Overview

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

Revenues and gross profit increased in the first quarter of 2009 compared to the same period in the prior year due in a large part to the base rate increases in our electric operations.

Earnings for the first quarter of 2009 were significantly impacted by the pension plan freeze. The pension curtailment expensed in the first quarter of 2009 as a result of the freeze was approximately $2.3 million. The impact to net income for the effects of these curtailment expenses is approximately $1.4 million after income taxes or $.24 per share for the quarter ending March 31, 2009.

Earnings continue to be impacted by the overall economic slow-down and management expects current conditions to continue through 2009 with an ongoing impact to our customer growth rates, unit sales and sales expense. Management continues to look for ways to help offset the negative impacts of the current economic condition.

Early in the second quarter, we entered into a merger agreement with Chesapeake Utilities Corporation. See Note 15, "Subsequent Events," above and "Outlook," below for more information about this proposed merger.

Results of Operations

Revenues and Gross Profit Summary

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

                             Revenues and Gross Profit
                              (Dollars in thousands)
                                                     Three Months Ended
                                                         March 31,
                                                      2009        2008
          Natural Gas
          Revenues                                   $19,711    $22,137
          Cost of fuel and other pass through costs   11,063     14,082


           Gross Profit                              $ 8,648    $ 8,055
           Units sold:  (MDth)                         1,964      1,861
           Customers (average for the period)         52,095     52,166
           Electric
           Revenues                                  $22,033    $17,523
           Cost of fuel and other pass through costs  17,715     13,859
           Gross Profit                              $ 4,318    $ 3,664
           Units sold: (MWH)                         165,245    173,276
           Customers(average for the period)          31,109     31,221
           Propane Gas
           Revenues                                   $4,037     $5,370
           Cost of fuel                                1,884      2,971
           Gross Profit                               $2,153     $2,399
           Units sold:  (MDth)                           166        170
           Customers (average for the period)         12,374     12,666
           Consolidated
           Revenues                                  $45,781    $45,030
           Cost of fuel                               30,662     30,912
           Gross Profit                              $15,119    $14,118
           Customers(average for the period)          95,578     96,053

Three Months Ended March 31, 2009 Compared with Three Months Ended March 31, 2008.

Revenues and Gross Profit

Natural Gas

Natural gas service revenues decreased $2.4 million in the first quarter of 2009 from the same period in 2008 due to lower fuel and other costs passed through to customers of $3 million. Colder temperatures in the first quarter of 2009 compared to the same period last year was the primary reason for a 5.5% increase in units sold and a 7% increase in gross profit. Interim rates awarded in our natural gas rate proceeding beginning March 2009 also positively impacted our gross profit.

Electric

Electric service revenues increased $4.5 million in the first quarter of 2009 over the same period in 2008. Higher cost of fuel and other costs that were passed through to customers accounted for $3.9 million of this increase.

Gross profit increased by $654,000 or 18% this quarter compared to the first quarter of 2008 primarily due to the final base rate increase approved April 2008, compared to interim rates which were in effect in the first quarter of 2008. Units sold, excluding industrial customers, decreased by 4.8%. Management believes this decrease is a result of possible conservation measures taken by our customers due to fuel and base rate increases. Gross profit was not materially impacted by reduced consumption as this was forecasted in our electric rate increase approved April 2008. Rates were set to compensate for the anticipated reduction in units sold due to significant increases in fuel costs.

Propane Gas

Propane revenues decreased $1.3 million in the first quarter of 2009 compared to the same period in 2008. The cost of fuel contributed to $1.1 million of the revenue decrease, with gross profit decreasing by $246,000.

In spite of colder temperatures units sold declined by 2.4%. Management believes this is a result of the downturn in the housing market and the economy as a whole which had a negative impact on customer usage.

Operating Expenses

Operating expenses increased $3.0 millionin the first quarter of 2009 as compared to the same period in 2008. The recent pension plan freeze significantly impacted our operating expenses in the first quarter of 2009; related curtailment costs associated with our pension plan freeze increased operating expenses by approximately $2.2 million. In addition to the pension curtailment costs, administrative and general expenses increased $178,000 primarily due to increased pension expenses unrelated to the plan freeze and auditing fees related to our initial required audit of internal control over financial reporting under Sarbanes Oxley section 404. As we continue to experience the impact of the declining economy, bad debt expenses increased $220,000 due in a large part to a recent bankruptcy of a commercial customer in our electric segment. Maintenance expenses increased $129,000 as a result of several severe storms and storm hardening initiatives recently mandated by the FPSC.

Other Income and Deductions

Merchandise and service revenue increased by $39,000 and expense increased by $25,000 in the first quarter of 2009 compared to the same period last year resulting in increased profitability of $14,000. Although we continue to experience effects of the slowing economy, sales increased through a successful coupon program.

Other income increased $44,000 primarily for interest income on a deposit refund from one of our fuel providers.

Total interest expense decreased by $77,000 in the first quarter of 2009 compared to the same period last year. This was due primarily to a lower average balance on our line of credit as a result of increased cash flow from operations and lower capital expenditures. In addition, the interest rate on our line of credit, tied to the London Interbank Rate (LIBOR), was lower this quarter, compared to the first quarter of 2008. Our line of credit was also amended in March 2008, lowering the interest rate margin paid on borrowings by 0.10% or 10 basis points.

Liquidity and Capital Resources

Cash Flows

Operating Activities

Net cash flow provided by operating activities for the three months ended March 31, 2009 increased by approximately $8.2 million over the same period in 2008. Over-recovered fuel costs accounted for approximately $3.8 million of the increase in the current year's net cash flow. Colder temperatures along with our electric and natural gas base rate increases also contributed approximately $2.8 million of the increase.

Investing Activities

Construction expenditures in the three months ended March 31, 2009 decreased by $1.0 million compared with the same period last year. The decrease was primarily due to discretionary capital expenditures controls instituted by the company during the current slow-down in the economy.

Financing Activities

Short-term borrowing on our line of credit decreased by $8.3 million in the first quarter of 2009 compared to the same period in 2008 primarily as a result of the reduced need for short-term borrowing primarily because of the increase in funds provided from our operations and lower capital expenditures.

Capital Resources

We have a revolving line of credit with Bank of America which expires July 1, 2010. Prior to March 2008, the available line of credit was $15 million with the ability to increase the limit to a maximum of $20 million upon 30 days notice. In March 2008, we amended our line of credit to allow us, upon 30 days notice, to increase our maximum credit line from $20 million to $26 million and to reduce the interest rate paid on borrowings by 0.10% or 10 basis points. In April 2008, we increased the currently available line of credit from $12 million to $15 million. The balance outstanding was $3 million at March 31, 2009. We reserve $1 million of the line of credit to cover potential expenses for any major storm repairs in our electric segment and an additional $250,000 for a letter of credit insuring propane gas facilities.

The line of credit contains affirmative and negative covenants that, if violated, would give the bank the right to accelerate the due date of the loan to be immediately payable. The line of credit covenants with Bank of America include certain financial ratios, all of which are currently met.

The line of credit, long-term debt and preferred stock as of March 31, 2009 comprised 52% of total debt and equity capitalization.

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

Our 1942 Indenture of Mortgage and Deed of Trust, which is a mortgage on all real and personal property, permits the issuance of additional bonds based upon a calculation of unencumbered net real and personal property. At March 31, 2009, such calculation would permit the issuance of approximately $49.6 million of additional bonds.

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

We have $3.5 million in invested funds for payment of future environmental costs. We expect to use some or all of these funds in 2010 and 2011.

We expect to receive tax refunds of approximately $1.8 million in early 2009. The primary reason for this refund is our planned pension contribution of $4.6 million for plan year 2008 expected to be made in 2009. This pension contribution is a deduction for tax purposes in 2008 calendar year but was not known at the time of estimated tax payments made in calendar year 2008.

As of March 31, 2009 there was approximately $5.7 million in receivables from the 2003 sale of our water assets. Final payment of principal and interest totaling $5.7 million is expected in February 2010.

Capital Requirements

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

Capital expenditures are expected to be lower for the remainder of 2009 compared to 2008 by approximately $900,000 due primarily to the Company's current controls on discretionary capital expenditures during the current economic slow-down.

We currently do not have any outstanding commitments for capital expenditures.

Cash requirements will increase significantly in the future due to environmental cleanup costs, sinking fund payments on long-term debt and pension contributions. Environmental cleanup is forecast to require payments of $774,000 in 2009, with remaining forecasted payments, which could total approximately $9.1 million net of investment proceeds, beginning in 2010. Annual long-term debt sinking fund payments of approximately $1.4 million will continue in 2009 for ten years.

Based on current projections, we will make required contributions to our defined benefit pension plan of approximately $560,000 and $1.2 million in 2009 for the 2008 and 2009 plan years respectively. In addition, we expect to make a voluntary contribution of $4 million for the 2008 plan year. We will continue in future years to make contributions as required by the Pension Protection Act funding rules.

We believe that cash from operations, coupled with short-term borrowings on our line of credit, will be sufficient to satisfy our operating expenses, normal construction expenditure and dividend payments through 2009. However, if we experience significant environmental expenditures in the next two or three years it is possible we may need to raise additional funds. There can be no assurance, however, that equity or debt transaction financing will be available on favorable terms or at all when we make the decision to proceed with a financing transaction.

Outlook

Pension Plan

In March 2009, the Company's Board of Directors authorized amendments to the pension plan in an effort to reduce anticipated future pension expenses. As a result of these amendments, the Company will freeze the pension plan for all participants effective December 31, 2009. All future benefit accruals under the plan shall cease, including freezing salary rates at levels existing in 2009 average compensation as of December 31, 2009. In addition to the freeze, the reduced early retirement eligibility will be lowered from 30 years to 20 years and two additional service years can be earned by active participants at the December 31, 2009 average compensation levels for the purposes of benefit accrual, vesting and retirement eligibility. Beyond December 31, 2011, active participants will continue to accrue service years for the purposes of vesting and retirement eligibility. The two additional service years will increase annual pension cost by $800,000 in each of the next two years.

The amendments to the plan have been accounted for in accordance with SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. The pension liability has been reduced by $5.7 million and we recognized approximately $2.7 million non-cash pretax curtailment loss of which $2.3 million is reflected in expenses and $400,000 is reflected on the balance sheet in the Company's consolidated statements.

The freeze will reduce pension expenses beginning in the second quarter of 2009. With the freeze, pension expense and pension contribution are expected to be approximately $500,000 and $13 million, respectively spread over the period 2009 through 2013.

Natural Gas Base Rate Proceeding

We filed a request with the FPSC in the fourth quarter of 2008 for a base rate increase of approximately $9.9 million annually in our natural gas segment. This request included recovery of increased expenses and some capital expenditures since our last rate proceeding in 2004.

On May 5, 2009 the FPSC approved a final natural gas rate increase of approximately $8.5 million in revenues annually with new rates beginning June 4, 2009. Interested parties may protest the action of the Commission within 21 days after the entry of the Commission order and if the ruling is protested, a full hearing will be required within eight months. Revenues may be collected pending possible refund upon final determination at the full hearing. These revenues should provide an increase to the Company's overall profitability for the natural gas segment and recovery of increased expenditures including depreciation and other expenses beginning in 2009.

Interim rate relief was approved by the FPSC on February 10, 2009 for partial recovery of the increased expenditures. Interim rates which should produce additional annual revenues of approximately $1.0 million became effective on March 12, 2009 and will remain effective until final rates are in place on June 4, 2009.

Electric Franchise Marianna

The City of Marianna employed a Consultant to review the existing franchise agreement with the Company that is up for renewal in 2010 and to review the feasibility of purchasing the portion of our electric system that is within the city limits. On May 7, 2009 the City of Marianna Commissioners voted to enter into a new ten year franchise agreement with FPUC with stipulations that new Interruptible and Time of Use rates become available for certain customers prior to February 2011 or the franchise could be voided six months after that date. The second reading and final passage of the franchise ordinance is scheduled for June 2009 and the new agreement will be effective February 1, 2010. Should final approval of the ordinance not be obtained as anticipated, the City could elect to purchase the Marianna portion of the distribution system. This would require the city to pay severance/reintegration costs, fair market value for the system and the initial investment in the infrastructure to operate this limited facility. If the franchise is not renewed and the City purchases this portion of our electric system, the Company would have a gain in the year of the acquisition; but, ongoing financial results would be negatively impacted from the loss of this operating area within our electric operations.

Storm Preparedness Expenses

Regulators continue to focus on hurricane preparedness and storm recovery issues for utility companies. Mandated storm preparedness initiatives impacted our 2008 earnings and continue to impact our operating expenses and capital expenditures in 2009. The current forecast is not expected to exceed additional annual expenditures of approximately $260,000. During the 2008 rate proceeding, these storm preparedness costs were approved and have been included in the base rates.
It is possible that additional regulation and rules will be mandated regarding storm related expenditures over the next several years.

Land Purchase

We purchased land for $3.5 million in July 2007 for a new South Florida operations facility. We started preparing plans for site development of this property but have temporarily placed this project on hold. We may begin construction in the next one to three years or sell the property if we determine we can return to the existing operations location.

Natural Gas Depreciation Study

We filed a depreciation study with the FPSC in the fourth quarter of 2008 for our natural gas segment. In April 2009, the FPSC approved new deprecation rates to be effective July 1, 2009. As a result of new depreciation rates, depreciation expense is expected to increase approximately $200,000 annually beginning July 1, 2009, and we received full recovery for this increased expense in our base rate increase.

Large Customer in NE Electric Division

A large industrial customer in our northeast electric division filed for bankruptcy on January 26, 2009.

Although the average monthly gross profit from this customer was approximately $29,000 in 2008, the average total monthly bill including fuel costs for this customer was approximately $250,000. This customer has currently paid all outstanding amounts that were due as of December 31, 2008. The Company has reserved approximately $200,000 for this potential bad debt in the first quarter of 2009 awaiting the outcome of this bankruptcy proceeding. If the courts determine that we have to refund any prior payments, the Company may be required to write-off a portion of this customer's receivables including fuel cost to our reserve.

Bad Debt Expense

Management expects bad debt expense and related write-offs of receivables to continue increasing further in 2009 as a result of the current economic climate and the impact to our customers. We are not able to predict the impact to our financial results, but we do anticipate an increase to bad debt expense over 2008 levels.

Energy Efficiency Legislation

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

Covenants

We have historically met all our line of credit and fuel supplier covenants. As of December 2008 we were in violation of a covenant regarding our total liabilities to tangible net worth ratio included in one of our supply agreements with a fuel provider. The violation was caused primarily by a significant increase in our pension liability. Failure to meet this covenant would have required us to provide a one year irrevocable letter of credit for $3.3 million; however, we received a 30 day time extension to March 27, 2009 to meet this covenant ratio. On March 20, 2009, we calculated the covenant ratio, as of February 28, 2009 as required, and the supplier was advised that we were once again in compliance with this covenant. At this time management does not anticipate any further covenant violations.

Our line of credit contains a similar covenant ratio. Management is continuing to take steps to comply with all covenants on an ongoing basis, but there can be no assurance that further deterioration of the market or the economy will not occur and give rise to a violation.

The Company is in compliance with all covenants on our line of credit and other fuel supply agreements at March 31, 2009.

Merger

We entered into a definitive merger agreement with Chesapeake Utilities Corporation ("Chesapeake") on April 17, 2009. The merger was approved by both companies' boards of directors and is subject to the approval of both companies' shareholders. Under the merger agreement, holders of Florida Public Utilities common stock will receive 0.405 shares of Chesapeake common stock in exchange for each outstanding share of Florida Public Utilities. The merger is intended to qualify as a tax-free reorganization and is subject to various regulatory approvals and closing conditions as set forth in the merger agreement. The merger is expected to close during the fourth quarter of 2009 assuming all approvals are obtained and closing conditions are satisfied.

Forward-Looking Statements (Cautionary Statement)

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

·

Our consideration of equity or debt financing in the next few years.

·

Cash requirements will increase significantly in the future due to environmental clean-up costs, sinking fund payments on long-term debt and pension contributions.

·

Cash from operations, coupled with short-term borrowings on our line of credit, will be sufficient to satisfy our operating expenses, normal construction expenditure and dividend payments through 2009.

·

Realization of actual additional revenues from the electric rate proceeding finalized in May 2008 will occur as expected.

·

Realization of actual additional revenues from the natural gas rate proceeding finalized in May 2009 will occur as expected.

·

Impact of the overall economic conditions on our earnings, customer growth rates, unit sales and sales expense.

·

Capital expenditures will be less than originally expected for 2009.

·

Timing and progress of construction on the South Florida operations facility.

·

Increase in pension contributions to our defined benefit pension plan in 2009 and beyond.

·

Amortization of pension service costs and pension expense as expected in future years.

·

Increase in bad debt expense on our customer accounts receivable.

·

Impact of Energy Efficiency Legislation on our Company and our operating results.

·

Renewal of the Marianna Franchise.

·

Additional annual expenditures relating to storm preparedness.

These statements involve certain risks and uncertainties. Actual results may differ materially from what is expressed in such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed by the forward-looking statements include, but are not limited to, those set forth in "Risk Factors" in our Form 10-K for the year ended December 31, 2008.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

None of our gas or electric contracts are accounted for using the fair value method of accounting. While some of our contracts meet the definition of a derivative, we have designated these contracts as "normal purchases" under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". As of March 31, 2009, we had not entered into any hedging activities, and we do not anticipate entering into hedging activities in 2009. Beginning in 2009, we started pre-buying propane when certain price levels are reached.

. . .