.

FPU does not engage in research activities.

Competition

Generally, FPU does not face substantial competition with respect to its natural gas and electric services due to the fact that in municipalities and other areas where FPU provides natural gas and electric services, no other utility directly renders such services.  There is, however, competition in these areas among FPU and providers of alternate sources of energy.   FPU's propane gas services are unregulated and therefore subject to competition from other suppliers of propane gas, as well as suppliers of natural gas, electricity and alternative energy sources.  Competition in the propane gas services segment is based primarily on price and customer service.

Available Information

FPU files or furnishes periodic reports including its Form 10-Qs, Form 10-K, and Form 8-Ks, and any amendments thereto, with the Securities and Exchange Commission (the "SEC").  The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information filed electronically with the SEC.  Additional information about FPU may be obtained from FPU’s web site (http://www.fpuc.com).

Item 2.   Properties

FPU owns office and warehouse facilities in Northwest, Northeast, Central, West Central and South Florida which are used for operations and storage by the natural gas, electric, and propane segments.  Additionally, FPU owns various substations, easements and other assets located throughout its service areas which are utilized in its operations.  In the electric segment at December 31, 2003, FPU owned 22 miles of electric transmission lines located in Northeast Florida and 1,053 miles of electric distribution lines located in Northeast and Northwest Florida.  In the natural gas segment, FPU owns natural gas mains that distribute gas through 1,453 miles of gas main located in Central and South Florida.  The propane gas segment is operated by FPU's subsidiary and has bulk storage facilities and tank installations on the customers' premises.

FPU owns a three-story, 28,620 square foot building in West Palm Beach where its headquarters are located.

All of the properties of FPU and the shares of Flo-Gas Corporation, a wholly-owned subsidiary, are subject to a lien collateralizing the funded indebtedness of FPU under its Mortgage Indenture.

Item 3.   Legal Proceedings

Environmental. FPU currently uses or used in the past, in connection with its operations, several contamination sites with respect to which there is now pending or threatened environmental litigation and is in the process of investigating and assessing that litigation;  see "Contingen­cies" in the Notes to Consolidated Financial Statements.  FPU intends to vigorously defend its rights in this litigation.  FPU has insurance to cover a portion of any losses or expenses incurred as a result of this litigation and plans to apply to the FPSC for rate relief on any uninsured losses or expenses.  FPU believes that the aggregate of all future contamination assessment and remedial costs, legal fees and other related expenses will not exceed the combined sum of any insurance proceeds received and any rate relief granted.

Violet Skipper, PC Buyers, Inc. and Thomas Wade Skipper v. Florida Public Utilities Company, Case No. CL 00-10131-AF, Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida. On October 18, 2000, Plaintiffs sued FPU for damages allegedly resulting from a fire on Plaintiffs' property.  Plaintiffs allege that FPU failed to properly install and/or maintain electric power lines, utility poles and related equipment located on Plaintiffs' land and that FPU's negligence caused a fire that spread to and destroyed a warehouse.  FPU denied Plaintiffs' claims and defended same on the theory that the fire started within the warehouse/office facility and not from its electrical equipment.  Plaintiffs alleged damages in excess of $1,000,000.  The warehouse served as the office for PC Buyers, Inc.   PC Buyers, Inc. was in the business of purchasin g surplus vehicles and heavy equipment for resale.  The warehouse contained property waiting to be resold.  Much of this property was destroyed in the fire.  Trial in this matter occurred during the week of December 2, 2003-December 5, 2003.  The jury returned a verdict in favor of FPU, finding no liability on the part of FPU for the fire.  The Court entered a final judgment on the jury's verdict on January 21, 2004.  Plaintiffs had thirty (30) days or until February 20, 2004 to file an appeal of the final judgment. Similarly, FPU had until February 20, 2004 to file a motion to tax costs.  FPU proposed to Plaintiffs that it would waive its right to recover costs and potential attorney fees if Plaintiffs did not pursue an appeal of the final judgment.  FPU received a letter from Plaintiffs' counsel advising that Plaintiffs agreed to waive any right to appeal in exchange for FPU waiving its right to seek attorney’s fees and costs against the Plaintiffs.  On Mar ch 29, 2004, Counsel for FPU was informed by the Court’s Clerk that the Court has signed and entered the Dismissal Order.  A copy is in the mail at the present time.  Hence, this matter is closed, with no further appeals.

Glen Simon v. Florida Public Utilities Company, Gapss, Inc. and James Celi, Case No.  CA03-02209 AJ, Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida.  This case arises out of an explosion in the garage of co-Defendant James Celi ("Celi") that allegedly resulted from the negligent installation of a water heater by co-Defendant Gapss, Inc. ("Gapss").  Prior to the explosion, FPU had contracted with Gapss to install a water heater and stand in co-Defendant Celi's garage.  Plaintiff filed his Complaint on February 27, 2003 against FPU, Gapss and Celi.  Plaintiff has voluntarily dismissed FPU from this case without prejudice.  FPU previously asserted a cross-claim against Celi for contribution and a cross-claim against Gapss for contribution, indemnification, and breach of contract.  Celi also asserted a cross-claim against FPU for contribution.  Both FPU and Celi have dismissed their respective cross-claims against each other without prejudice.  FPU will be dismissing its cross-claim against Gapss without prejudice.  Upon the filing of FPU's dismissal of its cross-claim against Gapss, FPU will no longer be a party to this action.  

James F. Celi v. Gapss, Inc. a/k/a Gas Appliance Piping Sales & Service, Inc., Case No. 502003CA009110XXONAJ, Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida.  This case arises out of an explosion in Claimant James Celi's ("Celi") garage that allegedly resulted from the negligent installation of a water heater by Gapss, Inc. ("Gapss").  Prior to the explosion, FPU had contracted with Gapss to install a water heater and stand in Celi's garage.  Although Mr. Celi previously indicated he was considering filing a claim against FPU, Mr. Celi has filed a lawsuit against Gapss only on August 25, 2003.  In the event a lawsuit is filed against FPU, FPU intends to vigorously defend against the claim.  

Apart from the litigation described above, FPU is also involved with other various claims and litigation incidental to its business.  In the opinion of management, none of these other claims and litigation will have a material adverse effect on FPU's results of operations or its financial condition.

Item 4.   Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.

Market for the Registrant’s Common Equity and Related Stockholder Matters

QUARTERLY STOCK PRICES AND DIVIDENDS PAID

FPU's common shares are traded on the American Stock Exchange under the symbol FPU.  The quarterly cash dividends declared and the reported last sale price range per share of FPU common stock for the most recent two years were as follows:

On February 24, 2004, there were approximately 2,724 holders of record of FPU’s Common Stock.

It is FPU's intent to continue to pay quarterly dividends for the foreseeable future.  Dividend policy is reviewed on an ongoing basis by FPU’s Board of Directors and is dependent upon FPU's future earnings, cash flow, financial condition, capital requirements and other factors.

FPU’s Fifteenth Supplemental Indenture of Mortgage and Deed of Trust restricts the amount that is available for cash dividends.  At December 31, 2003, approximately $4.3 million  of retained earnings were free of such restriction and therefore available for the payment of dividends.

FPU has an Employee Stock Purchase Plan (see Notes to Financial Statements) but does not presently have any stock option or restricted stock plans.

Item 6.

Selected Financial Data

(dollars in thousands, except per share data)

Notes to the Selected Financial Data:

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Notes to Consolidated Financial Statements contained herein.  In the following discussion, all comparisons are with the corresponding items in the prior year.

Forward-Looking Statements

This report and the documents incorporated by referenced herein contain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. "Forward-looking" statements are any statements that are not based on historical information.  Statements other than statements of historical facts included in this report, including, without limitation, statements regarding FPU’s future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are ‘‘forward-looking’’ statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as ‘‘may," ‘‘will,’’ ‘‘expect,’’ ‘‘anticipate,& #146;’ ‘‘intend,’’ ‘‘plan,’’ ‘‘believe,’’ ‘‘seek,’’ ‘‘estimate’’ or ‘‘continue’’ or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and FPU can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or ‘‘cautionary statements,’’ include, but are not limited to, weather conditions, changes in laws or regulations, changes in the market environment, restrictions on FPU's ability to raise capital on fa vorable terms, any direct or indirect effects of terrorist threats and activities, FPU's successfully petitioning for and receiving rate increases, FPU's ability to identify attractive acquisition opportunities at favorable prices and to successfully and timely complete and integrate them.

Overview

FPU is organized into two regulated business segments, natural gas and electric, and one non-regulated business segment, propane gas.

FPU’s two regulated business segments are regulated by the Florida Public Service Commission ("FPSC").  As part of this regulation, the FPSC set the rates FPU is permitted to charge to its customers.  The rates approved by the FPSC allow FPU a specified rate of return on its regulated investment and to pass through to its customers changes in the costs of its gas and electricity and, in some cases, certain of FPU’s overhead costs.  The FPSC previously viewed FPU as operating three distinct regulated entities: (i) Northwest Florida electric, (ii) Northeast Florida electric and (iii) natural gas, which includes Palm Beach County and the Sanford and DeLand area in Central Florida.  Accordingly, the FPSC formerly required that FPU file three separate rate cases with the FPSC in order to recover through rate relief the effects of inflation and construction expenditures for all such entities.

On August 14, 2003, FPU filed for electric rate increases and petitioned to consolidate the two electric entities into one.   The request included recovery for recent increases to certain operating expenses, including pension and insurance expenses, of approximately $4.0 million. FPU went before the FPSC on February 18, 2004, at which time the FPSC granted the petition to consolidate the rate cases on a going forward basis and granted a $1.8 million increase in revenue.  The effective date for the increase was March 17, 2004.

FPU is planning to file a request for natural gas rate relief with the FPSC in the summer of 2004. FPU will include in the filing recovery of $9.0 million for environmental liabilities (included on the balance sheet in other assets, other regulatory assets – environmental), along with recovery of certain expense increases.  In addition, FPU has requested approval from the FPSC for inclusion in the rate base of the goodwill and intangible assets associated with its acquisition of Atlantic Utilities.  The FPSC has not ruled on the appropriate treatment of the goodwill and intangible assets and has requested that FPU re-address this issue in the filing for natural gas rate relief in 2004.

Prior to these rate increases, FPU last received rate increases for the Northwest Florida electric division in February 1994, for the Northeast Florida electric division in November 1989 and for the natural gas segment in May 1995.

On March 27, 2003,  FPU sold certain assets comprising its former water utility system to the City of Fernandina Beach ("City").  The City paid FPU $19.2 million in cash at closing and agreed to pay future consideration of approximately $7.4 million to be paid in annual installments until February 15, 2010.  The net proceeds from the sale received at closing were used to pay down short-term bank debt.  FPU recognized and recorded the present value of the long-term receivable of $5.7 million, using a discount rate of 4.34%. The long-term receivable has been subsequently increased to recognize interest income of approximately $190,000. The fair value of the consideration is approximately $25.0 million.  The gain on the disposal of discontinued operations, including the income from discontinued operations for the first quarter of 2003, was $15.8 million, or $9.9 mil lion after tax, and has subsequently been adjusted to $15.9 million, or $9.9 million after tax, due to adjustments to sales related expenses that were previously estimated.  The assets of the water segment amount to approximately $10.2 million, or less than 10% of FPU’s assets including water. For the year ended December 31, 2002, the water segment’s operating income before income taxes was approximately 12% of total operating income before income taxes.

FPU’s strategy is to concentrate on developing stronger relationships with its customers, including builders and developers.  FPU is positioning itself as a total energy company, not just a supplier of electricity or gas. Included in the strategy is a plan to increase the rate of future growth by concentrating on increasing customers and territory coverage using improved marketing programs, along with acquiring small energy related companies, particularly propane gas companies.  In 2001, two acquisitions added approximately 7,300 customers.  During 2002, FPU made another acquisition comprising less than 10% of its assets, which added approximately 1,200 customers.  The cost of each of these acquisitions was less than 10% of FPU’s assets and they provide less than 10% of FPU’s revenues and operating income excluding income taxes.  

Pension expenses are projected to continue increasing into 2004 and 2005.  Current actuarial estimates show pension expense increasing by approximately $487,000 in 2004 over 2003.  FPU allocates its pension and other overhead expenses across its three operating segments.  The 2004 expenses relating to natural gas and electricity should be recovered in the rate proceedings with the FPSC, although further increases in 2005 and thereafter would require future rate increase requests to be filed with the FPSC.  Recovery of the expense allocated to the propane gas segment will depend on current market conditions in the propane industry.  Provided the increases experienced are industry-wide, FPU anticipates the ability to increase rates to recover the expenses while remaining competitive.

Recent industry events along with the threat of terrorism and continued increases in medical costs have resulted in increased insurance expenses. In 2003, medical insurance costs increased approximately $256,000.  Liability insurance, including workers’ compensation, increased approximately $451,000.  These costs are expected to remain at this level in 2004 and will most likely increase in 2005. FPU made revisions to its medical plan and is seeking rate relief in both the natural gas and electric segments to recover a majority of the effect of the plan on operating income. Future insurance increases may require additional rate increase requests to be filed with the FPSC.

RESULTS OF OPERATIONS

Discussion of Operating Results:

Please note that water has been excluded from operating results and is classified as discontinued operations.  See "Discontinued Operations" in the Notes to Consolidated Financial Statements for additional information.

Gross Profit  

Gross profit is defined as gross operating revenues less fuel costs, conservation and unbundling costs, and taxes based on revenues that are passed through to customers.  FPU  believes that gross profit provides a more meaningful basis for evaluating utility operations than gross operating revenues because fuel, conservation and unbundling costs along with taxes passed through to customers have no effect on results of operations and fluctuations in such costs distort the relationship of gross operating revenues between periods.  Gross profit is the net revenue retained by FPU for operating purposes.

Contributing to variations in gross profit are the effects of seasonal weather conditions, the timing of rate increases, acquisitions and the migration of winter residents and tourists to Florida during the winter season.

Natural Gas

Natural gas gross profit increased $2.1 million, or 11%, in 2003.  Gross profit increased primarily due to a non-recurring early termination fee of $1.5 million received from Lake Worth Generation LLC for the cancellation of a contract in late March 2003. FPU negotiated a new contract with the City of Lake Worth which resulted in a reduction of annual revenue by $231,000 compared to the previous contract. Approximately $300,000 of the increase in gross profit was attributable to an increase in residential and commercial customer sales.  Overall, average customers increased in 2003 by 3% due to normal growth, although this was offset by a decrease in usage per customer, most likely due to milder weather and a higher costs of gas.  Revenue associated with FPU’s area expansion program added $87,000, relating to carrying charges for construction charges that are due from customers. Late fee reve nue increased by $120,000.

Natural gas gross profit increased $3.2 million, or 20%, in 2002, primarily due to FPU’s acquisition of a natural gas company and a pipeline contract with a Lake Worth generation facility that added over $1.1 million of gross profit.  Transportation sales increased $800,000 in 2002, primarily due to a new ‘unbundling’ program that allows commercial customers to purchase their own natural gas.  As a result, FPU added 184 new transportation customers, an increase of over 200%.  However, these increases were primarily attributable to commercial customers transferring to transportation service, and were offset by fewer commercial customers and lower sales. Revenue also increased by over $500,000 due to late payment fees and charges for reconnecting services.  Overall, average customers increased 12% and units sold increased 3%, both due to the acquisitions and normal growth.   ;The increases in units sold from normal growth and acquisitions were offset by decreases in units sold per customer.

Electric

Electric gross profit increased $253,000, or 2%, in 2003, primarily due to an increase in late fees of $226,000.  Gross profits improved despite a decrease in revenues of  $1.4 million, or 3%, in 2003.  The decrease in revenues was due to a decrease in the costs of fuel, which are typically passed on to customers.  Customer growth was up 2% due to normal growth.  This growth was offset by a 4% decline in usage per customer most likely due to milder weather.

Electric gross profit increased  $299,000 in 2002.  This was attributed to average customer growth of 2% along with a 5% increase in units sold (excluding General Service Large Demand (GSLD) customers).  GSLD customers are commercial or industrial customers who pay on both usage and demand due to the higher service requirements.  Higher units sold per customer along with the growth in customers contributed to a 5% increase in sales in 2002.  This increase was offset by a $30,000 reduction in gross profit due a recording of potential over earnings in 2002.  The 2002 earnings were subject to review by the FPSC, and in 2003, the FPSC granted FPU permission to use the over earnings to increase its storm damage reserves.

Propane Gas

Propane gas gross profit increased $462,000, or 10%, in 2003 primarily due to the acquisition of a propane gas company in late 2002 and the construction and sale of two storage tanks at a Lake Worth high school, which attributed to $106,000 of the increase.  An increase in late fees and the assessment of regulatory compliance fees beginning in the first quarter of 2003 for propane gas customers also contributed to the increase.  These increases were offset by refinement of an estimate for propane gas inventory held at customer premises in the third quarter. In addition, the gross profit per unit sold decreased as FPU elected to reduce the profit margin for some customers in an effort to remain competitive.  The number of customers increased by 8% primarily due to the acquisition, and usage per customer increased.

Propane gas gross profit increased in 2002 by $1.5 million, or 48%, primarily due to two acquisitions. Average customers increased by 36% and units sold increased 57%.  Revenues increased due to colder weather in December 2002.

Operating Expenses (excluding income taxes)

Operating expenses, which include ‘Operations’ and ‘Taxes other than income taxes’, exclude fuel costs, conservation and unbundling costs, and taxes based on revenues that are passed through to customers.  These expenses have no effect on results of operations as they are passed on through revenue and fluctuations in such costs distort the relationship of operating expenses between periods.  These costs are grouped on a separate line of the income statement as ‘Cost of fuel and taxes based on revenues’.

Natural Gas

Natural gas operating expenses, excluding income taxes, increased $1.2 million, or 8%, in 2003.  Administrative expenses increased $668,000 and are discussed separately in the administrative expenses section.  Other operating expense increased $337,000, partially due to an increase in underground natural gas line location expense of $175,000 that was caused by an increase in the quantity of natural gas line locations performed due to construction related projects.  Other contributing factors to the increase include higher depreciation expense of $278,000 and an increase of $206,000 in maintenance expenses in the first quarter related to an abandoned construction project for a main insertion failure at Royal Park Bridge in South Florida.  These increases were offset by the collection of an expected bad debt of $172,000 related to the contract with Lake Worth Generation in the first quarter of 2003.

Natural gas operating expenses, excluding income taxes, increased $2.2 million, or 18%, in 2002.  Administrative expenses increased $713,000 and are discussed separately in the administrative expenses section. The increase in 2002 was also caused by an increase in customer administration expenses due to higher bad debt expense and payroll.   FPU increased collection efforts to reduce bad debt expense by focusing on collections and the adequacy of deposits.  Distribution expenses also increased because of more line locations and an increase in the cost per location by the contractor.  Other factors contributing to the increase for 2002 are increased depreciation expense of $333,000 and increased taxes other than income taxes (mainly consisting of payroll and property taxes) of $151,000, both primarily attributable to an asset acquisition in 2001.  

Electric

Electric operating expenses, excluding income taxes, increased $984,000, or 12%, in 2003.  Administrative costs, discussed below in more detail, increased $376,000.  Customer Accounts expense increased $141,000, due mostly to uncollectible accounts of $39,000 and temporary staffing of $37,000.  Depreciation and maintenance expenses increased $229,000 and $79,000, respectively, due to increases in plant assets.

Electric operating expenses, excluding income taxes, increased $212,000, or 3%, in 2002.  Administrative costs, discussed below in more detail, increased $393,000. Maintenance expenses decreased $272,000, primarily due to additional expense for substation work, transmission line access work and overhead line balancing in the prior year.

Propane Gas

Propane gas operating expenses, excluding income taxes, increased $706,000, or 17%,  in 2003.  Administrative expenses, discussed below, increased $321,000, and other operating expenses increased $275,000 primarily due to the acquisition of a company in late 2002.  Depreciation expense also increased $71,000 due to increases in plant assets.

Propane gas operating expenses, excluding income taxes, increased $1.4 million, or 53%, in 2002.  Administrative expenses, discussed below, increased $213,000, payroll for operating and maintenance expenses increased $805,000 and depreciation expense increased $114,000.   The increases in payroll for operating and maintenance expenses and depreciation expense were caused primarily by acquisitions of propane gas companies in 2001 and 2002.  

Administrative Expenses

Administrative expenses increased $1.4 million, or 25%, in 2003.  This increase was primarily caused by an increase in insurance expense of $451,000 caused by higher medical costs and increased premiums for worker’s compensation and general liability.  The increase in premiums resulted from increased payroll and higher insurance rates.  Pension expense increased $586,000 primarily as a result of the overall impact from the stock market decreases in 2001 and 2002.  Additionally, other outside services increased approximately $191,000 mostly due to Sarbanes-Oxley compliance, which required increased accounting related services, including internal auditing services to evaluate and improve FPU’s procedures and internal controls.  FPU also began utilizing additional outside tax related services in 2003.

Administrative expenses for 2002 increased $1.3 million, or 31%.  Increased claims for general liability and medical self-insurance resulted in increased expenses of $248,000 and $273,000, respectively. Workers’ compensation expense also increased $207,000 as a result of increased payroll and slightly higher rates. Pension expense increased $83,000 primarily as a result of the overall decline in the stock market.  Insurance premiums also increased $105,000, primarily in the latter part of 2002, contributing to the overall administrative expense increase.  In addition, outside services increased as a result of a new internal audit program to help FPU meet the requirements of the Sarbanes-Oxley Act.  This new program increased expenses for the year by $46,000.  Other increases in outside services relating to accounting fees accounted for an additional increase of $39,000.  Misce llaneous administrative expenses increased as a direct result of expensing $118,000 of costs associated with a stock offering that was not consummated.

Interest Charges and Other

Interest Charges

Interest charges consist of interest on bonds, short-term borrowings and customer deposits.  In 2003, total interest charges decreased $25,000.  Interest on short-term borrowings decreased $249,000, as a result of the decrease in notes payable, offset by a decrease in interest on the allowance for funds used during construction of $180,000 as a result of completing a generation pipeline in 2002.

Interest on long-term debt in 2002 increased $1.3 million due to two additional bonds issued in September and November of 2001 totaling $29.0 million.  The bonds were primarily used to finance acquisitions, fund a major Lake Worth Generation pipeline project and to reduce FPU’s short-term debt.  The offsetting decrease in short-term debt interest charges was $502,000.

Other

Other consists of income and expense from FPU’s merchandise and services, gains or losses on disposal of property and other miscellaneous income or deductions.  FPU’s merchandise and services activities include the sale of merchandise, installation and other contract work.  Merchandise and service profitability decreased approximately $114,000 in 2003 due to changes in marketing personnel that resulted in decreased focus on merchandise sales and product knowledge.  Other income decreased approximately $196,000, $112,000 of which was due to an adjustment required by the FPSC reclassifying interest income to the liability reserve. In 2002, FPU sold non-utility property for a gain of $112,000, further reducing the amount of expense in 2002 compared to 2003.  

Merchandise and service revenue and expenses both increased in 2002, primarily due to the gas division’s conservation program that offers rebates to customers for gas merchandise purchases.  Profitability has decreased due to increased costs of installing piping and servicing of appliances.  The South Florida merchandise revenue remained relatively flat due to the effects of road construction outside of the sales facility.

As discussed previously, FPU sold substantially all of the assets of its water division to the City of Fernandina Beach on March 27, 2003.  The sale was made pursuant to a "threat of condemnation" during the fourth quarter of 2002.  FPU has elected (for tax purposes) to defer the gain on the sale of the assets pursuant to Code Section 1033 of the Internal Revenue Code of 1986 (IRC).  Section 1033 allows nonrecognition of gain if property is disposed as a result of threat of condemnation and property that is similar or related in service or use is purchased to replace the property disposed.  To qualify, the replacement property must be purchased within the replacement period which begins on the earlier of date of disposition (March 27, 2003) or date of threat of condemnation (December 31, 2002) and ending two years after the close of the year of sale (December 31, 2005).  For r eal property, the replacement period is extended to three years (December 31, 2006).  FPU intends to purchase property that is similar or related in service or use within the replacement period.  In the first, second and third quarter, the related deferred tax liability was included in current taxes.  As of year end, it is included in deferred taxes payable.

LIQUIDITY AND CAPITAL RESOURCES

Portions of FPU's business are seasonal, and accordingly, short-term debt is used to meet working capital requirements primarily during periods of lower sales.  FPU also borrows under lines of credit to finance portions of its capital expenditures and acquisitions, pending refinancing at a later date through the issuance of equity or long-term debt, depending upon prevailing market conditions.

On March 27, 2003, FPU received $19.2 million in cash, along with future consideration valued at $5.7 million discounted to present value for the sale of its water division (for additional information see "Discontinued Operations" in the Notes to Consolidated Financial Statements).  

In April 2003, FPU retired an expiring $20.0 million line of credit.  The line of credit had a $16.1 million outstanding balance on March 27, 2003, that was repaid using proceeds from the sale of the water division.

On April 1, 2003, FPU obtained a new $12.0 million, thirty-nine month line of credit ("LOC") that matures on June 30, 2006.  As of December 31, 2003, the outstanding balance on the LOC is $2.3 million. FPU reserves $1.0 million of the LOC to cover expenses for any major storm repairs in its Northwest Florida division. An additional $250,000 of the LOC is reserved for a ‘letter of credit’ insuring propane facilities.  The lower credit line and change of banks resulted from a more restrictive banking environment in 2003, as compared to 2000 when the expiring credit line was established. Due to the current business environment, FPU will not be as leveraged in 2003 as it was in the prior three years.  Notes payable, long-term debt and preferred stock on December 31, 2003 comprised 57% of total capitalization, with common stock equity of 43%, whereas such securities comprised 70% o f total capitalization with 30% of common stock equity as of December 31, 2002.  The stronger equity ratio was a result of the sale of the water assets for a $9.9 million gain, net of income taxes.

Construction expenditures are budgeted at approximately $15.0 million in 2004, which will include system upgrades to electric facilities. In 2003, $9.7 million was spent on construction that related mostly to system expansions and replacements. The amount was lower than the $14.1 million spent in 2002 primarily due to a $1.5 million contribution received in 2003 due to the early termination of a contract with Lake Worth Generation, LLC which, for accounting purposes, was treated as a reduction in construction expenditures, and approximately $2.0 million of additional construction in 2002 relating to the Lake Worth generation project.  In 2001, $13.4 million of capital expenditures included $3.1 million to begin construction of the gas line to the generation facility.  FPU currently has no material commitments for construction expenditures.  

Additional financing of approximately $12.0 million will be needed to finance projected construction in 2004. Without additional financing, the system upgrades would be deferred. Based on FPU’s current financing structure and business environment, it is likely the additional financing will be provided by the issuance of equity in 2004.  This disclosure does not constitute an offer of any securities of FPU for sale.  FPU anticipates capital expenditure requirements for 2005 of $11.8 million.  The equity issuance expected in 2004, along with the capital resulting from normal operations, will be sufficient to fund these expenditures.

Net cash flow provided by continuing operating activities decreased slightly from 2002.  Fluctuations in the discontinued operations income, deferred income taxes, and accounts payable were mostly related to the sale of the water division.  In 2002, FPU had funds classified as restricted proceeds from the private activity bond acquired in late 2001.  As construction progressed, the balance of these restricted proceeds decreased, and was fully unrestricted in 2003.

On July 1, 2002, FPU affected a four-for-three stock split to the record holders of June 14, 2002 in the form of a stock dividend.  All information related to the Common Stock has been restated to reflect the stock split.

Long-term debt has sinking fund payments that begin in 2008.  Lines of credit are generally for three years and are renewed at that time.

Discontinued Operations

Water Service

On March 27, 2003,  FPU sold certain assets comprising its former water utility system to the City of Fernandina Beach ("City").  The City paid FPU $19.2 million in cash at closing and agreed to pay future consideration of approximately $7.4 million to be paid in installments summarized below until February 15, 2010.  The net proceeds from the sale received at closing were used to repay the outstanding balances of notes payable to a bank.  FPU recognized and recorded the present value of the long-term receivable of $5.7 million, using a discount rate of 4.34%. The long-term receivable has been subsequently increased to recognize interest income of $190,000. The fair value of the consideration is approximately $25.0 million. The gain on the disposal of discontinued operations, including the income from discontinued operations for the first quarter of 2003, was $15.8 million, or $9.9 million after tax, and has subsequently been adjusted to $15.9 million, or $9.9 million after tax, due to adjustments to sales related expenses that were previously estimated.  The assets of the water segment amount to approximately $10.2 million, or less than 10% of FPU’s assets including water.

The accompanying consolidated financial statements have been restated for all periods presented for the discontinued operations of the water division. FPU did not cease recording depreciation expense due to regulatory requirements and continued to record depreciation through the sale date of March 27, 2003. The total net plant amounted to approximately $9.7 million, and the net assets less liabilities amounted to approximately $8.9 million at the date of sale. The assets and liabilities of the water division have been included in current assets and current liabilities as of December 31, 2002, as assets and liabilities held for sale.

Estimated Annual Future Value of Consideration due from the City for years following December 31, 2003 are as follows (dollars in thousands):

Results of discontinued operations were as follows:

The major balance sheet classes included in assets and liabilities of discontinued operations in the Consolidated Balance Sheets, as of December 31, 2002, are as follows:

Acquisitions

In October 2001, FPU acquired Z-Gas Company, Inc., a propane gas service distribution company, in a stock for stock transaction valued at approximately $600,000. The acquisition added about 1,000 customers to the propane gas operation in the Northeast Florida division.

In December 2001, FPU acquired certain net assets of Atlantic Utilities, the Florida operation of Southern Union Company in a cash transaction valued at approximately $10.0 million. Atlantic Utilities served about 4,400 natural gas customers in New Smyrna Beach and about 1,900 propane gas customers in Central and South Florida.

The excess of the consideration paid over the estimated fair value, or the depreciated original cost for regulated entities, of net assets including intangibles acquired in both the Atlantic Utilities and Z-Gas acquisitions, was approximately $3.1 million.  This was recorded as goodwill and in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, is not being amortized.  The natural gas portion of this amount is approximately $1.5 million.

The following unaudited pro forma information combines the consolidated results of operations of FPU with those of Z-Gas and Atlantic Utilities as if these acquisitions had occurred at the beginning of 2001. The pro forma results are not necessarily an indication of the results that would have been achieved had the transactions been consummated as of the date indicated, or of the results that may be achieved in the future. The 2001 information includes actual amounts for November and December information for the results of Z-Gas and December 15-31 information for the results of Atlantic Utilities.  The income statement for 2002 includes all the effects from these two acquisitions and no pro forma adjustments are necessary.

In November 2002, FPU acquired Nature Coast Utilities, a propane gas service distribution company, in a cash for stock transaction valued at approximately $740,000.  The acquisition added about 1,200 customers to FPU’s Nature Coast division located in West Central Florida.

The excess of the consideration paid over the fair value of assets acquired and liabilities assumed associated with this acquisition resulted in goodwill of approximately $223,000 and in accordance with SFAS No. 142, it is not being amortized. In 2003, subsequent acquisition adjustments have increased the goodwill to $240,000.  There are no other intangible assets identified with this acquisition.

For additional information concerning these acquisitions, see "Acquisitions" in Notes to Consolidated Financial Statements.

Goodwill and Intangible Assets

Effective January 1, 2002, FPU adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under this statement, the amortization of goodwill is no longer permitted and intangible assets with an indefinite life will not be amortized.  The standard requires goodwill to be periodically tested for impairment and written down to fair value if considered impaired.  The reporting segments subject to impairment testing are propane gas and natural gas.  

Intangible assets associated with FPU’s acquisitions have been identified and are shown as separate line items on the balance sheet.  Balances as of December 31, 2001 have been reclassified to conform to this presentation.  The intangibles subject to amortization over a five-year period are non-compete agreements totaling $35,000.  The related amortization of $14,162 is included in the net intangible on the balance sheet.  The remaining intangibles identified are customer distribution rights of $1.9 million and customer relationships of $900,000, both of which have indefinite lives and are not subject to amortization.

All goodwill relates to the natural and propane gas acquisitions and accordingly, there is no amortization of goodwill reported in the accompanying consolidated financial statements. Goodwill is $1.5 million in the natural gas segment and $1.9 million in the propane gas segment. The initial test for goodwill impairment was performed for the reporting segments as of January 1, 2002 and the test results showed no impairment for either operating segment.  A subsequent impairment test was performed as of January 1, 2003 and showed no impairment for either reporting segment.

Off-Balance Sheet Arrangements

FPU does not use off-balance sheet financing, have minority interests in businesses, engage in energy trading activities, or make loans or guarantee loans to executives or directors.  All debt of FPU is reflected on the balance sheet.

Bond Related Issues

FPU's 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 December 31, 2003, such calculation would permit the issuance of approximately $27.0 million of additional bonds.

FPU issued its First Mortgage Bond 6.85% Series due 2031 on September 27, 2001, in the aggregate principal amount of $15.0 million as security for the 6.85% Secured Insured Quarterly Notes, due October 1, 2031 (IQ Notes).  Interest on the pledged bond accrues at the rate of 6.85% per annum payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and payable initially on January 1, 2002.  The pledged bond constitutes the Fourteenth Series of FPU's First Mortgage Bonds.

FPU issued $14.0 million of Palm Beach County municipal bonds (Industrial Development Revenue Bonds) on November 14, 2001 to finance development in the area.  The bond proceeds were restricted and held in trust until FPU incurred construction expenditures in the county.  Funds were drawn after each month’s construction expenditures. On December 31, 2002, the restricted funds were fully utilized for construction financing and no balance remained.

FPU had approval from the FPSC to issue and sell and/or exchange an additional $67.0 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 2003. FPU received this approval on November 25, 2002. FPU has current approval from the FPSC to issue and sell and/or exchange an additional amount of $30.0 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 2004.  FPU received this approval on November 12, 2003.

Impact of Recent Accounting Standards

Financial Accounting Standard No. 143

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement requires that the fair value of an asset retirement obligation be recognized at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset.  SFAS No. 143 also requires that components of previously recorded depreciation related to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, be removed from a company’s accumulated depreciation reserve. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.  FPU adopted the provisions of the Statement as of January 1, 2003, as prescribed by the FPSC.  Under FPSC guidelines, the estimated cost of removal e xpenses for normal retirements related to regulated fixed assets were reserved through the depreciation expense and accumulated reserves. This was disclosed in a footnote until December 31, 2003, when FPU also reclassified the estimated cost of removal from accumulated depreciation to a regulatory liability for the obligation.  The estimated value of the reserve that has been accumulated for future cost of removal as of December 31, 2003 and 2002 was approximately $6.1 million and $5.8 million, respectively.  All prior period amounts have been restated to conform to the current year presentation.

Financial Accounting Standard No. 149

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities."  This statement clarifies the circumstances under which a contract with an initial net investment becomes a derivative, and clarifies when a derivative contains a financing component.  As FPU has designated all material contracts meeting the definition of possible derivative instruments as "normal purchases and sales" under SFAS No. 133, "Accounting for Derivatives", this statement had no impact on the current financial statements issued by FPU but could impact future financial statements.

Financial Accounting Standard No. 150

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."  It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 had no impact on current financial instruments issued by FPU, but could impact future financial instruments issued by FPU.

OTHER

Critical Accounting Policies and Estimates

Rate Regulated Basis of Accounting - FPU prepares its financial statements in accordance with the provisions of SFAS No. 71 – "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) and it is FPU’s most critical accounting policy. In general, SFAS No. 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation.  As a result, a regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the rate making process, there will be a corresponding increase or decrease in revenues. SFAS No. 71 does not apply to the unregulated propane gas operations.

Use of Estimates - Inherent in the accounting process is the use of estimates when preparing financial statements in accordance with accounting principles generally accepted in the United States of America.  Actual results could differ from these estimates.  FPU uses estimates in the preparation of its financial statements including the accrual for pensions, environmental liabilities, and uninsured liability claims.  An actuary calculates the estimated pension liability in accordance with FASB 87.  Environmental liabilities are subject to certain unknown future events.  FPU is self-insured for the first $250,000 of each general and auto liability claim and therefore accrues for estimated losses occurring from both asserted and unasserted claims.  The estimate for unasserted claims arising from unreported incidents is based on an analysis of historical claims data and judgmen t.  FPU became fully insured for medical in December 2003 and will no longer require accrual of estimated claims.  Management believes that the accruals for potential liabilities are adequate.

Revenue Recognition – FPU bills utility customers on a monthly cycle basis; however, the billing cycle periods for most customers do not coincide with the accounting periods used for financial reporting. FPU accrues estimated revenue for gas and electric customers not yet billed during the accounting period. Determination of unbilled revenue relies on the use of estimates, fuel purchases, and historical data.

Effects of Inflation - FPU's tariffs associated with its utility operating divisions provide for fuel clauses through which rates charged to customers are adjusted for changes in the cost of fuel on a reasonably current basis. Increases in other utility costs and expenses not otherwise offset by increases in revenues or reductions in other expenses could have an adverse effect on earnings due to the time lag associated with obtaining regulatory approval to recover such increased costs and expenses, the uncertainty of whether regulatory commissions will allow full recovery of such increased costs and expenses, and any effect on unregulated propane gas operations.

Environmental Matters - FPU currently uses or used in the past, in connection with its operations, several contamination sites with respect to which there is now pending or threatened environmental litigation and is in the process of investigating and assessing that litigation;  see "Contingen­cies" in the Notes to Consolidated Financial Statements.  FPU intends to vigorously defend its rights in this litigation.  FPU has insurance to cover a portion of any losses or expenses incurred as a result of this litigation and plans to apply to the FPSC for rate relief on any uninsured losses or expenses.  FPU believes that the aggregate of all future contamination assessment and remedial costs, legal fees and other related expenses will not exceed the combined sum of any insurance proceeds received and any rate relief granted.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

All financial instruments held by FPU were entered into for purposes other than for trading.  FPU has market risk exposure only from the potential loss in fair value resulting from changes in interest rates.  FPU has no material exposure relating to commodity prices because FPU, under its regulatory jurisdictions, is fully compensated for the actual costs of commodities (natural gas and electricity) used in its 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. This can be performed due to the competition having similar increases that are customarily passed through to their customers.

None of FPU’s gas or electric contracts are accounted for using the fair value method of accounting. While some of FPU’s contracts meet the definition of a derivative, FPU has designated these contracts as "normal purchases and sales" under SFAS No. 133, "Accounting for Derivatives".

FPU’s long term receivable (non-interest bearing) from the sale of the water operations was discounted at 4.34%. A hypothetical  0.5% (50 basis points) increase in the interest rate used would change the current fair value from $5.9 million to $5.8 million.

FPU has no exposure to equity risk, as it does not hold any equity instruments.  FPU’s exposure to interest rate risk is limited to investments held for environmental costs and short-term borrowings on the line of credit. These investments are fixed income debt securities whose carrying amounts are not materially different than fair value. Such investments mature through 2004 and are expected to be held to maturity. Therefore, FPU does not believe it has material market risk exposure related to these instruments.  The indentures governing FPU’s two first mortgage bond series outstanding contain "make-whole" provisions, which are pre-payment penalties that charge for lost interest, which render refinancing impracticable.  In 2003, a hypothetical 0.5% (50 basis points) decrease in the long-term interest rate on $52.5 million debt would change the fair value from $62.8 million to $66.6 million.

Changes in short-term interest rates could have an effect on income depending on the balance borrowed on the variable rate line of credit. On December 31, 2003 and 2002, FPU had $2.3 million and $19.2 million in short-term debt, respectively.  A hypothetical 1% increase in interest rates would have resulted in a decrease in annual earnings by $14,000 and $120,000 respectively, based on year-end borrowings.

Item 8.

Financial Statements and Supplementary Data

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)

                                                                                                                 _Years Ended December 31_

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CAPITALIZATION

(dollars in thousands)                                                                            December 31,

See notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS

      (dollars in thousands)                                                                                    Years Ended December 31,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting and Reporting Policies

Business and Regulation  FPU is an operating public utility engaged principally in the purchase, transmission, distribution and sale of electricity and in the purchase, transmission, distribution, sale and transportation of natural gas.  FPU is subject to the jurisdiction of the FPSC with respect to its natural gas and electric operations.  The suppliers of electric power to the Northwest Florida division and of natural gas to the natural gas divisions are subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC).  The Northeast Florida division is supplied most of its electric power by a municipality which is exempt from FERC and FPSC regulation.  FPU also distributes propane gas through a non-regulated subsidiary.  FPU's accounting policies and practices conform to accounting principles generally accepted in the United States of Ame rica as applied to regulated public utilities and are in accordance with the accounting requirements and rate making practices of the FPSC.

FPU prepares its financial statements in accordance with the provisions of SFAS No. 71 – "Accounting for the Effects of Certain Types of Regulation".  In general, SFAS No. 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation.  As a result, a regulated utility may defer recognition of a cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the rate making process, there will be a corresponding increase or decrease in revenues.  Accordingly, FPU has recognized certain regulatory assets and regulatory liabilities in the consolidated balance sheets.  FPU believes that the FPSC will continue to allow it to recover such items through its rates. In the event that a portion of FPU’s operations are no longer subject to the provisions of SFAS No. 71, it would be required to write off related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, FPU would be required to determine if an impairment related to other assets exists, including plant, and write down the assets, if impaired, to their fair value. A summary of such items is as follows (dollars in thousands):

(1)  Deferred development costs, unamortized piping and conversion costs, and unamortized loss on reacquired debt are included in deferred charges in the consolidated balance sheets.

(1)

Prior periods have been restated to conform to SFAS No. 143 (for additional information see "Impact of Recent Accounting Standards" in the Notes to Consolidated Financial Statements).

(2)

FPU has accrued $9 million as a regulatory asset pending future rate recovery to be authorized by the FPSC.  The regulatory liability excludes the $9 million as it represents a legal but not regulatory liability.

FPU has agreed with the FPSC staff to limit its earned return on equity for its regulated natural gas and electric operations.  The disposition of any over earnings is left to the discretion of the FPSC, with alternatives including a refund to customers, recording the over earnings to the storm damage reserves, or the reduction of any depreciation reserve deficiency.  The over earnings for 1997, 1998 and 1999 at one of FPU’s electric divisions were ordered by the FPSC to be added to that division’s storm damage reserve.  Since that last order on the 1999 disposition of over earnings, the FPSC has allowed FPU the automatic flexibility of recording the over earnings to the storm damage reserves each year thereafter through use of the over earnings and allowing additional storm damage accruals up to a cap in those reserves of $1.5 million and $1.4 million in the North east and Northwest electric divisions, respectively.  FPU recorded an additional $237,000 relating to 2000 over earnings and $9,500 relating to 2002 over earnings in its Northeast electric storm reserve. FPU recorded an additional $16,300 relating to 2002 over earnings to its Northwest electric storm reserve. In 2001 and 2003 FPU did not have any over earnings and accordingly has not recorded any additional amounts to its storm damage reserves.  As of the end of 2003, the Northeast and Northwest electric storm reserves were at approximately $1.2 million and $964,000, respectively.  FPU also expects that the FPSC will grant it permission to record the 2002 natural gas over earnings of $105,000 to its environmental reserves. Finalization of this over earnings review is expected in early 2004. In accordance with FPSC guidance, FPU has recorded to its environmental reserve any over earnings.  

FPU filed tariff sheets for its unbundled program to give its commercial natural gas customers the option of purchasing their gas supplies from third parties.  FPU officially offered unbundled services to commercial customers on August 1, 2001.  Even though FPU has had among the lowest overall gas costs in the Florida market, third party suppliers may be able to offer its customers additional programs, which a regulated gas company cannot offer.  Furthermore, by purchasing their gas supplies from third parties, FPU’s commercial customers may avoid certain taxes and fees, which FPU is required to collect and impose on the sale of natural gas.  FPU’s operating results will not be affected as it realizes the same gross profit regardless of whether the customer purchases the gas from FPU or uses FPU’s system to transport the gas since it does not profit on the fuel sales.  The FPSC approved various mechanisms, which will allow FPU to be reimbursed for the incremental cost of providing unbundled services.  For years after 2004, FPU will request recovery through base rates instead of being reimbursed.

Revenue  FPU bills utility customers on a monthly cycle basis; however, the billing cycle periods for most customers do not coincide with the accounting periods used for financial reporting. FPU accrues estimated revenue for gas and electric customers not yet billed during the accounting period. Determination of unbilled revenue relies on the use of estimates, fuel purchases, and historical data.

FPU’s rates include base revenues, fuel adjustment charges and the pass-through of certain governmental imposed taxes based on revenues.  The base revenues are determined by the FPSC and remain constant until a request for an increase in such rates is filed and approved by the FPSC.  From the FPSC perspective, FPU previously operated three distinct "entities", i.e., Northwest Florida electric, Northeast Florida electric and its natural gas division, consisting of Palm Beach County, and the Sanford and DeLand area in Central Florida.  Thus, for FPU to recover through rate relief the effects of inflation and construction expenditures for all such "entities", a request for an increase in base revenues would have required the filing of three separate rate cases.  In 2003 FPU successfully filed for electric rate increases and petitioned to consolidate the two electric &qu ot;entities" into one.  FPU anticipates filing for natural gas rate increases in 2004.  Fuel adjustment charges are estimated for customer billing purposes and any under/over-recovery difference between the incurred cost of fuel and estimated amounts billed to customers is deferred for future recovery or refund and either charged or credited to customers.  Interest accrues on such under/over-recoveries and is included in the subsequent adjustment.

Consolidation  The consolidated financial statements include the accounts of FPU and its wholly owned subsidiary, Flo-Gas Corporation.  All significant intercompany balances and transactions have been eliminated.

Certain reclassifications may have been made to the prior years' financial statements and other financial information contained herein to conform to the 2003 presentation.

Utility Plant and Depreciation Utility plant is stated at original cost. Propane utility plant that has been acquired in acquisitions is stated at fair market value at the time of each acquisition. The costs of additions to utility plant include contracted services, direct labor, transportation and materials.  The costs of units of property retired are removed from utility plant, and such costs plus removal costs, less salvage, are charged to accumulated depreciation.  Maintenance and repairs of property and replacement and renewal of items determined not to be units of property are charged to operating expenses. Substantially all of the utility plant and the shares of Flo-Gas Corporation collateralize FPU's First Mortgage Bonds.

Depreciation is computed using the composite straight-line method at rates prescribed by the FPSC for financial accounting purposes.  Propane depreciation is computed using a composite straight-line method at an average rate based on estimate life of approximately 20 years. Such rates are based on estimated service lives of the various classes of property.  Depreciation provisions on average depreciable property approximate 3.4% in 2003, 3.3% in 2002, and 3.4% in 2001.

Income Taxes  Deferred income taxes are provided on all significant temporary differences between the financial statements and tax basis of assets and liabilities at currently enacted tax rates.  Investment tax credits have been deferred and are amortized based upon the average useful life of the related property in accordance with the rate treatment.

Use of Estimates Inherent in the accounting process is the use of estimates when preparing financial statements in accordance with accounting principles generally accepted in the United States of America.  Actual results could differ from these estimates.  FPU used estimates in the preparation of its financial statements including the accrual for pensions, environmental liabilities, and uninsured liability claims.  An actuary calculates the estimated pension liability in accordance with FASB 87. Environmental liabilities are subject to certain unknown future events. FPU is self-insured for the first $250,000 of each general and auto liability claim and therefore accrues for estimated losses occurring from both asserted and unasserted claims.  The estimate for unasserted claims arising from unreported incidents is based on an analysis of historical claims data and judgment.  FPU b ecame fully insured for medical in December 2003 and will no longer require accrual of estimated claims.  Management believes that the accruals for potential liabilities are adequate.

2.  Impact of Recent Accounting Standards

Financial Accounting Standard No. 143

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The statement requires that the fair value of an asset retirement obligation be recognized at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset.  SFAS No. 143 also requires that components of previously recorded depreciation related to the cost of removal of assets upon retirement, whether legal asset retirement obligations or not, be removed from a company’s accumulated depreciation reserve. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.  FPU adopted the provisions of the Statement as of January 1, 2003, as prescribed by the FPSC.  Under FPSC guidelines, the estimated cost of removal e xpenses for normal retirements related to regulated fixed assets are reserved through the depreciation expense and accumulated reserves. At December 31, 2003, FPU reclassified the estimated cost of removal from accumulated depreciation to a regulatory liability for the obligation.  The estimated value of the reserve that has been accumulated for future cost of removal as of December 31, 2003 and 2002 was approximately $6.1 million and $5.8 million, respectively.  All prior period amounts have been restated to conform to the current year presentation.

Financial Accounting Standard No. 149

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities."  This statement clarifies the circumstances under which a contract with an initial net investment becomes a derivative, and clarifies when a derivative contains a financing component.  As FPU has designated all material contracts meeting the definition of possible derivative instruments as "normal purchases and sales" under SFAS No. 133, "Accounting for Derivatives", this statement had no impact on the current financial statements issued by FPU but could impact future financial statements.

Financial Accounting Standard No. 150

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 had no impact on current financial instruments issued by FPU, but may impact any future financial instruments issued.

3.  Notes Payable

On April 1, 2003 FPU opened a $12.0 million, thirty-nine month line of credit, the current outstanding balance of which is $2.3 million. The $20.0 million line of credit held until April 2003 expired. The old line of credit had $19.2 million borrowed at the end of 2002 and provided for interest at LIBOR plus fifty basis points. FPU reserves $1.0 million of the LOC to cover expenses for any major storm repairs in its Northwest Florida division. An additional $250,000 of the LOC is reserved for a ‘letter of credit’ insuring propane facilities. The interest rates for the line of credit at December 31, 2003, 2002, and 2001 were approximately 2.0%, 1.9% and 2.4%, respectively.

In October 2001, FPU acquired Z-Gas Company, Inc., a propane gas service distribution company, in a stock for stock transaction valued at approximately $600,000. The acquisition added about 1,000 customers to the propane gas operation in the Northeast Florida division.

In December 2001, FPU acquired certain net assets of Atlantic Utilities, the Florida operation of Southern Union Company in a cash transaction valued at approximately $10.0 million. Atlantic Utilities served about 4,400 natural gas customers in New Smyrna Beach and about 1,900 propane gas customers in Central and South Florida.

The excess of the consideration paid over the estimated fair value, or the depreciated original cost for regulated entities, of net assets including intangibles acquired in both the Atlantic Utilities and Z-Gas acquisitions was approximately $3.1 million.  This was recorded as goodwill and in accordance with SFAS No. 142, is not being amortized.  The natural gas portion of this amount is approximately $1.5 million.

The following unaudited pro forma information combines the consolidated results of operations of FPU with those of Z-Gas and Atlantic Utilities as if these acquisitions had occurred at the beginning of 2001. The pro forma results are not necessarily an indication of the results that would have been achieved had the transactions been consummated as of the date indicated, or of the results that may be achieved in the future. The 2001 information includes actual amounts for November and December information for the results of Z-Gas and December 15-31 information for the results of Atlantic Utilities.  The income statement for 2002 includes all the effects from these two acquisitions and no pro forma adjustments are necessary.

In November 2002, FPU acquired Nature Coast Utilities, a propane gas service distribution company, in a cash for stock transaction valued at approximately $740,000.  The acquisition added about 1,200 customers to FPU’s new Nature Coast division located in West Central Florida.

The excess of the consideration paid over the fair value of assets acquired and liabilities assumed associated with this acquisition, resulted in goodwill of approximately $223,000 and in accordance with SFAS No. 142, it is not being amortized.  In 2003, subsequent acquisition adjustments have increased the goodwill to $240,000.  There are no other intangible assets identified with this acquisition.

5.  Goodwill and Intangible Assets

Effective January 1, 2002, FPU adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under this statement, the amortization of goodwill is no longer permitted and intangible assets with an indefinite life will not be amortized. The standard requires goodwill to be periodically tested for impairment and written down to fair value if considered impaired.  The reporting units have been determined to be propane gas and natural gas for the purposes of impairment testing.

Intangible assets associated with FPU’s acquisitions have been identified and are shown as separate line items on the balance sheet.   The intangibles subject to amortization over a five-year period are non-compete agreements totaling $35,000.  The related amortization of $14,162 is included in the net intangible asset on the balance sheet.  The remaining intangibles identified are customer distribution rights of $1.9 million and customer relationships of $900,000, both of which have indefinite lives and are not subject to amortization.

All goodwill relates to the natural and propane gas acquisitions and accordingly, there is no amortization of goodwill reported in the accompanying consolidated financial statements. Goodwill is $1.5 million in the natural gas segment and $1.9 million in the propane gas segment.  The initial test for goodwill impairment was performed for the reporting segments as of January 1, 2002 and the test results showed no impairment for either operating segment.  A subsequent impairment test was performed as of January 1, 2003 and showed no impairment for either reporting segment.

6.  Discontinued Operations

Water Service

On December 3, 2002, FPU entered into an agreement to sell certain assets comprising its water utility system to the City of Fernandina Beach. The closing of this transaction took place on March 27, 2003.  The City paid FPU $19.2 million  in cash at closing, as well as future consideration of approximately $7.4 million to be received (as summarized below) until February 15, 2010, when FPU will receive the final payment from the City. The net proceeds from the sale resulted in the payoff of the notes payable balance.  FPU recognized and recorded the present value of the long-term receivable in the amount of $5.7 million, using a discount rate of 4.34%. The long-term receivable has been subsequently increased to recognize interest income in the amount of $190,000.  The fair value of the consideration is approximately $25.0 million. The gain on the disposal of Discontinued Operations inc luding the income from discontinued operations for the first quarter of 2003, was $15.8 million or $9.9 million after tax, and has subsequently been adjusted to $15.9 million or $9.9 million after tax due to adjustments to sales related expenses that were previously estimated.  

The accompanying consolidated financial statements have been restated for all periods presented for the discontinued operations of the water division. FPU did not cease recording depreciation expense due to the regulatory requirements and continued to record depreciation through the sale date of March 27, 2003. The total net plant amounted to approximately $9.7 million, and the net assets less liabilities amounted to approximately $8.9 million at the date of sale. The assets and liabilities of the water division have been included in current assets and current liabilities as of December 31, 2002, as assets and liabilities held for sale.  

Estimated Annual Future Value of Consideration due from the City for years following December 31, 2003 is as follows (in thousands):

Results of discontinued operations were as follows:

The major balance sheet classes included in assets and liabilities of discontinued operations in the Consolidated Balance Sheets, as of December 31, 2002, are as follows:

7.  Gain on Sale of Property

FPU sold property held in Delray Beach, in its South Florida division, for a gain of approximately $529,000 in the first quarter of 2002.  This property was primarily regulated property and accordingly the majority of the gain was deferred awaiting FPSC approval on the disposition of that gain. FPU has been granted approval by the FPSC to allow amortization of the gain with an offset to depreciation expense over five years beginning April 2002. The non-regulated portion of the gain has been recognized in 2002 and amounted to $53,000, net of income taxes.  

FPU sold property held in DeLand, in its Central Florida division, for a gain of approximately $186,000 during 2002.  This property was primarily regulated property and accordingly the majority of the gain was deferred awaiting FPSC approval on the disposition of that gain.  FPU has been granted approval by the FPSC to allow amortization of the gain with an offset to depreciation expense over five years beginning August 2002.  The non-regulated portion of the gain was recognized in 2002 and amounted to $17,000, net of income taxes.

8.  Capitalization

Common Stock Split

In July 2002, FPU affected a four-for-three stock split in the form of a stock dividend and, accordingly, transferred from paid-in capital to common stock, an amount equal to the aggregate par value of the additional shares.  All per share data included herein have been retroactively restated to reflect the stock split.

Common Shares Reserved  

FPU has reserved 91,049 common shares for issuance under the Dividend Reinvestment Plan and 8,750 common shares for issuance under the Employee Stock Purchase Plan.  

Dividend Restriction

The Indenture of Mortgage and Deed of Trust and supplements thereto provide for restriction of the payment of cash dividends.  At December 31, 2003 approximately $4.3 million of retained earnings were free of such restriction, and therefore available for the payment of dividends.

9.  Debt

FPU issued its First Mortgage Bond, 6.85% Series due 2031 on September 27, 2001 in the aggregate principal amount of $15.0 million as security for the 6.85% Secured Insured Quarterly Notes, due October 1, 2031 (IQ Notes). Interest on the pledged bond accrues at the rate of 6.85% per annum payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, payable initially on January 1, 2002.  The pledged bond constitutes the Fourteenth Series of FPU's First Mortgage Bonds.

FPU issued $14.0 million of Palm Beach County municipal bonds (Industrial Development Revenue Bonds) on November 14, 2001 to finance development in the area.  The interest rate on the thirty-year callable bonds is 4.90%.  The bond proceeds were restricted and held in trust until construction expenditures were actually incurred by FPU.  In 2002 the remaining $8 million was drawn from the restricted funds held by the trustee.

In 1992, FPU issued its First Mortgage Bond 9.08% Series in the amount of $8.0 million.  The thirty-year bond is due in June 2022.

FPU issued two of its First Mortgage bond series on May 1, 1988; the 9.57% Series due 2018 in the amount of $10.0 million and 10.03% Series due 2018 in the amount of $5.5 million.  The pledged bonds constitute the Twelfth Series of FPU’s First Mortgage Bonds.  These two issuances require sinking fund payments of $909,000 and $500,000 respectively, beginning in 2008.

On April 1, 2003 FPU changed banks and opened a $12.0 million, thirty-nine month line of credit, the current outstanding balance of which is $2,278,000. FPU reserves $1 million of the LOC to cover expenses for any major storm repairs in its Northwest Florida division. An additional $250,000 of the LOC is reserved for a ‘letter of credit’ insuring propane facilities.

10.  Segment Information

FPU is organized into two continuing regulated business segments: natural gas and electric and one non-regulated business segment, propane gas.  Water, a regulated segment, has been classified as discontinued operations and has been eliminated from segment information with the exception of Identifiable assets that are shown for 2002 and 2001. There are no material inter-segment sales or transfers.

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

Business segment information for 2003, 2002 and 2001 is summarized as follows:

(in thousands)

12.  Employee Benefit Plans

Pension Plan

The following table provides the components of net periodic benefit cost for the plans for fiscal years 2003, 2002 and 2001: