-----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, TIaeuK5ivNmyxTWMaDDzLyGkUasZvmrWqhf/4OYusOT90dcMgJCvKYOx7RnbHoDO RkpzpUttRcgRbiWJ+/rOrA== 0000102710-98-000031.txt : 19981126 0000102710-98-000031.hdr.sgml : 19981126 ACCESSION NUMBER: 0000102710-98-000031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981125 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: SEC FILE NUMBER: 001-07924 FILM NUMBER: 98759808 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, 1998 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 $12.625 per share (the closing price of such stock on October 20, 1998 on the American Stock Exchange) was $61,645,198.50. As of October 20, 1998 there were 4,993,028 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 appearing on pages 1 and 4 of the Registrant's Annual Report to Stockholders for the fiscal year ended August 31, 1998 are incorporated by reference in Parts I, II and IV. Portions of the Proxy Statement dated November 3, 1998 as filed with the Securities and Exchange Commission are incorporated by reference in Part III. PART I Item 1 Business -------- 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 & Warren" and collectively with Valley Gas, the "Utilities")--regulated natural gas distribution companies; Valley Appliance and Merchandising Company ("VAMCO")--a merchandising and appliance rental company; Valley Propane, Inc. ("Valley Propane")--a wholesale and retail propane company; and Morris Merchants, Inc., d/b/a the Walter Morris Company ("Morris Merchants")--a wholesale distributor of franchised lines in plumbing and heating contractor supply and other energy-related business. The Corporation also has an 80% interest in Alternate Energy Corporation ("AEC") which sells, installs and designs natural gas conversion systems and facilities, is an authorized representative of the ONSI fuel cell, holds a patent for a natural gas/diesel co-firing system and has a patent pending for a device to control the flow of fuel on dual-fuel equipment. Strategy - -------- The Corporation considers itself an integrated diversified energy company. It plans to continue its diversification efforts, primarily through internal growth of existing subsidiaries. Existing businesses continue to focus on the expansion of their activities to acquire additional market share. If attractive opportunities become available, diversification efforts would also include the acquisition of new businesses. The Corporation has no present understandings, commitments or agreements with respect to any acquisition. Utility Operations - ------------------ Gas Sales and Transportation The Corporation's utility operations are conducted through the Utilities, which had an average of 62,910 customers during the fiscal year ended August 31, 1998, of which approximately 91% were residential and 9% were commercial and industrial. For the fiscal year ended August 31, 1998, 52% of gas sales were to residential customers and 48% were to commercial and industrial customers. 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 & Warren's service territory is approximately 15 square miles in eastern Rhode Island with a population of approximately 35,000. Since November 1995, the Utilities have operated under a single rate structure. The following table shows the distribution of gas sold and transported during the years since fiscal 1994 in millions of cubic feet ("MMcf"): For the Fiscal Year Ended August 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Residential .................... 4,225 4,393 4,612 4,078 4,517 Commercial ..................... 2,060 2,161 2,252 1,953 2,078 Industrial-firm ................ 1,133 1,440 1,391 1,338 1,299 Industrial-seasonal ............ 648 1,110 1,047 1,298 996 Transportation-firm ............ 346 -0- -0- -0- -0- Transportation-seasonal ........ 4,895 5,043 3,273 4,419 3,624 ------ ------ ------ ------ ------ TOTAL ........................ 13,307 14,147 12,575 13,086 12,514 ====== ====== ====== ====== ======
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 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 & Warren 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' sales 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 throughput 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 is 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. Seasonality The Utilities business is seasonal. 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. 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. Gas Supply and Storage Tennessee Gas Pipeline Company is the major natural gas transporter for Valley Gas under long-term contracts. Bristol & Warren'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 & Warren together have 24,402 dekatherms per day ("Dth/day") of year-round firm supply under long-term contracts with four domestic and two Canadian suppliers. Of these contracts, 22,335 of the contracted Dth/day will expire in the next four years; 7,035 Dth/day are due to expire November 1, 1999 and 15,300 Dth/day are 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, under a contract that 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 participants in this market, and contract prices are at competitively favorable terms. Liquefied Natural Gas ("LNG") - Valley Gas is entitled to 5,300 Dth/day of firm supply from Distrigas, which re-vaporizes LNG at its Everett, Massachusetts facility for delivery during the winter months to Valley Gas 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 7,550 dekatherms. There are no minimum takes, and the contract runs through October 31, 2005. Maritimes & Northeast Pipeline - Subject to approval by the Federal Energy Regulatory Commission 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 Dth/day to its city gate. 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 1,544,258 dekatherms of underground storage capacity with Tennessee Gas Pipeline, Texas Eastern Gas Transmission, CNG Transmission and National Fuel Gas Supply Corporation, with 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. 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 24,912 Dth/day. Of this total, 86% expires by November 1, 2000. Storage Pipeline Capacity - The Utilities' storage-related pipeline capacity totals 12,738 Dth/day. About 85% of this capacity expires November 1, 2000, and the remainder extends through 2012. On-Site LNG and Propane Storage - In addition to the gas delivered by the interstate pipeline, the Utilities have on-site storage facilities for liquid propane gas ("LPG"), with Valley Gas having about 857,000 gallons and Bristol & Warren 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 or electricity to gas. In recent utility rate decisions, 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 has a compressed natural gas ("CNG ") fueling station at its Cumberland, Rhode Island headquarters. The use of natural gas in vehicles is promoted through conversions of its own fleet and the CNG rate approved by the RIPUC. The Utilities' residential marketing department seeks to increase conversions from oil to natural gas through installations of conversion burners and conversions to natural gas of housing developments that initially chose alternate energy sources. Additional efforts are made to convert homes with inactive natural gas service and to replace electric heating systems with natural gas systems. The distribution company unbundling process will add competition from a new source-- natural gas suppliers. The Utilities have received approval from the RIPUC for transportation rates which allow large commercial and industrial customers the choice to purchase gas from the Utilities or from natural gas marketers; gas purchased by users within the Utilities' territories is transported to the users by the Utilities. Since the Utilities' profits are derived from distribution of natural gas and not natural gas sales, this process is not expected to significantly impact the profitability of the Utilities. Gas Distribution System Valley Gas' distribution system consists of approximately 900 miles of gas mains and service lines. Bristol & Warren's gas distribution system consists of approximately 100 miles of gas mains and service lines. 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 70 MMcf in 1998, 73 MMcf in 1997, 71 MMcf in 1996, 66 MMcf in 1995, and 77 MMcf in 1994. Gas Marketing - ------------- The Corporation is positioning itself to participate in the deregulated energy markets 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. Effective June 1, 1997, the Utilities were authorized to offer transportation rates to large commercial and industrial customers and redesign the rates for other customers. Appliance Contract Sales and Rentals - ------------------------------------ The Corporation conducts appliance sales, service contract sales and appliance 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. The merchandising subsidiaries are in competitive businesses with competition based on many factors, including price, quality of product and service. 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. 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, 1998, Valley Propane had 2,494 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 revenues 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. In fiscal 1998, AEC opened a public natural gas vehicle (NGV) refueling station located at the Valley Resources corporate headquarters. AEC buys gas from Valley Gas and retails it to a number of different customers. The Corporation acquired its 80% interest in AEC in May 1996 and has the obligation over the next four fiscal years to acquire the remaining 20%, which is currently held by the management of AEC. Environmental Proceedings - ------------------------- For information regarding the Corporation's potential environmental liabilities, see "Management's Discussion and Analysis of the Results of Operations and Financial Condition - Liquidity and Capital Resources", pages 30 and 31, and Note H, page 25, in the 1998 Annual Report to Stockholders which is incorporated by reference herein. 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 also located at this facility. The Corporation considers these facilities to be suitable and adequate to meet its needs. 425 Turnpike Street Canton, Massachusetts Office and Warehouse Facilities Morris Merchants 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 all corporate assets of the Corporation. 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 all corporate assets of the Corporation. 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 & Warren and includes construction, credit, engineering, garage, maintenance, service, and storeroom. Brown Street Warren, Rhode Island Propane Storage This facility is used for the storage of propane used in peak-shaving operations of Bristol & Warren. 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 25, in the 1998 Annual Report to Stockholders which is incorporated by reference herein. 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, 1998 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 51 Chairman, President Chairman since December 1997; and Chief Chief Executive Officer of Executive Officer Valley Resources, Inc. since March 1995; President, Valley Resources, Inc. from July 1994; Executive Vice Presi- dent, Philadelphia Gas Works for more than 5 years prior to July 1994. Kenneth W. Hogan 53 Senior Vice President, Senior Vice President since Chief Financial July 1994; Vice President Officer and prior to July 1994; Chief Secretary Financial Officer since Decem- ber 1994 and Secretary since April 1977. Charles K. Meunier 56 Vice President, Vice President Operations since Operations December 1994; Assistant Vice President Operations and Human Resources prior to December 1994. Richard G. Drolet 50 Vice President, Vice President Information Information Systems Systems and Corporate Planning and Corporate since December 1994; Assistant Planning Vice President Information Systems and Corporate Planning prior to December 1994. Jeffrey P. Polucha 43 Vice President, Vice President Marketing and Marketing and Development since December Development 1994; Manager Residential and Propane Sales prior to December 1994. PART II Item 5 Market for the Registrant's Securities and Related Stockholder Matters -------------------------------------- The common stock market prices, dividends declared and dividend restrictions appearing on pages 1, 4 and 20 of the Annual Report to Stockholders for the fiscal year ended August 31, 1998 are incorporated herein by reference. The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR. There were 1,991 shareholders at August 31, 1998. Item 6 Selected Financial Data ----------------------- The selected financial data (Summary of Consolidated Operations) appearing on page 33 of the Annual Report to Stockholders for the fiscal year ended August 31, 1998 is incorporated herein by reference. Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- Management's discussion and analysis of the results of operations, liquidity and capital resources appearing on pages 28 through 32 of the Annual Report to Stockholders for the fiscal year ended August 31, 1998 are incorporated herein by reference. Item 7A Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Not applicable Item 8 Financial Statements and Supplementary Data ------------------------------------------- The following consolidated financial statements of the registrant and its subsidiaries appearing on pages 14 through 27 in the Annual Report to Stockholders for the fiscal year ended August 31, 1998 are incorporated herein by reference: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1998 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1998 Consolidated Balance Sheets - August 31, 1998 and 1997 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1998 Consolidated Statements of Capitalization - August 31, 1998 and 1997 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 5 of the Proxy Statement filed with the Securities and Exchange Commission on November 3, 1998 is incorporated herein by reference. Section 16 (a) Beneficial Ownership Reporting Compliance - --------------------------------------------------------- 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 9 of the Proxy Statement filed with the Securities and Exchange Commission on November 3, 1998 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 3, 1998 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 18 through 31 in the Annual Report to Stockholders for the year ended August 31, 1998 are incorporated by reference in Item 8: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1998 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1998 Consolidated Balance Sheets - August 31, 1998 and 1997 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1998 Consolidated Statements of Capitalization - August 31, 1998 and 1997 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants (a) 2. Consolidated Financial Schedule Schedule VIII - Valuation and Qualifying Accounts Report of Independent Certified Public Accountants on Consolidated Financial Schedule 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. (a) 3. Exhibits 3. (a) Articles of Incorporation, as amended (Exhibit 3 to the Corpo- ration's Annual Report on Form 10-K for the year ended August 31, 1988 is hereby incorporated by reference.) 3. (b) Bylaws of the Corporation (Exhibit 3 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1988 is hereby incorporated by reference.) 4. (a) Indenture between Valley Resources, Inc. and Mellon Bank, N.A., Trustee dated as of September 1, 1997. (Exhibit 4 to the Corporation's Registration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 4. (b) 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.) 4. (c) Loan Agreement between Valley Resources, Inc. and Fleet National bank dated June 30, 1997 (Exhibit 10 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997 is incorporated herein 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 Registra- tion 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 (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1996 is hereby incorporated by reference.) 10. (f) Termination agreement dated December 31, 1996 between Valley Valley Resources, Inc. and Charles K. Meunier. (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 10. (g) Termination agreement dated December 31, 1996 between Valley Resources, Inc. and Richard G. Drolet. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1997 is incorporated herein by reference. 10. (h) Termination agreement dated December 31, 1996 between Valley Resources, Inc. and Jeffrey P. Polucha. Other Material Contracts or Agreements 10. (i) 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. (j) Storage Service Agreement dated July 3, 1985 between Valley Gas 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. (k) Underground Storage Service Agreement dated October 3, 1984 between Valley Gas 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. (l) Underground Storage Service Agreement dated August 19, 1983 between Valley Gas 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. (m) Service agreement for storage of LNG dated June 30, 1982 between Valley Gas 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. (n) Contract for the purchase of natural gas dated March 1, 1981, between Valley Gas 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. (o) Storage Service Transportation contract dated May 15, 1981, between Valley Gas 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. (p) Storage Service Transportation contract dated May 26, 1981, between Valley Gas 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. (q) Storage Service Agreement dated February 18, 1980, between Valley Gas 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. (r) Precedent Agreement for Firm Services on Maritimes and Northeast Pipeline Project Phase II dated September 21, 1996, between Valley Gas and Maritimes and Northeast Pipeline L.L.C. (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 10. (s) Gas Sales Agreement dated June 15, 1992 between Aquila Energy Marketing Corporation and Valley Gas. (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. (t) 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 (Exhibit 21 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1996 is incorpo- rated herein by reference). 23. Consent of Grant Thornton LLP. 27. Financial Data Schedule. (b) No Form 8-K was 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 25, 1998 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 25, 1998 s/A. P. Degen ---------------------------------------- Alfred P. Degen, Chairman, President and Chief Executive Officer Date: November 25, 1998 s/K. W. Hogan ---------------------------------------- Kenneth W. Hogan, Senior Vice President, Chief Financial Officer & Secretary Date: November 25, 1998 ---------------------------------------- Ernest N. Agresti, Director Date: November 25, 1998 s/M. G. Alperin ---------------------------------------- Melvin G. Alperin, Director Date: November 25, 1998 s/C. H. Davison ---------------------------------------- C. Hamilton Davison, Director Date: November 25, 1998 s/D. A. DeAngelis ---------------------------------------- Don A. DeAngelis, Director Date: November 25, 1998 ---------------------------------------- James M. Dillon, Director Date: November 25, 1998 s/J. K. Farnum ---------------------------------------- Jonathan K. Farnum, Director Date: November 25, 1998 ---------------------------------------- John F. Guthrie, Jr., Director Date: November 25, 1998 ---------------------------------------- Eleanor M. McMahon, Director Item 14(a) 2 VALLEY RESOURCES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SCHEDULE VIII Fiscal Years Ended August 31, 1998, 1997 and 1996
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 ----------- ------------ ---------------- -------------- ---------- ---------- 1998 - ---- Allowance for doubtful accounts $840,433 $1,912,813 $126,610 (a) $1,951,577 (b) $928,279 1997 - ---- Allowance for doubtful accounts $719,721 $1,603,597 $183,220 (a) $1,666,105 (b) $840,433 1996 - ---- Allowance for doubtful accounts $655,951 $1,459,761 $156,755 (a) $1,552,746 (b) $719,721 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 25, 1998, 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 25, 1998 EX-10 2 Exhibit 10(h) January 2, 1997 Mr. Jeffrey P. Polucha Vice President Marketing & Development Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Polucha: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on January 1, 1997 and shall continue in effect through December 31, 1997; provided, however, that commencing on January 1, 1998 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4 (iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reason- able belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars there- of in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (A) the assignment to you of any duties inconsistent with your status as Vice President of Marketing & Development or a substantial alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the occurrence of a change in control of the Company or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control; (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable dili- gence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accor- dance with this Subsection. Amounts paid under this Subsection are in addi- tion to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except as otherwise provided in paragraph (C) of Subsection 4 (iii). 4. Compensation Upon Termination. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment you shall be entitled to the following benefits: (i) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii) If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 1.00 times the base salary paid to you during the twelve (12) months immediately prior to the issuance of the Notice of Termination (provided, however, that in the case of a termination at your option under that portion of Section 3 (iii) giving you an option to terminate at your discretion, the severance payment under this paragraph shall be in an amount equal to your base salary for the twelve (12) months immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii) (C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) that number of additional months of service credit there- under equal to the number of months for which severance pay shall be due to you under Section 4 (iii) (B) hereof, at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of service credit after your sixty-fifth (65th) birthday), and (y) the retirement pension (deter- mined as a straight-life annuity commencing at age 65) which you had then accrued pursuant to the provisions of the Retirement Plan. For purposes of clause (x), the term "compensation" shall include amounts payable pursuant to Section 4 (iii) (B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan immediately prior to the change in control of the Company; (E) In the event that any payment or benefit received or to be received by you in connection with a change in control of the Company or the termination of your employment (whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control of the Company or any person affiliated with the Company or such person) (the "Total Payments") would not be deductible (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1954 as amended (the "Code"), the benefits provided under this Section 4(iii) shall be reduced or eliminated in the following order, viz., first, Subsection D; then, Subsection C; then, Subsection B; and finally, Subsection A, but only to the extent necessary so that no portion of the Total Payments is not deductible as a result of Section 280G of the Code. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which you shall have effectively waived in writing prior to the date of payment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you, does not constitute a "parachute payment" within the meaning of Section 280G of the Code, (iii) the Total Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clause (i) or clause (ii) of this paragraph) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred pay- ment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G of the Code; (F) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement) except to the extent that the payment of such fees and expenses would not be, or would cause any other portion of the Total Payments not to be, deductible by reason of Section 280G of the Code. (iv) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (v) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. 6. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, VALLEY RESOURCES, INC. By s/Alfred P. Degen ------------------------------------------- Name: Alfred P. Degen Title: President & Chief Executive Officer Agreed to this 19th day ---- of May , 1997 ----- s/Jeffrey P. Polucha - ------------------------- Jeffrey P. Polucha EX-13 3 Valley Resources, Inc. - 1998 Annual Report (Photo appears here) "Impressions From A Changing Marketplace" Inside Front Cover Last year we observed that change was the only constant in today's energy products and services environment. In the past year, a changing market has provided insight into the impressions customers have of Valley as a provider of quality products and services. This has created opportunities for Valley to compete successfully in an increasingly competitive business. This approach has positioned Valley Resources, Inc. to capitalize on new opportunities while continuing to serve its loyal customer base through an unwavering commitment to excellence in customer service, workforce development, and creative energy product and service solutions. We will develop a vibrant palette of new and unique supplier and customer relationships with an eye on continued diversification. (Photo appears here) Photo tag: Changing leaves at the signpost of Valley Resources' Cumberland headquarters mark the movement of seasons and the entry into a transformed energy product and service marketplace. Cover photo: An arched stone bridge overlooks waterfalls in the heart of Valley Gas Company's natural gas distribution territory. Use of clean natural gas helps to ensure the preservation of natural beauty for enjoyment by future generations of Rhode Islanders. Corporate Overview ------------------ Valley Resources, Inc. has six active subsidiaries. Valley Gas Company and Bristol & Warren Gas Company (collectively, the "Utilities") are natural gas distribution companies regulated by the Rhode Island Public Utilities Commission; Valley Appliance and Merchandising Company (VAMCO) merchandises and rents appliances, energy conservation equipment and residential water filtration equipment and offers appliance service contracts; Valley Propane, Inc. (Valley Propane) sells propane at both retail and wholesale; and Morris Merchants, Inc. (Morris) is a wholesale distributor of franchised lines in plumbing and heating contractor supply and other energy related businesses. Alternate Energy Corporation (AEC), 80 percent owned, designs and installs natural gas conversion systems and facilities, is an authorized representative of the ONSI fuel cell, holds a patent for a natural gas/diesel co-firing system and has a patent pending for a device to control the flow of fuel on dual-fuel equipment. Financial Highlights
For the year ended August 31 (in thousands) 1998 1997 1996 - ------------------------------------------- ---- ---- ---- Operating revenues ............................... $81,589 $87,484 $80,360 Operation expenses, maintenance and depreciation . 69,781 75,302 67,975 ------- ------- ------- Operating income before taxes .................... 11,808 12,182 12,385 Taxes - other than Federal income ................ 4,120 4,243 4,091 Taxes - Federal income ........................... 1,330 1,335 1,444 Other income - net of taxes ...................... 289 423 460 Interest charges ................................. 3,041 3,368 3,312 ------- ------- ------- Net income ....................................... $ 3,606 $ 3,659 $ 3,998 ======= ======= ======= Basic and diluted earnings per share ............. $ 0.73 $ 0.86 $ 0.94 Dividends declared per common share .............. $ 0.745 $ 0.735 $ 0.725 Net utility plant (thousands) .................... $51,310 $50,447 $49,442 Capital expenditures (thousands) ................. $ 4,534 $ 4,293 $ 5,009 Average number of common shares outstanding ...... 4,966,270 4,267,038 4,258,877
- 1 - Message to Shareholders - ----------------------- Valley Resources' long-term business strategy of providing a diverse offering of energy products and services worked well in fiscal 1998, as solid performances by most of our nonutility subsidiaries partially offset the impact of warmer than normal weather on our propane business and losses caused by expenses associated with properly positioning AEC in the marketplace. Net income of both the Corporation and the Utilities in fiscal 1998 was essentially flat compared to fiscal 1997 results, despite weather which was 6.4 percent warmer on a year-to-year comparison and 8.5 percent warmer than normal. Our utility throughput, although adversely affected by weather, continued to show solid growth on a weather normalized basis through the addition of customers both from new construction and conversion from other fuels. Valley's utility subsidiaries must be viewed from the long-term perspective. While there are certainly many changes facing the energy industry, the distribution of energy to the ultimate end-user will remain a critical component in the process. Whether customers buy the commodity portion of their energy service from the local utility or from a third party, the safe, reliable and efficient delivery of that commodity will be essential to increasing throughput and maximizing returns for the delivery provider. Vital to any business is the economic climate in which it operates. In northern Rhode Island, the economic indicators remain positive. Unemployment levels have dropped in all cities and towns served by Valley's utility businesses. Residential construction continues to be strong in both Valley Gas and Bristol & Warren service areas. In addition, several major economic development stories have unfolded in the past year. In Lincoln, Fleet Bank recently converted a warehouse building to a major customer service facility adding a number of new jobs to the local economy. Also in Lincoln, Amica Insurance and CytoTherapeutics opened new corporate facilities during the past year. At Highland Corporate Park in Cumberland, construction began on two buildings, marking the first development for this upscale light industrial/office park complex. In Woonsocket, CVS broke ground for a major expansion of their corporate headquarters. Although not in Valley Gas' service area, the opening of the new operations center for Fidelity Investments Institutional Services in nearby Smithfield has provided a significant economic boost to northern Rhode Island. All of these facilities specified natural gas as their fuel of choice. This level of development will undoubtedly be of benefit to Valley's utility businesses and consumer products and services activities for many years ahead. Valley's nonutility subsidiaries provided meaningful contributions to our corporate success and the expectation of future growth. Our Morris and VAMCO subsidiaries performed well in fiscal 1998, building on their solid reputations in their respective fields. Valley Propane was able to match last year's earnings levels in spite of warmer weather. AEC is expanding its expertise beyond the natural gas vehicle market by offering innovative products and services utilizing state-of-the- (Photo appears here) Photo tag: CVS Corporate Headquarters Expansion, Woonsocket. (Photo appears here) Photo tag: Spec building under construction, Highland Corporate Park. (Photo appears here) Photo tag: New commercial building, Highland Corporate Park. - 2 - art natural gas technologies. In fiscal 1998, AEC completed construction of an automated natural gas refueling station at Valley's headquarters in Cumberland. In addition to being used by local natural gas vehicle fleet operators for refueling, this showpiece facility is available to AEC to demonstrate their design and construction capabilities to prospective customers. Throughout the years, Valley has done a very good job of providing quality service to its customers. This report contains numerous examples where Valley and its subsidiaries have demonstrated market responsiveness and innovation. No matter what changes may occur in the business, Valley believes it is well positioned to participate in a positive way in the ever-evolving energy marketplace. In March 1998, the Board of Directors increased the Corporation's dividend to an indicated annual rate of 75 cents per share, marking the 20th consecutive year of dividend increases. Total shareholder return for fiscal 1998, including dividends and stock appreciation, was 12 percent. The Corporation's balance sheet and financial ratios are solid, benefiting from the recapitalization completed at the end of fiscal 1997. Cash flow in fiscal 1998 was strong, resulting in significantly reduced levels of short-term debt during fiscal 1998. The Corporation's strong financial position should be helpful as we continue to look for opportunities to grow the business and maximize shareholder value. On January 1, 1998, Clement W. Bethel, Assistant Treasurer, retired after 34 years of service to the Corporation. Clem's dedication and commitment to Valley will be missed. On behalf of the Board of Directors, I would like to thank all employees for their service and dedication to the Corporation, and to our shareholders for their ongoing support and confidence. Sincerely, Alfred P. Degen Chairman, President & Chief Executive Officer (Photo appears here) Photo tag: Fleet Operations Center, Lincoln (Photo appears here) Photo tag: Fidelity Investments, Smithfield (Photo appears here) Photo tag: CytoTherapeutics Facility, Lincoln (Photo appears here) Photo tag: Alfred P. Degen, Chairman, President & Chief Executive Officer - 3 - Summary of Annual Earnings and Dividends - ---------------------------------------- Consolidated net income is derived from the operations 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 1998 was $3,605,961 or $0.73 per average common share outstanding, as compared to $3,659,313 or $0.86 per share in fiscal 1997. Average number of common shares outstanding increased to 4,966,270 from 4,267,038 as a result of the Corporation's 1997 public offering, thus contributing to the decrease in earnings per share. The Utilities contributed $2,633,100 to consolidated net income, a slight increase over fiscal 1997. Despite warmer weather, utility operations experienced an earnings increase as a result of decreased interest expense. Weather during the period, as measured on a degree day basis, was 6.4 percent warmer than in the previous year and 8.5 percent warmer than normal. This resulted in a decline in total firm gas throughput of 2.9 percent from the prior year. In fiscal 1998, the contribution of the nonutility operating companies to consolidated earnings was $972,900 compared to $1,051,800 for fiscal 1997. Retail and wholesale operations earnings increased, but were offset by earnings declines from propane operations and AEC. Retail operations have continued to be positively impacted by sales in the commercial market and conversions in the residential heating market from electricity and oil. Wholesale operations were positively impacted through a program of combining components from varying lines to meet customer requirements. Unanticipated maintenance on a propane delivery vehicle caused the slight earnings decrease for Valley Propane. A loss in the operations of AEC was the result of start-up costs associated with additional staffing to position the company to compete in the future. In March 1998, the Board of Directors increased the dividend 1.4 percent to an indicated annual rate of $0.75 per share. This is the twentieth 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. Dividends and Market Data - -------------------------
Cash Market Price 1998 Dividend High Low - ---- -------- ---- --- First Quarter $.1850 $11.50 $10.25 Second Quarter .1850 12.38 10.63 Third Quarter .1875 12.13 11.13 Fourth Quarter .1875 12.13 11.13 1997 - ---- First Quarter $.1825 $13.00 $11.75 Second Quarter .1825 12.00 11.00 Third Quarter .1850 12.50 10.75 Fourth Quarter .1850 11.94 10.50
- 4 - (Photo appears here) Photo tag: A new residential development in nearby Cumberland. (Photo appears here) Photo tag: Valley Gas construction crew connecting gas service installation to a new home in Cumberland. (Photo appears here) Photo tag: Valley Gas crew work on installing supply to a new phase residential development in Lincoln. (Charts appear here) Net Income
Utility Nonutility 1994 2,914,300 911,700 1995 1,665,400 889,500 1996 3,206,400 792,000 1997 2,607,500 1,051,800 1998 2,633,100 972,900
Dividends Paid 1994 $0.69 1995 $0.71 1996 $0.725 1997 $0.735 1998 $0.745
- 5 - Year in Review - -------------- Impressions from the changing marketplace have confirmed Valley Resources' view of the deregulated energy environment and have focused our direction on providing innovative approaches to delivering energy and energy related services to meet our customers' needs. Bringing to market products and services that anticipate and meet customer demand will ensure improved profitability, maximization of shareholder value and creation of a dynamic corporate environment that will provide challenges and opportunities for our employees to deliver superior customer service. Flexibility and Responsiveness - In fiscal 1998, to reinforce our commitment to the customer, the commercial and industrial marketing department of the Utilities met with customers to determine their specific natural gas requirements. Various options, including the use of firm and interruptible transportation service, remaining on firm sales service, as well as the potential for customers to expand their natural gas usage, were discussed. As a result of obtaining this information concerning use requirements, the sales representatives offered specific rate treatments to maximize gas usage by the customer. Additionally, because of our understanding of gas markets we can act in an advisory role, when requested by the customer, to adjust supply contracts with third party marketers. If the customer chooses minimal involvement in the gas procurement process, the recommended solution is to remain on firm sales service. During the fiscal year, a local manufacturer discussed modifications to its process with representatives of the Utilities that increased its natural gas use. These discussions led to the customer changing its internal piping system, enabling the customer to take advantage of a more attractive natural gas rate. Ultimately it was determined that firm transportation would be provided by Valley Gas and gas supplies would be purchased on the open market. Roger Williams University continues to have a very favorable impression of natural gas and the services brought to it by Bristol & Warren Gas, as evidenced by their continued commitment to the use of natural gas for several new buildings to be constructed on their Bristol campus. These installations represent the eighth time that the University has made natural gas its fuel of choice. In 1996 Valley Gas, in conjunction with the Blackstone Valley Development Foundation and the Woonsocket Industrial Development Corporation, installed eight thousand feet of natural gas main in the Highland Corporate Park on the Cumberland - Woonsocket border. This installation came about because of the necessity for clean, dependable natural gas to be part of the offering that would attract potential owners to the park. Two new buildings are under construction in the park marking the arrival of the first businesses. Continuous Improvement - In fiscal 1998 Valley continued its commitment to workforce development and continuous improvement. Ongoing work projects, intended to foster cross functional decision making, continue to provide innovative programs, ideas, and solutions. For example, (Photo appears here) Photo tag: Clean, economical, environmentally friendly natural gas being utilized for heat and hot water. (Photo appears here) Photo tag: Heating and hot water heating equipment installed by VAMCO at the Cumberland Housing Authority elderly housing complex. (Photo appears here) Photo tag: Commercial installation by VAMCO at the Pawtucket Country Club. - 6 - (Photo appears here) Photo tag: Impressionist view of early morning light over the Blackstone River in Lincoln. - 7 - the installation of new gas service lines involved the residential sales, construction, service, customer service, and credit departments. Through a comprehensive review of this process from both internal and external customers' view points, a new model has been implemented, including the creation of a new central control position, through which highly accurate, responsive service is being facilitated. Safety - Valley Gas has always made safety its number one priority, and such diligence was recognized twice in fiscal 1998. This past spring, both the American Gas Association and the New England Gas Association presented Valley Gas with awards citing its exemplary safety record. Customer Satisfaction - VAMCO, the Corporation's retail appliance merchandising and appliance rental company, was very responsive to the marketplace in fiscal 1998. The owner of a vacant warehouse in Pawtucket again turned to VAMCO for solutions to space heating and cooling requirements because of the impression made by VAMCO in other installations for him. VAMCO was able to assist with engineering, consulting, equipment procurement and installation coordination. Once again in fiscal 1998, a local school department building committee called upon VAMCO, as a result of the work performed by VAMCO in the town's high school, to assist in the engineering and equipment selection when the school department was having budgetary problems. The favorable impressions left by VAMCO from a domestic hot water installation a few years ago, led a local housing authority to ask for a similar installation at another elderly housing complex in fiscal 1998. Based on the success of that installation, when the decision was made to expand this facility to include assisted living, VAMCO was again asked to provide the energy solution. Also in fiscal 1998 VAMCO installed a ValPure water filtration system at a local health and fitness center. When the same center needed water heating equipment replaced, they once again called on VAMCO professionals for assistance. Positive impressions for quality products and professional service continues to expand VAMCO's horizons. Customer Driven Innovation - Quality, dependability, and service are the impressions that Valley Propane leaves with its customers. It has done this through its responsiveness to customer requests. In fiscal 1998, Valley Propane expanded its program of offering fixed-price arrangements to customers for the winter period or longer. This program was met with very strong acceptance among customers that use propane for heating, water heating and cooking. Valley Propane also continued to abide by its policy of maintaining reasonable margins on sales to be in a position to render quality service to its loyal customers. Valley Propane has recently placed an order for a new electronic delivery ticket system that will be operational in fiscal 1999. Customer input, relative to how they would like (Photo appears here) Photo tag: VAMCO Project Manager John Jackson (left) and Commercial & Industrial Representative Michael McCaughey (right) discuss project management impressions at a job site. (Photo appears here) Photo tag: Custom installation at Fore Court, Cumberland. (Photo appears here) Photo tag: VAMCO's expertise in customized integrated heating and water heating provides reliable year round comfort for members of Cumberland's Fore Court indoor tennis league. - 8 - (Photo appears here) Photo tag: View of the colonial style cupola atop the recently renovated Cumberland Town Hall illustrates the timeless charm and scenic beauty of New England architecture. - 9 - delivery information presented, motivated this technological improvement. Once again impressions from the marketplace directed company response. Morris represents a wide variety of plumbing, heating and water filtration products. Morris does more than simply call upon supply houses; it also conducts training classes to improve plumbers' product knowledge and expertise. This creates more than a positive impression of the products Morris represents; it builds brand loyalty, creates a forum for needed feedback and provides better solutions for customers. Morris sometimes assembles components from various lines to provide market ready solutions to meet customer needs. Continued consolidation in the wholesale supplier business makes this interaction essential to improving market share. Leading Edge Technologies - The Corporation continues to invest in AEC to develop innovative applications to provide an opportunity to contribute to future earnings. This fiscal year, AEC expanded its professional staff to focus on natural gas vehicle (NGV) refueling stations, fuel cell technology applications and its new technology for controlling fuel use. Discussions between AEC and commercial and industrial customers led to the development of a device to control fuel utilized in dual-fuel systems. The ability to control automatically either the quantity of fuel or the time of the day the fuel is utilized could have a positive impact on the customer's fuel price. The application for patent coverage on its exclusive Passport Fuel Management System coincided with a marketing campaign to introduce this innovative fuel technology to commercial and industrial energy users. AEC has compressed natural gas, CNG, demonstration vehicles available for use by fleet operators. These vehicles are provided by American Honda Motor Corporation and Ford Motor Company to cultivate markets for NGV fleets and fueling infrastructure throughout New England. Fiscal 1998 saw the dedication of AEC's public NGV refueling station located at the Valley Resources corporate headquarters. The station buys gas from Valley Gas and retails it to a number of different customers. Besides Valley Gas' CNG vehicles, others utilizing the site are the Cumberland Police Department and the State of Rhode Island. Additionally, the station fills natural gas cylinders for a variety of commercial applications where pipeline gas is unavailable. Summary - The image created by Valley Resources and its subsidiaries with customers for high quality, professional products and services and an attentive ear to customer needs have generated repeat business and provided opportunities to bring new applications to market. Being attentive to customer needs from the changing marketplace has positioned Valley Resources to meet the objectives of its long range plan successfully. (Photo appears here) Photo tag: At Morris Merchants, employees ensure quality service by continuing to demonstrate product knowledge and attention to customer needs. (Photo appears here) Photo tag: Morris' internal analysis has generated business process improve- ments company wide which have resulted in improved efficiency and productivity. (Photo appears here) Photo tag: Alternate Energy Corporation (AEC) dedicated its public NGV refueling station located at the Valley Resources corporate head- quarters. Here, a Cumberland Police officer refuels one of the department's new Ford Crown Victoria police cruisers which is factory-produced to use compressed natural gas as a fuel. - 10 - (Photo appears here) Photo tag: A barnlike structure adjacent to the waterfalls on the Cumberland- Central Falls line is a picturesque backdrop for the robust trees which line the river. - 11 - (Photo appears here) Photo tag: Valley Gas construction crew installing gas service for a new Cumberland residential housing development. - 12 - Financial Information - --------------------- Consolidated Statements of Earnings................................ 14 Consolidated Statements of Cash Flows.............................. 15 Consolidated Balance Sheets........................................ 16 Consolidated Statements of Changes in Common Stock Equity.......... 18 Consolidated Statements of Capitalization.......................... 18 Notes to Consolidated Financial Statements......................... 19 Report of Independent Certified Public Accountants................. 27 Management's Discussion and Analysis............................... 28 Summary of Consolidated Operations................................. 33 Gas Operating Statistics........................................... 34 Corporate Information.............................................. 35 Directors.......................................................... 36 Officers........................................................... 36 - 13 - Consolidated Statements of Earnings
For the year ended August 31 1998 1997 1996 - ---------------------------- ---- ---- ---- Operating revenues: Utility gas revenues ..................... $59,343,603 $66,230,787 $60,773,519 Nonutility revenues ......................... 22,245,293 21,253,190 19,586,615 ----------- ----------- ----------- Total ................................ 81,588,896 87,483,977 80,360,134 ----------- ----------- ----------- Operating expenses: Cost of gas sold ......................... 31,437,159 37,843,842 31,951,154 Cost of sales - nonutility ............... 15,516,609 14,790,835 13,688,935 Operations .................................. 17,880,673 17,890,281 17,706,904 Maintenance .............................. 1,671,829 1,633,671 1,671,971 Depreciation ............................. 3,274,513 3,143,719 2,956,727 Taxes - other than Federal income ....... 4,119,808 4,242,841 4,090,751 - Federal income .................. 1,330,045 1,334,677 1,443,547 ----------- ----------- ----------- Total ................................ 75,230,636 80,879,866 73,509,989 ----------- ----------- ----------- Operating income ............................ 6,358,260 6,604,111 6,850,145 Other income - net of tax ................... 288,464 423,476 459,938 ----------- ----------- ----------- Total income before interest ................ 6,646,724 7,027,587 7,310,083 ----------- ----------- ----------- Interest charges: Long-term debt ........................... 2,482,840 1,957,052 1,927,154 Other .................................... 557,923 1,411,222 1,384,569 ----------- ----------- ----------- Total ................................ 3,040,763 3,368,274 3,311,723 ----------- ----------- ----------- Net income available for common stock ....... $ 3,605,961 $ 3,659,313 $ 3,998,360 =========== =========== =========== Average number of common shares outstanding . 4,966,270 4,267,038 4,258,877 Basic and diluted earnings per share ........ $ 0.73 $ 0.86 $ 0.94 The accompanying Notes are an integral part of these statements.
- 14 - Consolidated Statements of Cash Flows
For the year ended August 31 1998 1997 1996 - ---------------------------- ---- ---- ---- Increase (decrease) in cash: Cash flows from operating activities: Net income .......................................... $ 3,605,961 $ 3,659,313 $ 3,998,360 Adjustments to reconcile net income to net cash: Depreciation ...................................... 3,274,513 3,143,719 2,956,727 Provision for uncollectibles ...................... 1,912,813 1,603,597 1,459,761 Deferred Federal income taxes ..................... 773,217 441,638 922,007 Amortization of investment tax credits ............ (48,402) (49,090) (49,452) Change in assets and liabilities: Accounts receivable ............................... (413,842) (2,841,404) (718,826) Deferred fuel costs ............................... (1,277,658) 1,620,252 (3,977,779) Unbilled gas costs ................................ 1,702 (1,140) (4,603) Fuel and other inventories ........................ 301,688 (71,908) (663,964) Prepayments ....................................... (63,281) 119,631 (249,971) Common stock held for dividend reinvestment plan .. 230,552 (220,829) 158,876 Prepaid pensions .................................. (1,728,432) (924,745) (625,374) Accounts payable .................................. (23,435) (944,778) 921,892 Security deposits ................................. (57,230) (61,952) (65,258) Taxes accrued ..................................... 73,554 171,730 (317,791) Other ............................................. 548,114 520,799 (75,564) ------------ ------------ ------------ Total adjustments ................................. 3,503,873 2,505,520 (329,319) ------------ ------------ ------------ Net cash provided by operating activities ........... 7,109,834 6,164,833 3,669,041 ------------ ------------ ------------ Cash flows from investing activities: Utility capital expenditures ........................ (3,555,028) (3,599,752) (4,396,081) Nonutility capital expenditures ..................... (978,538) (693,229) (612,628) Other investments ................................... (44,924) (81,222) (49,360) ------------ ------------ ------------ Net cash used by investing activities ............... (4,578,490) (4,374,203) (5,058,069) ------------ ------------ ------------ Cash flows from financing activities: Dividends paid ...................................... (3,698,155) (3,130,413) (3,083,369) Common stock transactions ........................... 869,155 6,450,861 184,615 Issuance of long-term debt, net of issuance cost .... -0- 9,655,515 -0- Issuance of revolving credit arrangement ............ 100,000 100,000 2,200,000 Retirement of long-term debt ........................ (209,200) (1,553,395) (860,000) Increase (decrease) in notes payable ................ 400,000 (13,000,000) 3,000,000 ------------ ------------ ------------ Net cash (used) provided by financing activities .... (2,538,200) (1,477,432) 1,441,246 ------------ ------------ ------------ Net (decrease) increase in cash ........................ (6,856) 313,198 52,218 Cash, beginning ........................................ 820,011 506,813 454,595 ------------ ------------ ------------ Cash, ending ........................................... $ 813,155 $ 820,011 $ 506,813 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest .......................................... $ 2,788,390 $ 3,378,894 $ 3,311,577 ============ ============ ============ Federal income taxes .............................. $ 500,000 $ 861,140 $ 885,000 ============ ============ ============ Supplemental disclosures of noncash activity: Capital lease obligations incurred .................. $ 832,026 $ 388,139 $ 1,844,817 ============ ============ ============ The accompanying Notes are an integral part of these statements.
- 15 - Consolidated Balance Sheets
August 31 1998 1997 - --------- ---- ---- Assets: Utility plant, at cost ............................................. $82,964,897 $79,728,717 Less: Accumulated provision for depreciation ...................... 31,655,080 29,281,602 ----------- ----------- Net utility plant .................................................. 51,309,817 50,447,115 ----------- ----------- Leased property-less accumulated amortization of $4,007,748 and $3,379,848 .................................................. 2,302,601 2,377,376 ----------- ----------- Nonutility property-less accumulated provision for depreciation of $4,315,566 and $4,076,160 ....................................... 4,106,232 3,711,869 ----------- ----------- Other investments .................................................. 1,636,606 1,591,682 ----------- ----------- Current assets: Cash ........................................................... 813,155 820,011 Accounts receivable-less allowance for uncollectibles of $928,279 and $840,433 .................................................. 9,684,317 11,183,288 Deferred fuel costs ............................................. 484,418 -0- Deferred unbilled gas costs ..................................... 438,332 440,034 Fuel and other inventories ...................................... 5,818,667 6,120,355 Prepayments ..................................................... 1,352,952 1,289,671 Common stock held for dividend reinvestment plan ................ 121,096 351,648 ----------- ----------- Total current assets .......................................... 18,712,937 20,205,007 ----------- ----------- Deferred debits: Recoverable postretirement benefit .............................. 230,974 461,948 Recoverable vacations accrued ................................... 632,966 595,781 Recoverable deferred Federal income taxes ....................... 6,108,997 6,043,670 Recoverable transition obligation ............................... 21,300 373,200 Unamortized debt discount and expense ........................... 1,711,815 1,745,161 Prepaid pensions ................................................ 8,824,014 7,095,582 Other ........................................................... 2,882,349 3,048,746 ----------- ----------- Total deferred debits ....................................... 20,412,415 19,364,088 ----------- ----------- Total assets ................................................ $98,480,608 $97,697,137 =========== =========== The accompanying Notes are an integral part of these statements.
- 16 - Consolidated Balance Sheets
August 31 1998 1997 - --------- ---- ---- Capitalization and liabilities: Capitalization ..................................... $64,860,725 $66,293,195 ----------- ----------- Revolving credit arrangement ....................... 2,400,000 2,300,000 ----------- ----------- Obligations under capital leases ................... 1,527,655 1,541,418 ----------- ----------- Current liabilities: Current maturities of long-term debt ............ 2,288,937 150,000 Obligations under capital leases ................ 774,946 835,957 Notes payable ................................... 2,300,000 1,900,000 Accounts payable ................................ 4,274,994 4,298,429 Security deposits ............................... 977,565 1,034,795 Taxes accrued ................................... 435,309 361,755 Deferred fuel costs ............................. -0- 793,240 Accrued interest ................................ 793,732 541,359 Other ........................................... 740,971 696,889 ----------- ----------- Total current liabilities ..................... 12,586,454 10,612,424 ----------- ----------- Commitments and contingencies Deferred credits: Unamortized investment tax credit ............... 626,196 674,598 Transition obligation ........................... 21,300 373,200 Unfunded deferred Federal income taxes .......... 1,849,022 1,886,708 Postretirement benefit obligation ............... 230,974 461,948 Other ........................................... 1,785,230 1,734,012 ----------- ----------- Total deferred credits ........................ 4,512,722 5,130,466 ----------- ----------- Deferred Federal income taxes ...................... 12,593,052 11,819,634 ----------- ----------- Total liabilities ............................. 33,619,883 31,403,942 ----------- ----------- Total capitalization and liabilities .......... $98,480,608 $97,697,137 =========== =========== The accompanying Notes are an integral part of these statements.
- 17 - Consolidated Statements of Changes in Common Stock Equity Common Shares Issued Paid in Retained & Outstanding Capital Earnings -------------------- ------- -------- Number Amount ------ ------ 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 ... 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 --------- ---------- ----------- ----------- Add (deduct): Net income ................... 3,659,313 Cash dividends on common stock (3,130,413) Issuance of common stock ..... 620,000 620,000 5,893,100 Other ........................ (62,239) --------- ---------- ----------- ----------- Balance, August 31, 1997 ........ 4,900,028 4,900,028 24,034,924 8,279,306 --------- ---------- ----------- ----------- Add (deduct): Net income ................... 3,605,961 Cash dividends on common stock (3,698,155) Issuance of common stock ..... 93,000 93,000 795,296 Other ........................ (19,141) --------- ---------- ----------- ----------- Balance, August 31, 1998 ........ 4,993,028 $4,993,028 $24,811,079 $ 8,187,112 ========= ========== =========== =========== The accompanying Notes are an integral part of these statements.
Consolidated Statements of Capitalization
August 31 1998 1997 - --------- ---- ---- Common stock equity: Common stock, $1 par value Authorized 20,000,000 shares Issued and outstanding 4,993,028 and 4,900,028 shares ..... $ 4,993,028 $ 4,900,028 Paid in capital ............................................. 24,811,079 24,034,924 Retained earnings ........................................... 8,187,112 8,279,306 ----------- ----------- 37,991,219 37,214,258 Less: Accounts receivable from Valley Resources, Inc. 401(k) Employee Stock Ownership Plan ............................. 2,768,343 2,907,049 ----------- ----------- Total common stock equity .......................... 35,222,876 34,307,209 ----------- ----------- Long-term debt: 8% First Mortgage Bonds, due 2022 ........................... 20,039,000 20,090,000 7.7% Debentures, due 2027 ................................... 7,000,000 7,000,000 9% Notes Payable, due 1999 .................................. 2,138,937 2,138,937 Note payable, due 2007 ...................................... 2,748,849 2,907,049 ----------- ----------- Total .............................................. 31,926,786 32,135,986 Less: Current maturities .................................... 2,288,937 150,000 ----------- ----------- Total long-term debt ............................... 29,637,849 31,985,986 ----------- ----------- Total capitalization ............................... $64,860,725 $66,293,195 =========== =========== The accompanying Notes are an integral part of these statements.
- 18 - 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"), 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 (collectively the "Utilities") 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 the Utilities are determined on a composite straight-line basis. The composite rate for fiscal 1998, 1997 and 1996 was 2.91%. Depreciation provisions for other subsidiary companies are provided on the straight-line and accelerated methods at rates ranging from 2.86% to 34%. OTHER ASSETS - Included in other assets is goodwill which is amortized on a straight-line basis over forty years. The Corporation continually evaluates the carrying value of goodwill. Any impairments would be recognized when the expected undiscounted future operating cash flows derived from goodwill is less than the carrying value. UNAMORTIZED DEBT EXPENSE - Costs incurred to obtain debt financing are amortized over the expected term of the related debt. Amortization of deferred financing costs is recorded as interest expense. DEFERRED FUEL COSTS - The Utilities' 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. Valley Gas 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 the Utilities 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. - 19 - PENSION PLANS - The Utilities maintain two non-contributory defined benefit pension plans covering substantially all of their employees which provide benefits based on compensation and years of service. The Utilities fund pension costs that are deductible for Federal income tax purposes (see Note H). On January 1, 1997, the Valley Gas Company 401(k) plan and the Valley Gas Employee Stock Ownership Plan ("ESOP") were merged into the Valley Resources 401(k) Employee Stock Ownership Plan ("KSOP"). The KSOP covers all Corporate employees, if eligible (see Note D). The expense of these plans, in fiscal 1998, 1997 and 1996 were $144,000, $160,800 and $226,100, 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. In fiscal 1998, 1997, and 1996 profit sharing expense was $72,000, $64,600, and $68,400, respectively. NEW ACCOUNTING STANDARDS - In 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," to establish standards for reporting information about operating segments in annual financial statements and to require reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. The new standard is effective for fiscal years beginning after December 15, 1997. Adoption of SFAS No. 131 will not effect the Corporation's financial condition or results of operations. The Corporation is evaluating the impact on its operating segment disclosures. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 132 "Employers' Disclosures About Pensions and Other Postretirement Benefits" to be effective in fiscal 1999, which are 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:
1998 1997 ---- ---- Fuels (at average cost) ........................ $3,542,932 $3,809,617 Merchandise and other (at average cost) ........ 1,241,224 1,252,846 Merchandise (at LIFO) .......................... 1,034,511 1,057,892 ---------- ---------- $5,818,667 $6,120,355 ========== ==========
Merchandise (at LIFO), if valued at current cost, would have been greater by $246,300 in fiscal 1998 and $270,900 in fiscal 1997. Note B: Common Stock and Rights On August 26, 1997, the Corporation issued 620,000 shares of Common Stock. The net proceeds of this offering were used to reduce the short-term debt of the Utilities, to make loans to nonutility subsidiaries to repay short-term debt and for working capital requirements. On September 24, 1997, the Underwriters of the stock offering exercised their over-allotment option and 93,000 additional common shares were issued. Pursuant to the Corporation's direct stock purchase 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. All shares issued pursuant to the plan in fiscal 1998 and 1997 were open-market purchases. In fiscal 1996, the Corporation issued 19,231 shares of common stock under provisions of the direct stock purchase plan. At August 31, 1998 and 1997, 10,116 and 31,179 shares, respectively, were held by the Corporation for issuance to the plan. On August 31, 1998, 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 direct stock purchase 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 - 20 - value $100, at a price of $35 per one one-hundredth of a share subject to adjustment. The Rights are not currently exercisable, and trade automatically with the 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 1998, 1997, and 1996 amounted to $106,800, $110,000 and $114,800, respectively. There are no legal restrictions on withdrawal of compensating balances. A detail of short-term borrowings for fiscal 1998, 1997, and 1996 is as follows:
1998 1997 1996 ---- ---- ---- At year end Weighted average interest rate . 5.7% 5.7% 5.7% Unused lines of credit ......... $34,700,000 $35,100,000 $14,100,000 For the year ended Weighted average interest rate . 5.8% 5.7% 6.0% Average borrowings ............. $ 2,433,300 $16,800,000 $12,908,300 Maximum month-end borrowings ... $ 6,200,000 $22,000,000 $16,000,000 Month of maximum borrowings .... December January November
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 1998 are: 1999, $3,063,900; 2000, $3,327,400; 2001, $481,300; 2002, $357,500 and 2003, $209,400, 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, $51,000, $122,000, and $860,000 of the bonds were redeemed by holders in fiscal 1998, 1997, and 1996, 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, 1998. Regulatory treatment allows payments under capital leases to be recorded as rental expenses. Rental expenses for all leases in fiscal 1998, 1997, and 1996, were $1,218,600, $1,169,500, and $1,437,900, respectively. Valley Gas 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 2000. The Corporation 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 KSOP. The receivable from the KSOP has been shown as a reduction of common stock equity. The financing by the KSOP is secured by the common stock of two unregulated subsidiaries and the unallocated shares held by the KSOP. The Corporation's common stock purchased by the KSOP with the borrowed money is held by the KSOP trustee in a "suspense account." As the Corporation matches employee 401(k) contributions and makes discretionary 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. - 21 - Note E: Restriction on Retained Earnings At August 31, 1998, $2,119,400 of the retained earnings of Valley Gas were available for the payment of cash dividends to the Corporation under the most restrictive provisions of Valley Gas' first mortgage bonds. There are no restrictions as to the payment of dividends for the other subsidiaries. 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, 1998, the Corporation has a liability of $6,109,000 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:
1998 1997 1996 ---- ---- ---- Current income tax expense: Operating expense ................. $ 556,828 $ 893,039 $ 521,540 Nonoperating expense .............. 57,482 103,200 147,065 ---------- ---------- ---------- 614,310 996,239 668,605 ---------- ---------- ---------- Deferred income tax expense: Accelerated depreciation .......... 316,197 332,771 276,474 Pensions .......................... 587,667 314,413 212,627 Deferred fuel costs ............... 99,941 (229,039) 293,801 Uncollectibles .................... (36,985) (23,830) (21,840) Directors' fees and interest ...... (42,525) (36,845) (36,453) Bond premium ...................... (6,240) (6,240) (6,240) Rate case expenses ................ (61,308) (97,257) (37,626) Capitalization of inventory costs . 1,155 28,869 (6,897) Consulting contracts .............. (19,920) 30,570 64,392 Software amortization ............. (86,136) 140,856 140,856 Alternative minimum tax ........... 96,359 -0- 8,617 Excess VEBA contribution .......... (78,532) (78,532) -0- Other ............................. 3,544 65,902 34,296 ---------- ---------- ---------- 773,217 441,638 922,007 ---------- ---------- ---------- Total ............................. $1,387,527 $1,437,877 $1,590,612 ========== ========== ==========
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:
1998 1997 1996 ---- ---- ---- Statutory Federal rate .................................. 34% 34% 34% Maintenance costs capitalized for book purposes ...... (4) (4) (3) Cost of removal ...................................... (1) (1) (1) ESOP dividends ....................................... (1) (1) (1) Prior year over accrual .............................. (2) -0- -0- Other ................................................ 2 -0- (1) --- ---- ---- Total ................................................ 28% 28% 28% === ==== ====
- 22 - Temporary differences which gave rise to the following deferred tax assets and liabilities at August 31, 1998 and 1997 are:
1998 1997 ---- ---- Unbilled revenues ............................... $ 266,652 $ 273,872 Directors' fees and interest .................... 294,847 252,322 Other ........................................... 568,055 549,248 ------------ ------------ Total deferred tax assets .................... 1,129,554 1,075,442 ------------ ------------ Accelerated depreciation ........................ (9,195,902) (8,879,705) Pensions ........................................ (3,018,851) (2,431,184) Software amortization ........................... (590,782) (676,918) Deferred fuel costs ............................. (164,703) (64,762) Other ........................................... (752,368) (842,507) ------------ ------------ Total deferred tax liabilities ............... (13,722,606) (12,895,076) ------------ ------------ Total deferred taxes ............................ $(12,593,052) $(11,819,634) ============ ============
The Corporation's nonutility operations are subject to state income taxes. For fiscal 1998, 1997, and 1996, state income taxes totaled $124,100, $170,700, and $124,300, respectively. Note G: Regulatory Matters On June 1, 1997, the Utilities received approval to redesign their rates and offer transportation services to large commercial and industrial customers. Note H: Commitments and Contingencies PENSION PLANS - The Utilities have two non-contributory defined benefit pension plans covering substantially all of their employees and a supplemental pension plan covering certain officers. Net periodic pension income for fiscal 1998, 1997, and 1996 included the following components:
1998 1997 1996 ---- ---- ---- Service cost - benefits earned during the period ......... $ 640,994 $ 543,241 $ 534,961 Interest cost on projected benefit obligation ............ 1,360,031 1,337,602 1,321,504 Actual return on plan assets ............................. (2,502,395) (8,425,498) (3,266,264) Net amortization and deferral ............................ (1,227,062) 5,619,910 784,425 ----------- ----------- ----------- Net periodic pension income .............................. $(1,728,432) $ (924,745) $ (625,374) =========== =========== ===========
Plans Funded Status - July 31 1998 1997 - ----------------------------- ---- ---- Projected benefit obligations: Vested................................................................ $ 18,144,320 $ 16,661,224 Nonvested ............................................................ 259,218 219,424 ------------ ------------ Accumulated ............................................................. 18,403,538 16,880,648 Due to recognition of future salary increases ........................ 4,898,370 4,308,115 ------------ ------------ Total .............................................................. (23,301,908) (21,188,763) Plan assets at fair value ............................................... 38,027,205 36,565,680 ------------ ------------ Plan assets in excess of projected benefit obligation ................... 14,725,297 15,376,917 Unrecognized transition amount .......................................... (529,184) (676,708) Unrecognized net gains .................................................. (5,372,099) (7,604,627) ------------ ------------ Prepaid pension costs ................................................... $ 8,824,014 $ 7,095,582 ============ ============
Plan assets are invested in common stock, short-term investments and various other fixed income securities. - 23 - The weighted-average discount rate used in determining the projected benefit obligation was 7 1/4% and 7 3/4% as of July 31, 1998 and 1997, respectively. The assumed rate of future compensation increases was 5 1/2% per year. The expected long-term rate of return on assets was 9% for all years presented. POSTRETIREMENT LIFE AND HEALTH BENEFIT PLAN - Valley Gas sponsors a postretirement benefit plan that covers substantially all of its employees except for nonunion employees hired on or after September 1, 1993 and union employees hired on or after April 1, 1994. 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"), Valley Gas records the cost for this plan on an accrual basis. As permitted by SFAS 106, Valley Gas will record the transition obligation over 20 years. Valley Gas' cost under this plan for fiscal 1998, 1997 and 1996 was $725,000, $775,600 and $809,500, 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 Valley Gas a phase-in recovery of the tax deductible portion of these postretirement benefits, if funded. Valley Gas 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. Valley Gas is currently funding the amount recovered through rates. The following table sets forth the plans' funded status reconciled with the amounts recognized in Valley Gas' financial statements at August 31:
1998 1997 ---- ---- Accumulated postretirement benefit obligation: Retirees ............................................................. $(3,161,328) $(2,986,423) Fully eligible active plan participants .............................. (848,099) (639,520) Other active plan participants ....................................... (2,514,200) (2,432,046) ----------- ----------- (6,523,627) (6,057,989) Plan assets at fair value ............................................... 2,351,191 1,699,662 ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets................................................................ (4,172,436) (4,358,327) Unrecognized transition obligation ...................................... 4,166,598 4,444,372 Unrecognized net (gain) from past experience different from that assumed and from changes in assumptions .............................. (225,136) (547,993) ----------- ----------- Accrued postretirement benefit cost ..................................... $ (230,974) $ (461,948) =========== ===========
Net periodic postretirement benefit cost consisted of the following: 1998 1997 1996 - -------------------------------------------------------------------- ---- ---- ---- Service cost - benefits attributable to service during the period .. $ 147,852 $ 136,372 $156,991 Interest cost on accumulated postretirement benefit obligation ..... 426,588 419,243 417,117 Actual return (loss) on plan assets ................................ 40,980 (57,041) 33,712 Net amortization and deferral ...................................... 109,628 277,015 201,640 --------- ---------- -------- Net periodic postretirement benefit cost ........................... 725,048 775,589 809,460 Regulatory asset ................................................... (230,974) (230,974) -0- --------- ---------- -------- Net expense ........................................................ $ 956,022 $1,006,563 $809,460 ========= ========== ========
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997; 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, 1998 by $484,000 and the aggregate of the service and the interest cost components of net periodic postretirement benefit cost ("NPPBC") for the year by $53,000. The discount rate was 7 1/4% 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. - 24 - LONG-TERM OBLIGATIONS - The Utilities 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% of total system requirements. FERC ORDER NO. 636 TRANSITION COSTS - As a result of FERC Order 636, the Utilities' interstate pipeline service providers have unbundled their supply, storage and transportation services. This unbundling 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 $21,300 and have recognized a liability for these costs as of August 31, 1998. The RIPUC has allowed the recovery of transition costs through the PGPA. Under the provisions of SFAS 71, regulatory assets totaling $21,300 were recorded for the expected future recovery of the transition obligations. Actual transition costs to be incurred depend on various factors, and, therefore, future costs may differ from the amounts discussed above. CONTINGENT LIABILITIES - 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 cleanup costs of approximately $6,000,000 at the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a site to which oxide waste was transported in the 1930's prior to the incorporation of Valley Gas. Management is of the opinion the Corporation will prevail as a result of the indemnification provisions included in the agreement entered into when Valley Gas acquired the utility assets from Blackstone. Management cannot determine the future cash flow impact, if any, of this claim and related legal fees. 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. Valley Gas received letters of responsibility from the Rhode Island Department of Environmental Management ("DEM") with respect to releases from coal waste on its properties that were the site of the former Tidewater gas manufacturing plant in Pawtucket, Rhode Island and the former Hamlet Avenue gas manufacturing plant in Woonsocket, Rhode Island. Valley Gas and Blackstone have submitted site investigation reports to DEM relating to certain releases on these sites. Management cannot determine the future cash flow impact, if any, of these claim and related expenses. As noted above, management takes the position that it is indemnified by Blackstone for any such expenses. Management intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant periods. Remediation of sites such as the former Tidewater plant and the Hamlet Avenue plant are governed by a regulatory framework which now permits more flexibility in methods of remediation and in property reuse. - 25 - Note I: Segment Information The following information is presented relative to the gas, merchandising and other operations of the Corporation.
1998 1997 1996 ---- ---- ---- Gas Operations Operating revenues ................................. $59,343,603 $66,230,787 $60,773,250 Operating income before Federal income taxes ....... 6,178,629 6,465,007 7,150,140 Identifiable assets at August 31 ................... 89,713,540 88,927,776 90,612,952 Depreciation ....................................... 2,692,326 2,594,712 2,364,999 Capital expenditures ............................... 3,555,028 3,599,752 4,396,081 Appliance & Contract Sales & Rentals Operating revenues ................................. $19,783,442 $18,490,238 $17,617,481 Operating income before Federal income taxes ....... 1,326,308 1,274,805 986,920 Identifiable assets at August 31 ................... 9,817,167 9,384,412 8,116,782 Depreciation ....................................... 489,861 464,564 512,242 Capital expenditures ............................... 612,481 572,069 531,152 Other Operations, including Corporate & Eliminations Operating revenues ................................. $ 2,461,851 $ 2,762,952 $ 1,969,403 Operating income before Federal income taxes ....... 183,368 198,976 156,632 Identifiable assets at August 31 ................... (1,050,099) (615,051) (2,040,749) Depreciation ....................................... 92,326 84,443 79,486 Capital expenditures ............................... 366,057 121,160 81,476 Total Corporation Operating revenues ................................. $81,588,896 $87,483,977 $80,360,134 Operating income before Federal income taxes ....... 7,688,305 7,938,788 8,293,692 Federal income tax expense ......................... (1,330,045) (1,334,677) (1,443,547) Nonoperating income-net ............................ 288,464 423,476 459,938 Interest expense ................................... (3,040,763) (3,368,274) (3,311,723) Net income ......................................... 3,605,961 3,659,313 3,998,360 Identifiable assets at August 31 ................... 98,480,608 97,697,137 96,688,985 Depreciation ....................................... 3,274,513 3,143,719 2,956,727 Capital expenditures ............................... 4,533,566 4,292,981 5,008,709
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. Certain items on the Segment Information at August 31, 1997 and 1996 have been reclassified to conform with the presentation at August 31, 1998. - 26 - Note J: Summarized Quarterly Financial Data (Unaudited)
Three months ended (in thousands, except as to basic and diluted earnings (loss) per share) November February May August - ---------------------------------- -------- -------- --- ------ Fiscal 1998 Total operating revenues ..................... $15,824 $30,428 $22,587 $12,750 Income (loss) before Federal income taxes .... $(1,288) $ 4,818 $ 2,692 $(1,229) Net income (loss) ............................ $ (761) $ 3,232 $ 1,828 $ (693) Basic and diluted earnings (loss) per share .. $ (0.15) $ 0.65 $ 0.37 $ (0.14) Fiscal 1997 Total operating revenues...................... $16,340 $30,932 $26,281 $13,931 Income (loss) before Federal income taxes..... $(1,263) $ 4,916 $ 2,830 $(1,386) Net income (loss)............................. $ (772) $ 3,260 $ 1,956 $ (785) Basic and diluted earnings (loss) per share... $ (0.18) $ 0.76 $ 0.46 $ (0.18)
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, 1998 and 1997 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, 1998. 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, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1998, in conformity with generally accepted accounting principles. s/Grant Thornton LLP Boston, Massachusetts September 25, 1998 - 27 - 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 (collectively the "Utilities"), 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, designs and installs natural gas refueling facilities, natural gas conversion systems and energy use control devices. Operating results are derived from two major classifications - utility and nonutility. Utility earnings are generated from the sale and transportation of natural gas. Nonutility earnings are a consolidation of the earnings of VAMCO, Valley Propane, Morris Merchants and AEC. Natural gas sales to customers, on a year-round basis, for heating, water heating, cooking and processing are the primary source of firm utility revenues. Firm utility revenues also include proceeds from the transportation of customer-owned natural gas through the Utilities' distribution system. Firm customers can be residential, commercial or industrial. The revenues from firm customers are determined by regulated tariff schedules and through Rhode Island Public Utilities Commission ("RIPUC") approved commodity charge factors. These factors include the Purchased Gas Price Adjustment ("PGPA"), which requires the Utilities to collect from or return to firm sales 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 and can be interrupted by the Utilities at any time. Margins from seasonal sales and margins above $1 per thousand cubic feet ("Mcf") of gas sold to dual fuel customers are returned to firm sales customers through a reduction in the PGPA. The Utilities also provide interruptible transportation services through their distribution systems. Morris Merchants and VAMCO generate nonutility revenues through wholesale and retail sales of plumbing and heating supplies and appliances. Additionally, VAMCO generates revenues from appliance rentals and a service contract repair program. Valley Propane sells propane at both wholesale and retail and provides service to propane customers in Rhode Island and southeastern Massachusetts. AEC generates revenues through the design and installation of natural gas refueling facilities and through the conversion of vehicles and stationary engines to natural gas. The Corporation owns an 80% interest in AEC and has the obligation to acquire the remaining 20% of the company currently held by the management of AEC. RESULTS OF OPERATIONS Fiscal 1998 versus Fiscal 1997 Utility gas revenues in fiscal 1998 totaled $59,343,600, a decrease of 10.4% from fiscal 1997. The decrease in revenues from the prior year was attributable to a weather related decline in firm gas sales, a decrease of $2,518,000 in gas costs recovered through the PGPA and the transfer of customers from sales to transportation. The PGPA does not impact operating income as it effectuates a dollar for dollar recovery of gas costs. The transfer of customers to transportation does not affect margins although it does produce less revenues. Firm gas throughput, firm gas sales and transportation, was 7,763,400 Mcf in fiscal 1998, a decrease of 2.9% from fiscal 1997. The primary contributor to the decline in gas throughput was weather which was 8.5% warmer than a normal year and 6.4% warmer than the prior year. Throughput to interruptible customers in fiscal 1998 decreased 9.9% as compared to fiscal 1997 due to the lower price of competitive fuels. Interruptible throughput includes sales to seasonal and dual-fuel customers and the transportation of customer-owned natural gas to interruptible and off-peak customers. Interruptible sales and transportation, excluding off-peak, are dependent on the availability of natural gas and the cost of competing fuels. Profits on seasonal sales are returned to firm sales customers through the PGPA and do not impact operating income. Interruptible transportation revenues decreased $206,100 from the prior year. - 28 - Nonutility revenues totaled $22,245,300, an increase of 4.7% over fiscal 1997. Revenues from merchandising operations, both retail and wholesale, increased 7.0% over the prior fiscal year. VAMCO's commitment to the commercial and industrial market, as well as continued efforts in the residential heating replacement market, continued to contribute to increased revenues. An increase in the number of customers participating in the service contract and rental programs was also responsible for improvement in retail revenues. Revenues generated from wholesale operations increased over the prior year through emphasis on existing products and a new approach to marketing these products. Despite an increase in gallons of propane sold and increased customers, revenues from the propane operation declined from the prior year. A decrease in revenues from AEC also impacted nonutility revenues, additionally start-up costs associated with adding personnel generated a net operating loss for AEC. 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 in fiscal 1998 was $4.02 versus $4.07 in fiscal 1997. All changes in gas costs for utility operations are passed through to firm sales customers through the PGPA. Therefore, changes in gas costs do not impact the profitability of the Utilities. The cost of sales for nonutility operations increased 4.9% in fiscal 1998 over the prior year. The increase was the result of increased merchandising sales partially offset by a decrease in the cost of propane gas sold. Other operation expenses in fiscal 1998 totaled $17,880,700, a slight decline from the prior year. Other operation expenses declined as a result of a decrease in administrative and general expenses due to an additional $803,700 of net periodic pension income. This decrease was partially offset by increased uncollectible expense and wages. Maintenance expenses increased in fiscal 1998 by 2.3% over the prior fiscal year to $1,671,800. Wages and repairs to a propane delivery vehicle were responsible for the increased expense. Taxes - other than Federal income taxes totaled $4,119,800, a 2.9% decrease from the prior fiscal year. The impact of the gross receipts tax on lower utility revenues was responsible for the decrease in taxes. The effective Federal income tax rate for the years ended August 31, 1998 and 1997 was 28%. Other income - net of tax was $288,500 in fiscal 1998 and $423,500 in fiscal 1997. A decrease in earnings from other investments was responsible for the reduction. Fiscal 1998 interest expense was $3,040,800, a 9.7% decrease from the prior fiscal year as a result of decreased short-term interest expense offset slightly by increased interest expense on long-term debt. The net proceeds of the Valley Resources debt and equity offerings in August 1997 were used to reduce the short-term borrowings of utility operations resulting in the decrease in interest expense. Fiscal 1997 versus Fiscal 1996 Fiscal 1997 utility gas revenues totaled $66,230,800, a 9.0% increase over fiscal 1996. Revenues generated from firm sales increased in fiscal 1997 by 8.6% over fiscal 1996. The increase in firm revenues was the result of a $6,461,000 increase in gas costs recovered through the PGPA, which has no direct earnings impact, partially offset by a $1,580,600 decrease in base revenues, resulting from warmer weather in fiscal 1997. Utility gas revenues were also positively impacted by increased revenues from seasonal and transportation customers. Gas sales to firm customers were 7,994,400 Mcf in fiscal 1997, a decrease of 3.2% from the prior year. The primary contributor to the sales decrease was warmer weather. Weather, as measured by degree days, in fiscal 1997 was 2.3% warmer than normal and 2.8% warmer than fiscal 1996. Weather during the critical heating period, December through February, was 10.4% warmer than the prior year and 5.4% warmer than normal. In fiscal 1997, gas sales to seasonal customers increased 6.0% over the prior fiscal year. Sales to seasonal customers are dependent upon the availability of natural gas and the price of alternate fuels. Margins earned from seasonal sales are returned to firm customers through the PGPA and do not impact the profitability of the company. The Utilities also transport natural gas owned by customers. Transportation revenues increased $301,700 in fiscal 1997. - 29 - Nonutility revenues in fiscal 1997 were $21,253,200, an increase of 8.5% over fiscal 1996. All nonutility operations enjoyed increased revenues in fiscal 1997 and were favorably impacted by an improving regional economy. VAMCO's revenue improvement was the result of increased equipment sales resulting from traditional conversions from electric heating in the residential market and its more aggressive and comprehensive focus on the commercial and industrial market segments. This has also led to an improvement in the gross margin of the retail operations. The rental and service contract programs continued to impact earnings positively. Revenues generated from wholesale operations improved through the addition of new product lines and new marketing directions for existing products. AEC also contributed to increased nonutility revenues although start-up costs have resulted in losses for this subsidiary. Propane revenues in fiscal 1997 increased 6.1% despite an 8.0% decrease in gallons sold. The warm weather impact on sales volumes was offset by market timing differences in retail pricing and margins increased due to lower cost basis. Price competition continued to be a critical factor in the ability to expand these operations. The average cost per Mcf of gas distributed in fiscal 1997 was $4.07 versus $3.84 in fiscal 1996. Gas costs increased as a result of both the purchase price of natural gas and increased gas costs related to the PGPA reconciliation. Cost of sales - nonutility includes the cost of sales for VAMCO, Valley Propane, Morris Merchants and AEC. Cost of merchandise sold increased 8.0% in fiscal 1997 over fiscal 1996 which was directly attributable to the increase in sales. Operations expenses in fiscal 1997 increased 1.0% over fiscal 1996. Expenses recovered in the utilities most recent rate filing, normal wage increases and uncollectible expense were partially offset by decreased expenses related to operation of the LNG plant due to the warmer winter. Maintenance expense in fiscal 1997 was $1,633,700, a 2.3% decrease from fiscal 1996. A shift of maintenance projects to capital and the lack of snow removal costs were responsible for the decrease. Operation and maintenance expenses were impacted by wages and general inflation. Taxes - other than Federal income taxes were $4,242,800 in fiscal 1997, an increase of $152,100 over the prior year. The impact of gross receipts taxes on increased utility revenues was responsible for the increase. The effective Federal income tax rate for the years ended August 31, 1997 and 1996 was 28%. Fiscal 1997 other income - net of tax decreased $36,500 from the prior year as a direct result of a decline in off-system sales. The decrease was slightly offset by increased interest income and the recognition of income on other investments. Interest expense in fiscal 1997 totaled $3,368,300, an increase of 1.7% over fiscal 1996. Increased short-term borrowings were responsible for the increase in interest expense. This increase was partially offset by a reduction in interest accrued on deferred fuel costs and lower borrowing rates. LIQUIDITY AND CAPITAL RESOURCES Cash is generated through the distribution and sale of natural gas, propane and merchandise. Additional revenues are collected through the rental and service contract programs. 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 working capital requirements. When deemed appropriate by management, long-term and intermediate financings and equity issues have been used to refinance short-term debt. Utility operations are subject to seasonality. The bulk of firm sales and transportation are made during the months of November through March. As a result, the highest levels of earnings and cash flow are generated in the quarters ending in February and May. Most capital expenditures occur 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. The need for short-term borrowing arises when internally generated funds are not sufficient to cover all capital and operating requirements, particularly in the summer and fall. Short-term - 30 - 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. The requirement to inventory supplemental gas supplies and the timing of inventory acquisitions to meet the peak winter demand of the Utilities negatively impact the cash flow of the Corporation. Supplemental gas inventories are filled primarily in the summer period for use during the winter period. Warmer than normal weather in fiscal 1998 resulted in decreased gas sales and a negative impact on cash flow. Additionally, cash flow in fiscal 1998 was negatively impacted as a result of the Utilities returning to firm sales customers, through a reduction in the PGPA, over recovered gas costs from fiscal 1997. Fiscal 1998 actual gas costs were greater than expected, resulting in an under recovery of gas costs, which also negatively impacted cash flow. This under recovery will be collected from firm sales customers through an increase in the PGPA in fiscal 1999. Interest costs and the timing of Federal and state tax payments also impact liquidity. On September 24, 1997, Valley Resources issued 93,000 additional shares of common stock in fulfillment of the over-allotment option exercised in connection with the August 1997 Common Stock offering. The net proceeds, $888,300, were used to reduce the short-term debt of the Utilities and for working capital requirements. This financing favorably impacted liquidity. Funding requirements are met through short-term borrowings under existing lines of credit. On August 31, 1998, the Corporation had $34,700,000 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. Management believes the available financings are sufficient to meet cash requirements for the foreseeable future. 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 $6,000,000 at the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a site to which oxide waste was transported in the 1930's prior to the incorporation of Valley Gas. Management is of the opinion the Corporation will prevail as a result of the indemnification provisions included in the agreement entered into when Valley Gas acquired its utility assets from Blackstone. Management cannot determine the future cash flow impact, if any, of this claim and related legal fees. 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. Valley Gas received letters of responsibility from the Rhode Island Department of Environmental Management ("DEM") with respect to releases from coal waste on its properties that were the site of the former Tidewater gas manufacturing plant in Pawtucket, Rhode Island and the former Hamlet Avenue gas manufacturing plant in Woonsocket, Rhode Island. Valley Gas and Blackstone have submitted site investigation reports to DEM relating to certain releases on these sites. Management cannot determine the future cash flow impact, if any, of these claim and related expenses. As noted above, management takes the position that it is indemnified by Blackstone for any such expenses. Management intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant periods. Remediation of sites such as the former Tidewater plant and the Hamlet Avenue plant are governed by a regulatory framework which now permits more flexibility in methods of remediation and in property reuse. The Corporation's net cash from operating activities in fiscal 1998 was $7,109,800 versus $6,164,800 in fiscal 1997 and $3,669,000 in fiscal 1996. Investing activities used cash in the amount of $4,578,500 in fiscal 1998, $4,374,200 in fiscal 1997 and $5,058,100 in fiscal 1996 primarily for capital expenditures. Financing activities in fiscal 1998 used cash of $2,538,200 primarily for the payment of dividends. Fiscal 1997 financing activities used cash of $1,477,400 which is the result of proceeds from the Corporation's issuance of common equity and long-term debt that were used to reduce short-term debt and from the payment of dividends. Financing activities generated cash of $1,441,200 in fiscal 1996. - 31 - 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 1998, capital expenditures were $4,533,600 versus $4,293,000 in fiscal 1997 and $5,008,700 in fiscal 1996. Fiscal 1999 capital expenditures are estimated to be $4,707,000 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. YEAR 2000 ISSUES Certain of the software applications currently in use by the Corporation are certified to be Year 2000 compliant by the software vendors from whom the applications were purchased. Certain other software applications currently in use by the Corporation are not Year 2000 compliant. The Corporation has made plans to modify, replace or upgrade those applications which are not Year 2000 compliant before January 1, 2000. The Corporation is conducting a survey and compiling cost estimates of the effort involved to perform those modifications, replacements and upgrades. Currently, management believes that the cost to bring all of its software applications into Year 2000 compliance will not have a material adverse effect on the Corporation's results of operations, and involves a remaining capital outlay of approximately $50,000 to $100,000. There can be no guarantee that the systems of other companies on which the Corporation's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Corporation's systems, would not have a material adverse impact on the Corporation. The costs of the project and the date on which the Corporation plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved; actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer programs and microprocessors, and similar uncertainties. FORWARD LOOKING STATEMENTS; RISK AND UNCERTAINTIES Statements contained in this report 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. In addition, words such as "believes," "anticipates," "expects" and similar expressions are intended to identify forward looking statements. Certain factors that could cause the actual results to differ materially from those projected in these forward-looking statements include, but are not limited to: variations in weather, changes in the regulatory environment, customers' preferences on energy sources, general economic conditions, increased competition and other uncertainties all of which are difficult to predict, and many of which are beyond the control of the Corporation. NEW ACCOUNTING STANDARD In 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," to establish standards for reporting information about operating segments in annual financial statements and to require reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. The new standard is effective for fiscal years beginning after December 15, 1997. Adoption of SFAS No. 131 will not effect the Corporation's financial condition or results of operations. The Corporation is evaluating the impact on its operating segment disclosures. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 132 "Employers' Disclosures About Pensions and Other Postretirement Benefits" to be effective in fiscal 1999, which are not expected to have a material impact on the Corporation's financial condition or results of operations. - 32 - Summary of Consolidated Operations
August 31 (in thousands) 1998 1997 1996 1995 1994 - ------------------------ ---- ---- ---- ---- ---- Assets Utility plant - net ................ $51,310 $50,447 $49,442 $47,411 $44,207 Leased property - net .............. 2,303 2,377 2,945 2,014 2,436 Nonutility plant - net ............. 4,106 3,712 3,568 3,547 3,519 Current assets ..................... 18,713 20,205 19,307 18,409 18,358 Other assets ....................... 22,049 20,956 21,427 20,957 22,549 ------- ------- ------- ------- ------- Total ....................... $98,481 $97,697 $96,689 $92,338 $91,069 ======= ======= ======= ======= ======= Capitalization and liabilities Capitalization Common equity .................... $35,223 $34,307 $27,092 $25,993 $26,036 Long-term debt (less current maturities) ...... 29,638 31,986 23,256 24,616 27,035 ------- ------- ------- ------- ------- Total ....................... 64,861 66,293 50,348 50,609 53,071 Revolving credit arrangement ....... 2,400 2,300 2,200 -0- -0- Obligations under capital leases ... 1,528 1,541 2,134 1,255 1,747 Current liabilities ................ 12,586 10,612 24,005 23,932 18,530 Other liabilities .................. 17,106 16,951 18,002 16,542 17,721 ------- ------- ------- ------- ------- Total ....................... $98,481 $97,697 $96,689 $92,338 $91,069 ======= ======= ======= ======= =======
For the year ended August 31, (in thousands, except as to share and per share data) 1998 1997 1996 1995 1994 - ------------------- ---- ---- ---- ---- ---- Operating revenues ................. $81,589 $87,484 $80,360 $74,870 $83,553 ------- ------- ------- ------- ------- Operating expenses: Cost of gas sold ................ 31,437 37,844 31,951 30,229 38,234 Cost of sales - nonutility ......... 15,517 14,791 13,689 13,190 12,784 Other operation and maintenance . 19,553 19,524 19,379 18,288 17,784 Depreciation ....................... 3,274 3,143 2,956 2,685 2,474 Taxes - other than Federal income 4,120 4,243 4,091 4,002 4,463 - Federal income .......... 1,330 1,335 1,444 732 1,313 ------- ------- ------- ------- ------- Total .............................. 75,231 80,880 73,510 69,126 77,052 ------- ------- ------- ------- ------- Operating income ................ 6,358 6,604 6,850 5,744 6,501 Other income - net ................. 289 423 460 115 227 Total interest charges ............. 3,041 3,368 3,312 3,304 2,902 ------- ------- ------- ------- ------- Net income ...................... $ 3,606 $ 3,659 $ 3,998 $ 2,555 $ 3,826 ======= ======= ======= ======= ======= Shares outstanding - average ....... 4,966,270 4,267,038 4,258,877 4,222,662 4,205,760 Shares outstanding - year-end ... 4,993,028 4,900,028 4,280,028 4,260,797 4,213,043 Basic and diluted earnings per share $0.73 $0.86 $0.94 $0.61 $0.91 Dividends declared per share ....... $0.745 $0.735 $0.725 $0.71 $0.69 Year-end book value per share ...... $7.05 $7.00 $6.33 $6.10 $6.18
- 33 - Gas Operating Statistics
For the year ended August 31 1998 1997 1996 1995 1994 - ---------------------------- ---- ---- ---- ---- ---- Gas utility revenues (in thousands): Residential ........................ $35,733 $37,340 $34,678 $30,606 $37,065 Commercial ......................... 14,792 16,267 14,891 13,212 15,633 Industrial - firm .................. 5,697 8,156 7,314 8,011 9,057 Industrial - seasonal .............. 2,072 3,605 3,335 3,507 2,945 Transportation ..................... 882 684 382 507 372 Other .............................. 167 179 173 170 252 ------- ------- ------- ------- ------- Total ............................ $59,343 $66,231 $60,773 $56,013 $65,324 ======= ======= ======= ======= ======= Gas sold and transported-MMcf: Residential ........................ 4,225 4,393 4,612 4,078 4,517 Commercial ......................... 2,060 2,161 2,252 1,953 2,078 Industrial - firm .................. 1,133 1,440 1,391 1,338 1,299 Industrial - seasonal .............. 648 1,110 1,047 1,298 996 Transportation - firm .............. 346 -0- -0- -0- -0- Transportation - seasonal .......... 4,895 5,043 3,273 4,419 3,624 ------- ------- ------- ------- ------- Total throughput ................. 13,307 14,147 12,575 13,086 12,514 Company use and losses ............. 91 179 198 128 176 ------- ------- ------- ------- ------- Total ............................ 13,398 14,326 12,773 13,214 12,690 ======= ======= ======= ======= ======= Gas received-MMcf: Liquid propane gas ................. -0- 17 70 -0- -0- Liquefied natural gas .............. 848 805 992 378 574 Natural gas stored underground ..... 1,009 1,373 1,348 1,156 1,075 Pipeline natural gas ............... 6,304 7,088 7,090 7,261 7,417 Transportation gas ................. 5,237 5,043 3,273 4,419 3,624 ------- ------- ------- ------- ------- Total ............................ 13,398 14,326 12,773 13,214 12,690 ======= ======= ======= ======= ======= Average number of customers: Residential ........................ 57,001 56,048 55,676 55,186 54,715 Commercial ......................... 5,626 5,448 5,333 5,212 5,111 Industrial - firm .................. 228 230 237 241 249 Industrial - seasonal .............. 51 51 54 59 58 Transportation ..................... 4 3 2 2 2 ------- ------- ------- ------- ------- Total ............................ 62,910 61,780 61,302 60,700 60,135 ======= ======= ======= ======= ======= Average revenue per residential customer ............... $627 $666 $623 $555 $677 Average use per residential customer-Mcf ........... 74 78 84 74 83 Maximum daily throughput-Mcf .......... 69,564 72,675 70,904 65,619 76,910 Sales degree days ..................... 5,797 6,191 6,369 5,820 6,459
- 34 - Corporate Information - --------------------- Annual Meeting and Proxies The Annual Meeting of Stockholders will be held in Cumberland, Rhode Island, on December 8, 1998. 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 20, 1998. 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: 1-888-269-8845 Stock Listing The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR and on the Boston Stock Exchange. 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. - 35 - Directors Officers of the Corporation Other Offices - --------- --------------------------- ------------- Ernest N. Agresti Alfred P. Degen David L. Hickerson Retired Partner, Chairman, President & President, Edwards & Angell, Chief Executive Officer Morris Merchants, Providence, Rhode Island Inc. Kenneth W. Hogan Melvin G. Alperin Senior Vice President, Richard C. Hadfield President, Chief Financial Officer Executive Vice Brewster Industries, & Secretary President, Pawtucket, Rhode Island Morris Merchants, Richard G. Drolet Inc. C. Hamilton Davison Vice President, President & Chief Information Systems & Rosemary Platt Executive Officer, Corporate Planning Controller, Paramount Cards, Inc., Morris Merchants, Pawtucket, Rhode Island Charles K. Meunier Inc. Vice President, Don A. DeAngelis Operations Thomas A. Aubee Vice Chairman & Chief President Executive Officer, Murdock Jeffrey P. Polucha Alternate Energy Webbing Company, Inc., Vice President, Marketing Corp. Central Falls, Rhode Island & Development Alfred P. Degen James P. Carney Chairman, President & Assistant Vice President, Chief Executive Officer, Human Resources Valley Resources, Inc., Cumberland, Rhode Island Sharon Partridge Assistant Vice President, James M. Dillon Finance & Treasurer Retired Director of Development, The Roman Catholic Diocese, Alan H. Roy Bridgeport, Connecticut Assistant Vice President, Gas Supply Jonathan K. Farnum Chairman & President, Robert A. Young Wardwell Braiding Assistant Vice President Machine Company, & Chief Engineer Central Falls, Rhode Island Patricia A. Morrison John F. Guthrie, Jr. Assistant Secretary; Vice President, Clerk, Morris Merchants, Inc. 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 - 36 - Back Cover Logo and Address Valley Resources, Inc. & Subsidiaries 1595 Mendon Road P. O. Box 7900 Cumberland, Rhode Island 02864-0700 (401) 334-1188 http://www.valleyresources.com EX-23 4 Exhibit 23 Consent of Independent Certified Public Accountants We have issued our reports dated September 25, 1998, 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, 1998. We hereby consent to the inclusion and incorporation by reference of said reports in the Registration Statements of Valley Resources, Inc. and subsidiaries on Form S-3D (File No. 333-41277) and Form S-8 (File No. 333-19259). GRANT THORNTON LLP Boston, Massachusetts November 24, 1998 EX-27 5
UT YEAR AUG-31-1998 AUG-31-1998 PER-BOOK 51,309,817 8,045,439 18,712,937 20,412,415 0 98,480,608 4,993,028 24,811,079 8,187,112 35,222,876 0 0 27,039,000 2,300,000 2,598,849 0 2,288,937 0 1,527,655 774,946 26,728,345 98,480,608 81,588,896 1,330,045 73,900,591 75,230,636 6,358,260 288,464 6,646,724 3,040,763 3,605,961 0 3,605,961 3,698,155 2,482,840 7,109,834 0.73 0.73
-----END PRIVACY-ENHANCED MESSAGE-----