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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

or

[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   

For the transition period from      __________________     to    ________________________

Commission file number 001-10608

Florida Public Utilities Company

(Exact name of the registrant as specified in its charter)

    Florida                                                                                                         59-0539080

               (State or other jurisdiction of                                                                                    (I.R.S. Employer

              Incorporation or organization)                                                                              Identification Number)

401 South Dixie Highway, West Palm Beach, FL                                                                                               33401

(Address of principal executive offices)                                                                                                             (Zip Code)

Registrant’s telephone number, including area code

(561)832-0872

Securities registered pursuant to section 12(b) of the Act:

                         Title of each class                                                             Name of each exchange on which registered

     Common Stock par value $1.50 per share                                                    American Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

(Title of class)

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be file by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          [ X  ]  Yes    [    ]  No

Indicate by check mark if disclosure of the delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [    ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    [   ]Yes   [ X ] No

As of June 30, 2004, the aggregate market value of the Registrant’s Common Stock held by non-affiliates (based upon the closing price of the Common Stock on that date on the American Stock Exchange) was approximately $71,150,684.

On February 17, 2005, 3,960,619 shares of the Registrant’s $1.50 par value common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of FPU’s Proxy Statement for the May 10, 2005 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.

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, commercial and industrial customers in Florida.  FPU’s regulated segment sells natural gas and electricity to approximately 80,000 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 approximately 12,000 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.

The Florida Public Service Commission (“FPSC”) regulates FPU’s natural gas and electric operations; the propane gas operations of FPU are not regulated.  FPU operates through five divisions: (1) the South Florida division, which provides natural gas and propane gas to customers in Palm Beach, Martin and Broward Counties; (2) the Central Florida division, which provides natural gas and propane gas to customers in Lake, Seminole, Orange, Flagler and Volusia Counties; (3) the Northwest Florida division, which provides electricity to customers in Jackson, Calhoun and Liberty Counties; (4) the Northeast Florida division, which  provides electricity and propane gas to customers in Duval and Nassau Counties; and (5) the West Florida division, which provides propane gas to customers in Levy, Citrus, Hernando, Marion and Pasco Counties.

The economy in which the South Florida division operates relies somewhat on the migration of seasonal residents and tourists during the winter season.  However, year-round commercial, industrial 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.  As FPU gains customers from this growth it should stabilize results in the Central Florida division.  

The Northwest division’s growth relies on the economies in Jackson, Calhoun and Liberty Counties.  All three of those counties have historically been 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, Alliance Laundry Systems and a new 907,000 square foot Family Dollar Distribution Center which was constructed in 2004 and started merchandise distribution operations in January of 2005.  Jackson County is currently Florida’s only Federal Rural Enterprise Zone and both Jackson and Liberty Counties have been designated as Florida Enterprise Zones.  The incentives from these programs were instrumental in bringing the Family Dollar Distribution Center to J ackson County.  There are also a number of smaller industries in the division’s territory with growth increasing due to the incentive packages available through the Enterprise Zone designations.  All of this growth is providing additional customers and electric revenues in this division.  In the Northeast division, the economy is centered on two large paper mills, Rayonier, Inc. and Jefferson Smurfit Corp.  

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.  FPU is affected by environmental regulations relating to the clean-up of soil contamination on land owned by FPU.  See "Contingen­cies" in the Notes to Consolidated Financial Statements.

Natural Gas

FPU receives all of its natural gas supply at 14 City Gate Stations.  Thirteen of the City Gate Stations are connected to the interstate Florida Gas Transmission (FGT’s) pipeline system.  One City Gate Station is served from an intrastate high-pressure transmission line owned by Florida City Gas (FCG).  Natural gas is primarily composed of methane, which is a colorless, odorless fuel that burns cleaner than many other traditional fossil fuels.  The interstate and intrastate transmission companies and FPU add odorant, which enables one to readily detect a gas leak.  Natural gas is one of the most popular forms of energy today.  It is used for heating, cooling, cooking, production of electricity by utilities, backup generation by business owners and homeowners and in many other ways by various industries.  Increasingly, natural gas is being used in combination with oth er 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 onshore and offshore.  FPU has not experienced any 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.

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 passes all fuel costs on to its customers.  FPU also transports natural gas for customers who purchase their own gas supplies and arrange for pipeline transportation.  FPU’s operating results are not adversely affected if the customer purchases its gas from third parties because FPU does not profit on fuel sales.

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.  Although the Florida Public Service Commission (FPSC) permits FPU to pass through to customers the increase in price for its gas supply, higher rates may cause customers to purchase less natural gas.  FPU's current portfolio of natural gas 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. 

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 Jacksonville Electric Authority).  In 1996, FPU executed long-term fixed-price purchased power contracts 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 year-round electric sales that do not have highly seasonal fluctuations.  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.  Therefore, FPU does not provide transportation service to electric customers.

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 barges to terminals in Tampa and Ft. Lauderdale, by railcars and through the Dixie Pipeline terminus at Alma and Albany, Georgia. 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. Propane gas is a hazardous material and as such is subject to strict code enforcement and safety requirements.

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 sales during that period are affected by tourism and the weather.  The propane gas segment's sales volumes and revenues are closely balanced between residential and commercial customers.  FPU is employing two strategies to become less weather dependent by concentrating on the forklift propane gas cylinder exchange market and marketing propane gas appliances 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.

The propane gas division competes directly with other propane, natural gas and electric suppliers.  FPU competes on the basis of pricing and customer service.

Information about Reporting 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 the Company to maximize synergies within existing operating units.  

For information concerning revenues, operating income, and identifiable assets of each of FPU’s segments, see Note 10 in Notes to Consolidated Financial Statements.

Regulation

The natural gas and electric segments are highly regulated by the FPSC.  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.  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 passing on increased expenses for certain fuel costs to customers.  Other operational expenses, such as pension and medical expenses, require FPU to pet ition the FPSC for rate increases.  The FPSC is likely to grant rate increases to offset increased expenditures necessary for business operations.  FPU successfully petitioned for an electric rate increase, which became effective on March 17, 2004, and for a natural gas rate increase that went into effect on November 18, 2004.

Franchises

FPU holds franchises in each of the incorporated municipalities where it provides natural gas and electricity.  These franchises generally have terms ranging from 10 to 30 years and terminate on varying dates.  FPU is currently in negotiations with some of the municipalities in which its franchises have lapsed and in new areas of service within current operating divisions.  FPU continues to provide services to these municipalities and does not anticipate any interruption in its service.

Employees

As of February 18, 2005 FPU had approximately 360 total employees, of which approximately 10 were part-time.  Of these employees, about 171 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.

Competition

Generally, FPU does not face substantial competition with respect to its natural gas and electric services.  This is because no other competitors can provide the same energy in our areas due to FPSC regulations and territorial agreements between utilities.  However, there is competition in these areas between 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 ("SEC").  These periodic reports and FPU’s annual report and FPU’s Code of Ethics Policy can be obtained through the Company’s website (http://www.fpuc.com).

Item 2.   Properties.

FPU owns office and warehouse facilities in Northwest, Northeast, Central, West and South Florida, which are used for operations and materials storage by the natural gas, electric, and propane segments.  Additionally, FPU owns various substations, city gate and regulator stations, easements and other assets located throughout its service areas, which are utilized in its operations.  In the electric segment at December 31, 2004, FPU owned 22 miles of electric transmission lines located in Northeast Florida and 1,067 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 1,481 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 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.  See Note 1 in Notes to Consolidated Financial Statements.

Item 3.   Legal Proceedings.

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.  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.  The natural gas rate relief, granted in late 2004, included provisions for recovery of $9.1 million for environmental liabilities.

FPU is subject to federal and state legislation with respect to soil, groundwater and employee health and safety matters and to environmental regulations issued by the Florida Department of Environmental Protection (FDEP), the United States Environmental Protection Agency (EPA) and other federal and state agencies.  Except as discussed below, FPU does not expect to incur material future expenditures for compliance with existing environmental laws and regulations.

West Palm Beach Site

The Company is currently evaluating remedial options to respond to environmental impacts to soil and groundwater at and in the immediate vicinity of a parcel of property owned by it in West Palm Beach, Florida upon which the Company previously operated a gasification plant.  The Company entered into a Consent Order with the FDEP effective April 8, 1991, that requires FPU to delineate the extent of soil and groundwater impacts associated with the prior operation of the gasification plant and to remediate such soil and groundwater impacts, if necessary.  Numerous reports have been submitted by FPU to FDEP, describing the results of soil and groundwater sampling conducted at the site.  A Supplemental Contamination Assessment Report Addendum ("SCARA") was submitted to FDEP in December 2001, summarizing the results of past investigations and providing the results of additional fieldwork conducted in 2001, in response to comments received previously from FDEP.

On September 29, 2003, FPU submitted to FDEP a Comprehensive Soil and Groundwater Assessment Report which described the results of substantial additional fieldwork undertaken in 2003 to respond to FDEP's comments to the SCARA.  Following a meeting with FDEP in October 2004 to discuss FDEP's comments to the Comprehensive Soil and Groundwater Assessment Report, FPU agreed to implement additional fieldwork that was initiated in December 2004 and will be completed by Spring 2005.  The cost of the additional fieldwork is projected to be approximately $50,000.

Based on the likely acceptability of proven remedial technologies implemented at similar sites in other states, consulting/remediation costs to address the impacts now characterized at the West Palm Beach site are projected to range from $10.0-$15.0 million.  This range of costs covers such remedies as in situ solidification, slurry wall and cap containment, air sparge/soil vapor extraction, or in situ chemical oxidation, or some combination of these remedies.

Prior to FDEP's approval of a final remedy for the site, we are unable to determine the complete extent or cost of remedial action which may be required. Remediation costs (including attorneys' fees and costs) for this site are currently projected to range from $10.2 million to $15.2 million.

Sanford Site

FPU owns a parcel of property located in Sanford, Florida, upon which a gasification plant was operated prior to FPU's acquisition of the property.  Following discovery of soil and groundwater impacts on the property, FPU has participated with four former owners and operators of the gasification plant in the funding of numerous investigations of the extent of the impacts and the identification of an appropriate remedy.  On or about March 25, 1998, FPU executed an Administrative Order on Consent ("AOC") with the four former owners and operators (collectively, the "Group") and the EPA that obligated the Group to implement a Remedial Investigation/Feasibility Study ("RI/FS") task and to pay EPA's past and future oversight costs for the RI/FS.  The Group also entered into a Participation Agreement and an Escrow Agreement on or about April 13, 1998 ("RI/FS Participation Agreement").  These agreements governed the manner and means by which all parties were to satisfy their respective obligations under the AOC for the RI/FS task.  FPU agreed to pay approximately 13.7% of the cost for the RI/FS.  Fieldwork for the RI/FS was initiated in 1998.  A final RI report was submitted to EPA in July 1999.  The Group also submitted a Baseline Risk Assessment to EPA in January 2000, including an Ecological Risk Assessment ("ERA").  FPU's share of the cost of these tasks was previously paid in full.  The RI/FS Participation Agreement was amended on September 18, 2003, to authorize an additional $400,000 to be incurred by the Group to complete the ecological risk assessment and cover EPA oversight costs for the RI/FS.  FPU paid its share of $54,822.40 of the additional RI/FS funding in November 2003.

On July 5, 2000, EPA issued a Record of Decision ("ROD") approving the final remedial action for contaminated soils at the site ("OU1 Remedy").  The initial estimated cost for the OU1 Remedy described in the ROD ranges from $5.6 million to $5.8 million.  On June 12, 2001, EPA issued a ROD approving the final remedial action for contaminated groundwater at the site ("OU2 Remedy").  The present worth cost estimate for the OU2 Remedy is $320,252.

FPU is a party to the Second Participation Agreement entered into by members of the Group on August 1, 2000, as amended through June 19, 2002.  The Second Participation Agreement provides for funding the remedial design/remedial action task for OU1 and OU2.  FPU's share of costs for implementation of the remedial design/remedial action task for OU1 and OU2, including the pre-remedial design fieldwork described below, is 10.5%, providing the total cost of the remedial design/remedial action task, including the pre­-remedial design fieldwork, does not exceed $6.0 million.

Pre-remedial design fieldwork was performed in 2002-2003 to assist in the design of the final remedy for OU1 and OU2.  Based on the pre-remedial design fieldwork, it is now anticipated that the final cost of the remedy for OU1 and OU2 will significantly exceed the $6.0 million combined estimate provided in the RODs for OU1 and OU2.  In 2002, FPU paid $210,178 to the Escrow Agent pursuant to a first call for funds under the Second Participation Agreement.  FPU's remaining obligation under the Second Participation Agreement for the remedial design/remedial action task for OU1 and OU2 is $420,356.  This assumes FPU's total allocated share remains no greater than 10.5% of $6.0 million, as currently set forth in the Second Participation Agreement, as amended through June 19, 2002.  FPU has notified Group members that FPU will oppose any effort by the Group to increase FPU's share of total remedial costs above 10.5% of the current $6.0 million cap, since the increased remedial cost is due to the discovery of additional impacted soils on property not owned by FPU.

In addition, FPU will be obligated to pay for a share of EPA's oversight costs for the remedial design/remedial action task for OU1 and OU2.  It is anticipated that FPU's share of these costs will be 10.5% of EPA's total bill.  It is not possible at this time to calculate, to a reasonable degree of certainty, EPA's oversight cost. However, based on other similar sites, it would be reasonable to assume such oversight cost to be approximately 20% of the projected remedial design/remedial action costs for OU1 and OU2.  Assuming FPU's maximum exposure for the remedial design/remedial action cost for OUI and OU2 does not exceed 10.5% of $6.0 million, a reasonable estimate of FPU's share of oversight cost would be approximately $125,000.

Prior to EPA's approval of a final remedy for the site, and the completion of negotiations among members of the Group on FPU's maximum allocated share, we are unable to determine the complete extent of FPU's remaining exposure at this site.  Based on the existing Second Participation Agreement, FPU's remaining exposure for the remedial design/remedial action task for OU1 and OU2, EPA's oversight costs, and FPU's attorneys' fees and costs, is projected to be approximately $705,000.

Pensacola site

FPU is the prior owner/operator of the former Pensacola gasification plant, located at the intersection of Cervantes Street and the Louisville and Nashville (CSX) Railroad line, Pensacola, Florida.  Following notification on October 5, 1990, that FDEP had determined that FPU was one of several responsible parties for any environmental impacts associated with the former gasification plant site, FPU entered into cost sharing agreements with three other responsible parties providing for the funding of certain contamination assessment activities at the site.

A final report describing the results of contamination assessment activities at the site was submitted to FDEP in November 1995.  The report concluded that soil or groundwater remediation was not warranted at the site.  The report further recommended that existing environmental impacts be monitored through periodic sampling of groundwater at the site.  By letter dated July 16, 1997, FDEP approved a groundwater-monitoring plan that provides for annual sampling of selected monitoring wells at the site.  Such annual sampling has been undertaken at the site since 1998.  To date, FPU's share of these costs has not exceeded $3,000 annually.

In March 1999, EPA requested site access in order to undertake an Expanded Site Inspection ("ESI").  The ESI was completed by EPA's contractor in 1999 and an ESI Report was transmitted to FPU in January 2000.  The ESI Report recommends additional work at the site. The responsible parties met with FDEP on February 7, 2000 to discuss EPA's plans for the site.  In February 2000, EPA indicated preliminarily that it will defer management of the site to FDEP; however, as of this date, FPU has not received any written confirmation from EPA or FDEP regarding this matter.  Prior to receipt of EPA's written determination regarding site management, FPU is unable to determine whether additional fieldwork or site remediation will be required by EPA, and if so, the scope or costs of such work.

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

None.

Executive Officers of the Registrant

The following sets forth certain information about the executive officers of FPU as of February 24, 2005.  

         Name

Age

Position

Date

John T. English

61

Chief Executive Officer

1998 - Present

President

1997 - Present

Chief Operating Officer

1997 - 2000

Charles L. Stein

55

Senior Vice President

1997 - Present

Chief Operating Officer

2001 - Present

George M. Bachman

45

Corporate Secretary

2004 - Present

Chief Financial Officer

2001 - Present

Treasurer

2001 - Present

Mr. English was Senior Vice President from 1993 preceding his appointment as President and Chief Operating Officer.

Mr. Stein was Vice President from 1993 preceding his appointment as Senior Vice President.

Mr. Bachman was Controller from 1996 preceding his appointment as Chief Financial Officer & Treasurer.

Each of these executive officers has been appointed for a one-year term expiring at the Board Meeting that follows the annual meeting of shareholders subject to his earlier resignation or removal.  There are no family relationships among any of the executive officers and directors of the company.  

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

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’s common stock for the most recent two years were as follows:

As of February 17, 2005, there were approximately 3,164 holders of record.  

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, 2004, approximately $5.5 million of retained earnings were free of such restriction and therefore available for the payment of dividends.

Securities Authorized for Issuance under Equity Compensation Plans

                                          Equity Compensation Plan Information

* Includes 25,000 for the Non-Employee Director Compensation Plan. This plan was adopted by the Board of Directors on March 18, 2005 and is subject to shareholder approval at the 2005 meeting of shareholders.  Pursuant to the Plan, each non-employee director shall be paid an annual retainer fee partially in cash and partially in shares of Common Stock as determined from time to time by the Board.  The total amount of the retainer fee shall also be determined from time to time by action of the Board. Also includes 100,000 shares to be added to the Employee Stock Purchase Plan previously approved by shareholders.

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 the Consolidated Financial Statements contained herein.

Overview

FPU’s strategy is to concentrate on developing stronger relationships with its customers, including builders and developers of residential and commercial properties.  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.  The Company actively pursues opportunities to purchase small gas companies to assist in growth, as feasible opportunities arise.  

RESULTS OF OPERATIONS

General

On August 14, 2003, FPU filed for electric rate increases and petitioned to consolidate the two electric divisions, for ratemaking purposes 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 annual increase in revenue. The effective date for the increase was March 17, 2004.

On May 26, 2004 the Company completed its filing with the FPSC requesting an increase in its natural gas rates and charges of approximately $8.2 million.  On October 19, 2004 the Company was granted rate relief of approximately $5.9 million annually. The interim rate relief of $1.2 million became effective August 5, 2004, with the remaining $4.7 million effective on November 18, 2004.  The natural gas rate relief includes provisions for recovery of $9.1 million for environmental liabilities (included on the balance sheet as “Other regulatory assets”), along with increased operating expenses.  In addition, FPU requested approval from the FPSC for inclusion in the rate base (regulated investment) the goodwill and intangible assets associated with the acquisition of Atlantic Utilities and was granted recovery, as an acquisition adjustment of the portion included in goodwill that represente d the difference between fair market value of the assets acquired and the original cost.  The approved acquisition adjustment amounted to approximately $1.0 million, thereby allowing the company to earn a return on this investment.

Revenue and Gross Profit  

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

Natural Gas

Natural gas service revenues increased $2.4 million in 2004 over 2003 primarily due to a $1.8 million increase in cost of fuel and other costs that were passed through to customers.  Gross profit increased $583,000 or 3%.  The primary reason for the gross profit increase was the interim rate relief beginning in August 2004 and a final increase effective November 2004 as well as normal customer growth and a 3% increase in units sold.  A $1.5 million early termination fee received in 2003 offset the increase in gross profit.    

Natural gas service revenues increased $13.5 million in 2003 compared to 2002, primarily due to an $11.4 million increase in the cost of fuel and other costs that were passed through to customers.  Natural gas gross profit increased $2.1 million, or 11% in 2003 as compared to 2002.  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 in 2003 was attributable to an increase in residential and commercial customer sales.  Overall, the average number of customers increased in 2003 over 2002 by 3% due to normal growth, although this was offset by a decreas e in usage per customer, most likely due to milder weather and higher costs of gas.  

Electric

Electric service revenues increased $3.4 million in 2004 over 2003.  $1.7 million of the increase was for the cost of fuel and other costs that were passed through to customers.  Gross profit increased $1.6 million or 14% in 2004 over 2003.  The increase in gross profit was primarily due to the rate increases granted in March 2004, along with normal customer growth and a 6% increase in units sold.

Electric service revenues decreased $1.4 million, or 3% in 2003 compared to 2002, primarily due to a $1.7 million decrease in the cost of fuel and other costs that were passed through to customers.  Electric gross profit increased $253,000 or 2% in 2003 over 2002 primarily due to an increase in late fees of $226,000.  Customer growth was up 2% in 2003 over 2002 due to normal growth. This growth was offset by a 4% decline in usage per customer most likely due to milder weather.

Propane Gas

Propane revenue increased $1.6 million and gross profit increased $727,000 or 14% in 2004 compared to 2003.  The margin on propane rates charged to customers increased 11% from the previous year.  Additionally, approximately $130,000 of the gross profit increase in 2004 over 2003 is attributable to a refinement of propane inventory estimate that lowered gross profit in the third quarter of 2003.  Propane unit sales increased 7% due primarily to the addition of a large wholesale customer along with an increase in the total number of customers in 2004.

Propane revenue increased in 2003 compared to 2002 by approximately $2.2 million, primarily attributable to a $1.6 million increase in the cost of gas sold.  The cost of gas sold was passed onto customers through rate increases.  Propane revenue from late fees and service fees increased $291,000.  Propane gas gross profit increased $462,000, or 10%, 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 contributed $106,000 to 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 s old 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.

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 (discussed above).  

Natural Gas

Natural gas operating expenses, excluding income taxes, increased $795,000, or 5%, in 2004 as compared with 2003.  Depreciation and amortization expense increased $353,000 due to an increase in plant assets and customer account expense increased $260,000.  The increase in customer account expense in 2004 over 2003 was primarily due to a reduction, in the first quarter of 2003, of operating expenses due to a $172,000 recovery of bad debt related to the contract with Lake Worth Generation. Administrative expenses increased $146,000 and are discussed separately in the administrative expenses section. Other operating expense increased $61,000, partially due to an increase in underground natural gas line location expense of $32,000 that was caused by an increase in the quantity of natural gas line locations performed due to construction related projects.  The increase was offset by a decrease o f $121,000 in maintenance expenses in the first quarter of 2004 related to an abandoned construction project for a main inse