UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q



(Mark
One)



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



For the quarterly period ended June 30, 2009



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



For the transition period from ____________  to
______________



Commission File Number:  001-10608



FLORIDA PUBLIC UTILITIES COMPANY

(Exact name of registrant as specified in its charter)



|                                                               |                                     
|-------------------------------------------------------------- | ------------------------------------
|Florida                                                        | 59-0539080                          
|(State or other jurisdiction of incorporation or
organization) | (I.R.S. Employer Identification No.)



401 South Dixie Highway,

West Palm Beach, Fl.  33401

(Address of principal executive offices)



(561) 832-0872

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).

Yes [  ]     No [  ]



Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
 See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



Large
accelerated filer  [  ]

Accelerated filer [  ]

Non-accelerated
filer [  ]

Smaller
reporting company [X]

(Do
not check if a smaller reporting company)



Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes  [  ]
     No [X]



On
August 3, 2009, there were 6,140,592 shares of $1.50 par value common stock
outstanding.









INDEX



Part
I.

Financial
Information



Item
1.

Financial
Statements



Condensed
Consolidated Statements of Income

Condensed
Consolidated Statements of Comprehensive Income

Condensed
Consolidated Balance Sheets

Condensed
Consolidated Statements of Common Shareholders Equity

Condensed
Consolidated Statements of Cash Flows

Notes
to Condensed Consolidated Financial Statements



Item
2.

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





Item
3.

Quantitative
and Qualitative Disclosures about Market Risk



Item
4T.

Controls
and Procedures



Part
II.

Other
Information



Item
1.

Legal
Proceedings



Item
1A.

Risk
Factors



Item
4.

Submission
of Matters to a Vote of Security Holders



Item
6.

Exhibits



Signatures













PART
I.

FINANCIAL
INFORMATION



Item
1.

Financial
Statements

|                                                                                                                      |                    |  |                  |  |           |  |          
|--------------------------------------------------------------------------------------------------------------------- | ------------------ |  | ---------------- |  | --------- |  | ---------
|Florida Public Utilities Company                                                                                     
|Condensed Consolidated Income Statements
(Unaudited)                                                                 
|(Dollars in thousands, except share data)                                                                            
|                                                                                                                     
|                                                                                                                      | Three Months Ended |  | Six Months Ended
|                                                                                                                      | June 30,           |  | June 30,        
|                                                                                                                      | 2009               |  | 2008             |  | 2009      |  | 2008     
|Revenues                                                                                                              |                    |  |                  |  |           |  |          
|Natural
gas                                                                                                           | $12,480            |  | $18,973          |  | $32,191   |  | $41,110  
|Electric                                                                                                              | 19,526             |  | 18,214           |  | 41,559    |  | 35,737   
|Propane
gas                                                                                                           | 2,968              |  | 4,189            |  | 7,005     |  | 9,559    
|Total
revenues                                                                                                        | 34,974             |  | 41,376           |  | 80,755    |  | 86,406   
|Cost of Fuel and
Other Pass Through Costs                                                                             | 21,633             |  | 29,351           |  | 52,295    |  | 60,263   
|Gross
Profit                                                                                                          | 13,341             |  | 12,025           |  | 28,460    |  | 26,143   
|                                                                                                                      |                    |  |                  |  |           |  |          
|Operating
Expenses                                                                                                    |                    |  |                  |  |           |  |          
|Operation
and maintenance                                                                                             | 7,770              |  | 7,913            |  | 17,641    |  | 14,894   
|Depreciation
and amortization                                                                                         | 2,294              |  | 2,206            |  | 4,659     |  | 4,459    
|Taxes
other than income taxes                                                                                         | 812                |  | 764              |  | 1,690     |  | 1,637    
|Total
operating expenses                                                                                              | 10,876             |  | 10,883           |  | 23,990    |  | 20,990   
|Operating Income                                                                                                      | 2,465              |  | 1,142            |  | 4,470     |  | 5,153    
|                                                                                                                      |                    |  |                  |  |           |  |          
|Other Income
and (Deductions)                                                                                         |                    |  |                  |  |           |  |          
|Merchandise
and service revenue                                                                                       | 598                |  | 534              |  | 1,359     |  | 1,256    
|Merchandise
and service expenses                                                                                      | (488)              |  | (591)            |  | (1,137)   |  | (1,215)  
|Other
income                                                                                                          | 133                |  | 170              |  | 307       |  | 300      
|Interest
expense                                                                                                      | (1,123)            |  | (1,195)          |  | (2,269)   |  | (2,418)  
|Total
other deductions  net                                                                                          | (880)              |  | (1,082)          |  | (1,740)   |  | (2,077)  
|Earnings Before
Income Taxes                                                                                          | 1,585              |  | 60               |  | 2,730     |  | 3,076    
|Income
Taxes                                                                                                          | (581)              |  | 21               |  | (982)     |  | (1,045)  
|Net Income                                                                                                            | 1,004              |  | 81               |  | 1,748     |  | 2,031    
|Preferred Stock
Dividends                                                                                             | 7                  |  | 7                |  | 14        |  | 14       
|Earnings For
Common Stock                                                                                             | $997               |  | $74              |  | $1,734    |  | $2,017   
|                                                                                                                      |                    |  |                  |  |           |  |          
|(Basic and
Diluted):                                                                                                  |                    |  |                  |  |           |  |          
|Earnings
Per Common Share                                                                                             | $0.16              |  | $0.01            |  | $0.28     |  | $0.33    
|                                                                                                                      |                    |  |                  |  |           |  |          
|Dividends
Declared Per Common Share                                                                                   | $0.1200            |  | $0.1175          |  | $0.2375   |  | $0.2300  
|                                                                                                                      |                    |  |                  |  |           |  |          
|Average
Shares Outstanding                                                                                            | 6,123,697          |  | 6,078,446        |  | 6,120,101 |  | 6,075,005
|These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.





|                                                                                                                      |                             |                           |        |       
|--------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------- | ------ | ------
|Florida Public Utilities Company
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)  
|                                                                                                                      | Three months ended June 30, | Six months ended June 30,
|                                                                                                                      | 2009                        | 2008                      | 2009   | 2008  
|Net
income                                                                                                            | $1,004                      | $81                       | $1,748 | $2,031
|Other
comprehensive gain:                                                                                             |                             |                           |        |       
|Pension
and post-retirement costs                                                                                     | -                           | 36                        | 1,825  | 73    
|Income
tax expense on other comprehensive gain                                                                        | -                           | (14)                      | (687)  | (28)  
|Comprehensive
income, net of tax                                                                                      | $1,004                      | $103                      | $2,886 | $2,076
|These
financial statements should be read with the accompanying Notes to
Condensed Consolidated Financial Statements.





|                                                                                                                      |          |  |             
|--------------------------------------------------------------------------------------------------------------------- | -------- |  | ------------
|Florida Public Utilities Company                                                                                     
|Condensed Consolidated Balance Sheets (Unaudited)                                                                    
|(Dollars in thousands)                                                                                               
|                                                                                                                      |          |  |             
|                                                                                                                      | June 30, |  | December 31,
|                                                                                                                      | 2009     |  | 2008        
|ASSETS                                                                                                                |          |  |             
|Utility
Plant                                                                                                         |          |  |             
|Utility
Plant                                                                                                         | $215,018 |  | $210,628    
|Less
Accumulated depreciation                                                                                         | 71,080   |  | 68,303      
|Net
utility plant                                                                                                     | 143,938  |  | 142,325     
|                                                                                                                      |          |  |             
|Current
Assets                                                                                                        |          |  |             
|Cash                                                                                                                  | 2,084    |  | 2,997       
|Accounts
receivable                                                                                                   | 11,422   |  | 13,973      
|Income
taxes receivable                                                                                               | 819      |  | 2,211       
|Allowance
for uncollectible accounts                                                                                  | (559)    |  | (455)       
|Unbilled
receivables                                                                                                  | 2,042    |  | 2,041       
|Notes
receivable                                                                                                      | 5,724    |  | 252         
|Inventories
(at average unit cost)                                                                                    | 3,352    |  | 3,961       
|Prepaid
expenses                                                                                                      | 471      |  | 1,037       
|Under-recovery
of fuel costs                                                                                          | 1,387    |  | 756         
|Deferred
income taxes-current                                                                                         | 459      |  | 513         
|Other
regulatory assets-environmental                                                                                 | 456      |  | 456         
|Deferred
charges-current                                                                                              | 403      |  | 155         
|Special
deposit  fuel contract                                                                                       | -        |  | 130         
|Total
current assets                                                                                                  | 28,060   |  | 28,027      
|                                                                                                                      |          |  |             
|Other
Assets                                                                                                          |          |  |             
|Regulatory
asset - environmental                                                                                      | 6,396    |  | 6,636       
|Regulatory
asset  retirement plan                                                                                    | 2,824    |  | 9,945       
|Long-term
receivables and other investments                                                                           | 15       |  | 5,619       
|Investments
held for environmental costs                                                                              | 3,518    |  | 3,507       
|Deferred
charges                                                                                                      | 3,964    |  | 6,409       
|Goodwill                                                                                                              | 2,405    |  | 2,405       
|Intangible
assets (net)                                                                                               | 3,891    |  | 4,058       
|Total
other assets                                                                                                    | 23,013   |  | 38,579      
|Total
Assets                                                                                                          | $195,011 |  | $208,931    
|                                                                                                                      |          |  |             
|These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.



| |  |  | 
| |  |  | 



|                                                                                                                      |          |  |             
|--------------------------------------------------------------------------------------------------------------------- | -------- |  | ------------
|Florida Public Utilities Company                                                                                     
|Condensed Consolidated Balance Sheets
(Unaudited)                                                                    
|(Dollars in thousands)                                                                                               
|                                                                                                                      |          |  |             
|                                                                                                                      | June 30, |  | December 31,
|                                                                                                                      | 2009     |  | 2008        
|CAPITALIZATION
AND LIABILITIES                                                                                        |          |  |             
|Capitalization                                                                                                        |          |  |             
|Common
shareholders' equity                                                                                           | $50,239  |  | $48,512     
|Preferred
stock                                                                                                       | 600      |  | 600         
|Long-term
debt                                                                                                        | 46,452   |  | 47,920      
|Total
capitalization                                                                                                  | 97,291   |  | 97,032      
|                                                                                                                      |          |  |             
|Current
Liabilities                                                                                                   |          |  |             
|Line
of credit                                                                                                        | -        |  | 12,747      
|Accounts
payable                                                                                                      | 11,683   |  | 11,481      
|Long-term
debt - current                                                                                              | 1,409    |  | 1,409       
|Insurance
accrued                                                                                                     | 180      |  | 265         
|Interest
accrued                                                                                                      | 580      |  | 1,081       
|Other
accruals and payables                                                                                           | 3,308    |  | 3,241       
|Environmental
Liability  current                                                                                     | 2,125    |  | 774         
|Taxes
accrued                                                                                                         | 2,514    |  | 1,902       
|Over-recovery
of fuel costs and other                                                                                 | 3,703    |  | 1,965       
|Customer
deposits                                                                                                     | 13,228   |  | 11,099      
|Total
current liabilities                                                                                             | 38,730   |  | 45,964      
|                                                                                                                      |          |  |             
|Other
Liabilities                                                                                                     |          |  |             
|Deferred
income taxes                                                                                                 | 18,368   |  | 18,023      
|Environmental
liability                                                                                               | 10,949   |  | 12,655      
|Regulatory
liability  storm reserve                                                                                  | 2,479    |  | 2,418       
|Regulatory
liability  other                                                                                          | 11,387   |  | 11,011      
|Regulatory
liabilities  retirement                                                                                   | 13,438   |  | 19,352      
|Other
liabilities                                                                                                     | 2,369    |  | 2,476       
|Total
other liabilities                                                                                               | 58,990   |  | 65,935      
|Total
Capitalization and Liabilities                                                                                  | $195,011 |  | $208,931    
|                                                                                                                      |          |  |             
|These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.







|                                                                                                                      |              |           |         |          |          |          |               |              
|--------------------------------------------------------------------------------------------------------------------- | ------------ | --------- | ------- | -------- | -------- | -------- | ------------- | -------------
|Florida Public Utilities Company
Consolidated Statements of Common Shareholders Equity
(Unaudited)                  
|(Dollars in thousands, except for shares)                                                                            
|                                                                                                                      |              |           |         |          |          |          | Accumulated   |              
|                                                                                                                      | Common Stock |           |         |          | Treasury | Other    | Common       
|                                                                                                                      | Shares       | Aggregate | Paid-in | Retained | Treasury | Shares   | Comprehensive | Shareholders'
|                                                                                                                      | Issued       | Par Value | Capital | Earnings | Shares   | Cost     | Income (Loss) | Equity       
|Balances
as of December 31, 2008                                                                                      | 6,199,070    | $9,299    | $6,065  | $36,424  | 97,350   | $(1,725) | $(1,551)      | $48,512      
|Net
income                                                                                                            |              |           |         | 1,748    |          |          |               | 1,748        
|Dividends                                                                                                             |              |           |         | (1,469)  |          |          |               | (1,469)      
|Other
Comprehensive Income                                                                                            |              |           |         |          |          |          | 1,138         | 1,138        
|Stock
plans                                                                                                           | 18,043       | 27        | 190     |          | (5,226)  | 93       |               | 310          
|Balances
as of June 30, 2009                                                                                          | 6,217,113    | $9,326    | $6,255  | $36,703  | 92,124   | $(1,632) | $(413)        | $50,239      
|These
financial statements should be read with the accompanying Notes to
Condensed Consolidated Financial Statements.







|                                                                                                                      |                  |  |         | 
|--------------------------------------------------------------------------------------------------------------------- | ---------------- |  | ------- | 
|Florida Public Utilities Company                                                                                     
|Condensed Consolidated Statement of Cash Flows
(Unaudited)                                                           
|(Dollars in thousands)                                                                                               
|                                                                                                                      |                  |  |        
|                                                                                                                      | Six Months Ended
|                                                                                                                      | June 30,        
|                                                                                                                      | 2009             |  | 2008   
|                                                                                                                      |                  |  |        
|Net cash provided
by operating activities                                                                             | $17,701          |  | $5,452 
|                                                                                                                      |                  |  |        
|Investing
Activities                                                                                                  |                  |  |        
|Construction
expenditures                                                                                             | (3,407)          |  | (5,749)
|Proceeds
received on notes receivable                                                                                 | 252              |  | 283    
|Other                                                                                                                 | (118)            |  | 92     
|Net
cash used in investing activities                                                                                 | (3,273)          |  | (5,374)
|                                                                                                                      |                  |  |        
|Financing
Activities                                                                                                  |                  |  |        
|Net
(decrease) increase in short-term borrowings                                                                      | (12,747)         |  | 1,407  
|Repayment
of long-term borrowings                                                                                     | (1,409)          |  | (1,409)
|Dividends
paid                                                                                                        | (1,432)          |  | (1,345)
|Other
increases                                                                                                       | 247              |  | 283    
|Net
cash used in provided by financing activities                                                                     | (15,341)         |  | (1,064)
|                                                                                                                      |                  |  |        
|Net decrease in
cash                                                                                                  | (913)            |  | (986)  
|                                                                                                                      |                  |  |        
|Cash at beginning
of period                                                                                           | 2,997            |  | 3,478  
|                                                                                                                      |                  |  |        
|Cash at end of
period                                                                                                 | $2,084           |  | $2,492 
|These financial statements should be read with the
accompanying Notes to Condensed Consolidated Financial
Statements.













FLORIDA PUBLIC UTILITIES COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2009



1.

Basis
of Presentation

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the generally accepted
accounting principles in the United States (GAAP) for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments necessary for fair presentation have been included.
The operating results for the period are not necessarily indicative of the
results that may be expected for the full year. For further information, refer
to the audited consolidated financial statements and footnotes included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2008.



2.

Use
of Estimates

The preparation of financial statements in conformity with GAAP
requires the Company to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
include allowances, accruals for pensions, environmental liabilities, liability
reserves, regulatory deferred tax liabilities, unbilled revenue and
over-earnings liability. Actual results may differ from these estimates.



3.

Regulation

The financial statements are prepared in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71 
"Accounting for the Effects of Certain Types of Regulation".  SFAS No. 71
recognizes that accounting for rate-regulated enterprises should reflect the
relationship of costs and revenues introduced by rate regulation. A regulated
utility may defer recognition of a cost (a regulatory asset) or show recognition
of an obligation (a regulatory liability) if it is probable that, through the
ratemaking process, there will be a corresponding increase or decrease in
revenues. The Company has recognized certain regulatory assets and liabilities
in the condensed consolidated balance sheets.



As a result, Florida Public Service Commission (FPSC) regulation
has a significant effect on the Companys results of operations. The FPSC
approves rates that are intended to permit a specified rate of return on
investment. Rate tariffs allow the flexibility of automatically passing through
the cost of natural gas and electricity to customers. Increases in the operating
expenses of the regulated segments may require a request for increases in the
rates charged to customers.



The FPSC approved an annual electric final rate increase of
approximately $3.9 million effective May 22, 2008.  Interim rates set to
produce additional annual revenues of approximately $800,000 were effective from
November 2007 through May 22, 2008, the date our final rates went into
effect.



The FPSC approved an annual natural gas final rate increase of
approximately $8.5 million effective June 4, 2009. Interim rates set to produce
additional annual revenues of approximately $1 million were effective March 12,
2009 until June 4, 2009, when final rate increase went into effect. On June 17,
2009 the Office of Public Counsel entered a protest to the FPSC natural gas
final rate increase ruling and a full hearing is required within eight
months. Previously approved final rates and the related revenues will be
collected pending possible refund upon final determination at the full hearing.
The vote for the final rates is scheduled for February 9, 2010.



At this time management does not estimate any adjustments to the
final rate increase approved on May 5, 2009 and has not set up a liability for a
possible rate refund as of June 30, 2009. Management will recognize a liability
for a possible rate refund if we determine adjustments are probable. It is
possible that the final rate increase awarded may be lower than was approved by
the FPSC on May 5, 2009 and a refund may be required to our customers for any
variance in the final rates approved at the full hearing compared to the
previously approved rates on May 5, 2009.  The impact of a refund of
previously collected rates could be material to our results of operation.



4.

Pledged
Assets

Substantially all of the Companys utility plant and the shares of
its wholly owned subsidiary, Flo-Gas Corporation, collateralize the Companys
First Mortgage Bonds (long-term debt).  Cash, accounts receivable and
inventory are collateral for the line of credit.



5.

Restriction
on Dividends

The Companys Fifteenth Supplemental Indenture of Mortgage and
Deed of Trust restricts the amount that is available for cash dividends. At June
30, 2009, approximately $10.5 million of retained earnings were free of such
restriction and available for the payment of dividends. The Companys line of
credit agreement contains covenants that, if violated, could restrict or prevent
the payment of dividends. The Company is not in violation of these
covenants.



6.

Allowance
for Uncollectible Accounts

The Company records an allowance for uncollectible accounts based
on historical information and current economic conditions.  The following
is a summary of bad debt activity for the second quarter as of June 30:



|                                |      |     
|------------------------------- | ---- | ----
|Allowance for Doubtful Accounts
|(Dollars in thousands)         
|                                | 2009 | 2008
|Bad
Debt Write-offs             | $196 | $200
|Bad
Debt Accrual Provision      | $179 | $164



7.

Storm
Reserves

As of June 30, 2009, the Company had a storm reserve of
approximately $1.7 million for the electric segment and approximately $789,000
for the natural gas segment. The Company does not have a storm reserve for the
propane gas segment.



8.

Goodwill
and Other Intangible Assets

The
Company does not amortize goodwill or intangibles with indefinite lives. The
Company periodically tests the applicable reporting segments, natural gas and
propane gas, for impairment. In the event goodwill or intangible assets related
to a segment are determined to be impaired, the Company would write down such
assets to fair value.  The impairment tests performed effective January 1,
2009 showed no impairment for either reporting segment.



Goodwill associated with the Companys acquisitions consists of
$550,000 in the natural gas segment and $1.9 million in the propane gas segment.
The summary of intangible assets at June 30, 2009 and December 31, 2008, is as
follows:



|                                             |                          |               |                  
|-------------------------------------------- | ------------------------ | ------------- | -----------------
|Intangible Assets
(Dollars in thousands)    
|                                             |                          | June 30,
2009 | December 31,
2008
|Customer
distribution rights                 | (Indefinite
life)        | $
2,800       | $
2,800          
|Software                                     | (Five to nine year
life) | 3,591         | 3,542            
|Accumulated
amortization                     | (2,500)                  | (2,284)      
|Total
intangible assets, net of amortization | $
3,891                  | $
4,058      



The amortization expense of intangible assets was approximately
$109,000 and $106,000 for the three months ended June 30, 2009 and 2008,
respectively, and $217,000 and $210,000 for the six months ended June 30, 2009
and 2008, respectively.



9.

Over-earnings

The FPSC approves rates that are intended to permit a specified
rate of return on investment and limits the maximum amount of earnings of
regulated operations. The Company has agreed with the FPSC staff to limit the
earned return on equity for regulated natural gas and electric operations.



All over-earnings prior to 2007 have been settled. Management does
not anticipate any electric or natural gas over-earnings for 2007, 2008 or
2009.



10.

Environmental
Contingencies

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



|                       |              |           
|---------------------- | ------------ | ----------
|(Dollars in thousands)
|Site                   | Range From   | Range To  
|West
Palm Beach        | $      4,823 | $   18,305
|Sanford                | 410          | 410       
|Pensacola
and Key West | 119          | 119       
|Total                  | $      5,352 | $   18,834



The Company currently has $13.1 million recorded as our best
estimate of the environmental liability. The FPSC approved up to $14 million for
total recovery from insurance and rates based on the original 2005 projections
as a basis for rate recovery. The Company has recovered a total of $6.2 million
from insurance and rate recovery, net of costs incurred to date.  The
remaining balance of $6.9 million is recorded as a regulatory asset.  On
October 18, 2004 the FPSC approved recovery of $9.1 million for environmental
liabilities. The amortization of this recovery and reduction to the regulatory
asset began on January 1, 2005. The majority of environmental cash expenditures
is expected to be incurred before 2012, but may continue for another nine
years.



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 us in West Palm Beach, Florida upon which we
previously operated a gasification plant. Pursuant to a Consent Order between
the Company and the Florida Department of Environmental Protection effective
April 8, 1991, the Company completed the delineation of soil and groundwater
impacts at the site. On June 30, 2008, the Company transmitted a revised
feasibility study, evaluating appropriate remedies for the site, to the Florida
Department of Environmental Protection. On April 30, 2009, FDEP issued a
remedial action order which has since been withdrawn.  In response to the
order and as a condition to its withdrawal, the Company committed to perform
additional field work in 2009 and complete an additional engineering evaluation
of certain remedial alternatives.  The total projected cost of this work is
approximately $450,000.



The feasibility study evaluated a wide range of remedial
alternatives based on criteria provided by applicable laws and regulations. The
total costs for the remedies evaluated in the feasibility study ranged from a
low of $2.8 million to a high of $54.6 million. Based on the likely
acceptability of proven remedial technologies described in the feasibility study
and implemented at similar sites, management believes that
consulting/remediation costs to address the impacts now characterized at the
West Palm Beach site will range from $4.4 million to $17.9 million. This range
of costs covers such remedies as in situ solidification for deeper soil impacts,
excavation of surficial soil impacts, installation of a barrier wall with a
permeable biotreatment zone, monitored natural attenuation of dissolved impacts
in groundwater, or some combination of these remedies.



Negotiations between the Company and the Florida Department of
Environmental Protection on a final remedy for the site continue. Prior to the
conclusion of those negotiations, we are unable to determine, to a reasonable
degree of certainty, the complete extent or cost of remedial action that may be
required. As of June 30, 2009, and subject to the limitations described above,
management believes the Company's remediation expenses, including attorneys'
fees and costs, will range from approximately $4.8 million to $18.3 million for
this site.



Sanford
Site

The Company owns a parcel of property located in Sanford, Florida,
upon which a gasification plant was operated prior to our acquisition of the
property. On March 25, 1998, the Company executed an Administrative Order on
Consent with the four former owners and operators (collectively, the "Group")
and the United States Environmental Protection Agency that obligated the Group
to implement a Remedial Investigation/Feasibility Study and to pay the United
States Environmental Protection Agency's past and future oversight costs. The
Group also entered into a Participation Agreement and an Escrow Agreement on or
about April 13, 1998. Work under the Remedial Investigation/Feasibility Study
Administrative Order on Consent and Participation Agreement and an Escrow
Agreement is now complete and the Company has no further obligations under
either document.



In 2008, a revised Consent Decree was signed by all Group members
and the United States Environmental Protection Agency, providing for the
implementation by the Group of the remedies the United States Environmental
Protection Agency approved earlier for the site, which are set forth in the
Records of Decision for Operable Units 1-3, and for the payment of the United
States Environmental Protection Agency's past and future oversight costs. The
Consent Decree was entered by the Federal Court in Orlando and became effective
on January 15, 2009; the parties to the Consent Decree are now obligated to
implement the remedy approved by United States Environmental Protection Agency
for the site.



In January 2007, the Company and other members of the Group signed
a Third Participation Agreement, which provides for funding the remediation work
specified in the Records of Decision for Operable Units 1-3 and supersedes and
replaces the Second Participation Agreement.  The Company's share of
remediation costs under the Third Participation Agreement is set at 5% of a
maximum of $13 million, or $650,000. To date, the Company has contributed
$300,000 of its total share of remediation costs under the Third Participation
Agreement. It is currently anticipated that the total cost of the final remedy
will exceed $13 million. The Company has advised the other members of the Group
that we are unwilling at this time to agree to pay any sum in excess of the
$650,000 committed by us in the Third Participation Agreement.



Several members of the Group recently concluded negotiations with
two adjacent property owners to resolve damages that the property owners allege
that they have/will incur as a result of the implementation of the Environmental
Protection Agency approved remedy. In settlement of these claims, members of the
Group (excluding the Company) have agreed to pay specified sums of money to the
parties. In one case, the settlement agreement requires the select members of
the Group to purchase the third party's property for approximately $2 million;
the third party then has an option to buy back the property after completion of
the remedy for approximately the same amount. In the other case, the select
members agreed to a lump sum payment of $450,000. The Company has refused to
participate in the funding of the third party settlement agreements based on the
contention that it did not contribute to the release of hazardous substances at
the site giving rise to the third party claims.



As of June 30, 2009, the Companys remaining share of remediation
expenses, including the Companys attorneys' fees and costs, are projected to be
approximately $410,000 for this site. However, at this time, we are unable to
determine, to a reasonable degree of certainty, whether the other members of the
Group will accept the Companys asserted defense to liability for costs
exceeding $13 million to implement the final remedy for the site or will pursue
a claim against the Company for a sum in excess of the $650,000 that the Company
has committed to fund the remedy.



Pensacola
Site

The Company 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 the Florida Department of Environmental
Protection had determined that the Company was one of several responsible
parties for any environmental impacts associated with the former gasification
plant site, the Company entered into cost sharing agreements with three other
responsible parties providing for the funding of certain contamination
assessment activities at the site.



Following field investigations performed on behalf of the
responsible parties, on July 16, 1997, the Florida Department of Environmental
Protection approved a final remedy for the site that provides for annual
sampling of selected monitoring wells. Such annual sampling has been undertaken
at the site since 1998. The Company's share of these costs is less than $2,000
annually.



In March 1999, the United States Environmental Protection Agency
requested site access in order to undertake an Expanded Site Inspection. The
Expanded Site Inspection was completed by the United States Environmental
Protection Agency's contractor in 1999 and an Expanded Site Inspection Report
was transmitted to the Company in January 2000. The Expanded Site Inspection
Report recommends additional work at the site. The responsible parties met with
the Florida Department of Environmental Protection on February 7, 2000 to
discuss the United States Environmental Protection Agency's plans for the site.
In February 2000, the United States Environmental Protection Agency indicated
preliminarily that it will defer management of the site to the Florida
Department of Environmental Protection; as of July 31, 2008, the Company has not
received any written confirmation from the United States Environmental
Protection Agency or the Florida Department of Environmental Protection
regarding this matter. Prior to receipt of the United States Environmental
Protection Agency's written determination regarding site management, we are
unable to determine whether additional field work or site remediation will be
required by the United States Environmental Protection Agency and, if so, the
scope or costs of such work.



As of June 30, 2009, the Companys share of remediation expenses
for the site, including attorneys fees and costs, are projected to be
approximately $26,000.



Key West Site

Between 1927 and 1938, the Company owned and operated a
gasification plant on Catherine Street, in Key West, Florida. The plant
discontinued operations in the late 1940s; the property on which the plant was
located is currently used for a propane gas distribution business. In March
1993, a Preliminary Contamination Assessment Report was prepared by a consultant
jointly retained by the Company and the current site owner and was delivered to
the Florida Department of Environmental Protection. The Preliminary
Contamination Assessment Report reported that very limited soil and groundwater
impacts were present at the site. By letter dated December 20, 1993, the Florida
Department of Environmental Protection notified the Company that the site did
not warrant further "CERCLA consideration and a Site Evaluation Accomplished
disposition is recommended." the Florida Department of Environmental Protection
then referred the matter to its Marathon office for consideration of whether
additional work would be required by the Florida Department of Environmental
Protection's district office under Florida law. As of June 30, 2009, the Company
has received no further communication from the Florida Department of
Environmental Protection with respect to the site. At this time, we are unable
to determine whether additional field work will be required by the Florida
Department of Environmental Protection and, if so, the scope or costs of such
work. In 1999, the Company received an estimate from its consultant that
additional costs to assess and remediate the reported impacts would be
approximately $166,000. As of June 30, 2009 and assuming the current owner
shared in such costs according to the allocation agreed upon by the parties for
the Preliminary Contamination Assessment Report, the Company's share of
remediation expenses, including attorneys' fees and costs, is projected to be
$93,000 for this site.



11.

Other
Contingencies

On May 8, 2009, a putative class action lawsuit purportedly on
behalf of the shareholders of FPU, challenging the merger was filed in Palm
Beach County, Florida, against FPU, each member of FPUs board of directors and
Chesapeake. The complaint alleges, among other things, that the approval of the
proposed merger by the directors of FPU constituted a breach of their fiduciary
duties. The suit seeks to enjoin completion of the merger. While the Company and
its directors believe that the allegations in the lawsuit are without merit and
intend to defend vigorously against these allegations, no assurance can be given
as to the outcome of this lawsuit, including the costs associated with defending
this claim, or any other liabilities or costs the parties may incur in
connection with the litigation or settlement of this claim.



The Company has been issued a notice of alleged violation of
certain reliability standards by the Florida Reliability Coordinating Council
(FRCC). The FRCC is a not-for-profit company established as a regional entity
with delegated authority from the North American Electric Reliability
Corporation whose purpose is to propose and enforce reliability standards to
enhance reliability and adequacy of bulk electricity supply. Enforcement of
these standards began in July of 2009 and the Company received notice that it
had been in violation of four of these reliability standards.  The Company
has agreed to enter into settlement negotiations with the FRCC to address these
alleged violations. At this time management is unable to estimate the amount of
any penalties that may arise from this matter.



12.

Employee
Benefit Plans

The Company sponsors a qualified defined benefit pension plan for
employees hired before January 1, 2005. Employees hired after January 1, 2005
and employees who elected to transfer out of the defined benefit pension plan
are not eligible for the defined benefit pension plan and are in a 401k match
plan. The Company also sponsors a post-retirement medical plan.



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. The freeze will include
freezing salary rates at 2009 average compensation levels as of December 31,
2009 and only allowing two additional service years to be earned by active
participants with less than 35 years of service. In addition to the freeze, the
reduced early retirement eligibility will be lowered from 30 years to 20
years.



The two additional service years will incur service costs of
approximately $650,000 in each of the next two years. Beyond December 31, 2011,
active participants will continue to accrue service years only for the purposes
of vesting and retirement eligibility.



As a result of the pension freeze, employees currently in the
pension plan will be eligible to receive matching contributions in the companys
401k Plan effective January 1, 2010. Contribution expense is forecasted to
increase approximately $580,000 as a result of this option. 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, resulting in the recognition of approximately $2.7
million in non-cash pre-tax 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 financial statements.



The following table provides the components of the net periodic
benefit cost for our pension plan and post-retirement benefit plan for the six
months ended June 30, 2009 and 2008.



|                                         |                    |   |                  |   |         |       |         |  
|---------------------------------------- | ------------------ | - | ---------------- | - | ------- | ----- | ------- | -
|FLORIDA PUBLIC UTILITIES COMPANY        
|Net Periodic Benefit Costs              
|(Dollars in thousands)                  
|                                         |                   
|                                         | Three Months Ended |   | Six Months Ended
|                                         | June 30,           |   | June 30,        
|                                         | 2009               |   | 2008             |   | 2009    |       | 2008   
|Pension Plan:                            |                    |   |                  |   |         |       |        
|Service
Cost                             | $173               |   | $249             |   | $430    |       | $522   
|Interest
Cost                            | 638                |   | 712              |   | 1,332   |       | 1,354  
|Expected Return on
Plan Assets           | (676)              |   | (653)            |   | (1,310) |       | (1,301)
|Amortization of
Prior Service Cost       | -                  |   | 176              |   | 179     |       | 360    
|Actuarial Net
(Gain) or Loss             | -                  |   | -                |   | 54      |       | -      
|Total FAS87 Net
Periodic Pension Cost    | 135                |   | 484              |   | 685     |       | 935    
|Curtailment
Cost                         |                    | - |                  | - |         | 2,722 |         | -
|Net
Periodic Pension Cost                | $135               |   | $484             |   | $3,407  |       | $935   
|Postretirement
Benefit Plan:             |                    |   |                  |   |         |       |        
|Service
Cost                             | 15                 |   | 14               |   | 28      |       | 28     
|Interest
Cost                            | 29                 |   | 34               |   | 55      |       | 59     
|Amortization of
Transition Obligation    | 11                 |   | 11               |   | 22      |       | 22     
|Amortization of
Net (Gain) or Loss       | (12)               |   | 1                |   | (25)    |       | (12)   
|Net
Periodic Postretirement Benefit Cost | $43                |   | $60              |   | $80     |       | $97    
|                                         |                    |   |                  |  









For additional information related to our employee benefit plans,
please see Notes to Consolidated Financial Statements in the Companys Form 10-K
for the year ended December 31, 2008.



FASB issued Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans that requires the Company to
show the funded status of its pension and retiree health care plan as a prepaid
asset or accrued liability, and to show the net deferred and unrecognized gains
and losses related to the retirement plans, net of tax, as part of accumulated
other comprehensive income or loss (AOCI) in shareholders equity. The
cumulative impact to other comprehensive income is a loss of approximately
$413,000 which includes deferred tax expense of $249,000 at June 30, 2009
compared to a gain of approximately $133,000 which included deferred tax expense
of $80,000 for June 30, 2008. Previously, the net deferred and unrecognized
gains and losses were included in the prepaid asset or accrued liability
recorded for the retirement plans.



13.

Impact
of Recent Accounting Standards

Financial
Accounting Standard No. 161

In March 2008, the FASB issued Statement No. 161, Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB
Statement No. 133. This standard requires enhanced disclosures about an
entitys derivative and hedging activities and thereby improves the transparency
of financial reporting. This statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
  The Company adopted SFAS No. 161 effective January 1, 2009. The
adoption of SFAS No. 161 did not have an impact on the Companys
disclosures.



FASB
Staff Position, FAS No. 142-3

In April 2008, the FASB issued FASB Staff Position, or FSP, FAS
142-3, Determination of the Useful Life of Intangible Assets, effective for
financial statements issued for fiscal year beginning after December 15, 2008,
and interim periods within those fiscal years. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142
Goodwill and Other Intangible Assets, thereby resulting in improved
consistency between the useful life applied under SFAS No. 142, and the period
of expected cash flows used to measure the fair value of the asset under SFAS
No. 141R, Business Combinations. We adopted FSP FAS 142-3 effective January 1,
2009. The adoption of FSP, FAS No. 142-3 did not have a material effect on our
results of operations or financial position.



Financial
Accounting Standard No. 162

In May 2008, the FASB issued Statement No. 162, The Hierarchy of
Generally Accepted Accounting Principles.  This standard offers guidance
on the principles used to prepare financial statements in accordance with GAAP.
 FASB Statements of Financial Accounting Concepts now supersede industry
practice. The adoption of this standard did not have an effect on our financial
position or results of operation.



FSP
132(R)-1, Employers Disclosure about Postretirement Benefit Plan
Assets.

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers
Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132 (R)-1). FSP
FAS 132 (R)-1 amends FASB Statement No. 132 (revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits, to provide
guidance on an employers disclosures about plan assets of a defined benefit
pension or other postretirement plan. FSP FAS 132 (R)-1 is effective for fiscal
years ending after December 15, 2009. The Company has made the required
disclosures.



FSP
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Values of Financial Instruments. It requires the fair
value for all financial instruments within the scope of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS No. 107), to be
disclosed in the interim periods as well as in annual financial statements. This
standard is effective for the quarter ending after June 15, 2009. The adoption
of this standard did not have an effect on our financial position or results of
operation. The Company has made the required disclosures.



FSP
No. 157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly

In April 2009, the FASB issued FSP No. 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly, or
FSP 157-4. FSP 157-4 provides additional authoritative guidance to assist both
issuers and users of financial statements in determining whether a market is
active or inactive, and whether a transaction is distressed. The FSP was
effective for us for the quarter ending June 30, 2009. This statement did not
have any effect on our financial position or results of operations.



FSP
SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies

In April 2009, FASB issued FSP SFAS 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, to amend the provisions related to the initial recognition
and measurement, subsequent measurement and disclosure of assets and liabilities
arising from contingencies in a business combination under SFAS 141(R). Under
the new guidance, assets acquired and liabilities assumed in a business
combination that arise from contingencies should be recognized at fair value on
the acquisition date if fair value can be determined during the measurement
period. If fair value cannot be determined, companies should typically account
for the acquired contingencies using existing guidance. The FSP was effective
for us for the quarter ending June 30, 2009. This statement did not have any
effect on our financial position or results of operations.



SFAS
168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles

In July 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles (SFAS. 168). Statement No. 168
supersedes Statement No. 162 issued in May 2008. Statement No. 168 will become
the source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by non-governmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. Adoption of this statement is not expected to have an impact
on our financial statements.



14.

Fair Value of Financial Instruments

In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. In February
2008, the FASB deferred the effective date of SFAS 157 by one year for
certain non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). On January 1, 2008, we adopted the
provisions of SFAS 157, except as it applied to those non-financial assets
and non-financial liabilities for which the effective date has been delayed by
one year. On January 1, 2009, we adopted the provisions of SFAS 157 for
non-financial assets and non-financial liabilities. The adoption of
SFAS 157 did not have a material effect on our financial position or
results of operations.



The carrying amounts reported in the balance sheet for investments
held in escrow for environmental costs, notes payable, taxes accrued and other
accrued liabilities approximate fair value.  The fair value of long-term
debt excluding the unamortized debt discount is estimated by discounting the
future cash flows of each issuance at rates currently offered to the Company for
similar debt instruments of comparable maturities. The indentures governing our
two first mortgage bond series outstanding contain "make-whole" provisions
(pre-payment penalties that charge for lost interest). The values at June 30,
2009 and December 31, 2008 are shown below.



|                       |                  |                        |                  |                       
|---------------------- | ---------------- | ---------------------- | ---------------- | ----------------------
|(Dollars
in thousands) | June 30, 2009    | December 31, 2008     
|                       | Carrying
Amounts | Approximate Fair Value | Carrying
Amounts | Approximate Fair Value
|Long-term
debt         | $49,457          | $53,201                | $50,966          | $ 56,600              









On January 1, 2008, we adopted the provisions of
SFAS No. 159 The Fair Value Option for Financial Assets and Financial
Liabilities  including an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 provides companies with an option to report
selected financial assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date. The fair value option:
(i) may be applied instrument by instrument, with a few exceptions, such as
investments accounted for by the equity method; (ii) is irrevocable (unless
a new election date occurs); and (iii) is applied only to entire
instruments and not to portions of instruments. We did not elect to record any
additional assets or liabilities at fair value.



15.

Segment
Information

The Company is organized into two regulated business segments:
natural gas and electric, and one non-regulated business segment, propane gas.
There are no material inter-segment sales or transfers.



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



Business segment information at June 30, 2009, and December 31,
2008 is summarized as follows:



|                       |   |         |   |         | 
|---------------------- | - | ------- | - | ------- | 
|(Dollars
in thousands) |   | 2009    |   | 2008    | 
|Identifiable
assets    |   |         |   |         | 
|Natural
gas            | $ | 98,076  | $ | 101,920 | 
|Electric               |   | 59,047  |   | 58,220  | 
|Propane
gas            |   | 17,197  |   | 18,534  | 
|Common                 |   | 20,691  |   | 30,257  | 
|Consolidated           | $ | 195,011 | $ | 208,931 | 





Business segment information for the quarter ending and six months
ending June 30, 2009, and June 30, 2008 are summarized as follows:



|                                         |   |                               |   |                             |   |        |  |   |        |  |  |  |  |  | 
|---------------------------------------- | - | ----------------------------- | - | --------------------------- | - | ------ |  | - | ------ |  |  |  |  |  | 
|                                         |   | Three Months Ended   June 30, |   | Six Months Ended   June 30, |   |       
|(Dollars
in thousands)                   |   | 2009                          |   | 2008                        |   | 2009   |  |   | 2008   | 
|Revenues                                 |   |                               |   |                             |   |        |  |   |        | 
|Natural
gas                              | $ | 12,480                        | $ | 18,973                      | $ | 32,191 |  | $ | 41,110 | 
|Electric                                 |   | 19,526                        |   | 18,214                      |   | 41,559 |  |   | 35,737 | 
|Propane
gas                              |   | 2,968                         |   | 4,189                       |   | 7,005  |  |   | 9,559  | 
|Consolidated                             | $ | 34,974                        | $ | 41,376                      | $ | 80,755 |  | $ | 86,406 | 
|Operating
income, excluding   income tax |   |                               |   |                             |   |        |  |   |        | 
|Natural
gas                              | $ | 1,483                         | $ | 225                         | $ | 3,182  |  | $ | 2,617  | 
|Electric                                 |   | 885                           |   | 866                         |   | 899    |  |   | 1,601  | 
|Propane
gas                              |   | 97                            |   | 51                          |   | 389    |  |   | 935    | 
|Consolidated                             | $ | 2,465                         | $ | 1,142                       | $ | 4,470  |  |   | 5,153  | 
|Depreciation
and amortization            |   |                               |   |                             |   |        |  |   |        | 
|Natural
gas                              | $ | 1,174                         | $ | 1,129                       | $ | 2,427  |  | $ | 2,317  | 
|Electric                                 |   | 824                           |   | 796                         |   | 1,640  |  |   | 1,583  | 
|Propane
gas                              |   | 209                           |   | 203                         |   | 419    |  |   | 404    | 
|Common                                   |   | 87                            |   | 78                          |   | 173    |  |   | 155    | 
|Consolidated                             | $ | 2,294                         | $ | 2,206                       | $ | 4,659  |  | $ | 4,459  | 
|Income
tax expense (benefit)             |   |                               |   |                             |   |        |  |   |        | 
|Natural
gas                              | $ | 290                           | $ | (172)                       | $ | 584    |  | $ | 407    | 
|Electric                                 |   | 193                           |   | 171                         |   | 118    |  |   | 313    | 
|Propane
gas                              |   | 23                            |   | (46)                        |   | 111    |  |   | 230    | 
|Common                                   |   | 75                            |   | 26                          |   | 169    |  |   | 95     | 
|Consolidated                             | $ | 581                           | $ | (21)                        | $ | 982    |  | $ | 1,045  | 
|Construction
expenditures                |   |                               |   |                             |   |        |  |   |        | 
|Natural
gas                              | $ | 740                           | $ | 1,599                       | $ | 1,883  |  | $ | 2,854  | 
|Electric                                 |   | 472                           |   | 839                         |   | 1,124  |  |   | 2,331  | 
|Propane
gas                              |   | 140                           |   | 280                         |   | 271    |  |   | 466    | 
|Common                                   |   | 74                            |   | 62                          |   | 129    |  |   | 98     | 
|Consolidated                             | $ | 1,426                         | $ | 2,780                       | $ | 3,407  |  | $ | 5,749  | 



16.

Merger

On April 20, 2009, FPU and Chesapeake Utilities Corporation
(Chesapeake) announced a definitive merger agreement, pursuant to which FPU will
merge with a wholly-owned subsidiary of Chesapeake with FPU being the surviving
corporation and operating as a wholly-owned subsidiary of Chesapeake after the
merger. The merger was unanimously approved by the board of directors of each
company on April 17, 2009. Under the merger agreement, holders of FPU common
stock will receive 0.405 shares of Chesapeakes common stock in exchange for
each outstanding share of FPU.



The merger agreement contains certain termination rights for
Chesapeake and FPU, including the right to terminate the merger agreement if the
merger is not completed by January 31, 2010 (subject to possible extension to
March 31, 2010, under specified circumstances). The merger agreement further
provides that, upon termination of the merger agreement under certain
circumstances involving a third-party takeover proposal of FPU or a change in
the FPU board of directors recommendation of the merger, FPU would be required,
subject to certain conditions, to pay Chesapeake a termination fee of
$3.4 million.



The merger is intended to qualify as a tax-free reorganization and
is subject to various regulatory approvals as well as approval by the
shareholders of both companies. The statutory waiting period for the
Hart-Scott-Rodino Act expired on June 4, 2009, without comment from the
Antitrust Division of the United States Department of Justice or the Federal
Trade Commission, thus allowing the companies to continue with the merger. The
expiration of the waiting period does not, however, preclude the Department of
Justice or the Federal Trade Commission from challenging the merger on antitrust
grounds. Chesapeake has also received all of the necessary regulatory approvals
from the Delaware, Maryland and Florida Public Service Commissions for the
merger. Special shareholder meetings for Chesapeake and FPU to vote on the
merger-related matters have not been scheduled. On July 24, 2009, a Form S-4
registration statement with joint proxy relating to the proposed merger was
filed by Chesapeake and the Company with the Securities and Exchange Commission.
The parties are working to finalize that document in anticipation of setting the
meeting dates for the shareholder meetings.



The Companys management believes that the merger will close in
the fourth quarter of 2009. The Company expects to incur significant pre-merger
related costs associated with the pending merger between Chesapeake and FPU.
These costs include legal services, investment banking services, and other
pre-merger related items. At this time management anticipates additional costs
to be incurred in the third and fourth quarter, 2009, of approximately $1.6
million.



17.

Income
Taxes

In December 2008 the Company filed for a quick refund of
overpayment on estimated tax payments for the 2008 tax year in the amount of
$1.5 million. The Company received the Federal income tax refund of $1.5 million
in May 2009. The primary reason for the refund is due to our planned pension
contribution of $4.6 million for plan year 2008, which we plan to make in
September, 2009. This pension contribution is a deduction for tax purposes in
the 2008 calendar year. It was not known at the time the estimated tax payments
were paid that FPU would make this contribution during 2008.



As noted above, in the second quarter of 2009, FPU and Chesapeake
announced execution of a definitive merger agreement. This pending transaction
is structured as a reorganization under Section 368(a)(1)(B) of the Internal
Revenue Code. The Company assessed the income tax effect of merger-related
transaction costs based on circumstances that existed as of the date costs were
incurred, without assuming the merger will ultimately occur, and recorded a
deferred tax asset related to merger-related transaction costs. The Company may
be required to reassess the income tax effect of merger-related transaction
costs in the future depending on the status of the pending merger. The Company
has incurred total merger related costs of approximately $540,000 through June
30, 2009. A deferred tax asset of $140,000 was recorded as of June 30, 2009
relating to $372,000 of the merger related transaction costs.



18.

Reclassification

Certain amounts in the 2008 financial statements have been
reclassified to conform to the 2009 presentation.



Item
2.

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



Overview

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



Revenues decreased in the first six months of 2009 compared to
2008 due to lower cost of natural and propane gas costs which are passed through
to our customers. Although revenues decreased, gross profit increased in the
year to date ending June 30, 2009 compared to the same period in the prior year
due in a large part to the base rate increases in our electric and natural gas
operations and colder winter temperatures.



Earnings for the first half of 2009 were significantly adversely
impacted by the pension plan freeze. The pension curtailment loss recognized in
the first half of 2009 as a result of the freeze was approximately $2.3 million.
The impact to net income is approximately $1.4 million after income taxes or
$.23 per share for the year to date ending June 30, 2009.



Earnings continue to be affected by the overall economic
slow-down. Management expects current conditions to continue through 2009 with
an ongoing decrease in our customer growth rates, unit sales and sales expense.
Management continues to look for new 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 16, Merger above.





Results
of Operations



Revenues
and Gross Profit Summary

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



|                                          |                             |  |                           |  |         |  |        
|----------------------------------------- | --------------------------- |  | ------------------------- |  | ------- |  | -------
|Revenues and Gross Profit                
|(Dollars
and units in thousands)          | Three
Months Ended
June
30, |  | Six Months Ended
June
30,
|                                          | 2009                        |  | 2008                      |  | 2009    |  | 2008   
|Natural
Gas                               |                             |  |                           |  |         |  |        
|Revenues                                  | $12,480                     |  | $18,973                   |  | $32,191 |  | $41,110
|Cost
of fuel and other pass through costs | 5,225                       |  | 12,846                    |  | 16,288  |  | 26,928 
|Gross
Profit                              | $
7,255                     |  | $
6,127                   |  | $15,903 |  | $14,182
|Units sold:
 (MDth)                       | 1,388                       |  | 1,318                     |  | 3,352   |  | 3,179  
|Customers (average
for the period)        | 52,076                      |  | 52,130                    |  | 52,087  |  | 52,148 
|Electric                                  |                             |  |                           |  |         |  |        
|Revenues                                  | $19,526                     |  | $18,214                   |  | $41,559 |  | $35,737
|Cost
of fuel and other pass through costs | 15,083                      |  | 13,994                    |  | 32,798  |  | 27,853 
|Gross
Profit                              | $
4,443                     |  | $
4,220                   |  | $8,761  |  | $7,884 
|Units sold:
(MWH)                         | 178,043                     |  | 188,421                   |  | 343,288 |  | 361,697
|Customers (average
for the period)        | 31,096                      |  | 31,294                    |  | 31,103  |  | 31,258 
|Propane
Gas                               |                             |  |                           |  |         |  |        
|Revenues                                  | $
 2,968                    |  | $
 4,189                  |  | $7,005  |  | $9,559 
|Cost of
fuel                              | 1,325                       |  | 2,511                     |  | 3,209   |  | 5,482  
|Gross
Profit                              | $
 1,643                    |  | $
 1,678                  |  | $
3,796 |  | $
4,077
|Units sold:
 (MDth)                       | 120                         |  | 128                       |  | 285     |  | 298    
|Customers (average
for the period)        | 12,288                      |  | 12,536                    |  | 12,332  |  | 12,602 
|Consolidated                              |                             |  |                           |  |         |  |        
|Revenues                                  | $34,974                     |  | $41,376                   |  | $80,755 |  | $86,406
|Cost of
fuel                              | 21,633                      |  | 29,351                    |  | 52,295  |  | 60,263 
|Gross
Profit                              | $13,341                     |  | $12,025                   |  | $28,460 |  | $26,143
|Customers (average
for the period)        | 95,460                      |  | 95,960                    |  | 95,522  |  | 96,008 
|                                          |                             |  |                           |  |         |  |        





| |  |  |  |  |  |  | 
| |  |  |  |  |  |  | 





Three
Months Ended June 30, 2009 Compared with Three Months Ended June 30,
2008.



Revenues
and Gross Profit

Natural
Gas

Natural gas service revenues decreased $6.5 million, or 34%, in
the second quarter of 2009 from the same period in 2008 due to declines in fuel
costs passed through to customers of $7.6 million.



Gross profit increased $1.1 million, or 18% primarily as a result
of base rate increases in the second quarter of 2009. The FPSC approved an
annual natural gas final rate increase of approximately $8.5 million effective
June 4, 2009. Interim rates set to produce additional annual revenues of
approximately $1 million were effective March 12, 2009 until June 4, 2009, the
date our final rates went into effect.



Customer growth remained relatively flat; however, units sold
increased by 5% primarily due to colder temperatures in our South Florida
division this year compared to the same period last year.



Electric

Electric revenues increased $1.3 million in the second quarter of
2009 over the same period in 2008. Higher cost of fuel and other costs that were
passed through to customers accounted for $1.1 million of this increase.



Gross profit this quarter increased by $223,000 or 5% compared to
the second quarter of 2008 primarily due to the final base rate increase
effective May 22, 2008. Other factors impacting gross profit were a 1% decrease
in customer growth and a 2% decrease in usage per customer, excluding two large
industrial customers. Management believes the decrease in usage per customer
relates to conservation measures taken by our customers.



Propane
Gas

Propane revenues decreased by $1.2 million in the second quarter
of 2009 compared to the same period in 2008 as a result of decreases in the cost
of gas sold and related revenues.



The $35,000 decrease in gross profit was impacted by a 2% decrease
in customers, a 6% decrease in units sold, lower profit margins on commercial
bulk accounts, and possible conservation measures taken by our customers. The
difference between the periods was partially offset by a $108,000 inventory loss
adjustment in June of the prior year.



Operating
Expenses

Operating expenses remained flat in the second quarter of 2009
compared to the same period in 2008. Primarily as a result of the pension freeze
in the first quarter, administrative and general expenses decreased by
approximately $200,000 compared to the prior year.  Additionally, merger
related administrative and general expenses were $540,000 in 2009 which were
almost the same as the initial merger negotiations costs of approximately
$500,000 incurred in 2008.



Maintenance expenses increased $126,000 primarily in our electric
segment as a result of several severe storms along with storm hardening
initiatives mandated by the FPSC.



Other
Income and Deductions

Merchandise and service revenues increased by $64,000 and related
expense decreased by $103,000 in the second quarter of 2009 compared to the same
period last year. Profits increased $167,000 due to increased sales as a result
of a successful marketing coupon program.



Total interest expense decreased $72,000 in the second quarter
primarily due to a decrease in our line of credit balance as a result of
increased cash flow from operations. In addition, the interest rate on our line
of credit, tied to the London Interbank Rate (LIBOR), was lower this period,
compared to the same period last year.



Six
Months Ended June 30, 2009 Compared with Six Months Ended June 30,
2008.



Revenue
and Gross Profit

Natural
Gas

Natural gas service revenues decreased $8.9 million in the six
months ended June 2009 from the same period in 2008. This was primarily caused
by $10.6 million in lower fuel and other costs passed through to customers.



Gross profit increased by $1.7 million, or 12% this period
compared to the first six months of 2008. In addition to the rate increases,
colder temperatures in 2009 contributed to a 5.4% increase in units sold over
the same period in 2008.



Electric

Electric service revenues increased $5.8 million in the first six
months of 2009 over the same period in 2008. Higher cost of fuel and other costs
passed through to customers accounted for $4.9 million of this increase.



Gross profit increased by $877,000 or 11% over this period
compared to the first six months of 2008. This was primarily due to the higher
final rates approved April 2008, compared to interim rates in effect in the
first quarter of 2008. Units sold, excluding industrial customers, decreased by
3%. Management believes this decrease is a result of conservation measures taken
by our customers.  Gross profit was not materially impacted by the reduced
consumption, as lower consumption was forecasted in our electric rate increase.
Rates were set to compensate for the anticipated reduction in units sold due to
higher fuel costs.



Propane
Gas

Propane revenues decreased $2.6 million in the first six months of
2009 compared to the same period in 2008.  The lower cost of fuel passed
through revenues contributed to $2.3 million of the revenue decrease, with gross
profit decreasing by $281,000 due to lower unit sales.



Units sold declined by 4% in spite of colder temperatures.
 Management believes this is a result of the downturn in the housing market
and the economy as a whole. When compared to the prior year, the decrease in
gross profit was partially offset by an inventory loss adjustment of $108,000 in
June 2008.



Operating
Expenses

Operating expenses increased $3.0 million in the six months ended
June 30, 2009 compared to the same period in 2008. The March 2009 pension plan
freeze significantly increased our operating expenses in the first half of 2009.
The non-recurring related curtailment costs associated with our pension plan
freeze increased operating expenses by approximately $2.2 million. In addition
to the pension curtailment costs, merger related administrative and general
expenses were $540,000 in 2009 which were almost the same as the initial merger
negotiations costs of approximately $500,000 incurred in 2008.



As we continue to be impacted by the declining economy, bad debt
expenses increased $123,000. A large part of the increase was due to the
bankruptcyof a commercial customer in our electric
segment.



Maintenance expenses increased $255,000 primarily in our electric
segment as a result of several severe storms and storm hardening initiatives
recently mandated by the FPSC.



Other
Income and Deductions

Merchandise and service revenues increased $103,000 and expense
decreased $78,000 in the six months ended June 30, 2009 compared to the same
period in 2008 resulting in increased profitability of $181,000. This is largely
due to increased sales experienced through a successful marketing coupon
program.



Total interest expense decreased by $149,000 in the six months
ended June 30, 2009 compared to the same period last year. This was primarily
due to a lower average balance on our line of credit as a result of increased
cash flow from operations. In addition, the interest rate on our line of credit,
tied to the LIBOR, was lower this period, compared to the same period last year.
 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 six months
ended June 30, 2009 increased by approximately $12.2 million over the same
period in 2008. Base rate increases in our electric and natural gas segments,
colder temperatures and reduced capital expenditures contributed significantly
to this increase. Over-recovered fuel costs collected this year also added
approximately $2.5 million in cash flow.



The Company received a Federal income tax refund of $1.5 million
in May 2009. The primary reason for the refund is due to our planned pension
contribution of $4.6 million for plan year 2008, which we plan to make in
September, 2009. This pension contribution is a deduction for tax purposes in
the 2008 calendar year. It was not known at the time the estimated tax payments
were paid that FPU would make this contribution.



Investing
Activities

Construction expenditures in the six months ended June 30, 2009
decreased by $2.34 million compared with the same period last year. The decrease
was primarily due to discretionary capital expenditures controls instituted by
the company as a result of increased pension costs and contributions, and
covenant violation concerns before the pension freeze.



Financing
Activities

Short-term borrowing on our line of credit decreased by $14.2
million in the first half of 2009 compared to the same period in 2008. This was
primarily a result 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. In March 2008, we amended our line of credit to allow us,
upon 30 days notice, to increase our maximum credit line to $26 million. The
amendment also reduced the interest rate paid on borrowings by 0.10% or 10 basis
points. In April 2008, we increased the available line of credit from $12
million to $15 million. There were no borrowings on the line of credit at June
30, 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.
Management expects to continue to meet these covenants for the foreseeable
future.



The line of credit, long-term debt and preferred stock as of June
30, 2009 comprised 49% 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. 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.



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.



Our 1942 Indenture of Mortgage and Deed of Trust, which is a
mortgage on all real and personal property, permits the issuance of additional
bonds based upon a calculation of unencumbered net real and personal property.
 At June 30, 2009, such calculation would permit the issuance of
approximately $52.6 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.



As of June 30, 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 higher by approximately
$1.4 million for the remaining six months of 2009 as compared to the same period
in 2008. The expected overall increase is due primarily to reduced construction
levels during the second half of 2008, and anticipated increases in capital
spending levels during the remainder of 2009.



As of June 30, 2009 we had $123,000 of outstanding commitments for
capital expenditures for the purchase of 14 concrete transmission poles to be
delivered during the third quarter 2009.



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 $1
million in 2009, with remaining payments, which could total approximately $11.2
million net of investment proceeds, beginning in 2010. Annual long-term debt
sinking fund payments of approximately $1.4 million will continue for nine
years.



In April 2009, we made our first required pension contribution of
$411,000 towards our 2009 plan year. Based on actuarial projections, we will
continue to make required contributions to our defined benefit pension plan of
approximately $560,000and $822,000 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
in September 2009.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. 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. The freeze will include
freezing salary rates at 2009 average compensation levels as of December 31,
2009 and only allowing two additional service years to be earned by active
participants with less than 35 years of service. In addition to the freeze, the
reduced early retirement eligibility will be lowered from 30 years to 20 years.
The two additional service years will incur service costs of approximately
$650,000 in each of the next two years. Beyond December 31, 2011, active
participants will continue to accrue service years only for the purposes of
vesting and retirement eligibility.



As a result of the pension freeze, employees currently in the
pension plan will be eligible to receive matching contributions in the companys
401k Plan effective January 1, 2010. Contribution expense is forecasted to
increase approximately $580,000 as a result of this option.



The amendments to the plan have been accounted for in accordance
with SFAS No. 88, resulting in the recognition of approximately $2.7 million in
non-cash pre-tax 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
financial 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 $200,000 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 February 10, 2009 the FPSC approved interim rate relief for
partial recovery of the increased expenditures.  Interim rates which
produced additional annual revenues of approximately $1.0 million became
effective on March 12, 2009 until the final rates were effective on June 4,
2009.



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.   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.



On June 17, 2009 the Office of Public Counsel entered a protest to
FPSCs final natural gas rate increase ruling and a full hearing will be
required within eight months. The vote for the final rates is scheduled for
February 9, 2010. Previously approved final rates and the related revenues will
be collected pending possible refund upon final determination at the full
hearing.



At this time management does not estimate any adjustments to the
final rate increase approved on May 5, 2009 and has not set up a liability for a
possible rate refund as of June 30, 2009. Management will recognize a liability
for a possible rate refund if we determine adjustments are probable. It is
possible that the final rate increase awarded may be lower than was approved by
the FPUC on May 5, 2009 and a refund may be required to our customers for any
variance in the final rates approved at the full hearing compared to the
previously approved rates on May 5, 2009.  The impact of a refund of
previously collected rates could be material to our results of operation.



Electric Franchise Marianna

The City of Marianna Commissioners voted on July 7, 2009 to enter
into a new ten year franchise agreement with the Company effective February 1,
2010. The agreement stipulated 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. Should the Company fail to make
available the new rates and the franchise is voided and the City elects to
purchase the Marianna portion of the distribution system, it would require the
city to pay the Company severance/reintegration costs, fair market value for the
system, and an initial investment in the infrastructure to operate this limited
facility.  If the City purchased 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. See Natural Gas Base Rate
Proceeding above for more information on the 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.



The average monthly gross profit from this customer was
approximately $29,000 in 2008 and the average total monthly bill including fuel
costs for this customer was approximately $250,000. This customer paid all
outstanding amounts that were due as of December 31, 2008. The Company has
reserved approximately $200,000 for potential bad debt 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.  The Company understands the
overall benefits from the legislation but the burden imposed on a small utility
like ours is of particular concern.  Although legislation has not yet been
passed, 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.  The company is also working with other Florida Utilities to
develop a comprehensive Demand Side Management Plan that we be implemented
during 2010 which will further enhance the conservation programs in place.
 To support these programs Smart Grid Technology is being considered
which would require significant capital investment to develop, install and
manage.



Propane Pre-Buys

We are currently involved in pre-buy contracts for our propane
commodity that range from 20% to 45% of our supply over the next fifteen
months.  The average price for the fifteen month pre-buy strip was
approximately 5% below daily market price on June 30, 2009.



Pre-Merger Costs

The Company expects to incur significant pre-merger related costs
associated with the pending merger between Chesapeake and FPU. These costs
include legal services, investment banking services, and other pre-merger
related items. At this time management anticipates additional costs to be
incurred in the 2009 third and fourth quarter of approximately $1.6 million.



Forward-Looking
Statements (Cautionary Statement)

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



·

Our expectation that the pending merger with Chesapeake will be
effective in the fourth quarter of this year.

·

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 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 greater for the remainder of 2009
compared to the prior year.

·

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, pension expense and 401K
expenses 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.

·

Additional annual expenditures relating to storm preparedness.

·

Pre-merger costs are estimated to be $1.6 million over the
remainder of 2009.



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 June 30, 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.



We have no exposure to equity risk, as we do not hold any material
equity instruments. Our exposure to interest rate risk is limited to investments
held for environmental costs, the long-term notes receivable from the sale of
our water division and short-term borrowings on the line of credit. The
investments held for environmental costs are short-term fixed income debt
securities whose carrying amounts are not materially different than fair value.
We had no balances outstanding on our short-term borrowings at the end of June
2009. We do not believe we have material market risk exposure related to these
instruments. The indentures governing our two first mortgage bond series
outstanding contain "make-whole" provisions (pre-payment penalties that charge
for lost interest), which render refinancing impracticable until sometime after
2012.



Item
4T.

Controls
and Procedures



Disclosure
Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we
carried out an evaluation, under the supervision and with the participation of
management, including our CEO and CFO, of the effectiveness of our disclosure
controls and procedures as of June 30, 2009. Based on that evaluation, our CEO
and CFO have concluded that, as of June 30, 2009, our disclosure controls and
procedures were effective.



Changes
in Internal Control over Financial Reporting

There have not been any changes in the Companys internal control
over financial reporting during the fiscal quarter ended June 30, 2009 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.



PART
II.

OTHER
INFORMATION



Item
1.

Legal
Proceedings

On May 8, 2009, a putative class action lawsuit purportedly on
behalf of the shareholders of FPU, challenging the merger was filed in Palm
Beach County, Florida, against FPU, each member of FPUs board of directors and
Chesapeake. The complaint alleges, among other things, that the approval of the
proposed merger by the directors of FPU constituted a breach of their fiduciary
duties. The suit seeks to enjoin completion of the merger. While the Company and
its directors believe that the allegations in the lawsuit are without merit and
intend to defend vigorously against these allegations, no assurance can be given
as to the outcome of this lawsuit, including the costs associated with defending
this claim, or any other liabilities or costs the parties may incur in
connection with the litigation or settlement of this claim.



The Company has been issued a notice of alleged violation of
certain reliability standards by the Florida Reliability Coordinating Council
(FRCC).  The FRCC is a not-for-profit company established as a regional
entity with delegated authority from the North American Electric Reliability
Corporation whose purpose is to propose and enforce reliability standards to
enhance reliability and adequacy of bulk electricity supply.  Enforcement
of these standards began in July of 2009 and the Company received notice that it
had been in violation of four of these reliability standards.  The Company
has agreed to enter into settlement negotiations with the FRCC to address these
alleged violations.  At this time management is unable to estimate the
amount of any penalties that may arise from this matter.



Item
1A.

Risk
Factors

Failure
to complete the merger could adversely impact the stock prices and the future
business and financial results of the Company because of, among other things,
the market disruption that would occur as a result of uncertainties relating to
a failure to complete the merger.

There is no assurance that Chesapeake and Florida Public Utilities
will obtain the necessary shareholder approvals to complete the merger or
satisfy the other conditions to the completion of the merger. If the merger is
not completed for any reason, the Company will be subject to several risks,
including the following:



·

Florida Public Utilities may be required to pay Chesapeake a
termination fee;

·

the price of the Companys common shares may decline to the extent
that the current market price reflects a market assumption that the merger will
be completed and that the related benefits and synergies will be realized, or as
a result of the markets perceptions that the merger was not consummated due to
an adverse change in Florida Public Utilities business; and

·

the business of Florida Public Utilities may be harmed, and the
price of our stock may decline, to the extent that employees, customers,
suppliers and others believe that the Company cannot compete in the marketplace
as effectively without the merger or otherwise remain uncertain about the
Companys future prospects in the absence of the merger.



A
pending shareholder suit could delay or prevent the closing of the merger or
otherwise adversely impact the business and operations of Florida Public
Utilities.

On May 8, 2009, a putative class action lawsuit purportedly on
behalf of the shareholders of Florida Public Utilities was filed in Palm Beach
County, Florida against Florida Public Utilities, each of its directors and
Chesapeake. The complaint alleges, among other things, that approval of the
proposed merger by the directors of Florida Public Utilities constituted a
breach of their fiduciary duties. The suit seeks to enjoin completion of the
merger.  No assurances can be given as to the outcome of this lawsuit,
including the costs associated with defending this lawsuit or any other
liabilities or costs the parties may incur in connection with the litigation or
settlement of this lawsuit. Furthermore, one of the conditions to closing the
merger is that there are no injunctions issued by any court preventing the
completion of the transactions. No assurance can be given that this lawsuit will
not result in such an injunction being issued which could prevent or delay the
closing of the transactions contemplated by the merger agreement.



Florida
Public Utilities will be subject to business uncertainties and contractual
restrictions while the merger is pending which could adversely affect our
business.

Uncertainty about the effect of the merger on employees and
customers may have an adverse effect on Florida Public Utilities. These
uncertainties may impair our ability to attract, retain and motivate key
personnel until the merger is consummated and for a period of time thereafter.
These uncertainties also could cause customers, suppliers and others that deal
with us to seek to change existing business relationships. Employee retention
may be particularly challenging during the pendency of the merger, as employees
may experience uncertainty about their future roles with the combined company.
In addition, the merger agreement restricts Florida Public Utilities, without
Chesapeakes consent, from making certain acquisitions and taking other
specified actions until the merger occurs or the merger agreement terminates.
These restrictions may prevent us from pursuing otherwise attractive business
opportunities and making other changes to our businesses prior to completion of
the merger or termination of the merger agreement.



Current
market conditions have had an adverse impact on the return on plan assets for
our pension plan, which may require significant additional funding and adversely
affect cash flows.

Florida Public Utilities has a pension plan that has been closed
to new employees. The costs of providing benefits and related funding
requirements of these plans are subject to changes in the market value of the
assets that fund the plans. As a result of the extreme volatility and disruption
in the domestic and international equity and bond markets, during 2008 our
pension plan experienced a decline of $10.9 million in its asset values. The
funded status of the plan and the related costs reflected in the financial
statements are affected by various factors that are subject to an inherent
degree of uncertainty, particularly in the current economic environment. Under
the Pension Protection Act of 2006, continued losses of asset values may
necessitate accelerated funding of the plans in the future to meet minimum
federal government requirements. Continued downward pressure on the asset values
of the plan may require the Company to fund obligations earlier than originally
planned, which would have an adverse impact on our cash flows from operations,
decrease borrowing capacity and increase interest expense.



Pending
environmental cleanup proceedings in West Palm Beach, Florida may have a
material adverse effect on the company.

We are currently evaluating remedial options to respond to
environmental impacts to soil and groundwater at and in the immediate vicinity
of a parcel of property in West Palm Beach, Florida. We are working with the
Florida Department of Environmental Protection with respect to remedies for this
property. The total costs for remedies which have been evaluated range from a
low of $2.8 million to a high of $54.6 million. Discussions with the Florida
Department of Environmental Protection are ongoing to reach a final remedy for
the site. Prior to the conclusion of those negotiations, however, we are unable
to determine, to a reasonable degree of certainty, the complete extent or cost
of remedial action that may be required. The ultimate remedy could exceed the
current expectations and environmental reserves of Florida Public Utilities and
have a material adverse effect on the Company.



The risk factors should be read in conjunction with those included
in our most recent Form 10-K for the year ending December 31, 2008.



Item
4.

Submission
of Matters to a Vote of Security Holders



The Company held its annual meeting of stockholders on May 12,
2009.  At that meeting, the stockholders were asked to consider and act on
the following:



·

Election of two directors

·

Approve an amendment to the Companys Dividend Reinvestment Plan
to increase the number of shares of common stock available in this Plan by
100,000 shares

·

Ratification of the appointment of BDO Seidman, LLP, as the
Companys independent registered certified public accounting firm

·

Approve a shareholder proposal regarding classified board



Each of the following directors was reelected for a term expiring
in 2011 and received the number of votes set forth opposite his or her name:



|                   |           |          
|------------------ | --------- | ---------
|Nominee            | For       | Withheld 
|Ellen
Terry Benoit | 4,339,488 | 1,173,619
|John
T English     | 4,734,602 | 778,505  



The following votes were cast with respect to the amendment to the
Companys Dividend Reinvestment Plan, the ratification of the appointment
of the Companys independent registered certified public accounting firm, BDO
Seidman, LLP, and the shareholder proposal regarding classified board:





|                                  |           |           |                  |            
|--------------------------------- | --------- | --------- | ---------------- | -----------
|                                  | For       | Against   | Broker Non-votes | Abstentions
|Amendment to DRIP                 | 3,918,634 | 127,175   | 1,444,033        | 23,265     
|Ratification of  BDO Seidman, LLP | 5,453,853 | 33,007    | 0                | 26,247     
|Shareholder proposal              | 1,573,212 | 2,418,871 | 1,444,034        | 76,990     



Item
6.

Exhibits



2.1

Agreement and Plan of Merger between Florida Public Utilities
Company and Chesapeake Utilities Corporation, a Delaware corporation, and its
wholly owned subsidiary, CPK Pelican, Inc., a Florida corporation. (incorporated
by reference to Exhibit 2.1 to our Form 8-K filed on April 17, 2009).



3.1

Restated Articles of Incorporation (incorporated herein by
reference as Exhibit 3.2 on Form 8-K filed November 10, 2008).



3.2

Restated By-Laws (incorporated herein by reference as 3.1 on Form
8-K filed November 10, 2008).



4.1

Indenture of Mortgage and Deed of Trust of FPU dated as of
September 1, 1942 (incorporated by reference herein to Exhibit 7-A to
Registration No. 2-6087).



4.2

Fourteenth Supplemental Indenture dated September 1, 2001
(incorporated by reference to exhibit 4.2 on our annual report on Form 10-K for
the year ended December 31, 2001).



4.3

Fifteenth Supplemental Indenture dated November 1, 2001
(incorporated by reference to exhibit 4.3 on our annual report on Form 10-K for
the year ended December 31, 2001).



31.1

Certification of Chief Executive Officer (CEO) per Section 302 of
the Sarbanes-Oxley Act of 2002.



31.2

Certification of Chief Financial Officer (CFO) per Section 302 of
the Sarbanes-Oxley Act of 2002.



32

Certification of Principal Executive Officer and Principal
Financial Officer per Section 906 of the Sarbanes-Oxley Act of 2002.











SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.



FLORIDA PUBLIC UTILITIES COMPANY

(Registrant)











Date: August12, 2009

By: /s/ George M. Bachman

George
M. Bachman

Chief
Financial Officer

(Principal
Accounting Officer)















FLORIDA PUBLIC UTILITIES COMPANY

EXHIBIT INDEX

Item
Number



31.1

Certification of Chief Executive Officer (CEO) per Section 302 of
the Sarbanes-Oxley Act of 2002.



31.2

Certification of Chief Financial Officer (CFO) per Section 302 of
the Sarbanes-Oxley Act of 2002.



32

Certification of Principal Executive Officer and Principal
Financial Officer per Section 906 of the Sarbanes-Oxley Act of 2002.