-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tzq+cOvWXJzf9wflEqGOxRUXdIm0yR7ypPQfxiLeaxknFexAttpYlSSivKoY44kj Wxsv7sSCsAxuSkoBFEqB2A== 0000102710-96-000114.txt : 19961202 0000102710-96-000114.hdr.sgml : 19961202 ACCESSION NUMBER: 0000102710-96-000114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY RESOURCES INC /RI/ CENTRAL INDEX KEY: 0000102710 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 050384723 STATE OF INCORPORATION: RI FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07924 FILM NUMBER: 96673907 BUSINESS ADDRESS: STREET 1: 1595 MENDON RD CITY: CUMBERLAND STATE: RI ZIP: 02864 BUSINESS PHONE: 4013341188 MAIL ADDRESS: STREET 1: PO BOX 7900 CITY: CUMBERLAND STATE: RI ZIP: 02864-7900 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended August 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________________ to _____________________ Commission File number 1-7924 VALLEY RESOURCES, INC. (Exact name of Registrant as specified in its charter) Rhode Island 05-0384723 (State of Incorporation or Organization) (IRS Employer Identification No.) 1595 Mendon Road, Cumberland, Rhode Island 02864 (Address of principal executive offices) Registrant's Telephone Number, Including Area Code (401) 334-1188 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock American Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [__] The aggregate market value of the common stock held by non-affiliates, computed on the basis of $12.50 per share (the closing price of such stock on October 22, 1996 on the American Stock Exchange) was $53,500,350. As of October 22, 1996 there were 4,280,028 shares of Valley Resources, Inc. Common Stock, $1 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Report of Independent Certified Public Accountants, Management's Discussion and Analysis, Summary of Consolidated Operations, Dividends and Market Data and Stockholder Statistics of the Registrant's Annual Report to Stockholders for the fiscal year ended August 31, 1996 are incorporated by reference in Parts I, II and IV. Portions of the Proxy Statement dated November 5, 1996 as filed with the Securities and Exchange Commission are incorporated by reference in Part III. PART I Item 1 Business -------- Valley Resources, Inc. (the "Corporation") is a holding company organized in 1979 and incorporated in the State of Rhode Island. The Corporation has five wholly-owned active subsidiaries: Valley Gas Company ("Valley Gas") and Bristol & Warren Gas Company ("Bristol")--regulated natural gas distribution companies; Valley Appliance and Merchandising Company ("VAMCO")--a merchandising and appliance rental company; Valley Propane, Inc. ("Valley Propane"); and Morris Merchants, Inc. (d/b/a "The Walter F. Morris Company")--a wholesale distributor of franchised lines in plumbing and heating contractor supply and other energy related business. The Corporation also has an 80 percent interest in Alternate Energy Corporation ("AEC") which sells, installs and designs natural gas conversion systems and facilities. The headquarters for the Corporation and the sales and service offices of Valley Gas, VAMCO and Valley Propane are located in Cumberland, Rhode Island. Morris Merchants, Inc.'s sales and warehouse facilities are located in Canton, Massachusetts. The operation center of Bristol and New England Gas is located in Bristol, Rhode Island. The administrative offices for AEC are located in Cumberland, Rhode Island and the service center is located in Johnston, Rhode Island. Bristol, acquired by the Corporation on April 1, 1992, was incorporated in the State of Rhode Island in 1953 to distribute natural gas to customers in Bristol and Warren, Rhode Island. In May 1996, the Corporation acquired an 80 percent interest in AEC. AEC was incorporated in the State of Rhode Island in April 1992 to design and install equipment for the conversion of vehicular and stationary engines to natural gas. Effective September 1995, all propane sales and service were consolidated into a single operation under the name Valley Propane. The New England Gas Company became inactive at that time. Financial information about industry segments appearing on page 28 of the Annual Report to Stockholders for the year ended August 31, 1996 is incorporated herein by reference. The Corporation does not expect any material effects on its business as a result of compliance with environmental regulations. The Corporation and its subsidiaries had 249 employees at August 31, 1996, of which 57 were covered by a collective bargaining agreement with the Utility Workers Union of America, AFL-CIO, Local No. 472, expiring March 31, 1997, and 7 were covered by a collective bargaining agreement with the Service Employee International Union, AFL-CIO, Local No. 134, expiring May 31, 1997. Utility Operations - ------------------ Gas Sales and Transportation The Corporation's utility operations are conducted through Valley Gas and Bristol (the "utilities"). They had an average of 61,300 customers during the twelve months ended August 31, 1996, of which approximately 91% were residential and 9% were commercial and industrial. The utilities provide natural gas service to residential, commercial and industrial customers and transportation services to industrial customers. Valley Gas' service territory is approximately 92 square miles located in the Blackstone Valley region in northeastern Rhode Island with a population of approximately 250,000. Bristol's service territory is approximately 15 square miles in eastern Rhode Island with a population of approximately 35,000. Effective November 1995, the utilities operate under a single rate structure. The following table shows the distribution of gas sold during the years since 1992 in millions of cubic feet ("MMcf"): For the Year Ended August 31,(1) --------------------------------
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Residential 4,612 4,078 4,517 4,439 3,965 Commercial 2,252 1,953 2,078 1,978 1,680 Industrial-firm 1,391 1,338 1,299 1,185 1,152 Industrial-seasonal 1,047 1,298 996 818 1,010 ----- ----- --- --- ----- TOTAL 9,302 8,667 8,890 8,420 7,807 ===== ===== ===== ===== ===== (1) The operations of Bristol are included since April 1992.
Firm customers of the utilities use gas for cooking, heating, water heating, drying and commercial/industrial processing. Certain industrial customers use additional gas in the summer months when it is available at lower prices. These customers are subject to having their service interrupted at the discretion of the utilities with very little notice. This use is classified as seasonal use. As discussed further below, the margin on seasonal use is passed through the Purchased Gas Price Adjustment ("PGPA") to lower the cost of gas to all categories of firm customers. Bristol retained the margin on seasonal sales prior to November 1995. The primary source of utility revenues is firm use customers under tariffs which are designed to recover a base cost of gas, administrative and operating expenses and provide sufficient return to cover interest and profit. The utilities also service dual fuel, interruptible and transportation customers under rates approved by the Rhode Island Public Utilities Commission ("RIPUC"). Additionally, Valley Gas services cogeneration customers under separate contract rates that were individually approved by the RIPUC. The utilities tariffs include a PGPA which allows an adjustment of rates charged to customers in order to recover all changes in gas costs from stipulated base gas costs. The PGPA provides for an annual reconciliation of total gas costs billed with the actual cost of gas incurred. Any excess or deficiency in amounts collected as compared to costs incurred is deferred and either reduces the PGPA or is billed to customers over subsequent periods. The PGPA does not impact operating income as it effectuates a dollar for dollar recovery of gas costs. All margins from interruptible customers are returned to firm customers through the workings of the PGPA. Utility revenues include a surcharge on firm gas consumption to collect a portion of the costs to fund postretirement medical and life insurance benefits above the pay-as-you-go costs included in base tariffs. The surcharge was authorized by the RIPUC in a generic rate proceeding and are being phased in over a ten-year period which commenced September 1, 1993. Effective November 1995, the current year funding of postretirement medical and life insurance benefits is included in base tariffs. In September 1996 the RIPUC authorized the funding shortages from the first two years of the phase-in to be recovered through a surcharge over the next three fiscal years. The prices of alternative sources of energy impact the interruptible and dual fuel markets. The utilities serve these customers in the nonpeak periods of the year or when competitively priced gas supplies are available. These customers are subject to service discontinuance on short notice as system firm requirements may demand. Prices for these customers are based on the price of the customers' alternative fuel. In order to mitigate the volatility of earnings from interruptible and dual fuel sales the utilities roll into the PGPA the margin earned on these interruptible sales and all margins in excess of $1 per thousand cubic feet ("Mcf") of gas sold to dual fuel customers. This margin credit reduces rates to firm customers. This means of margin treatment alleviates the negative impact that swings in sales can have on earnings in the highly competitive industrial interruptible market. Rates and Regulation - -------------------- The utilities are subject to regulation by the RIPUC with respect to rates, adequacy of service, issuance of securities, accounting and other matters. On January 19, 1995, Valley Gas and Bristol filed revised tariffs with the RIPUC to consolidate their rate structure and to increase their combined annual revenues. On October 18, 1995, the RIPUC authorized the consolidated rate structure and allowed the companies to adjust their tariffs to collect $1.2 million or 2.0%. These rates became effective November 21, 1995. Gas Supply and Storage - ---------------------- The Federal Energy Regulatory Commission ("FERC") in 1992 issued its order No. 636, the primary purpose of which was to promote competition in the natural gas industry by requiring all interstate pipelines to separate or "unbundle" their all-encompassing firm gas sales service to public utilities into its five component parts: production, sales, aggregation, storage and transportation. Tennessee Gas Pipeline Company is the major natural gas transporter for Valley Gas under long-term contracts. Bristol's principal gas transporters are Algonquin Gas Transmission Company and Texas Eastern Transmission Corporation. The utilities purchase natural gas from several suppliers on a long-term firm basis, as well as on the spot market whenever available. Year-Round Wellhead Firm Supply Valley Gas is a charter member of the Mansfield Consortium, which consists of five local distribution companies joined together to use their combined market power to secure favorable terms for long-term gas supply. In addition, Valley Gas is an investor in Boundary Gas, Inc. and a customer of Alberta Northeast, LTD, both of which were founded by groups of gas distribution companies in the northeast to import natural gas from Canada. Valley Gas and Bristol together have 24,402 dekatherms per day of year-round firm supply under long-term contracts with four domestic and two Canadian suppliers. Of these contracts, 28.8% (7,035 Dth/day) expires November 1, 1999, and 91.5% (22,335 Dth/day) is due to expire on June 30, 2002. All of the utilities' gas supply contracts are spot-indexed based. The utilities have flexible take requirements, with only 1,973 dekatherms categorized as "baseload" supply which must be taken every day, and that contract expires in 1999. Winter-Only Firm Supply The utilities are well-positioned with respect to winter-only firm supply in that their actual and prospective long-term contracts are with major players in this market, and contract prices are at competitively favorable terms. Liquefied Natural Gas ("LNG") - Valley Gas is entitled to 5,300 dekatherms per day of firm supply from Distrigas, which re-vaporizes LNG at its Everett, Mass. facility for delivery during the winter months to Valley by Tennessee Gas Pipeline or to Bristol & Warren via Algonquin Gas Transmission. As an option, Valley Gas may take this gas in its liquefied state for transportation by truck to and storage at Valley Gas' on-site LNG tank. A further option allows Valley Gas to increase its maximum daily quantity from 5,300 to 7,950 dekatherms. There are no minimum takes, and the contract runs through October 31, 2005. Energy Plus - This agreement with a PanHandle Eastern affiliate (EnergyPlus) is for 100,000 dekatherms per year of LNG out of its Providence, R.I. facility. The contract is scheduled to go into effect November 1, 1997, pending FERC approval. There are no minimum takes and the expiration date is October 31, 2007. Maritimes & Northeast Pipeline - Subject to approval by the FERC and subsequent construction of the proposed Maritimes & Northeast Pipeline from Sable Island, Canada into a Massachusetts interconnect with Tennessee Gas Pipeline, Valley Gas will be entitled to firm winter delivery of 5,000 dekatherms per day to its city gate, with an option to increase its maximum daily quantity to 7,500 dekatherms. There are no minimum takes. This 10-year contract is scheduled to go into effect November 1, 1999. Pawtucket Power Co-Generation Plant - Valley Gas is entitled under long-term contract to utilize up to 540 dekatherms per hour, with a maximum annual quantity of 333,000 dekatherms, of natural gas used by Pawtucket Power in its generation of electricity and steam. This firm gas supply originates in Alberta, Canada. Underground Storage - The utilities have 1,543,958 dekatherms of underground storage capacity with CNG Transmission and National Fuel Gas Supply Corporation, for a total maximum daily withdrawal quantity of 20,589 dekatherms. Underground storage gas is injected during the non-winter months by the utilities into fields located in Pennsylvania and New York, for subsequent withdrawal during the winter when customer demand is greatest. By November 1, 2000, 49% of these storage contracts will have expired; the remaining 51% expires March 31, 2012. Interstate Pipeline Capacity - The utilities utilize firm pipeline capacity for two basic purposes: 1) daily transportation of firm and spot market gas supply throughout the year from the gulf coast to their city gates, and 2) winter-only transportation of underground storage gas to their city gates. Gas Supply Pipeline Capacity - Total year-round firm capacity is 24,902 dekatherms per day. Of this total, 86% expires by December 1, 2002. Storage Pipeline Capacity - The utilities storage-related pipeline capacity totals 11,349 dekatherms per day. About 37% of this capacity expires November 1, 2000, and the remainder extends from 2003 through 2012. On-Site LNG and Propane Storage - In addition to the gas delivered by the interstate pipeline, both utilties have on-site storage facilities for liquid propane gas ("LPG"), with Valley Gas having about 857,000 gallons and Bristol having about 117,000 gallons of LPG storage. Valley Gas also has on-site storage facilities for 968,320 gallons (about 85,000 dekatherms) of LNG. Both LPG and LNG are vaporized into the utilities distribution systems during periods of peak demand, and utilized as backup in the event of failure of an upstream pipeline to deliver needed gas supplies. Competition and Marketing - ------------------------- The primary competition faced by the utilities is from other energy sources, primarily heating oil. The principal considerations affecting a customer's selection among competing energy sources include price, equipment cost, reliability, ease of delivery and service. In addition, the type of equipment already installed in businesses and residences significantly affects the customer's choice of energy. However, where previously installed equipment is not an issue, households in recent years have consistently preferred the installation of gas heat. For example, Valley Gas' statistics indicate that approximately 90% of the new homes built on or near Valley Gas' service mains in recent years have selected gas as their energy source. The utilities are pursuing new markets believed to have the potential to provide both growth and/or lessen sales sensitivity to weather: industrial processing, cogeneration, natural gas vehicles and conversions from oil to gas. In the recent utility rate approval, the RIPUC approved rates which will retain and attract industrial customers. Additionally, the utilities have two rates which promote economic development in its service territory. These rates provide incentives for companies that add industrial processing load, make a substantial investment in new natural gas equipment and hire additional employees. The cogeneration market is addressed through sales contacts with customers who have applications suitable to use waste heat through the cogeneration process. There are established rate tariffs to specifically address the requirements of the cogeneration market. In addition, Valley Gas has a 50 kilowatt demonstration facility at its Cumberland location which provides electricity for computer facilities and hot water requirements. Valley Gas installed a compressed natural gas ("CNG ") fueling station at its Cumberland headquarters. The use of natural gas in vehicles will be promoted through conversion of its own fleet and the CNG rate approved by the RIPUC. The focus of the residential marketing department to increase conversions from oil to natural gas is in the installations of conversion burners and a continuous effort in the replacement market of housing developments that did not choose natural gas. Additional efforts are spent to convert homes with inactive natural gas service. The distribution company unbundling process will add competition from a new source, natural gas suppliers. The utilities have filed transportation rates with the RIPUC to allow customers the choice to purchase gas from the utilities or from natural gas marketers. Since the utilities' profits are derived from distribution and not natural gas sales, this process should not significantly impact the profitability of the utilities. Seasonality - ----------- The bulk of firm distribution and sales are made during the months of November through March. As a result, the highest levels of earnings and cash flow are generated from the quarters ending in February and May. The bulk of the capital expenditure programs are undertaken during the months of May through October, causing cash flow to be at its lowest during the quarters ending in November and August. Short-term borrowing requirements vary according to the seasonal nature of sales and expense activities of the utilities, creating greater need for short-term borrowings during periods when internally generated funds are not sufficient to cover all capital and operating requirements, particularly in the summer and fall. Short-term borrowings utilized for construction expenditures generally are replaced by permanent financing when it becomes economical and practical to do so and where appropriate to maintain an acceptable relationship between borrowed and equity resources. Gas Distribution System - ----------------------- Valley Gas' distribution system consists of approximately 900 miles of gas mains and service lines. Bristol's gas distribution system consists of approximately 100 miles of gas mains. The aggregate maximum daily quantity of gas that may be distributed through the utilities from their own facilities and under existing supply and transportation contracts is approximately 100 MMcf, and the maximum daily gas sendouts for all sales customers of the utilities during the last five fiscal years were 71 MMcf in 1996, 66 MMcf in 1995, 77 MMcf in 1994, 69 MMcf in 1993, and 67 MMcf in 1992. Appliance Contract Sales and Rentals - ------------------------------------ The Corporation conducts appliance, contract sales and rentals through its subsidiaries VAMCO and Morris Merchants. VAMCO's revenues are generated through retail appliance sales, service contract sales and through the rental of gas-fired appliances. Morris Merchants sells at wholesale gas- and oil-fired equipment and plumbing and heating supplies. Morris Merchants has contracts for the distribution of certain lines that it wholesales. At this time the Corporation has no reason to believe it will lose any of its existing lines. Morris Merchants is not dependent on any one of the existing lines. Propane Operations - ------------------ The propane operations are conducted through Valley Propane which sells, at retail, liquid propane gas to residential and commercial customers in Rhode Island and nearby Massachusetts. At August 31, 1996, Valley Propane had 2,579 customers. Valley Propane also supplies propane to holding customers of the utilities; these customers are serviced by Valley Propane until the utilities can connect mains and service lines. Valley Propane is also impacted by weather, as a large percentage of its customers use propane as a primary source of heat. Valley Propane increases and decreases the selling price of its gas depending upon supply and competition. Natural Gas Conversions - ----------------------- The Corporation conducts natural gas conversions through AEC. AEC generates its revenue through the engineering and installation of compressed natural gas refueling stations, the conversion of gasoline and diesel-powered vehicles to natural gas and through the implementation of its patented process to co-fire natural gas and diesel fuel in engines, primarily generators. The Corporation owns an 80 percent interest in AEC and has the right to acquire the remaining 20 percent of the company currently held by the management of AEC. The operations of AEC did not materially impact the operations of the Corporation in fiscal 1996. Forward Looking Statements - -------------------------- Statements contained in this Form 10-K that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Corporation cautions that, while it believes such statements to be reasonable and makes them in good faith, they almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material depending upon the circumstances. Investors should be aware of important factors that could have a material impact on future results. Factors include, but are not limited to, the regulatory environment, customers' preferences, unforeseen competition and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of the Corporation. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of the Corporation's common stock. Item 2 Properties ---------- 1595 Mendon Road, Cumberland, Rhode Island Office, Sales, and Service Center This location comprises the headquarters, sales and service operation of the Corporation, Valley Gas, VAMCO and Valley Propane; and includes accounting, billing, credit, engineering, garage, maintenance, service, storeroom and construction. The headquarters and sales office for AEC are located at this facility. The facilities are considered suitable and adequate for the Corporation. 425 Turnpike Street Canton, Massachusetts Office and Warehouse Facilities Morris Merchants, Inc. conducts its business at this leased warehouse and office building in Canton, MA. Its business does not require any special facilities and, therefore, its leased facilities are not significant to its operation. The total lease payments are less than 1 percent of corporate assets. 106-B Federal Way Johnston, Rhode Island Service Center AEC conducts its servicing business at this leased garage in Johnston, RI. The leased facility is not significant to its operations and the total lease payments are less than 1 percent of the corporate assets. Scott Road, Cumberland, Rhode Island LNG Storage Plant Propane Storage Plant This facility is used for the storage of LNG and propane used in the peak-shaving operations of Valley Gas. Its daily delivery capacity of LNG and LPG is 25,000 Mcf's and 12,000 Mcf's, respectively. Facility improvements which were completed during the fall of fiscal 1996 doubled the delivery capacity for LNG. 100 Broad Common Road Bristol, Rhode Island Office, Sales and Service Center This location comprises the office, sales and service operation of Bristol and includes construction, credit, engineering, garage, maintenance, service, and storeroom. This facility is considered suitable and adequate for the Bristol. Brown Street Warren, Rhode Island Propane Storage This facility is used for the storage of propane used in peak-shaving operations of Bristol. Its daily delivery capacity of LPG is 1,600 Mcf's. The Corporation believes its storage facilities are adequate to meet the needs of the utilities for the foreseeable future. All of the storage facilities are owned. All Valley Gas properties, except leased property, are held in fee. See item 1 for discussion of gas supply. Item 3 Legal Proceedings ----------------- There were no material legal proceedings pending to which the Corporation or any of its subsidiaries is a party, or of which any of their property is the subject, except two claims that were asserted against Valley Gas as referred to in Note H, page 27, of the 1996 Annual Report to Stockholders which is incorporated by reference. Item 4 Submission of Matters to a Vote of Security Holders --------------------------- None Executive Officers of the Registrant - ------------------------------------ The names, ages, and position of all the executive officers of the Corporation on October 15, 1996 are listed below together with their business experience during the past five years. All officers of the Corporation are elected or appointed annually by the board of directors at the directors' first meeting following the Annual Meeting of Stockholders. Business Experience Name Age Position During Last Five Years ---- --- -------- ---------------------- Alfred P. Degen 49 President and Chief President since July 1994 and Executive Officer Chief Executive Officer since March 1995; Executive Vice President-Acting President of Philadelphia Gas Works prior to July 1994. Kenneth W. Hogan 51 Senior Vice President, Senior Vice President since July Chief Financial 1994; Vice President prior Officer to July 1994; Chief Financial Officer since December 1994 and Secretary since April 1977. Charles K. Meunier 54 Vice President, Vice President since December Operations 1994; Assistant Vice President Operations and Human Resources prior to December 1994. PART II Item 5 Market for the Registrant's Securities and Related Stockholder Matters ------------------------------- Common stock market prices, number of common stockholders, dividends declared and dividend restrictions appearing on pages 14 and 23 of the Annual Report to Stockholders for the fiscal year ended August 31, 1996 are incorporated herein by reference. The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR. Item 6 Selected Financial Data ----------------------- The selected financial data (Summary of Consolidated Operations) appearing on page 34 of the Annual Report to Stockholders for the fiscal year ended August 31, 1996 is incorporated herein by reference. Item 7 Management's Discussion and Analysis ------------------------------------ Management's discussion and analysis of the results of operations, liquidity and capital resources appearing on pages 30 through 33 of the Annual Report to Stockholders for the fiscal year ended August 31, 1996 are incorporated herein by reference. Item 8 Financial Statements and Supplementary Data ------------------------------------------- The following consolidated financial statements of the registrant and its subsidiaries appearing on pages 16 through 29 in the Annual Report to Stockholders for the fiscal year ended August 31, 1996 are incorporated herein by reference: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1996 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1996 Consolidated Balance Sheets - August 31, 1996 and 1995 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1996 Consolidated Statements of Capitalization - August 31, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure -------------------------------------- None. PART III Item 10 Directors and Executive Officers of the Registrant -------------------------------------------------- For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" at the end of Part I of this report. Information regarding the directors of the registrant appearing on pages 2 through 6 of the Proxy Statement filed with the Securities and Exchange Commission on November 5, 1996 is incorporated herein by reference. Based solely upon a review of copies of Forms 3, 4 and 5 furnished to the Corporation pursuant to Rule 16a-3(e), the Corporation believes that each of the Corporation's directors, officers and beneficial owners of more than 10% of any class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") have timely filed all reports required by Section 16(a) of the Exchange Act during the most recent two fiscal years. Item 11 Executive Compensation ---------------------- Information regarding management compensation appearing on pages 6 through 11 of the Proxy Statement filed with the Securities and Exchange Commission on November 5, 1996 is incorporated herein by reference. Item 12 Security Ownership of Certain Beneficial Owners and Management -------------------------------- Information regarding the beneficial owners of more than 5 percent of the outstanding Common Stock of the Corporation, being the only class of equity security issued and outstanding, and the security ownership of management appearing on pages 1 and 2 of the Proxy Statement filed with the Securities and Exchange Commission on November 5, 1996 is incorporated herein by reference. Item 13 Certain Relationships and Related Transactions ---------------------------------------------- None. PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------- (a) 1. The following consolidated financial statements of Valley Resources, Inc. and subsidiaries appearing on pages 16 through 29 in the Annual Report to Stockholders for the year ended August 31, 1996 are incorporated by reference in Item 8: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1996 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1996 Consolidated Balance Sheets - August 31, 1996 and 1995 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1996 Consolidated Statements of Capitalization - August 31, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants (a) 2. Consolidated Financial Schedule Schedule VIII - Valuation and Qualifying Accounts Schedules I, II, III, IV, V, VI, VII, IX, X, XI, XII, XIII and XIV are either inapplicable or not required or the required information is shown in the financial statements or notes thereto under the instructions and have been omitted. Report of Independent Certified Public Accountants on Consolidated Financial Schedule (a) 3. Exhibits 3. Articles of Incorporation and Bylaws (Exhibit 3 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1988 is incorporated herein by reference.) 4. Indenture of First Mortgage dated as of December 15, 1992 between Valley Gas Company, Valley Resources, Inc. as guarantor and State Street Bank and Trust Company, Trustee (Exhibit 4 to the Corporation's Annual Report on Form 10-K for the year-ended August 31, 1993 is hereby incorporated by reference.) 10. Compensation Contracts or Arrangements 10. (a) Valley Gas Company Supplemental Retirement Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10. (b) Valley Resources, Inc. 1988 Executive Incentive Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10. (c) Termination agreement between Valley Resources, Inc. and Kenneth W. Hogan (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (d) Valley Resources, Inc. Directors Retirement Plan. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is hereby incorporated by reference.) 10. (e) Termination agreement dated June 21, 1995 between Valley Resources, Inc. and Alfred P. Degen. 10. Other Material Contracts 10. (f) Firm Storage Service Transportation contract between Valley Gas and Tennessee Gas Pipeline Company, dated December 15, 1985 (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1986 is hereby incorporated by reference.) 10. (g) Storage Service Agreement dated July 3, 1985 between Valley Gas Company and Consolidated Gas Transmission Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (h) Underground Storage Service Agreement dated October 3, 1984 between Valley Gas Company and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (i) Underground storage service agreement dated August 19, 1983 between Valley Gas Company and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1983 is hereby incorporated by reference. 10. (j) Service agreement for storage of LNG dated June 30, 1982 between Valley Gas Company and Algonquin LNG, Inc. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1982 is hereby incorporated by reference.) 10. (k) Contract for the purchase of natural gas dated March 1, 1981, between Valley Gas Company and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (l) Storage Service Transportation contract dated May 15, 1981, between Valley Gas Company and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (m) Storage Service Transportation contract dated May 26, 1981, between Valley Gas Company and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (n) Storage Service Agreement dated February 18, 1980, between Valley Gas Company and Consolidated Gas Supply Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (o) Loan Agreement dated July 18, 1991 between Valley Resources, Inc. and Fleet National Bank (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1991 is hereby incorporated by reference.) 10. (p) Gas Sales Agreement dated June 15, 1992 between Aquila Energy Marketing Corporation and Valley Gas Company. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is incorporated herein by reference.) 10. (q) Gas Sales Agreement dated June 8, 1992 between Natural Gas Clearinghouse and Valley Gas Company. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is incorporated herein by reference). 13. Annual Report to Stockholders. 21. Subsidiaries of the Registrant. 23. Consent of Grant Thornton LLP. 27. Financial Data Schedule. (b) Form 8-K was not required to be filed for the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. VALLEY RESOURCES, INC. AND SUBSIDIARIES Date: November 26, 1996 By S/K. W. Hogan --------------------------------------- Kenneth W. Hogan Senior Vice President, Chief Financial Officer & Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: November 26, 1996 S/A. P. Degen -------------------------------------------- Alfred P. Degen, President and Chief Executive Officer Date: November 26, 1996 S/K. W. Hogan -------------------------------------------- Kenneth W. Hogan, Senior Vice President, Chief Financial Officer & Secretary Date: November 26, 1996 S/E. N. Agresti -------------------------------------------- Ernest N. Agresti, Director Date: November 26, 1996 -------------------------------------------- Melvin G. Alperin, Director Date: November 26, 1996 -------------------------------------------- C. Hamilton Davison, Director Date: November 26, 1996 S/D. A. DeAngelis -------------------------------------------- Don A. DeAngelis, Director Date: November 26, 1996 -------------------------------------------- James M. Dillon, Director Date: November 26, 1996 S/J. K. Farnum -------------------------------------------- Jonathan K. Farnum, Director Date: November 26, 1996 S/J. F. Guthrie, Jr. -------------------------------------------- John F. Guthrie, Jr., Director Date: November 26, 1996 -------------------------------------------- Eleanor M. McMahon, Director VALLEY RESOURCES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SCHEDULE VIII Fiscal Years Ended August 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at (1) (2) Deductions Balance at Beginning of Charged to Costs Charged to from End of Description Period and Expenses Other Accounts Reserves Period ----------- ------ ------------ -------------- -------- ------ 1996 Allowance for doubtful accounts $655,951 $1,459,761 $156,755 (a) $1,552,746 (b) $719,721 ======== ========== ======== ========== ======== 1995 Allowance for doubtful accounts $653,927 $ 1,274,238 $104,176 (a) $1,376,390 (b) $655,951 ======== =========== ======== ========== ======== 1994 Allowance for doubtful accounts $592,504 $ 959,404 $ 66,073 (a) $964,054 (b) $653,927 ======== ========= ======== ======== ======== Notes: (a) Collections on accounts previously charged off. (b) Accounts charged off.
Report of Independent Certified Public Accountants on Consolidated Financial Schedule To the Shareholders of Valley Resources, Inc. In connection with our audit of the consolidated financial statements of Valley Resources, Inc. and subsidiaries referred to in our report dated September 24, 1996, which is included in the Annual Report to Stockholders and incorporated by reference in Part II of this form, we have also examined the schedule listed in the index at Part IV, Item 14(a)2. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Boston, Massachusetts September 24, 1996 EX-13 2 Valley Resources, Inc. 1996 Annual Report Inside Cover: (Photo appears here) Photo Tag: Melvin Alperin (L) and John Moriarty (R) A Higher Degree of Performance The people of Valley Resources are known for their unselfish commitment to the communities the company serves. The directors, management, and employees dedicate their time, energy, and money to countless organizations which provide a helping hand to those in need. This past year, Melvin Alperin, a director, and John Moriarty, a Valley Gas service technician, were among twenty-six local community heroes selected to carry the Olympic torch across Rhode Island. The runners were selected by a 16-member panel organized by The United Way of Southeastern New England, which searched for individuals who perform outstanding volunteer work, serving as community leaders, role models, and mentors. These individuals were also selected for their generosity, kindness, and extraordinary accomplishments in community and civic affairs. In consideration of Mel's work for the Rhode Island Foundation, The United Way, and The Jewish Federation of Rhode Island, and John's support of many organizations including The United Way, we were honored to have them represent Rhode Island and Valley Resources in the 1996 Olympic Torch Relay. Cover Photo: Bristol & Warren Gas Company is currently implementing its plan, approved by the residents of Bristol's North Farm Condominiums, to bring clean, economical, and convenient natural gas service to this exclusive waterfront development. Corporate Overview Valley Resources, Inc. (Valley or the Corporation) is a public utility holding company. The Corporation has five active wholly-owned subsidiaries: Valley Gas Company (Valley Gas or the Company) and Bristol & Warren Gas Company (Bristol & Warren), both regulated natural gas distribution companies; Valley Appliance and Merchandising Company (VAMCO), a merchandising, appliance rental, sales and service company; Valley Propane, Inc., a wholesale and retail propane sales company and Morris Merchants, Inc. (Morris) d/b/a the Walter F. Morris Company, a representative distributor of franchised lines. The Corporation also has an 80 percent interest in Alternate Energy Corporation (AEC) which sells, installs and designs natural gas conversion systems and facilities. Financial Highlights
For the year ended August 31 (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Operating revenues .................................................... $ 80,360 $ 74,870 $ 83,553 Operation expenses, maintenance and depreciation ...................... 67,975 64,392 71,275 ------ ------ ------ Operating income before taxes ......................................... 12,385 10,478 12,278 Taxes - other than Federal income ..................................... 4,091 4,002 4,464 Taxes - Federal income ................................................ 1,444 732 1,313 Other income - net of taxes ........................................... 460 115 227 Interest charges ..................................................... 3,312 3,304 2,902 ----- ----- ----- Net income ............................................................ $ 3,998 $ 2,555 $ 3,826 ========== ========== ========== Earnings per average common share outstanding ......................... $ 0.94 $ 0.61 $ 0.91 Dividends declared per common share ................................... $ 0.725 $ 0.71 $ 0.69 Net utility plant (thousands) ......................................... $ 49,442 $ 47,411 $ 44,207 Capital expenditures (thousands) ...................................... $ 5,009 $ 5,916 $ 4,553 Average number of common shares outstanding ........................... 4,258,877 4,222,662 4,205,760 Number of stockholders ................................................ 2,824 2,887 2,847
1 Message to Stockholders Valley Resources achieved record earnings in fiscal 1996, with earnings up more than 56 percent over the prior year. A reasonably cold winter, in tandem with the impact of rate relief and the ability to take advantage of opportunities for off-system sales, produced positive results for the Corporation. In addition to a successful financial performance, fiscal 1996 saw Valley move forward on several initiatives which should contribute to the future growth of the Corporation. In May, Valley acquired an 80 percent interest in Alternate Energy Corporation or AEC. AEC designs and installs equipment for the conversion of vehicular and stationary engines to natural gas. In addition, AEC designs and constructs natural gas refueling stations and is involved with fuel cells and other leading edge natural gas technology. Also in May, Valley entered into a strategic alliance with Total/Louis Dreyfus Energy Services, L.L.C. The alliance is designed to allow Valley the opportunity to participate in the rapidly emerging deregulated energy marketplace. Working with our alliance partners, Valley expects to be able to compete to supply the energy and equipment needs of customers both within and outside of our traditional utility service areas. The acquisition of AEC and the strategic alliance with Total/Louis Dreyfus are consistent with the key objectives contained in the Corporation's Strategic Plan which was completed during fiscal 1996. The plan recognizes the changing nature of the energy business and establishes goals and objectives designed to maximize shareholder value. As the energy business continues to unbundle and become more competitive, Valley intends to position itself to take advantage of the opportunities which these changes create. Although Valley is a diversified energy company with a variety of interests, our core business remains gas distribution. Our utility subsidiaries, Valley Gas and Bristol & Warren, continue to be the major contributors to revenues and earnings. The economic climate in which our utility subsidiaries operate showed improvement in fiscal 1996. Unemployment in the communities which we serve dropped significantly during the year. Residential and commercial construction was reasonably strong. Locally there are some very positive signs for the future, including an announcement earlier this year of Fidelity Investments' decision to locate a major facility in nearby Smithfield. This office complex will provide substantial employment opportunities and the need for housing and related commercial growth 2 Message to Stockholders(continued) in the Valley Gas service area. In addition to new construction, the utility subsidiaries continued to benefit from the environmental and economic advantages of natural gas as residential, commercial, and industrial users continue to convert to this clean burning energy source. Some representative conversion case studies are highlighted in the "Year In Review" which follows this letter. Valley Gas and Bristol & Warren recently filed new tariffs with the Rhode Island Public Utilities Commission which will provide customers with the opportunity to choose their natural gas supplier and arrange with the utilities to transport the customer purchased gas year round. Economic growth should be enhanced by these new rates as well as by the recently passed Rhode Island legislation which deregulates the electric industry. Electric utility rates will now be subject to competitive market forces, beginning July 1997, when industrial customers will also be able to choose their electric supplier. The unbundled natural gas rates and the new legislation will provide customers with the flexibility needed to manage costs in the competitive energy markets. In October 1995, the Rhode Island Public Utilities Commission approved a $1.1 million increase in base rates. A significant portion of this increase is generated by higher monthly customer charges, thereby reducing utility revenues sensitivity to weather. Additionally, the approved rates are designed to retain and attract industrial customers. Our nonregulated subsidiaries continue to adapt to the changing business environment. Valley Appliance and Merchandising Company, or VAMCO, continues to focus on larger commercial, industrial and institutional projects to augment the traditional residential appliance business. Valley Propane continues aggressively and successfully to pursue new business in an increasingly competitive market. Propane increased both the number (Photo appears here) Photo Tag: Valley Resources is experiencing firsthand the impacts of local economic development in residential, commercial, and industrial markets. 3 (Photo of Alfred P. Degen, President & CEO appears here) Message to Stockholders (continued) of customers served and gallons delivered compared to the prior year. Morris Merchants, Inc. faced intense competition in some of its major lines in fiscal 1996. While this had an impact on profit margins and earnings for the year, Morris continues to refocus sales efforts and pursue growth opportunities. In fiscal 1996 senior corporate executives took the Valley story to Philadelphia, Pennsylvania; and New Haven and Hartford, Connecticut. The Corporation's presentations were well received by the members of the financial community. Our investor relations program is designed to increase interest in Valley and establish positive long-term relationships with investment professionals. In keeping with the Board of Directors long-standing dividend policy, in March 1996, the Corporation's dividend was increased for the 18th consecutive year. The indicated annual dividend rate is now 73 cents per share. This past year not only brought record earnings, but also brought record snowfall to our utility service areas. The adverse weather conditions created an additional challenge, particularly to our utility work force, as they strove to provide the highest level of service possible to our customers. On behalf of the Board of Directors, I would like to acknowledge the extraordinary effort put forth by our employees in dealing with the winter of 1996 and their ongoing commitment to the Corporation. To our shareholders we express our appreciation for your ongoing faith in the Corporation. To our customers, you have our commitment to continue to provide high-quality service and products and to be there to assist you in the increasingly complex energy marketplace. Sincerely, Alfred P. Degen President & Chief Executive Officer 4 Summary of Annual Earnings and Dividends Consolidated net income is derived from the earnings of the Corporation's six active subsidiaries: Valley Gas Company, Bristol & Warren Gas Company, Valley Appliance and Merchandising Company, Valley Propane, Inc., Morris Merchants, Inc. and Alternate Energy Corporation. Consolidated net income for fiscal 1996 was $3,998,400 or $0.94 per average common share outstanding, as compared to $2,554,900 or $0.61 per share in fiscal 1995. Our utility subsidiaries, Valley Gas and Bristol & Warren, contributed $3,206,400 to consolidated net income, up from $1,665,400 in fiscal 1995. The increase in earnings was due to rate relief and opportunities in the off-system sales market. Utility earnings in fiscal 1996 were also affected by the weather which, although approximately normal, was significantly colder than in the previous year. During the critical winter period the weather was 5.6 Percent colder than normal and 17.0 Percent colder than last year. The contribution of nonutility operating companies to consolidated earnings was $792,000 compared to $889,500 for fiscal 1995. This decrease is a reflection of the competitive forces on both the retail and wholesale merchandise operations and start-up losses related to the acquisition of AEC, offset slightly by improvements in propane operations. In April 1996 the Board of Directors increased the dividend 1.4 percent to an indicated annual rate of $0.73 per share. This is the eighteenth consecutive year the dividend has been increased. The Board's continuing policy is to pay a reasonable percentage of sustainable corporate earnings in the form of dividends. Sales Degree Days
1992 1993 1994 1995 1996 Actual 5887 6341 6459 5820 6369 Normal 6406 6406 6406 6339 6339
Earnings and Dividends Per Share
1992 1993 1994 1995 1996 Earnings Per Share 0.74 0.89 0.91 0.61 0.94 Dividends Per Share 0.63 0.66 0.69 0.71 0.725
5 Year In Review The Corporation achieved record earnings in fiscal 1996, a year which saw the pace of change and competition in the gas industry intensify. This year also saw Valley's Strategic Plan direct the focus of the Corporation to maximize opportunities in this changing energy marketplace. The efficiency and environmental advantages of natural gas continue to spur conversions of residential and commercial customers from oil or electric energy. Fiscal 1996 saw large-scale conversion projects which brought new gas customers to the utility companies while also providing marketing opportunities for VAMCO, the Corporation's merchandising subsidiary. The conversion of the entire Cumberland High School campus and a five-building public housing complex in Pawtucket are examples of success stories that are bringing returns now from a coordinated marketing focus. Several factors contributed to the increase in earnings in fiscal 1996. The colder winter temperatures increased utility sales, and the Rhode Island Public Utilities Commission authorized a $1.1 million increase in utility revenues. Earnings were further enhanced by new revenue from the utilities' off-system gas sales. The Corporation continued its policy of investing in projects which are important to the operational health and competitiveness of the subsidiaries. One such undertaking was the construction of a new operations center for the Bristol & Warren service area. This new site provides a more efficient center for service, construction and customer activities than the previously leased facility. Also, its location in an "enterprise zone" affords the Corporation various tax incentives. At the Valley Gas site, fiscal 1996 saw the completion of the LNG peak-shaving facility upgrade. This 50 percent increase in vaporization capacity enhances the ability of Valley Gas to respond to the continued growth in demand for service. Aggressively managing costs while also maintaining supply stability continues to be the gas supply strategy of Valley Gas and Bristol & Warren. Although the colder winter weather raised gas costs, the utility subsidiaries took several steps to mitigate the impact: obtaining a cost-effective winter-only gas supply contract, making some strategic spot market purchases and securing pipeline transportation 6 (Photo appears here) Photo Tag: EnergyNorth, a natural gas distribution company located in New Hampshire, turned to the expertise of Valley Resources' recently acquired AEC subsidiary for the design and installation of its new natural gas fueling station. 7 Year In Review (continued) discounts. Valley Gas also negotiated a new long-term underground storage contract which will bring substantial savings to our customers as well as improved operating flexibility and security in the future. VAMCO intensified its focus on the commercial and industrial sectors which began in fiscal 1995. This subsidiary also greatly enhanced its competitive position by becoming the sole distributor in Rhode Island for Teledyne Laars boilers for both residential and commercial applications. While the commercial and industrial market provided a lower gross margin percentage, the opportunities to increase revenues both within and outside the utility service areas were better than in the traditional residential appliance business. Morris Merchants, Inc., located in Canton, Massachusetts, is a representative distributor of franchised plumbing and heating lines from manufacturers across the United States. Like its competitors, Morris contended with greatly reduced margins on certain product lines as a result of intense competition among manufacturers during fiscal 1996. Earnings were also affected by consolidation of wholesale outlets and increased competition from the discount retail market. Morris is responding to these market shifts by focusing its efforts on acquiring new lines and using its technology base to serve existing customers' needs in the best way possible. The propane industry also underwent a period of change in fiscal 1996. Corporate consolidations among competitors of Valley Propane gave rise to opportunities for growth in the residential market. Valley Propane's well-earned reputation for reliability and safety, as well as the impact of weather on heat-sensitive sales, enabled the propane subsidiary, which now encompasses the operations of Valley Propane and The New England Gas Company, to take advantage of this opportunity. Valley Propane's technical expertise has also made it a training resource for the Pawtucket Fire Department and the Rhode Island and Massachusetts State Police. In May 1996 the Corporation acquired an 80 percent interest in Alternate Energy Corporation (AEC). Costs associated with positioning AEC for the future resulted in a small operating loss in the reporting months. AEC broadens and strengthens the Corporation's energy-related operations by creating new 8 (Photo appears here) Photo Tag: VAMCO, Valley Resources' energy products subsidiary, brought an integrated package of energy products and services to the Pawtucket Housing Authority for their recently renovated Burns Manor residence, a five-building public housing complex located in the heart of Valley Gas Company's distribution area. 9 Year In Review (continued) opportunities to support natural gas growth both within and beyond the traditional utility service areas through the application of leading-edge technologies. AEC has been in the forefront in the conversion of gasoline and diesel-powered vehicles, both on- and off-road, to natural gas. However, the future of AEC lies in the engineering and installation of compressed natural gas fueling stations and the implementation of its patented process to co-fire natural gas and diesel fuel in engines, primarily generators. This new subsidiary will focus its efforts in these areas. Additionally, at the end of fiscal 1996, AEC became a sales representative for the ONSI fuel cell technology. ONSI is a subsidiary of International Fuel Cells, a United Technologies, Inc. company. This technology uses natural gas as the feedstock to produce electricity for customers that rely on high quality, uninterrupted electric power, such as hospitals, hotels, offices, sensitive computer installations and light industrial applications below one megawatt. While fuel cells are not anticipated to contribute significantly to fiscal 1997 earnings, AEC is positioning itself to capitalize on opportunities for growth in the commercial application of this technology. Anticipating and taking advantage of change has become the business philosophy for the Corporation. The Corporation's ongoing strategic plan charts the course for operating subsidiaries to position themselves for growth within the changing business climate and to recognize and profit from new opportunities brought about by those changes. The unregulated energy market, for example, will be an increasingly important source of economic opportunity; one for which the Corporation prepared itself in fiscal 1996 by forming a strategic marketing alliance with Total/Louis Dreyfus Energy Services, L.L.C. The alliance markets a variety of energy products throughout New England. Additionally, work was begun on unbundling utility services for commercial and industrial customers. This unbundling of rates will allow current utility customers to explore increased natural gas utilization which could result in improved load management for the utilities. As an integral part of the strategic plan, increased attention was given to the growth and development of two other resources essential to the Corporation's future: employees and the community. Success in the 10 (Photo appears here) Photo Tag: VAMCO provided the Cumberland School Department with a comprehensive heating system improvement package, including the dismantling of its old boilers and water heating systems, the installation of new high efficiency boilers, and asbestos abatement, allowing Cumberland High School to ensure a comfortable learning environment. 11 Year In Review (continued) business environment of today requires more than training toward traditional work skills. Just as the Corporation's subsidiaries are reshaping their products and services, so must our employees be encouraged and directed to achieve a higher level of performance in terms of understanding new technologies and subsidiary interaction. To this end, an expanded program of specialized training in customer service, computer skills and industrial technology was provided to employees in fiscal 1996. The tuition reimbursement program currently has 10 percent of the workforce actively pursuing higher education opportunities. They will join the many employees who have already successfully completed degree programs. The Corporation's support of its employees was mirrored by the activities of many of the employees on behalf of various community service organizations-- participation is encouraged by the Corporation as an appropriate part of doing business within the communities that it serves. The focus developed in fiscal 1996 continues to bring new opportunity as the Corporation enters fiscal 1997. The Town of Cumberland and the City of Woonsocket are planning further natural gas conversion projects with the assistance of Valley Gas and VAMCO. Similar commitments were obtained for conversion of the North Farm condominium complex in Bristol, the largest such project yet undertaken in that service area. The first phase of a major condominium conversion to propane is due to begin in Jamestown by October 1996, and the conversion of Canterbury Village Condominiums in North Providence is nearly complete. The Amica Mutual Insurance plant expansion at its gas-fueled Lincoln facility is also well on its way to completion. AEC recently completed a new natural gas fueling station in New Hampshire and has been awarded a major contract for the upgrade of a large vehicular fueling facility in Rhode Island. The regulated and unregulated businesses of Valley Resources, Inc. have achieved successes and will continue to do so by virtue of planning, flexibility and hard work. The Corporation remains committed to the pursuit of growth and new market opportunities as it approaches the 21st century prepared to deal in an unbundled, deregulated and competitive marketplace. 12 (Photo appears here) Photo Tag: The North Farm Condominium Association overwhelmingly approved Bristol & Warren Gas Company's plan to bring clean, economical, and convenient natural gas service to the development, formerly heated with electricity. In addition, VAMCO is currently in the process of installing heating, air conditioning, and water heating systems for the residents of this exclusive luxury condominium development located on the waterfront in scenic Bristol. 13 Dividends and Market Data
CASH MARKETPRICE 1996 DIVIDEND HIGH LOW - ---------------------------------------------------------------------------------------------------- First Quarter..................................................... $.18 $11.50 $10.25 Second Quarter.................................................... .18 11.38 10.50 Third Quarter..................................................... .1825 11.88 10.88 Fourth Quarter.................................................... .1825 12.63 11.88 1995 - ---------------------------------------------------------------------------------------------------- First Quarter..................................................... $.175 $13.25 $12.00 Second Quarter.................................................... .175 12.63 10.75 Third Quarter..................................................... .18 11.38 10.50 Fourth Quarter.................................................... .18 11.50 10.38
Stockholder Statistics
STATE SHARES STOCKHOLDERS - ----------------------------------------------------------------------------------------------------------------- Number Percent Number Percent - ----------------------------------------------------------------------------------------------------------------- Rhode Island................................ 1,526,207 35.7 695 24.6 New York.................................... 704,317 16.4 126 4.5 Massachusetts............................... 569,908 13.3 515 18.2 Florida..................................... 392,343 9.2 134 4.7 Missouri.................................... 387,860 9.1 38 1.4 Pennsylvania................................ 87,438 2.0 57 2.0 California.................................. 68,470 1.6 121 4.3 Illinois.................................... 60,772 1.4 117 4.1 Connecticut................................. 58,676 1.4 131 4.6 Texas....................................... 46,796 1.1 72 2.6 Other....................................... 377,241 8.8 818 29.0 ------- --- --- ---- 4,280,028 100.0 2,824 100.0 --------- ----- ----- -----
14 Financial Information Consolidated Statements of Earnings ................................ 16 Consolidated Statements of Cash Flows .............................. 17 Consolidated Balance Sheets ........................................ 18 - 19 Consolidated Statements of Changes in Common Stock Equity........... 20 Consolidated Statements of Capitalization .......................... 20 Notes to Consolidated Financial Statements ......................... 21 - 29 Report of Independent Certified Public Accountants ................. 29 Management's Discussion and Analysis ............................... 30 - 33 Summary of Consolidated Operations ................................. 34 Gas Operating Statistics ........................................... 35 Corporate Information .............................................. 36 Officers ........................................................... 36 Directors ................................................ Inside Back Cover 15 Consolidated Statements of Earnings
For the year ended August 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- Operating revenues: Utility gas revenues ........................................... $60,773,519 $56,012,913 $65,323,556 Nonutility revenues ............................................ 19,586,615 18,857,277 18,229,362 ---------- ---------- ---------- Total ........................................................ 80,360,134 74,870,190 83,552,918 ---------- ---------- ---------- Operating expenses: Cost of gas sold ............................................... 31,951,154 30,229,359 38,233,511 Cost of sales - nonutility ..................................... 13,688,935 13,189,797 12,783,575 Operations ..................................................... 17,706,904 16,752,501 16,299,527 Maintenance .................................................... 1,671,971 1,535,206 1,485,279 Depreciation (Note A) .......................................... 2,956,727 2,684,755 2,473,467 Taxes - other than Federal income ............................. 4,090,751 4,002,076 4,463,406 - Federal income (Notes A and F) ........................ 1,443,547 731,947 1,313,227 --------- ------- --------- Total ........................................................ 73,509,989 69,125,641 77,051,992 ---------- ---------- ---------- Operating income .................................................. 6,850,145 5,744,549 6,500,926 Other income - net of tax (Notes A and F) ......................... 459,938 115,032 227,450 ------- ------- ------- Total income before interest ................................. 7,310,083 5,859,581 6,728,376 --------- --------- --------- Interest charges: Long-term debt ................................................. 1,927,154 1,947,205 2,037,760 Other ......................................................... 1,384,569 1,357,451 864,590 --------- --------- ------- Total ....................................................... 3,311,723 3,304,656 2,902,350 --------- --------- --------- Net income available for common stock ............................. $ 3,998,360 $ 2,554,925 $ 3,826,026 =========== =========== =========== Average number of common shares outstanding ....................... 4,258,877 4,222,662 4,205,760 Earnings per average common share outstanding ..................... $ 0.94 $ 0.61 $ 0.91 The accompanying Notes are an integral part of these statements.
16 Consolidated Statements of Cash Flows
For the year ended August 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Increase (decrease) in cash: Cash flows from operating activities: Net income .................................... $ 3,998,360 $ 2,554,925 $ 3,826,026 Adjustments to reconcile net income to net cash: Depreciation ................................ 2,956,727 2,684,755 2,473,467 Provision for uncollectibles ................ 1,459,761 1,274,238 959,404 Deferred Federal income taxes ............... 922,007 619,918 1,040,691 Amortization of investment tax credits ...... (49,452) (50,144) (44,940) Change in assets and liabilities: Accounts receivable ......................... (718,826) (1,612,297) (492,220) Deferred fuel costs ......................... (3,977,779) 2,629,056 1,752,484 Unbilled gas costs .......................... (4,603) (4,617) (5,256) Fuel and other inventories .................. (663,964) 502,202 331,499 Prepayments ................................. (249,971) (72,088) (31,177) Common stock held for dividend reinvestment plan 158,876 (271,315) 23,530 Prepaid pensions ............................. (625,374) (572,320) (784,454) Accounts payable ............................. 921,892 (275,189) (323,061) Security deposits ............................ (65,258) 30,945 47,803 Taxes accrued ................................ (317,791) (131,917) 69,422 Other ........................................ (75,564) (578,144) (500,288) ------- -------- -------- Total adjustments .......................... (329,319) 4,173,083 4,516,904 -------- --------- --------- Net cash provided by operating activities ...... 3,669,041 6,728,008 8,342,930 --------- --------- --------- Cash flows from investing activities: Utility capital expenditures ................... (4,396,081) (5,335,159) (3,953,702) Nonutility capital expenditures ................ (612,628) (580,772) (599,725) Other investments .............................. (49,360) (13,400) (51,262) ------- ------- ------- Net cash used by investing activities .......... (5,058,069) (5,929,331) (4,604,689) ---------- ---------- ---------- Cash flows from financing activities: Dividends paid ................................. (3,083,369) (2,989,702) (2,900,408) Common stock transactions ...................... 184,615 391,278 (95,418) Issuance of revolving credit arrangement ....... 2,200,000 -0- -0- Retirement of long-term debt ................... (860,000) (1,333,000) (95,000) Increase (decrease) in notes payable ........... 3,000,000 3,000,000 (1,000,000) --------- --------- ---------- Net cash provided (used) by financing activities 1,441,246 (931,424) (4,090,826) --------- -------- ---------- Net increase (decrease) in cash .................. 52,218 (132,747) (352,585) Cash, beginning .................................. 454,595 587,342 939,927 ------- ------- ------- Cash, ending ..................................... $ 506,813 $ 454,595 $ 587,342 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ..................................... $ 3,311,577 $ 3,265,612 $ 2,895,752 =========== =========== =========== Federal income taxes ......................... $ 885,000 $ 380,000 $ 637,000 =========== =========== =========== Supplemental disclosures of noncash activity: Capital lease obligations incurred ............. $ 1,844,817 $ 300,972 $ 956,973 =========== =========== =========== The accompanying Notes are an integral part of these statements.
17 Consolidated Balance Sheets
August 31 1996 1995 - --------------------------------------------------------------------------------------------------------- Assets: Utility plant, at cost (Notes A and D) ...................................... $76,534,841 $72,759,666 Less: Accumulated provision for depreciation (Note A) ...................... 27,092,766 25,348,673 ---------- ---------- Net utility plant ........................................................... 49,442,075 47,410,993 ---------- ---------- Leased property-less accumulated amortization of $2,789,155 and $2,088,737 .. 2,944,581 2,013,647 --------- --------- Nonutility property-less accumulated provision for depreciation of $3,850,692 and $3,434,784 (Note A) .................................................. 3,567,797 3,546,543 --------- --------- Other investments ........................................................... 1,510,460 1,461,100 --------- --------- Current assets: Cash ...................................................................... 506,813 454,595 Accounts receivable-less allowance for uncollectibles of $719,721 and $655,951 ................................................... 9,945,481 10,686,414 Deferred fuel costs (Note A) .............................................. 827,012 -0- Deferred unbilled gas costs (Note A) ...................................... 438,894 434,291 Fuel and other inventories (Note A) ....................................... 6,048,447 5,384,483 Prepayments ............................................................... 1,409,302 1,159,331 Common stock held for dividend reinvestment plan (Note B) ................. 130,819 289,695 ------- ------- Total current assets .................................................... 19,306,768 18,408,809 ---------- ---------- Deferred debits: Recoverable postretirement benefit (Note H) ............................... 692,922 692,922 Recoverable vacations accrued ............................................. 633,194 846,825 Recoverable deferred Federal income taxes (Note F) ........................ 5,969,839 5,713,177 Recoverable transition obligation (Note H) ................................ 1,700,000 1,325,000 Unamortized debt discount and expense ..................................... 1,523,092 1,581,023 Prepaid pensions (Note H) ................................................. 6,170,837 5,545,463 Other ..................................................................... 3,227,420 3,792,004 --------- --------- Total deferred debits ................................................... 19,917,304 19,496,414 ---------- ---------- Total assets ............................................................ $96,688,985 $92,337,506 =========== =========== The accompanying Notes are an integral part of these statements.
18 Consolidated Balance Sheets August 31 1996 1995 - -------------------------------------------------------------------------------------------------------------- Capitalization and liabilities: Capitalization (see Consolidated Statements of Capitalization) ................... $50,348,234 $50,608,628 ----------- ----------- Revolving credit arrangement (Note D) ............................................ 2,200,000 -0- --------- --- Obligations under capital leases (Note D) ........................................ 2,133,543 1,254,778 --------- --------- Current liabilities: Current maturities of long-term debt (Note D) .................................. 500,000 500,000 Obligations under capital leases (Note D) ...................................... 811,036 758,870 Notes payable (Note C) ......................................................... 14,900,000 11,900,000 Accounts payable ............................................................... 5,243,207 4,321,315 Security deposits .............................................................. 1,096,747 1,162,005 Taxes accrued .................................................................. 190,025 507,816 Deferred fuel costs (Note A) ................................................... -0- 3,150,767 Accrued interest ............................................................... 551,979 655,045 Other ......................................................................... 712,413 976,138 ------- ------- Total current liabilities .................................................... 24,005,407 23,931,956 ---------- ---------- Commitments and contingencies (Note H) Deferred credits: Unamortized investment tax credit (Note A) ..................................... 723,688 773,141 Transition obligation (Note H) ................................................. 1,700,000 1,325,000 Unfunded deferred Federal income taxes (Note F) ................................ 1,922,773 1,930,375 Postretirement benefit obligation (Note H) ..................................... 692,922 692,922 Other ......................................................................... 1,700,469 1,729,504 --------- --------- Total deferred credits ....................................................... 6,739,852 6,450,942 --------- --------- Deferred Federal income taxes (Notes A and F) .................................... 11,261,949 10,091,202 ---------- ---------- Total liabilities ............................................................ 46,340,751 41,728,878 ---------- ---------- Total capitalization and liabilities ......................................... $96,688,985 $92,337,506 =========== =========== The accompanying Notes are an integral part of these statements.
19 Consolidated Statements of Changes in Common Stock Equity
Common Shares Issued Paid in Retained & Outstanding Capital Earnings - ---------------------------------------------------------------------------------------------------------------- Number Amount - ---------------------------------------------------------------------------------------------------------------- Balance, August 31, 1993....................... 4,213,043 $4,213,043 $17,790,573 $6,344,574 --------- ---------- ----------- ---------- Add (deduct): Net income.................................. 3,826,026 Cash dividends on common stock.............. (2,900,408) Other....................................... (95,418) --------- --------- ------- --------- Balance, August 31, 1994....................... 4,213,043 4,213,043 17,695,155 7,270,192 --------- --------- ---------- --------- Add (deduct): Net income.................................. 2,554,925 Cash dividends on common stock.............. (2,989,702) Dividend reinvestment plan (Note B)......... 47,754 47,754 465,376 Other....................................... (121,852) --------- --------- -------- --------- Balance, August 31, 1995....................... 4,260,797 4,260,797 18,038,679 6,835,415 --------- --------- ---------- --------- Add (deduct): Net income.................................. 3,998,360 Cash dividends on common stock.............. (3,083,369) Dividend reinvestment plan (Note B)......... 19,231 19,231 202,680 Other....................................... (37,296) --------- ---------- ------- ---------- Balance, August 31, 1996....................... 4,280,028 $4,280,028 $18,204,063 $7,750,406 ========= ========== =========== ==========
Consolidated Statements of Capitalization
August 31 1996 1995 - ------------------------------------------------------------------------------------------------- Common stock equity: Common stock, $1 par value (Note B) Authorized 20,000,000 shares Issued and outstanding 4,280,028 and 4,260,797 shares $ 4,280,028 $ 4,260,797 Paid in capital (Note B) .............................. 18,204,063 18,038,679 Retained earnings (Notes B and E) ..................... 7,750,406 6,835,415 --------- --------- 30,234,497 29,134,891 Less: Accounts receivable from Valley Gas Employee Stock Ownership Plan (Note D) ................ 3,142,200 3,142,200 --------- --------- Total common stock equity .......................... 27,092,297 25,992,691 ---------- ---------- Long-term debt (Note D): 8% First Mortgage Bonds, due 2022 ..................... 20,212,000 21,072,000 9% Notes Payable, due 1999 ............................ 2,138,937 2,138,937 Note payable .......................................... 1,405,000 1,905,000 --------- --------- Total .............................................. 23,755,937 25,115,937 Less: Current maturities .............................. 500,000 500,000 ------- ------- Total long-term debt ............................... 23,255,937 24,615,937 ---------- ---------- Total capitalization ............................... $50,348,234 $50,608,628 =========== =========== The accompanying Notes are an integral part of these statements.
20 Notes to Consolidated Financial Statements NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of Valley Resources, Inc. and its active wholly-owned subsidiaries (the Corporation)-Valley Gas Company (Valley Gas or the Company), Valley Appliance and Merchandising Company (VAMCO), Valley Propane, Inc. (Valley Propane), Morris Merchants, Inc. (Morris Merchants) (d/b/a the Walter F. Morris Company), and Bristol & Warren Gas Company (Bristol & Warren). The consolidated financial statements also include the Corporation's 80% interest in Alternate Energy Corporation (AEC). All significant intercompany transactions have been eliminated where required. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REGULATION - The utility operations of Valley Gas and Bristol & Warren are subject to regulation by the Rhode Island Public Utilities Commission (RIPUC). Accounting policies conform with generally accepted accounting principles, as applied in the case of regulated public utilities, and are in accordance with the accounting requirements and rate making practices of the RIPUC. DEPRECIATION - Annual provisions for depreciation for Valley Gas and Bristol & Warren are determined on a composite straight-line basis. The composite rate for fiscal 1996 was 2.91% and was 2.72% for fiscal 1995 and fiscal 1994. Depreciation provisions for other subsidiary companies are provided on the straight-line and accelerated methods at rates ranging from 2.86% to 34%. DEFERRED FUEL COSTS - Valley Gas and Bristol & Warren tariffs include a Purchased Gas Price Adjustment (PGPA) which allows an adjustment of rates charged to customers in order to recover all changes in gas costs from stipulated base gas costs. The PGPA provides for an annual reconciliation of total gas costs billed with the actual cost of gas incurred. Any excess or deficiency in amounts collected as compared to costs incurred is deferred and either reduces the PGPA or is billed to customers over subsequent periods. DEFERRED UNBILLED GAS COSTS - Revenue is recorded on the basis of bills rendered on a cycle basis throughout the month. The Company defers to the following month that portion of the base cost of gas delivered but not yet billed under the cycle billing system. ACCOUNTING FOR INCOME TAXES - Income tax regulations allow recognition of certain transactions for tax purposes in time periods other than the period during which these transactions will be recognized in the determination of net income for financial reporting purposes. As required by generally accepted accounting principles, deferred income taxes are provided to reflect the tax effect of these timing differences in the proper accounting periods. In accordance with Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes," deferred income taxes are recorded for all book and tax temporary timing differences. Investment tax credits relating to Valley Gas and Bristol & Warren property have been deferred and will be amortized to income over the productive lives of the related assets. Investment tax credits earned by the Corporation's other subsidiary companies were recognized as a reduction of Federal income tax expense in the year utilized. PENSION PLANS - Valley Gas maintains two non-contributory defined benefit pension plans covering substantially all of its employees. The plans provide benefits based on compensation and years of service. The Company's policy is to fund pension costs that are deductible for Federal income tax purposes (see Note H). Additionally, the Company maintains a 401(k) plan covering substantially all of the Company's 21 Notes to Consolidated Financial Statements (continued) employees. In fiscal 1996, 1995 and 1994, plan expense was $126,100, $122,400 and $112,900, respectively. Morris Merchants maintains an employee profit sharing plan covering substantially all of the employees who have completed one year of service. Contributions to the plan are at the discretion of the Board of Directors. Profit sharing expense was $68,400 in fiscal 1996 and 1995 and $73,700 in fiscal 1994. Bristol & Warren maintains a non-contributory defined contribution pension plan covering substantially all of its employees. The plan provides benefits based on hours worked and rate of pay. In fiscal 1996, 1995 and 1994 plan expense was $23,000, $27,500 and $23,100, respectively. NEW ACCOUNTING STANDARD - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", which will be effective for the Corporation's fiscal year ending August 31, 1997. This statement requires the Corporation to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Corporation intends to adopt this statement prospectively. The impact of the standard is not expected to have a material impact on the Corporation's financial condition or results of operations. INVENTORIES - Fuel and other inventories at August 31, are as follows:
1996 1995 - -------------------------------------------------------------------- Fuels (at average cost) .................. $3,622,698 $3,254,439 Merchandise and other (at average cost)... 1,199,856 1,051,585 Merchandise (at LIFO) .................... 1,225,893 1,078,459 --------- --------- $6,048,447 $5,384,483 ========== ==========
Merchandise (at LIFO), if valued at current cost, would have been greater by $327,300 in 1996 and $255,400 in 1995. NOTE B: COMMON STOCK AND RIGHTS Pursuant to the Corporation's dividend reinvestment plan, stockholders can reinvest dividends and make limited additional cash investments. Shares issued through dividend reinvestment can be acquired on the open market or original issue. In fiscal 1996 and 1995, the Corporation issued 19,231 and 47,754 shares of common stock, respectively, under provisions of the dividend reinvestment plan. All shares issued pursuant to the plan in fiscal 1994 were open-market purchases. At August 31, 1996 and 1995, 10,813 and 26,190 shares, respectively, were held by the Corporation for issuance to the plan. On August 31, 1996, except as mentioned above, no shares of common stock of the Corporation were held by or for the account of the Corporation or were reserved for officers or employees or for options, warrants or other rights, except 41,125 shares of common stock reserved subject to sale under the Corporation's dividend reinvestment plan. Each share of common stock of the Corporation includes one preferred stock purchase Right which entitles the holder to purchase one one-hundredth of a share of Cumulative Participating Junior Preferred Stock, par value $100, at a price of $35 per one one-hundredth of a share subject to adjustment. Initially the Rights will not be exercisable, and the Rights will trade automatically with common stock. The Rights will generally become exercisable, and separate certificates representing the Rights will be distributed, upon occurrence of certain events in excess of a stipulated percentage of ownership. The Rights should not interfere with any merger or business combination approved by the Board of Directors because, prior to the Rights becoming exercisable, the Rights may be redeemed by the Corporation at $0.01 per Right. The Rights have no dilutive effect and will not affect reported earnings per share. NOTE C: SHORT-TERM DEBT The Corporation borrows on bank lines of credit at the prevailing interest rate available at the time of borrowing. The Corporation either pays commitment fees or maintains compensating balances in connection with these lines of credit. Commitment fees paid in fiscal 1996, 1995 and 1994 amounted to $114,800, $94,500, and $64,900, respectively. There are no legal restrictions on withdrawal of compensating balances. 22 Notes to Consolidated Financial Statements (continued) A detail of short-term borrowings for fiscal 1996, 1995 and 1994 is as follows:
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- At year end Weighted average interest rate......................... 5.7% 5.9% 5.2% Unused lines of credit................................. $14,100,000 $15,100,000 $14,600,000 For the year ended Weighted average interest rate......................... 6.0% 6.2% 3.9% Average borrowings..................................... $12,908,300 $11,283,300 $10,991,700 Maximum month-end borrowings........................... $16,000,000 $16,000,000 $14,900,000 Month of maximum borrowings............................ November December January
NOTE D: LONG-TERM DEBT The composition of long-term debt is included in these financial statements in the separate Consolidated Statements of Capitalization. The aggregate amount of maturities and sinking fund requirements for each of the five fiscal years following fiscal 1996 are: 1997, $1,311,000; 1998, $3,901,100; 1999, $2,714,100; 2000, $568,400; and 2001, $135,500, inclusive of capitalized lease obligations. Valley Gas utility plant and equipment have been pledged as collateral to secure its long-term debt. In accordance with the redemption provisions of the Valley Gas 8% First Mortgage Bonds, $860,000 and $1,333,000 of the bonds were redeemed by holders in fiscal 1996 and 1995, respectively. The fair market value of the Corporation's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. Management believes the carrying value of the debt approximates the fair value at August 31, 1996. Regulatory treatment allows payments under capital leases to be recorded as rental expenses. Rental expenses for all leases in fiscal 1996, 1995 and 1994 were $1,437,900, $1,179,800, and $1,235,200, respectively. The Company entered into an intermediate term financing arrangement with a bank in November 1995. The terms of the arrangement call for a $6,000,000 revolving line of credit which matures in 1998, with the option to extend the termination date to November 30, 2000. Valley Resources, Inc. borrowed funds under a line of credit at rates less than the prevailing prime rate, which are restricted in their use to being loaned to the Company's Employee Stock Ownership Plan (ESOP). The receivable from the ESOP has been shown as a reduction of common stock equity. The financing by the ESOP is secured by the common stock of two unregulated subsidiaries and the unallocated shares held by the ESOP. The Valley Resources common stock purchased by the ESOP with the borrowed money is held by the ESOP trustee in a "suspense account." As the Company makes contributions to the plan, a portion of the common stock is released from the suspense account and allocated to participating employees. Any dividends on unallocated shares are used to pay loan interest. ESOP expense in fiscal 1996 was $100,000. There was no ESOP expense recorded in fiscal 1995 and 1994. NOTE E: RESTRICTION ON RETAINED EARNINGS At August 31, 1996, $1,229,400 of the retained earnings of Valley Gas were available for the payment of cash dividends to Valley Resources, Inc. under the most restrictive provisions of the Company's first mortgage bonds. There are no restrictions as to the payment of dividends for Valley Resources or the other subsidiaries. 23 Notes to Consolidated Financial Statements (continued) NOTE F: INCOME TAXES In accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109), the Corporation's financial statements are required, among other things, to record the cumulative deferred income taxes on all temporary timing differences. As approved by the RIPUC, the utilities did not fully record deferred income taxes but, rather, "flowed through" certain tax benefits to utility customers, prior to fiscal 1994. At August 31, 1996, the Corporation has a liability of $5,969,800 on the Consolidated Balance Sheets as recoverable deferred income taxes and a corresponding recoverable deferred charge. The liability represents the tax effect of timing differences for which deferred income taxes had not been provided, increased in accordance with SFAS 109 for the tax effect of future revenue requirements. The utilities are recovering unfunded deferred taxes from utility customers over the remaining book life of utility property. Federal income tax expense has been calculated based on filing a consolidated corporate tax return and is comprised of the following:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Current income tax expense: Operating expense ......................................... $ 521,540 $112,029 $ 272,536 Nonoperating expense....................................... 147,065 71,230 82,678 ------- ------ ------ 668,605 183,259 355,214 ------- ------- ------- Deferred income tax expense: Accelerated depreciation................................... 276,474 194,537 269,823 Pensions................................................... 212,627 194,588 266,715 Deferred fuel costs........................................ 293,801 -0- -0- Uncollectibles............................................. (21,840) 2,142 (32,289) Directors' fees and interest............................... (36,453) (8,744) (46,169) Bond premium .............................................. (6,240) (6,242) 176,387 Rate case expenses......................................... (37,626) 174,290 (43,785) Capitalization of inventory costs.......................... (6,897) (2,079) 45,977 Consulting contracts....................................... 64,392 64,389 150,111 Software amortization...................................... 140,856 140,856 254,350 Alternative minimum tax.................................... 8,617 (180,000) -0- Other ..................................................... 34,296 46,181 (429) ------ ------ ---- 922,007 619,918 1,040,691 ------- ------- --------- Total ..................................................... $1,590,612 $803,177 $1,395,905 ========== ======== ==========
The Federal income tax amounts included in the Consolidated Statements of Earnings differ from the amounts which result from applying the statutory Federal income tax rate to income from operations before income tax. The reasons, with related percentage effects, are shown below:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Statutory Federal rate......................................... 34% 34% 34% Maintenance costs capitalized for book purposes.............. (3) (4) (4) Cost of removal.............................................. (1) (1) (1) ESOP dividends............................................... (1) (2) (1) Prior year over accrual...................................... -0- (2) -0- Other ....................................................... (1) (1) (1) -- -- -- Total ....................................................... 28% 24% 27% == == ==
24 Notes to Consolidated Financial Statements (continued) Temporary differences which gave rise to the following deferred tax assets and liabilities at August 31, 1996 and 1995 are:
1996 1995 - ------------------------------------------------------------------------------------------------------------- Unbilled revenues ........................................................... $ 271,504 $ 264,144 Directors' fees and interest ................................................ 215,477 179,024 Other ....................................................................... 525,365 505,245 ------- ------- Total deferred tax assets ................................................ 1,012,346 948,413 --------- ------- Accelerated depreciation .................................................... (8,446,411) (7,905,673) Pensions (2,116,771) (1,904,144) Software amortization (536,062) (395,206) Deferred fuel costs ......................................................... (293,801) -0- Other ....................................................................... (881,250) (834,592) -------- -------- Total deferred tax liabilities ........................................... (12,274,295) (11,039,615) ----------- ----------- Total deferred taxes ........................................................ $(11,261,949) $(10,091,202) ============ ============
The Corporation's nonutility operations are subject to state income taxes. For fiscal 1996, 1995 and 1994, state income taxes totaled $124,300, $131,800, and $125,300, respectively. NOTE G: REGULATORY MATTERS In January 1995, Valley Gas and Bristol & Warren filed revised tariffs with the RIPUC to consolidate their rate structure and to increase their combined annual revenues. On October 18, 1995, the RIPUC authorized the utilities to adjust their tariffs to collect $1.1 million and consolidate their rate structure. NOTE H: COMMITMENTS AND CONTINGENCIES PENSION PLANS - Valley Gas has two non-contributory defined benefit pension plans covering substantially all of its employees and a supplemental pension plan covering certain officers. Net periodic pension income for fiscal 1996, 1995 and 1994 included the following components:
1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the period .... $ 534,961 $ 470,907 $ 472,621 Interest cost on projected benefit obligation ....... 1,321,504 1,232,168 1,153,139 Actual return on plan assets ........................ (3,266,264) (3,448,848) (251,149) Net amortization and deferral ....................... 784,425 1,173,453 (2,159,065) ------- --------- ---------- Net periodic pension income ......................... $ (625,374) $ (572,320) $ (784,454) ============ ============ ============
Plans Funded Status - July 31 1996 1995 - ------------------------------------------------------------------------------------------------------------- Projected benefit obligations: Vested ........................................... $ 15,511,957 $15,143,093 Nonvested ........................................ 225,232 140,275 ------- ------- Accumulated ...................................... 15,737,189 15,283,368 Due to recognition of future salary increases .... 3,757,612 3,685,361 --------- --------- Total .......................................... (19,494,801) (18,968,729) Plan assets at fair value ........................... 29,152,063 26,885,983 ---------- ---------- Plan assets in excess of projected benefit obligation 9,657,262 7,917,254 Unrecognized transition amount ...................... (824,232) (971,756) Unrecognized net gains .............................. (2,662,193) (1,400,035) ---------- ---------- Prepaid pension costs ............................... $ 6,170,837 $5,545,463 ============ ==========
25 Notes to Consolidated Financial Statements (continued) Plan assets are invested in common stock, short-term investments and various other fixed income securities. The weighted-average discount rate used in determining the projected benefit obligation was 7 3/4 percent and 7 1/2 percent, respectively, as of July 31, 1996 and 1995. The assumed rate of future compensation increases was 5 1/2 percent per year. The expected long-term rate of return on assets was 9 percent for all years presented. POSTRETIREMENT LIFE AND HEALTH BENEFIT PLAN - Valley Gas sponsors a postretirement benefit plan that covers substantially all of its employees. The plan provides medical, dental and life insurance benefits. The plan is non-contributory. In accordance with Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), the Company records the cost for this plan on an accrual basis. As permitted by SFAS 106, the Company will record the transition obligation over a twenty-year period. The Company's cost under this plan for 1996, 1995 and 1994 was $809,500, $815,100 and $841,500, respectively. The regulatory asset represents the excess of postretirement benefits on the accrual basis over amounts authorized to be recovered in rates. The RIPUC authorized the Company a phase-in recovery of the tax deductible portion of these postretirement benefits, if funded. The Company has funded a portion of these costs through trusts established under Section 501(c)(9) of the Internal Revenue Code for the bargaining and nonbargaining unit plans. The Company is currently funding the amount recovered through rates. The following table sets forth the Plans funded status reconciled with the amounts recognized in the Company's financial statements at August 31:
1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees .......................................................... $(2,787,993) $(2,719,221) Fully eligible active plan participants ........................... (775,563) (849,327) Other active plan participants .................................... (2,007,935) (2,156,452) ---------- ---------- (5,571,491) (5,725,000) Plan assets at fair value ............................................ 951,546 481,494 ------- ------- Accumulated postretirement benefit obligation in excess of plan assets (4,619,945) (5,243,506) Unrecognized transition obligation ................................... 4,722,146 4,999,920 Unrecognized net (gain) from past experience different from that assumed and from changes in assumptions .................. (795,123) (449,336) -------- -------- Accrued postretirement benefit cost .................................. $ (692,922) $ (692,922) =========== ===========
Net periodic postretirement benefit cost consisted of the following: 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Service cost - benefits attributable to service during the period ......................................................... $ 156,991 $ 140,882 $ 148,014 Interest cost on accumulated postretirement benefit obligation ................................................. 417,117 420,725 424,964 Actual return (loss) on plan assets .................................. 33,712 (10,575) -0- Net amortization and deferral ........................................ 201,640 264,026 268,511 ------- ------- ------- Net periodic postretirement benefit cost ............................. 809,460 815,058 841,489 Regulatory asset ..................................................... -0- 252,365 440,557 --- ------- ------- Net expense .......................................................... $ 809,460 $ 562,693 $ 400,932 =========== =========== ===========
26 Notes to Consolidated Financial Statements (continued) For measurement purposes, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 5% by fiscal 2002 and to remain at that level thereafter. The rates of increase assumed for post-age 65 medical benefits were slightly lower. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation at August 31, 1996 by $434,000 and the aggregate of the service and the interest cost components of net periodic postretirement benefit cost (NPPBC) for the year by $58,000. The discount rate was 7 1/2% for the development of the NPPBC. The assumed rate of future compensation increases was 5 1/2% per year. The trend rates were set by the RIPUC. LONG-TERM OBLIGATIONS - Valley Gas and Bristol & Warren have contracts which expire at various dates through the year 2012 for the purchase, delivery and storage of natural gas and supplemental gas supplies. Certain contracts for the purchase of the supplemental gas supplies contain minimum purchase obligations which approximate 2 percent of total system requirements. FERC ORDER NO. 636 TRANSITION COSTS - As a result of FERC Order 636, the utilities' interstate pipeline service providers have been required to unbundle their supply, storage and transportation services. This unbundling has caused the interstate pipeline companies to incur substantial costs in order to comply with Order 636. These transition costs include four types: (1) unrecovered gas costs (gas costs that have been incurred but not yet recovered by the pipelines when they were providing bundled service to local distribution companies); (2) gas supply realignment costs (the cost of renegotiating existing gas supply contracts with producers); (3) stranded costs (unrecovered costs of assets that cannot be assigned to customers of unbundled services); and (4) new facilities costs (costs of new facilities required to physically implement Order 636). Pipelines are expected to be allowed to recover prudently incurred transition costs from customers primarily through a demand charge, after approval by FERC. The utilities' pipeline suppliers began direct billing these costs in fiscal 1994 as a component of demand charges. The utilities estimate their remaining portion of transition costs to be $1,700,000 and have recognized a liability for these costs as of August 31, 1996. The RIPUC has allowed the recovery of transition costs through the PGPA. Under the provisions of SFAS 71, regulatory assets totaling $1,700,000 were recorded for the expected future recovery of the transition obligations. Actual transition costs to be incurred depend on various factors; therefore, future costs may differ from the amounts discussed above. CONTINGENT LIABILITY - In January 1994, a lawsuit was filed against Valley Gas and other parties by Blackstone Valley Electric Company (Blackstone), the former owners of the utility assets acquired by Valley Gas in 1961. The claim is for contribution towards a judgment against Blackstone's share of total clean up costs of approximately $6 million of a site to which oxide waste was transported in the 1930's (the "Mendon Road site"), prior to the incorporation of Valley Gas, and for related declaratory relief concerning potential liability for the site of the former Tidewater plant. Blackstone and the former Mendon Road site owner have been held jointly and severally liable for the cost of the clean up by the Massachusetts Department of Environmental Quality Engineering as a result of its suit of Blackstone and the former Mendon Road site owner. The management of Valley Gas is of the opinion the Company will prevail as a result of an indemnification which is part of the agreement signed at the time the Company acquired the utility assets. Legal fees associated with this claim are recovered in rates. In a recent decision of the U.S. Court of Appeals for the First Circuit, Blackstone's appeal of the judgment against it was sustained and the case was remanded for further proceedings, including a referral of the case to the EPA to determine if the substance in question (FFC) is hazardous. In September 1995, Valley Gas received a letter of responsibility from the Rhode Island Department of Environmental Management ("DEM") with respect to releases from manufactured coal waste on its property that is the site of the former Tidewater plant. The DEM has requested Valley Gas and Blackstone to submit a remedial action work plan to address certain releases on the site. It is too early in the process to determine the extent of any liability of Valley Gas. Management takes the position that it is indemnified by Blackstone for any such expenses. Valley Gas will seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. 27 Notes to Consolidated Financial Statements (continued) NOTE I: SEGMENT INFORMATION In accordance with SFAS 14, the following information is presented relative to the gas, merchandising and other operations of the Corporation.
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Gas Operations Operating revenues............................................ $60,773,250 $56,012,913 $65,323,556 Operating income before Federal income taxes.................. 7,150,140 5,157,534 6,412,020 Identifiable assets at August 31.............................. 84,646,797 83,952,630 83,070,742 Depreciation.................................................. 2,364,999 2,131,425 2,060,071 Capital expenditures.......................................... 4,396,081 5,335,159 3,953,702 Appliance & Contract Sales & Rentals Operating revenues............................................ $17,617,481 $17,216,397 $16,506,364 Operating income before Federal income taxes.................. 986,920 1,111,530 1,183,132 Identifiable assets at August 31.............................. 8,116,782 8,148,961 8,060,902 Depreciation.................................................. 512,242 475,456 339,068 Capital expenditures.......................................... 531,152 521,345 549,067 Other Operations, including Corporate & Eliminations Operating revenues............................................ $ 1,969,403 $ 1,640,880 $ 1,722,998 Operating income before Federal income taxes.................. 156,632 207,432 219,001 Identifiable assets at August 31.............................. 3,925,406 235,915 (62,447) Depreciation.................................................. 79,486 77,874 74,328 Capital expenditures.......................................... 81,476 59,427 50,658 Total Corporation Operating revenues............................................ $80,360,134 $74,870,190 $83,552,918 Operating income before Federal income taxes.................. 8,293,692 6,476,496 7,814,153 Federal income tax expense.................................... (1,443,547) (731,947) (1,313,227) Nonoperating income-net....................................... 459,938 115,032 227,450 Interest expense.............................................. (3,311,723) (3,304,656) (2,902,350) Net income.................................................... 3,998,360 2,554,925 3,826,026 Identifiable assets at August 31.............................. 96,688,985 92,337,506 91,069,197 Depreciation.................................................. 2,956,727 2,684,755 2,473,467 Capital expenditures.......................................... 5,008,709 5,915,931 4,553,427
Expenses used to determine operating income before Federal income taxes are charged directly to each segment or are allocated based on time studies. Assets allocated to each segment are based on specific identification of such assets as provided by Corporate records. 28 Notes to Consolidated Financial Statements (continued) NOTE J: SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three months ended (in thousands, except as to earnings (loss) per average share) November February May August - ----------------------------------------------------------------------------------------------------------------- Fiscal 1996 Total operating revenues............................. $14,095 $30,250 $23,665 $12,351 Income (loss) before Federal income taxes............ $(1,214) $5,817 $2,934 $(1,948) Net income (loss).................................... $(775) $3,855 $1,995 $(1,077) Earnings (loss) per average share.................... $(.18) $.90 $.47 $(.25) Fiscal 1995 Total operating revenues............................. $14,774 $26,965 $21,438 $11,693 Income (loss) before Federal income taxes............ $(1,186) $3,602 $2,242 $(1,300) Net income (loss).................................... $(735) $2,382 $1,586 $(678) Earnings (loss) per average share.................... $(.17) $.56 $.38 $(.16)
Report of Independent Certified Public Accountants To the Stockholders of Valley Resources, Inc. We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Valley Resources, Inc. (a Rhode Island corporation) and subsidiaries as of August 31, 1996 and 1995 and the related consolidated statements of earnings, cash flows and changes in common stock equity for each of the three years in the period ended August 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Valley Resources, Inc. and subsidiaries as of August 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. S/Grant Thornton LLP Boston, Massachusetts September 24, 1996 29 Management's Discussion and Analysis of the Results of Operations and Financial Condition OVERVIEW The discussion and analysis that follows reflect the operations of the Corporation and its six active subsidiaries: Valley Gas and Bristol & Warren, both regulated natural gas distribution companies; VAMCO, a merchandising, appliance rental, and service company; Valley Propane, a propane sales and service company; Morris Merchants, a representative distributor of franchised lines; and AEC, which sells, installs and designs natural gas conversion systems and facilities. Operating results are derived from two major classifications - utility and nonutility. Utility earnings are generated from the operations of the regulated natural gas distribution companies and include the distribution and sale of natural gas to firm and seasonal customers. Nonutility revenues are a consolidation of the revenues of VAMCO, Valley Propane, Morris Merchants and AEC. The distribution and sale of natural gas to customers on a year-round basis for heating, water heating, cooking and processing are the source of firm utility revenues. Firm customers can be residential, commercial or industrial. The revenues from firm sales customers are determined by regulated tariff schedules and through RIPUC-approved commodity charge factors. These factors include the Purchased Price Gas Adjustment (PGPA), which collects from or returns to customers changes in gas costs from those included in the regulated tariffs, and an adjustment to collect post-retirement benefits. Seasonal and dual-fuel sales are made when excess gas supplies are available and gas prices are competitive with alternative fuel markets. These sales are generally made in non-winter months and can be interrupted by the utilities at any time. Margins from seasonal sales and those above $1 per Mcf from dual fuel sales are returned to customers through a reduction in the PGPA. Prior to November 1995, Bristol & Warren retained all margins on seasonal sales. The utilities also provide transportation through their distribution systems for customer-purchased natural gas received by the utility company on an off-peak basis. Morris Merchants and VAMCO generate nonutility revenues through the wholesale and retail sales of plumbing and heating supplies and appliances. Additionally, VAMCO generates revenues from appliance rentals and a service contract repair program. The propane operations are conducted through Valley Propane which include the propane operations of The New England Gas Company since consolidation of the propane operations on September 1, 1995. Valley Propane sells propane at retail and provides service to propane customers in Rhode Island and southeastern Massachusetts. AEC, acquired in May 1996, generates revenues through the conversion of vehicles and stationary engines to natural gas and through the design and installation of natural gas fueling facilities. The Corporation owns an 80 percent interest in AEC and has the right to acquire the remaining 20 percent of the company currently held by the management of AEC. The operations of AEC did not materially impact the operations of the Corporation in fiscal 1996. Earnings per share for fiscal 1996 were $0.94 compared with $0.61 per common share in fiscal 1995 and $0.91 per common share in fiscal 1994. Fiscal 1996 net income was $3,998,400. This compares with net income of $2,554,900 in fiscal 1995 and $3,826,000 in fiscal 1994. RESULTS OF OPERATIONS Fiscal 1996 versus Fiscal 1995 Utility gas revenues in fiscal 1996 totaled $60,773,500, an increase of 8.5 percent over fiscal 1995. Revenues from sales to firm customers increased 9.8 percent over the prior fiscal year as a result of increased gas sales and rate relief. Offsetting the increase in revenues was a decrease of $2,654,800 in gas costs recovered through the PGPA. The PGPA does not impact operating income as it effectuates a dollar for dollar recovery of gas costs. In fiscal 1996, gas sold to firm customers increased 12.0 percent over fiscal 1995 and totaled 8,255,500 Mcf. The primary contributor to the increase in gas sales was the weather which was 17.0 percent colder than the prior year during the critical heating period, December through February. In October 1995, Valley Gas and Bristol & Warren were authorized by the RIPUC to consolidate their rate structures and to increase their tariffs to collect an additional $1.1 million in revenues. The new tariffs collect an increased share of revenues through the customer charge, thus reducing sensitivity of utility revenues to weather. Approximately $825,000 of this revenue increase is reflected in fiscal 1996 revenues. Sales to seasonal customers decreased 21.2 percent in fiscal 1996. Seasonal sales are dependent on the availability of gas and the price of competing fuels. The colder winter period resulted in less gas available for sales to this market. Since profits on seasonal sales are returned to firm sales customers through the PGPA, seasonal sales have no impact on operating income. Fiscal 1996 gas sales to dual fuel customers 30 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) reached the 1995 level. Transportation revenues declined by $124,800 or 24.6 percent in fiscal 1996. The reduction in transportation revenues was the result of a decrease in gas delivered to Valley Gas on behalf of customers. Nonutility revenues totaled $19,586,600, an increase of 3.9 percent over fiscal 1995. Revenues from retail merchandising operations, inclusive of rental and service program revenues, increased 12.6 percent over the prior fiscal year. The focus on the commercial and industrial markets led to an increase in retail merchandising revenues and the related gross profit, even though a lower profit margin percentage is earned on these sales. The service contract and rental program revenues increased due to new customers and price increases. The wholesale operations have faced gross profit margin declines because of pricing competition among manufacturers and consolidation of wholesale outlets within their market. Wholesale merchandise revenues declined slightly in fiscal 1996. The revenues generated from the propane company are included in nonutility revenues. Propane revenues increased 17.5 percent in fiscal 1996 over the prior fiscal year. The increase was due to a 12.3 percent increase in gallons of propane sold and an increase in the retail price of propane. Colder weather and sales to the construction heating market accounted for the increase in sales. Cost of gas sold includes the cost of natural gas, underground storage gas, liquefied natural gas and liquid propane gas to serve utility sales customers. The average cost per Mcf of natural gas distributed for utility operations in fiscal 1996 and fiscal 1995 was $3.84 and $3.21, respectively. Cold weather in November and December required the use of storage gas before the peak winter period which caused increased demands for natural gas supply during the winter period and resulted in increased natural gas prices. Changes in gas costs of the utility operations are passed through to firm sales customers in the calculations of the PGPA. Therefore, increases and decreases in gas costs do not impact the profit margins of the utility operations. The cost of sales for nonutility operations increased 3.8 percent over the prior fiscal year. The increase is the result of the increased retail sales and the increased gallons sold of propane. The average cost of propane distributed was $0.48 per gallon in fiscal 1996 versus $0.44 per gallon in fiscal 1995. Other operation expenses increased 5.7 percent in fiscal 1996, due to wages and increased costs associated with the operation of the peak shaving facilities. An increase in uncollectible expenses also contributed to the increase. Maintenance expense in fiscal 1996 was $1,672,000, an increase of 8.9 percent over the prior year. Maintenance expense increased due to costs related to the record snowfall experienced during the winter period and computer maintenance. Operation and maintenance expenses are impacted by general inflation and wages. Taxes - other than Federal income increased 2.2 percent to $4,090,800 in fiscal 1996. Gross receipts taxes on increased utility revenues are responsible for the increase. The effective Federal income tax rates for the years ended August 31, 1996 and 1995 were 28 percent and 24 percent, respectively. Other income net of tax totaled $459,900 in fiscal 1996 and $115,000 in fiscal 1995. The increase in fiscal 1996 is a result of off-system natural gas sales and investment income. Off-system natural gas sales are natural gas sales to customers outside the franchise area at market clearing prices. The opportunities for off-system sales are dependent upon market demand and the ability of other gas suppliers to meet their delivery requirements. Management believes it is unlikely that conditions will exist for this level of off-system sales in subsequent years. Fiscal 1996 interest expense was $3,311,700, an increase of 0.2 percent over the prior fiscal year. Interest expense was impacted by an increase in short-term debt only partially offset by a reduction in the deferred fuel cost liability and the related interest accrual. Fiscal 1995 versus Fiscal 1994 Fiscal 1995 utility gas revenues totaled $56,012,900, a 14.3 percent decrease from fiscal 1994. Firm revenues in fiscal 1995 decreased 16.1 percent from fiscal 1994 due to a $6,457,700 reduction in gas costs recovered through the PGPA and decreased gas sales. Gas sales to firm customers were 7,368,700 Mcf in fiscal 1995, a decrease of 6.7 percent from the prior year. The primary contributor to the sales decrease was warmer weather. Weather, as measured by degree days, in fiscal 1995 was 8.2 percent warmer than normal and 9.9 percent warmer than fiscal 1994. Weather during the critical heating period, December through February, was 15.5 percent warmer than the prior year. In fiscal 1995 sales to seasonal customers increased 23.3 percent over the prior fiscal year. The warm weather made gas supplies available at competitive prices which is the primary reason for the sales 31 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) increase. The profits from these sales for Valley Gas are returned to firm customers through the PGPA. Bristol & Warren's margin accrued to the benefit of stockholders in fiscal 1995 and 1994. Sales to dual fuel customers increased by 24,600 Mcf over the prior fiscal year. Revenues from the transportation of customer-owned natural gas increased $134,800 in fiscal 1995. Nonutility revenues in fiscal 1995 were $18,857,200, an increase of 3.4 percent over fiscal 1994. VAMCO focused its retail merchandising attention on the commercial and industrial equipment market in response to the effects of the sluggish economy on the residential market. This led to increased retail sales of equipment to this market and an improvement in the gross margin of the retail operations. The rental and service contract programs continued to impact earnings positively. Wholesale operations experienced slight improvements in sales levels and gross margins as they continued their focus on higher margin lines. However, profitability decreased in the wholesale business due to expenses incurred from changes in management and the implementation of a computerized reporting system to improve communications between the customers and the sales force. As stated earlier, propane operations also are included in nonutility revenues. A 4.8 percent decrease in propane revenues was the result of a 10.0 percent decrease in gallons sold, offset by increases in the wholesale price of propane. The warm weather was the major contributor to the decreased propane volume sold. Price competition continued to be a critical factor in the ability to expand these operations. The utility operations distribute natural gas, underground storage gas, liquefied natural gas and a limited amount of liquid propane gas to meet customer demands; the utility expense for these fuels is included in the cost of gas sold. The average cost per Mcf of gas distributed in fiscal 1995 was $3.21 versus $4.01 in fiscal 1994. The decrease in the cost per Mcf is the result of lower demand for natural gas as a result of the warmer weather. All changes in gas costs are passed through to firm customers through the workings of the PGPA. Cost of sales - nonutility includes the cost of sales for the retail merchandising operation, the wholesale merchandising operation and the propane operation. Cost of merchandising goods sold increased 3.4 percent in fiscal 1995 over fiscal 1994 which is directly attributable to the increase in merchandise sales. The average cost of propane for the retail propane operations, included in cost of sales, was $0.44 in fiscal 1995 versus $0.40 in fiscal 1994. Operations expenses increased 2.7 percent over fiscal 1994. Planned wage and benefit increases and an increase in uncollectible expenses accounted for a majority of this increase. A decreased use of peak shaving facilities and improved cost controls slightly offset these increases. Maintenance expense in fiscal 1995 was $1,535,200, an increase of 3.4 percent over fiscal 1994. Expenses related to the distribution system were responsible for the increase. Operation and maintenance expenses were impacted by wages and general inflation. Taxes - other than Federal income were $4,002,100, a decrease of $461,300 from the prior year. A reduction in gross receipts taxes as a result of decreased revenues and the lowering of the gross receipts tax rate for manufacturing customers were responsible for the decrease. The effective Federal income tax rates for the years ended August 31, 1995 and 1994 were 24 percent and 27 percent, respectively. Fiscal 1995 other income - net decreased $112,400 from the prior year. A decrease in funds available for overnight investments and interest earned on those investments were responsible for the decrease in other income. Interest expense in fiscal 1995 totaled $3,304,600, an increase of 13.8 percent over fiscal 1994. Increased short-term borrowing rates were responsible for the increase in interest expense. LIQUIDITY AND CAPITAL RESOURCES The sale of natural gas, propane and merchandise and revenues collected through the rental and service contract programs generate cash flows to meet the cash requirements of the Corporation. Operations, external financings and investments are also used to meet corporate cash needs. Short-term financings under existing lines of credit are available to meet daily cash need. Long-term and intermediate financings, and when appropriate, equity issues are used to refinance short-term debt when deemed appropriate by management. The cash position of the Corporation is impacted by the requirement to inventory supplemental gas supplies and the timing of inventory acquisitions to meet the peak winter demand of the utilities. Supplemental gas inventories are filled in the summer period for use during the winter period which has a negative impact on cash flows. Effective November 1995, the utilities, as authorized by the RIPUC, consolidated their rate structures 32 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) and increased their rate tariffs to collect an additional $1.1 million in revenues. Approximately $825,000 of this rate increase positively impacted liquidity in fiscal 1996. Colder weather and its positive influence on revenues similarly impacted cash flow. During fiscal 1996 actual gas costs were greater than expected which resulted in the utilities under-recovery of gas costs through the PGPA which caused the liability to customers at the end of fiscal 1995 to become a receivable from customers in fiscal 1996, negatively impacting liquidity. This under-recovery will be collected from customers through an increase in the PGPA in fiscal 1997 which will have a positive impact on fiscal 1997 cash flows. Interest costs and the timing of Federal and state tax payments also impact liquidity. Valley Gas entered into a revolving credit arrangement to fund the redemption of the Valley Gas 8% First Mortgage Bonds when they are redeemed by the current holders. During fiscal 1996, $2,200,000 of funds were issued under this arrangement, at a financing rate of less than 8%, which favorably impacted liquidity. Funding requirements are met through short-term borrowings under existing lines of credit. At August 31, 1996, the Corporation had $14,100,000 of available borrowings under its lines of credit. These lines are reviewed annually by the lending banks, and management believes they will be renewed or replaced. A lawsuit has been filed against Valley Gas and other parties by Blackstone Valley Electric Company (Blackstone) seeking contribution towards a judgment against Blackstone's share of total clean-up costs of approximately $6 million. The expenses relate to a site to which coal tar was transported in the 1930's prior to the incorporation of Valley Gas. Management is of the opinion the Company will prevail as a result of the indemnification provisions included in the agreement entered into when the Company acquired the utility assets from Blackstone. Management cannot determine the future cash flow impact, if any, of this claim and related legal fees. Valley Gas received a letter of responsibility from the Rhode Island Department of Environmental Management (DEM) with respect to releases from manufactured coal waste on its property that is the site of the former Tidewater plant. The DEM has requested Valley Gas and Blackstone to submit a remedial action work plan to address certain releases on the site. Management cannot determine the future cash flow impact, if any, of this claim and related expenses. Management takes the position that it is indemnified by Blackstone for any such expenses. Valley Gas intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. Remediation of sites such as the former Tidewater plant is governed by a regulatory framework which now permits more flexibility in methods of remediation and in property reuse. Rhode Island has taken a leadership role in deregulation by passing legislation that will allow customers to choose their electric supplier. The Corporation is positioning itself to participate in this deregulated environment by entering into a marketing alliance with Total/Louis Dreyfus Energy Services, L.L.C. to market natural gas and petroleum based products. The marketing alliance will provide the Corporation the opportunity to supply energy needs to customers without franchise territory barriers. The utilities also filed to unbundle their firm commercial and industrial tariffs with the RIPUC in September 1996. The proposed new transportation tariffs will allow natural gas customers to choose their natural gas suppliers. It is anticipated that these new tariffs will not materially impact the operations of the utilities in fiscal 1997. The Corporation's net cash from operating activities in fiscal 1996 was $3,669,000 versus $6,728,000 in fiscal 1995 and $8,342,900 in fiscal 1994. Cash from operations was impacted by the deferred fuel cost account which used funds of $3,977,800 in fiscal 1996 versus providing funds in fiscal 1995 and 1994. Cash from investing activities in the amount of $5,058,100 in fiscal 1996, $5,929,300 in fiscal 1995 and $4,604,700 in fiscal 1994 was used primarily for capital expenditures. Financing activities in fiscal 1996 provided cash of $1,441,200 primarily from the issuance of the revolving credit arrangement and the issuance of short-term debt offset by the use of funds for the payment of dividends and the redemption of its 8% First Mortgage Bonds. Financing activities used cash of $931,400 in fiscal 1995 and $4,090,800 in fiscal 1994. Capital expenditures are primarily for the expansion and improvement of the gas utility plant and for the purchase of rental and propane equipment. In fiscal 1996, capital expenditures were $5,008,700 versus $5,915,900 in fiscal 1995 and $4,553,400 in fiscal 1994. Fiscal 1997 capital expenditures are estimated to be $4,942,500 and will be primarily for the expansion and improvements of gas utility property. It is anticipated that such expenditures will be financed through funds from operations and short-term borrowings. Information on the sources and uses of cash flows for the past three years is included on the Consolidated Statements of Cash Flows on page 17 of this report. 33 Summary of Consolidated Operations
August 31 (in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------ Assets Utility plant - net .......... $49,442 $47,411 $44,207 $42,313 $38,838 Leased property - net ........ 2,945 2,014 2,436 2,395 3,343 Nonutility plant - net ....... 3,568 3,547 3,519 3,334 2,180 Current assets ............... 19,307 18,409 18,358 20,727 20,908 Other assets ................. 21,427 20,957 22,549 12,026 10,594 ------ ------ ------ ------ ------ Total .................. $96,689 $92,338 $91,069 $80,795 $75,863 ======= ======= ======= ======= ======= Capitalization and liabilities Capitalization Common equity .............. $27,092 $25,993 $26,036 $24,943 $24,018 Long-term debt (less current maturities) .. 23,256 24,616 27,035 27,580 15,795 ------ ------ ------ ------ ------ Total .................. 50,348 50,609 53,071 52,523 39,813 Revolving credit arrangement ... 2,200 -0- -0- -0- -0- Obligations under capital leases 2,134 1,255 1,747 1,847 1,790 Current liabilities ............ 24,005 23,932 18,530 18,982 26,922 Other liabilities .............. 18,002 16,542 17,721 7,443 7,338 ------ ------ ------ ----- ----- Total .................. $96,689 $92,338 $91,069 $80,795 $75,863 ======= ======= ======= ======= =======
For the year ended August 31, (in thousands, except as to share and per share data) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------- Operating revenues ................$ 80,360 $ 74,870 $ 83,553 $ 77,286 $ 67,144 ---------- ---------- ---------- ---------- ---------- Operating expenses: Cost of gas sold ................ 31,951 30,229 38,234 33,410 28,963 Cost of sales - nonutility ...... 13,689 13,190 12,784 12,715 11,893 Other operation and maintenance . 19,379 18,288 17,784 17,300 15,107 Depreciation .................... 2,956 2,685 2,474 2,304 1,770 Taxes - other than Federal income 4,091 4,002 4,463 4,073 3,557 - Federal income ......... 1,444 732 1,313 1,400 955 ----- --- ----- ----- --- Total ............................. 73,510 69,126 77,052 71,202 62,245 ------ ------ ------ ------ ------ Operating income .................. 6,850 5,744 6,501 6,084 4,899 Other income - net ................ 460 115 227 253 267 Total interest charges 3,312 3,304 2,902 2,610 2,051 ----- ----- ----- ----- ----- Net income $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115 ========== ========== ========== ========== ========== Shares outstanding - average ...... 4,258,877 4,222,662 4,205,760 4,203,398 4,201,105 Shares outstanding - year-end ..... 4,280,028 4,260,797 4,213,043 4,213,043 4,213,043 Earnings per share ................$ 0.94 $ 0.61 $ 0.91 $ 0.89 $ 0.74 Dividends declared per share ......$ 0.725 $ 0.71 $ 0.69 $ 0.66 $ 0.63 Year-end book value per share .....$ 6.33 $ 6.10 $ 6.18 $ 5.92 $ 5.77
34 Gas Operating Statistics
For the year ended August 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------- Gas utility revenues (in thousands): Residential ..................... $34,678 $30,606 $37,065 $34,250 $28,732 Commercial ...................... 14,891 13,212 15,633 13,964 11,314 Industrial - firm ............... 7,314 8,011 9,057 7,683 6,979 Industrial - seasonal ........... 3,335 3,507 2,945 2,762 2,916 Transportation .................. 382 507 372 408 287 Other ........................... 173 170 252 227 345 --- --- --- --- --- Total ................. $60,773 $56,013 $65,324 $59,294 $50,573 ======= ======= ======= ======= ======= Sales-MMcf: Residential ..................... 4,612 4,078 4,517 4,439 3,965 Commercial ...................... 2,252 1,953 2,078 1,978 1,680 Industrial - firm ............... 1,391 1,338 1,299 1,185 1,152 Industrial - seasonal ........... 1,047 1,298 996 818 1,010 ----- ----- --- --- ----- Total ................. 9,302 8,667 8,890 8,420 7,807 Company use and losses .......... 198 128 176 194 130 Transportation .................. 3,273 4,419 3,624 4,031 2,851 ----- ----- ----- ----- ----- Total sendout ......... 12,773 13,214 12,690 12,645 10,788 ====== ====== ====== ====== ====== Gas purchased and transported-MMcf: Liquid propane gas .............. 70 -0- -0- 158 141 Liquefied natural gas ........... 992 378 574 206 580 Natural gas stored underground .. 1,348 1,156 1,075 1,494 1,116 Pipeline natural gas ............ 7,090 7,261 7,417 6,756 6,100 Transportation .................. 3,273 4,419 3,624 4,031 2,851 ----- ----- ----- ----- ----- Total ................. 12,773 13,214 12,690 12,645 10,788 ====== ====== ====== ====== ====== Average number of customers: Residential ..................... 55,676 55,186 54,715 54,541 54,336 Commercial ...................... 5,333 5,212 5,111 5,077 5,034 Industrial - firm ............... 237 241 249 253 265 Industrial - seasonal ........... 54 59 58 58 46 Transportation .................. 2 2 2 2 2 - - - - - Total ................. 61,302 60,700 60,135 59,931 59,683 ====== ====== ====== ====== ====== Average revenue per residential customer ........... $ 623 $ 555 $ 677 $ 628 $ 529 Average use per residential customer-Mcf ....... 84 74 83 81 73 Maximum daily throughput-Mcf ...... 70,904 65,619 76,910 69,003 67,037 Sales degree days ................. 6,369 5,820 6,459 6,341 5,887
35 Corporate Information ANNUAL MEETING AND PROXIES The Annual Meeting of Stockholders will be held in Cumberland, Rhode Island, on December 10, 1996. Notice of the meeting and form of proxy along with this report are being mailed by the management to each holder of record of common stock on October 22, 1996. FORM 10-K The Corporation is required to file an annual report on Form 10-K with the Securities and Exchange Commission which includes additional information concerning the Corporation and its operations. A copy of this report will be forwarded to you upon written request to Mr. K. W. Hogan, Senior Vice President, Chief Financial Officer & Secretary, Valley Resources, Inc., 1595 Mendon Road, P. O. Box 7900, Cumberland, Rhode Island 02864-0700. Telephone: (401) 334-1188 CERTIFIED PUBLIC ACCOUNTANTS Grant Thornton LLP 98 North Washington Street Boston, Massachusetts 02114 REGISTRAR & TRANSFER AGENT The Bank of New York Shareholder Relations - Department 11E P. O. Box 11258 Church Street Station New York, NY 10286 Telephone: 1-800-524-4458 STOCK LISTING The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR. Quotes of Valley Resources, Inc. common stock are listed in The Wall Street Journal and many daily newspapers among the AMEX stocks traded for the day. Officers of the Corporation Alfred P. Degen President & Chief Executive Officer Kenneth W. Hogan Senior Vice President, Chief Financial Officer & Secretary Richard G. Drolet Vice President, Information Systems & Corporate Planning Charles K. Meunier Vice President, Operations Jeffrey P. Polucha Vice President, Marketing & Development James P. Carney Assistant Vice President, Human Resources Sharon Partridge Assistant Vice President, Finance & Treasurer Alan H. Roy Assistant Vice President, Gas Supply Robert A. Young Assistant Vice President & Chief Engineer Clement W. Bethel Assistant Treasurer Patricia A. Morrison Assistant Secretary; Clerk, Morris Merchants, Inc. Other Officers David L. Hickerson President, Morris Merchants, Inc. Richard C. Hadfield Executive Vice President, Morris Merchants, Inc. Rosemary Platt Controller, Morris Merchants, Inc. Thomas A. Aubee President, Alternate Energy Corporation 36 (Photo of Valley Resources, Inc. Board of Directors shown here) Photo Tag: From Left to Right, Seated: C. Hamilton Davison, John F. Guthrie, Jr., James M. Dillon, Jonathan K. Farnum; From Left to Right, Standing: Melvin G. Alperin, Eleanor M. McMahon, Ed. D., Alfred P. Degen, Don A. DeAngelis, Ernest N. Agresti Directors Ernest N. Agresti Retired Partner, Edwards & Angell, Providence, Rhode Island Melvin G. Alperin President, Brewster Industries, Pawtucket, Rhode Island C. Hamilton Davison President & Chief Executive Officer, Paramount Cards, Inc., Pawtucket, Rhode Island Don A. DeAngelis Vice Chairman & Chief Executive Officer, Murdock Webbing Company, Inc., Central Falls, Rhode Island Alfred P. Degen President & Chief Executive Officer, Valley Resources, Inc., Cumberland, Rhode Island James M. Dillon Retired Director of Development, The Roman Catholic Diocese, Bridgeport, Connecticut Jonathan K. Farnum Chairman & President, Wardwell Braiding Machine Company, Central Falls, Rhode Island John F. Guthrie, Jr. Vice President, The New England, Boston, Massachusetts Eleanor M. McMahon, Ed. D. Distinguished Visiting Professor, A. Alfred Taubman Center for Public Policy, Brown University, Providence, Rhode Island Valley Resorces, Inc. and Subsidiaries 1595 Mendon Road P. O. Box 7900 Cumberland, Rhode Island 02864-0700 (401) 334-1188 http://www.valleyresources.com EX-21 3 EXHIBIT 21 VALLEY RESOURCES, INC. SUBSIDIARIES OF THE REGISTRANT AUGUST 31, 1996 State of Incorporation ---------------------- Parent of Valley Resources, Inc. - None Rhode Island Subsidiaries of registrant - Valley Gas Company Rhode Island - Valley Appliance and Merchandising Company Rhode Island - Rhode Island Development and Exploration Company (Inactive) Rhode Island - Valley Propane, Inc. Rhode Island - Morris Merchants, Inc., d/b/a the Walter F. Morris Co. Massachusetts - Bristol & Warren Gas Company Rhode Island - The New England Gas Company (Inactive) Rhode Island Each of the above subsidiaries of the registrant is wholly-owned. Subsidiary of registrant - Alternate Energy Corporation Rhode Island Valley Resources, Inc. owns an 80 percent interest in the above subsidiary. EX-23 4 Exhibit 23 Consent of Independent Certified Public Accountants We have issued our reports dated September 24, 1996, accompanying the consolidated financial statements and schedule incorporated by reference or included in the Annual Report of Valley Resources, Inc. and subsidiaries on Form 10-K for the year ended August 31, 1996. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Valley Resources, Inc. and subsidiaries on Form S-3 (File No. 33-32827); Form S-8/S-3 (File No. 33-20770); Form S-8/S-3 (File No. 33-33574) and Form S-8 (File No. 33-33575). GRANT THORNTON LLP Boston, Massachusetts November 26, 1996 EX-27 5
UT YEAR AUG-31-1996 AUG-31-1996 PER-BOOK 49,442,075 8,022,838 19,306,768 19,917,304 0 96,688,985 4,280,028 18,204,063 7,750,406 27,092,297 0 0 20,212,000 14,900,000 3,543,937 0 500,000 0 2,133,543 811,036 27,496,172 96,688,985 80,360,134 1,443,547 72,066,442 73,509,989 6,850,145 459,938 7,310,083 3,311,723 3,998,360 0 3,998,360 3,083,369 1,927,154 3,669,041 0.94 0.94
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