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3/18/2003

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 (The Company or FPU) was incorporated on March 6, 1924 and reincorporated on April 29, 1925 under the 1925 Florida Corporation Law, continuing its corporate existence pursuant to such law and its Certificate of Reincorporation, as amended.  In 2001 the Company started a proactive process to look for opportunities to purchase small 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 assets and they provide less than 10% of revenues and operating income excluding income taxes.

Description of Business

Florida Public Utilities Company is regulated by the Florida Public Service Commission, except for propane gas service supplied by its wholly owned subsidiary Flo-Gas Corporation, and provides natural and propane gas service, electric service and water service to consumers in Florida.  The Company is comprised of the following five divisions and number of customers as of December 31, 2002: (1) South Florida division serves natural gas to 29,697 customers and propane gas to 6,288 customers; (2) Central Florida division serves natural gas to 16,670 customers and propane gas to 3,789 customers; (3) Northwest Florida division provides electricity to 12,335 customers; (4) Northeast Florida division serves electric to 14,020 customers, water to 7,089 customers and propane gas to 1,456 customers; and (5) Nat ure Coast division which serves propane gas to 1,207 customers.

On December 3, 2002 the Company entered into an agreement to sell the assets of its water utility system to the City of Fernandina Beach. A tentative closing date of March 27, 2003 is scheduled (for additional information see "Discontinued Operations" in the Notes to Consolidated Financial Statements). The sale will provide working capital for future capital expenditures and acquisitions and aligns the Company with its strategic goal of providing for customers’ energy needs and expanding core energy related businesses.

The economy of the South Florida division relies somewhat on the migration of seasonal residents and tourists during the winter season; however, small commercial and residential customers, who are not seasonal, provide stability.

Seasonal residents and tourists continue to play a role in the Central Florida division; however the I-4 corridor, particularly in Seminole County’s Lake Mary/Heathrow area, is producing a greater amount of large business parks, individual corporate buildings and call centers.  Volusia County’s economy still seems to be dominated by small and privately owned businesses with the major employers being Florida Power and Florida Power & Light which own and operate three power plants in the area.

The Northwest division growth relies on the economies in Jackson, Calhoun and Liberty Counties.  All three 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 involved in correction and rehabilitation centers.  There are also a number of smaller industries.

Northeast Florida’s economy is centered around two large paper mills, ITT Rayonier, Inc. and Jefferson Smurfit Corp.  The two large paper mills accounted for 8.6% of total 2002 electric division’s operating revenues and 4.0% of the Company's total operating revenues.  The mills accounted for 4.0% of total 2002 electric division gross profit and 1.3% of the Company's total gross profit. The beach area, Amelia Island, is noted for its fine beaches and resort amenities.

Natural Gas

The Company receives its total supply of natural gas at twelve City Gate Stations connected to Florida Gas Transmission Company's  (FGT) pipeline system. FGT is owned by Citrus Corporation, which is jointly owned by Enron Corporation and El Paso Corporation.  Due to the joint ownership of FGT, there has been no direct effect on FPU's operations from Enron’s bankruptcy.  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, production of electricity and it finds many uses in the industry.  Increasingly, natural gas is being used in combination with other fuels to improve their environmental performance and decrease pollution. 

The Company has adequate gate stations in each distribution system to assure high levels of continuous service to our customers.  The vast majority of the natural gas the Company distributes is purchased in the gulf coast region both on-shore and offshore.  The Company has not experienced any supply availability issues or shortage of natural gas in recent history, nor does it expect any shortages in years to come.  In fact the U.S. Department of Energy estimates that there is more than a 60-year supply of natural gas reserves (see web site: http://www.fe.doe.gov/education/index.html).  

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

The Company has continued to be in full compliance with the Gas Industry Standards Board’s (GISB) standards.  The GISB was formed to develop a uniform nationwide network of natural gas producers, marketers, gathering systems, pipelines, distribution companies and customers.  The GISB’s standards place all participants on the same time schedules for procurement, capacity transactions, invoicing, etc.  It causes the network to be fully available twenty-four hours per day, 365 days per year.  

The Company has gained vast experience directly contracting for gas supplies with marketers and producers while contracting for transportation services from FGT.  This experience appropriately postured the Company to be most effective in operating within an unbundled industry environment. All fuel costs and associated savings are passed along to our traditional sales customers.  Additionally, the Company 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.  The Company continues to be one of Florida’s lowest cost suppliers of natural gas.

The Company continued its activity in Off-System Sales since receiving approval for the appropriate tariff from the Florida Public Service Commission (FPSC).  Off-System Sales allow the Company to broaden its market to include any customer within the state of Florida who currently uses natural gas.  Since inception, Off-System Sales have been transacted between the Company and national marketers, electric generators, other gas distributors and agricultural firms, to name a few.  The tariff permits for profit sharing between the Company and its customers.  

The Company, through its Purchased Gas Adjustment (PGA) mechanism, collected the cost from its customers in 2002 for any 2001 under collections.  The Company's natural gas sales are affected by weather, which results in higher gas sales per day during the winter period as opposed to the summer season.  The Company's portfolio of customers is quite diverse with the largest customers using natural gas for the generation of electricity.  The Company is not dependent on a single natural gas customer for a large percentage of its total revenue. 

The Company provides unbundled gas service to its commercial natural gas customers whereby such customers have the option of purchasing their gas supplies from third parties or directly from FPU. The Company’s operating results are not adversely affected whether the customer purchases the gas from the Company or purchases the gas from third parties. This is because actual fuel costs are passed directly to customers and the Company does not profit on fuel sales. The Company officially offered unbundled services to commercial customers on August 1, 2001.  The FPSC approved various mechanisms, which will allow the Company to be reimbursed for the incremental cost of providing unbundled services.

Electricity  

The Company provides electrical service 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 Jacksonville Electric Authority.  In 1996, long term purchased power contracts were executed with both suppliers that will continue through 2007.  Southern Company provides electrical power to the Northwest division and the Jacksonville Electric Authority provides electrical power to the Northeast division.  Less than 1% of the Company'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 the Company to offer customers th e lowest electric rates in the State of Florida.

The Company is not a generating utility, which results in environmental regulations having minimal effect on operations.

Both the Northwest and Northeast divisions are located in northern Florida and experience a variety of weather patterns.  Hot summers and cold winters ensure that electrical sales are not extremely seasonal in nature.

The Company has no dependence upon any major customers.  No single customer accounts for more that 10% of sales or profit.

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

Florida Public Utilities purchases its supply of propane gas from several different wholesale companies such as: Dynegy- Gas Liquids Division, Propane Resources, Sea3 of Tampa and Harper Industries.  Propane makes its way to Florida via ocean going barge to seaport terminals in Tampa and Ft. Lauderdale, by railcar and through the Dixie Pipeline terminus at Alma, Ga.  The propane supply infrastructure is more than adequate to meet the needs of the industry in Florida for the foreseeable future.

Propane is a non-pollutant, therefore not affected by environmental regulations as other petroleum products are.  Propane 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.

The sales volume of propane is affected by the season and the weather.  Florida typically has a tourist season that coincides with the winter season; propane sold during that period is affected by tourism and the weather. The propane division's sales volumes and revenues are closely balanced between residential and commercial customers.  Some of the strategies the Company is employing to become less weather dependant are concentrating on the burgeoning forklift propane cylinder exchange market and the marketing of appliances that are not used for heating air.  Water heaters and forklift cylinder exchange accounts are excellent ways to strive toward becoming less weather reliant.  The propane division does not have any one customer that represents more than ten percent of the overall sal es volume or revenues.

Competition in the propane business is significant.  Propane competes directly with other propane suppliers, natural gas and electric companies.  A major consolidation in the propane industry has and will continue to provide Florida Public Utilities with opportunities to expand its market share.  FPU competes on the basis of fair priced energy and excellent customer service.

Regulation

The Florida Public Service Commission (FPSC), pursuant to State Statutes, has authority encompassing natural gas, electric, and water rates, conditions of service, the issuance of securities and certain other matters affecting the operations of the Company.  The water segment of the business was not subject to FPSC regulation in 2002 until July 29 because the Board of Nassau County had, on September 17, 2001, rescinded the FPSC jurisdiction but returned it to the FPSC on July 29, 2002. The water segment is classified as discontinued operations due to its pending sale (for additional information see "Discontinued Operations" in the Notes to Consolidated Financial Statements).

Franchises

The Company holds franchises in each of the incorporated municipalities where natural gas, electric and water operations take place.  These franchises generally have terms from 15 to 30 years and terminate at various dates.  We are in negotiations with some of our municipalities in which the Company’s franchises have lapsed.  We continue to provide services to these municipalities and do not anticipate any interruption in our service.

Employees

On December 31, 2002 the Company had 353 employees, of whom 104 were covered under union contracts with two labor unions, the International Brotherhood of Electrical Workers and the International Chemical Workers Union.

Research Expenditures and Environmental Regulations

Environmental regulations do not have a material impact on the Company.  The Company does not engage in research activities.

Competition

Generally, in municipalities and other areas where the Company provides natural gas, electric and water services, no other utility directly renders such service.  Propane gas has several propane competitors competing on price and service.

Item 2.   Properties

The Company's properties consist primarily of distribution systems and related facilities.  At December 31, 2002 the Company owned 22 miles of electric transmission lines and 1,047 miles of electric distribution lines. The gas properties distribute gas through 1,405 miles of gas main.  The water property consists of deep wells, pumping equipment, water treatment facilities and a distribution system.  The propane gas systems operated by the Company's subsidiary have bulk storage facilities and tank installations on the customers' premises.

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

Item 3.   Legal Proceedings

Environmental. The Company has several contamination sites involving pending or threatened litigation and is in various stages of assessment in­vestiga­tion; see "Contingen­cies" in the Notes to Consolidated Financial Statements.  The Company believes that all future contamination assessment and remedial costs, legal fees and other related costs will not be in excess of the rate relief granted the Company and insurance settlement proceeds received.

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 or about October 18, 2000, FPU was sued by the Plaintiffs in this case for damages allegedly arising out of FPU's alleged negligence in failing to properly install and/or maintain electrical power lines, utility poles and related equipment which allegedly caused a fire that spread to and eventually destroyed a warehouse/office facility that was owned by Violet Skipper, that housed the place of business of the corporate plaintiff and that contained property therein owned by all the plaintiffs.  The warehouse/office facility was located in Jackson County, Florida.  Plaintiffs alleged damages i n excess of $1,000,000.  FPU has denied the claims in the complaint and is defending it on the theory that the alleged fire started within the warehouse/office facility and not at or in its electrical equipment.  FPU has liability insurance that will limit our exposure on this claim to a maximum of $250,000.

This case, though filed originally in Palm Beach County, Florida, was transferred to Jackson County, Florida.  Discovery is still in process.  No Motions are currently pending.  No trial date has been scheduled. At this time we are unable to provide an evaluation of the likelihood of an unfavorable outcome or provide an estimate of the amount or range of potential loss. In the event that the Company does not prevail in this suit, there may be a material adverse effect on the financial statements.  However, FPU believes there are meritorious defenses to this pending litigation.

Darrell Glenn v. Florida Public Utilities Company v. Utility Service and Maintenance of Missouri, Inc., Case No. CA 01-07810 AI, Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County, Florida; Case No. 02-37-CA, Division A, Circuit Court for the Fourth Judicial Circuit, Nassau County, Florida. This is an action that was pending in state court in Palm Beach County, Florida until FPU successfully moved to have the case transferred to Nassau County, Florida.  Darrell Glenn ("Glenn"), an employee of a painting subcontractor, claimed to have been shocked and injured on May 16, 2001, while painting electrical equipment at FPU's Step down site in Fernandina Beach, Florida.  His employer, Utility Service & Maintenance, Inc. ("USM"), was operating under an ag reement that required it to supervise its own workers.   This matter has been settled by an agreement reached at mediation on January 15, 2003 pursuant to which FPU agreed to pay $300,000 to the plaintiff in return for a release. FPU will recover $50,000 of the settlement through liability insurance.

The Company is also involved with other various claims and litigation incidental to its business.  In the opinion of management, none of these incidental claims and litigation will have a material adverse effect on the Company'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

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

On February 8, 2003, there were approximately 2,736 holders of the Registrant’s Common Stock including individual participants in security position listing.

It is the Company's intent to continue to pay quarterly dividends in the foreseeable future.  Dividend policy is reviewed on an ongoing basis and is dependent upon the Company's expectation of future earnings, cash flow, financial condition, capital requirements and other factors.

The Company’s Fifteenth Supplemental Indenture of Mortgage and Deed of Trust restricts the amount that is available for cash dividends.  At December 31, 2002 approximately $4,000,000 of retained earnings were free of such restriction.

Recent Sales of unregistered securities

On November 14, 2001 the Company sold Palm Beach County Florida Industrial Development Revenue Bonds in the amount of $14,000,000. The aggregate offering price was $14,000,000, with payments relating to $420,000 in underwriting fees and $349,426 for insurance premiums.  The bond proceeds were restricted and held in trust until construction expenditures were actually incurred by the Company.  (See "Liquidity and Capital Resources" under Item 7 for additional information).  The Company issued its First Mortgage Bond, 4.9% Series due 2031 on November 14, 2001 in the aggregate principal amount of $14,000,000 as security for the $14,000,000 Palm Beach Industrial Development Revenue Development Bonds.  The pledged bond constitutes the Fifteenth Series of the Company's First Mortgage Bonds.

The exemption from registration is under the authority of Section 382 of the Securities Act of 1933, based on the bond being issued by a state and local government.

Item 6.

Selected Financial Data

(dollars in thousands, except per share data)